By Keith Norbury
A bilateral investor-protection agreement reached last year between Canada and China is either good for Canada, or bad, depending on which international trade expert one asks.
“It’s important to Canada mainly because Chinese investment in Canada already enjoys our transparency and judicial court system protection. But Canadian investment in China does not enjoy that,” said Dr. David Fung, Chairman and CEO of ACDEG Group of companies and a former senior fellow of the Asia Pacific Foundation of Canada.
On the other hand, Gus Van Harten, a professor at York University’s Osgoode Hall Law School, has been highly critical of the Canada-China Foreign Investment Promotion and Protection Agreement, or Canada-China FIPA, which representatives of the two countries signed in September, but which has yet to be put into force.
Mr. Van Harten outlined his concerns in a 14-point letter to Prime Minister Stephen Harper in October. Among Van Harten’s worries are that the treaty potentially locks in Canada for 31 years; that the treaty will allow Chinese investors in Canada “to challenge Canadian legislative, executive, or judicial decisions outside of the Canadian legal system;” and that because Chinese investment in Canada is expected to outstrip Canadian investment in China, “Canada will be much more exposed to claims and corresponding constraints.”
Debra Steger, a law professor at the University of Ottawa, said the main purpose of the Canada-China FIPA is to open more doors for Canadians to invest in China “because of concerns about the lack of protection for investments in China … and the risk of arbitrary decisions and the lack of rule of law protections.” And Mr. Fung noted that the Canada-China FIPA would “help to level the playing field” by enabling more Canadian investments into China. “Now, investment in China is important to Canadians fundamentally because, in today’s world, trade follows investment,” Mr. Fung said. “As the Chinese domestic market continues to expand, for Canadians to access that domestic market without being in the market will be a major disadvantage.”
That is pretty much the federal government’s rationale for concluding a FIPA with China. “This treaty is designed to protect and promote Canadian investors in China through stable, predictable rules and protection against discriminatory and arbitrary practices,” said an email from Rudy Husny, a spokesman for International Trade Minister Ed Fast. “Creating a secure, predictable environment for Canadian investors is why, since 2006, our government has concluded or brought into force FIPAs with 14 countries, and are actively negotiating with 12 others.”
While both countries have signed the Canada-China FIPA, it has yet to be put in force in either country. In December, Mr. Fast told reporters that the government would soon decide when to implement the deal, according to www.ipolitics.ca. Mr. Fast was not available for an interview. And Mr. Husny declined to say what is holding up ratification of the deal other than to say, “The Canada-China FIPA will come into force once both parties complete their domestic ratification processes.”
The government did, however, clear the way for that ratification process by tabling the agreement in the House of Commons in September. After 21 days in the House, with or without debate, the deal can then be ratified by the federal cabinet. “Curiously, the NDP and Liberal Party had no less than four different opportunities to debate the Canada-China FIPA in Parliament — but chose not to,” Mr. Husny said.
Ms. Steger said it isn’t unusual for ratification of an international trade deal to take months or even years. “Usually when the federal government negotiates and signs an international treaty, it is not ratified very quickly and this one was only signed late last year,” said Ms. Steger, who is an expert in international trade and a senior fellow with the Centre for International Governance Innovation, an economics think tank based at the University of Waterloo.
Dr. Fung speculated that the Canadian government is “just waiting for a quieter time and will then sign off on it.” As for the Chinese, they have been waiting for new President Xi Jinping and new Premier Li Keqiang to take office before bringing the FIPA into force, Dr. Fung said. (Both appointments were formalized in mid-March.)
Mr. Van Harten said in an email message that he couldn’t comment further on the FIPA because he has become “involved in a constitutional challenge to aspects” of the agreement. He isn’t alone, though, in raising concerns. The Hupacasath First Nation in B.C. filed court documents in January seeking an injunction against the FIPA, arguing it would violate treaty rights, the Canadian Press reported. And Financial Post columnist Diane Francis said in November that “Ottawa capitulated to China on everything” in the deal and compared the federal government’s negotiating skills to those of disgraced British Prime Minister Neville Chamberlain, who appeased Nazi dictator Adolph Hitler in the lead-up to the Second World War. “Opposition parties are screaming, but they always do about trade deals,” Ms. Francis wrote. “By contrast, I am a free enterpriser, a free trader, a small ‘c’ conservative and an experienced business person and believe this agreement represents a naïve, shocking lapse in judgment.” For example, Ms. Francis took exception to the agreement’s arbitration process that would allow a Chinese company to take any dispute “outside the Canadian legal system.” However, Ms. Steger said that is how arbitration of investment treaties has always worked. “This isn’t anything new,” Ms. Steger said. “There are 3,000 bilateral investment treaties and free trade agreements around the world that have investment chapters in them.”
FIPAs represent a framework for the fair and non-discriminatory treatment of international investors – they are not trade Agreements, like the North American Free Trade Agreement (NAFTA). Unlike NAFTA, the Canada-China FIPA applies to investments only after they have been established in either country. Foreign investors that have not yet received clearance to invest in the country, and that have therefore not completed their investment, are not protected by the Agreement. In Canada, foreign investors must meet the requirements of the Investment Canada Act, which means that if the proposed investment is judged to be subject to review, the proposed investment must be deemed to be in Canada’s best interests. Proposed Canadian investments in China will be subject to similar treatment.
It is interesting to note that Canadian investors in China may be subject to “performance requirements”, but Chinese investors in Canada will not be subject to such requirements. “Performance requirements” refer to conditions that the host country may impose related to required export levels of goods produced, purchase of locally-made goods and services, restrictions on local sales of goods, restrictions on transfer of know-how, etc. This difference in the treatment of investment proposals in the two countries, however, is the result of Canada being bound by the terms of NAFTA, which prohibits the application of performance requirements on mutual investments between the three NAFTA partners, and also prohibits the imposition of performance requirements on investments in the three NAFTA Countries by investors from third party nations. China is not subject to such restrictions, with or without this FIPA.
The Canada-China FIPA stipulates that either party can submit an arbitration claim to the International Center for the Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL). “There are three or four forums where these disputes can be resolved,” Ms. Steger said. “Again, they’re not new. They’ve been around for a long time. And there isn’t anybody who thinks that these processes aren’t fair.”
Ms. Steger and Mr. Van Harten agree that Canada typically signs FIPAs with developing countries that have few investments in Canada. But they disagree on the significance of China’s current investments in Canada. “Usually these agreements are negotiated between developed and developing countries and they benefit investors from developed countries. So is the idea that somehow the developing country investor is going to benefit from the provisions of this agreement in a developed country?” Dr. Steger said in a quizzical tone. “That’s not what these provisions are designed for.”
Mr. Van Harten, however, argues that China already invests heavily in Canada. According to Statistics Canada estimates, China had about US$10.7 billion of direct foreign investment in Canada in 2011, compared with about US$4.4 billion in Canadian direct foreign investment in China. (Chinese statistics estimate the latter at US$8.3 billion, says a document titled Canada-China Economic Complementaries Study on the International Trade Ministry’s website.) In any event, China only accounted for about two per cent of the total of US$597.4 billion direct foreign investment in Canada in 2011, as reported in Canada’s State of Trade: Trade and Investment Update 2012.That level of investment is not a lot, said Ms. Steger, “when you consider how much Chinese investment there is in the U.S. and Europe and other parts of the world.” Yet even without a FIPA, Chinese investment in Canada has grown 36-fold in the last decade, according to government figures.
Ms. Steger said that the national treatment provision in the Canada-China FIPA doesn’t mean that Canada is ceding provincial control over natural resources to a foreign power, as federal Opposition Leader Thomas Mulcair has charged. “What article 6, national treatment, means is simply that it allows government to regulate in any way it wishes,” Ms. Steger said. “It can change regulations at any time, any type of regulation, federal, provincial, municipal, whatever. The only thing is that the regulations that it applies must be applied no less favourably to foreign investors as they are applied to Canadian investors. Mr. Fung said it’s a “red-herring” that the Canada-China FIPA might impinge on provincial jurisdiction. “The federal government has consulted all the provinces and none of the provinces have raised any objections,” Mr. Fung said.
Ms. Steger admitted that the Canada-China FIPA “is not a perfect agreement for Canada.” For example, it doesn’t contain any provisions for state-owned enterprises, which make up about a third of China’s economy. Also, it requires Canadian investors wishing to bring a claim against a Chinese government to first make use of a Chinese “domestic administrative procedure,” she said. There is no such requirement for a Chinese investor bringing a claim against Canada. Ms. Steger also said the FIPA has “minimal” transparency provisions.
Another misunderstood provision in FIPAs is called “minimum standard of treatment,” Ms. Steger said. It doesn’t prevent Canadian governments from changing regulations either, she said. Sometimes called “fair and equitable treatment,” this provision will protect Canadian investments in China once they are in place, she said.
“There are lots of horror stories about Canadian investments in China,” Mr. Fung said, with some related to arbitrary decisions of local officials. “With a FIPA, fundamentally the central government is saying that they are providing coverage for the behaviour of their local governments,” Mr. Fung said. “In Canada, our cities don’t go and destroy somebody else’s investment. But in China, a mayor has a lot more power than our mayors in Canada.”