Companies in other North Atlantic Treaty Organization countries, which have more "balanced" controls, are picking up the slack, the report said.

The controls are designed to protect national security and to preserve Canada's unique trade relationship with the United States, but evidence suggests the Canadian government's interpretation and application of the controls "may be unduly sweeping and rigid, even going further, in some instances, than is typical in Washington".

"The result is lost business for Canada with no material enhancement of security," said the independent, government-mandated review, which looked into the competitiveness of Canada's aerospace and space industries.

It urged Ottawa to review its rules to see whether they are unnecessarily restrictive.

The country's aerospace sector is the fifth biggest in the world, and is dominated by Montreal-based Bombardier Inc, which is the world's No. 3 civil aircraft manufacturer. Bombardier has struggled to find customers for its all-new, narrow-body C-Series jet, which is set for its first flight by the middle of 2013.

Other prominent Canadian aerospace companies include flight simulator manufacturer CAE Inc and Heroux-Devtek, a maker of landing gear systems.

The review, which was chaired by David Emerson, a former federal minister of trade, industry and foreign affairs, also urged Canada's Conservative government to be more aggressive in opening doors for the aerospace industry in foreign markets.

"Canada, almost culturally, has been reticent to engage in aggressive 'diplomacy' of this kind," the review said.

"Companies indicate that other governments have taken notice of Canada's relatively passive approach and have sometimes interpreted it as a lack of enthusiasm for, and commitment to, Canadian products."

Industry Minister Christian Paradis welcomed the report saying the government is "committed to helping the sector grow and add to the nearly 160,000 direct, indirect and induced jobs the industry supports".

The Aerospace Industries Association of Canada said in a statement that the review recognized the "critical juncture the aerospace and space industry is facing, and the urgent need for government, industry, academia and unions to adapt to a rapidly changing and highly competitive global environment".

(Reporting By Nicole Mordant in Vancouver; Editing by Peter Galloway)

• A Permanent Economic Emergency