In this upside down and volatile world investors now inhabit, it is the United States which astonishingly is starting to fail most benchmarks in country risk and political risk assessments. These assessments are normally applied to investments from the so-called “developed” world into the “less developed world” to determine whether an investment requires a risk premium should the investment proceed at all. Looking to invest in the United States or in US Treasuries? Investor beware.
There are certainly patriotic reasons today for Canadian public pensions, and corporates as well, to desist from investing in the US and redirect all investment to critical infrastructure here. But there is another rational reason to turn away now. By many measures of “country risk”, the United States should no longer be considered a safe place to invest without a risk premium for doing so.
Let’s examine some of the things on the list to be considered when engaging in a country risk assessment: respect for the rule of law, sanctity of contracts, existence of and sanctity of investment treaties governing interactions between the investor country and the inbound country, political interference in commercial contracts, a neutral judiciary to hear disputes, predictability, favouritism, cronyism, bribery. Where to begin?
Treaties that establish and protect investor rights provide an essential foundation for investment. That is why investor protection treaties exist. Sometimes these are fairly basic, ensuring at a minimum: fairness, due process, protection from confiscation. Sometimes these protections for investors and investments are part of a broader and comprehensive bilateral treaty between states or guaranteed in trading frameworks adopted multilaterally.
The sanctity of bilateral or multilateral treaties like these is essential to a rational and realistic assessment of risk. So too the durability of bilateral tax treaties and international tax conventions which underpin investment decisions. Now consider the merry-go-round operating in Washington.
The USMCA, the foundational agreement governing trade in goods and services between Canada and the United States and Mexico, has gone from being “the best trade deal ever” according to President Trump 1, to what President Trump 2 now sees as a rip-off to be ripped up at or before its expiry. The President is equally hostile to the multilateral agreements which established the WTO and govern global trade and the adjudication of trade disputes. Even outside the structure of the USMCA or the rules of the WTO or relying (with scant reason) on flimsy “national security” exceptions within these agreements, the US threatens across the board tariffs, then sectoral tariffs (steel and aluminium) then offsetting tariffs.
Are tax treaties and tax conventions also at risk? It would be foolish to assume that they are not.
Shockingly, the United States right now may be a problem for investors and for purchasers of US bonds. The President muses about a forced conversion of US Treasuries held by foreigners into zero interest hundred-year bonds and that he will coerce holders of US sovereign debt to accept this unilateral an illegal act. Whether or not he makes good on these threats, merely musing about this could cause chaos in the bond markets. This kind of uncertainty emanating from a potentate in the developing world would set off alarm bells for potential investors and kill investment. But this is the United States we are talking about! Incredibly, despite this reality, investors are re-directing investment away from other places into the United States. The yellow caution light is on, but shortsighted and panicked investors are driving through the intersection.
Respect for the rule of law and independent courts free from political interference are other factors looked at in the context of a country risk assessment. President Trump denigrates judges, ignores rulings he doesn’t like, or boasts of how “his Judges’’ at the Supreme Court will see things his way or how “his” Justice Department will act. This should cause investors to ask if they will ever get a fair shake in a dispute involving the US government or before a US court today. What if the other party to the dispute is a friend of the President or has a bungalow at Mar-a-Lago? These are all legitimate questions when considering an investment, just not usually asked about the United States when investing there. Boards presented with an investment in other foreign countries would certainly ask these questions and take a pass. Does the United States get a pass?
This is not to be so naïve as to suggest that courts in the United States or anywhere else in the so-called “developed world” for that matter could always be counted on to be scrupulously neutral and not be inclined to favour the home team. But the cronyism, toadiness, and anticipatory obedience we are seeing in the US should give investors pause.
Risk premium or not, the US will always attract investors because of the scale of that market or because investments there are a way to protect things back home. But in this topsy turvy world it is Canada that offers all the things one wants when making an investment: respect for the rule of law, the sanctity of contracts (and treaties), a neutral judiciary, predictability, and no political interference in commercial contracts (except when one Opposition party or another promises to tear up some agreement inked by a predecessor government should they come into office.).
To be sure, Canada’s relatively small market, interprovincial trade barriers and an overlapping regulatory morass frustrates inbound investment. To attract more foreign direct investment, Canada must achieve more than high marks in a country risk or political risk assessment. Canada must urgently examine its tax policies and an unworkable federal regulatory review process which has and will continue to hold up large and critical infrastructure projects. The years it takes to thread the regulatory needle is self defeating.
To attract foreign investment Canada needs more than talking points. It needs to urgently examine and right-size regulatory regimes and tax policies to meet this moment.