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Minister Flaherty Mends Fences

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July 8, 2006

The new era for Canadian politics that began with Stephen Harper taking over in February as the first Conservative prime minister in 13 years extends to the country’s approach to economics and trade. Harper’s administration is committed to changing both the tone and the substance of financial and trade policy, particularly when it comes to foreign investment and Canada’s relations with its biggest trading partner, the U.S. In April, for example, Harper and President George W. Bush cooled a bitter, long-running dispute by strking a deal to end U.S. tariffs on Canadian lumber and ensure that suppliers in Canada charge fair-market prices.

Last month, Harper dispatched his Finance minister, Jim Flaherty, to address business and financial leaders at the New York Yacht Club.
Flaherty assured his audience that Canada is committed to free markets and will be more welcoming of foreign investment. “We’re free and fair traders,” Flaherty, 56, tells Institutional Investor. “It’s in the best interests of both countries that we don’t have impediments to trade, commerce and tourism across our borders.” (Just ten days after Flaherty’s visit, Canada arrested a group of suspected terrorist bombers near the U.S. border in southern Ontario, raising security concerns in the U.S. intelligence community.)

The scale of trade between Canada and the U.S. is staggering. Some 300,000 people and $1.6 billion in goods and services cross the border daily, adding up to $580 billion in annual bilateral trade, which, Flaherty says, supports 5 million U.S. jobs.

The relationship is taking on new strategic importance as energy prices soar and the U.S. seeks to reduce its dependence on oil from the Middle East. Canada, Flaherty notes, is by far the biggest exporter of energy – including oil, natural gas, electricity and uranium – to the States. “It may be one of our best-kept secrets,” he says. It is particularly important for Canada to nurture its relationship with its southern neighbor as Harper’s government takes a more open stance to foreign investment.

Perhaps the biggest opportunity for investors is in the energy sector: Flaherty estimates that Canada’s oil production, now 1 million barrels a day, will triple over the next ten years, with $45 billion in new projects coming online by 2010. Oil-hungry China has begun investing in western Canada’s vast oil-sands deposits, a development that presumably doesn’t sit well with the U.S. Flaherty acknowledges China’s ongoing interest in his country’s natural-resource sector and notes that the government is reviewing its policies regarding the approval of big foreign energy investments, with the goal of encouraging capital flows.

Regardless of how that delicate issue plays out, the Finance minister says that Canada’s objectives regarding the U.S. are fundamentally different today, with his country’s economy booming, than they were just a few years ago, when slow growth led to deficits and heavy borrowing from foreign investors.

“You know,” says Flaherty with a smile, “not too long ago a Canadian minister of Finance came to New York to sell debt. Now it’s private equity investment.” How times change.

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