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China Trade Deal a '31-Year Ball and Chain' on Canada

Expert says treaty gives Chinese corporations powers to override Canadians' self-determination.

By Andrew Nikiforuk, 19 Oct 2012, TheTyee.ca

Cuffed world

China's powerful state-owned enterprises including fossil fuel giants Sinopec, the Kailuan Group and CNOOC to control pace and scale of resource development in Canada, says Van Harten.

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The new China investment deal that Prime Minister Stephen Harper inked in Russia and that will become law by Nov 1 could be "a 31-year ball and chain on Canada," without critical changes says Gus Van Harten, a Toronto-based global legal authority on investment trade deals.

Moreover the agreement, part of Harper's aggressive agenda to sell Canadian energy and mining resources to the world's second largest economy, will make it easier for China's powerful state-owned enterprises (SOE's) such as Sinopec, (Asia's largest refiner) the Kailuan Group (a coal conglomerate) and CNOOC (a national oil company) to control the pace and scale of resource development in Canada.

The Foreign Investment Promotion and Protection Agreement (FIPA) also gives China's state owned enterprises, already under fire for corruption and inefficiency, the right to contest any Canadian standards that might stipulate the use of Canadian labour and materials in resource projects.

"The deal in effect gives risk insurance to Chinese companies borne by Canadian taxpayers. Taxpayers assume major liability for business losses of Chinese investors due to legal or regulatory changes in Canada," explains Van Harten, who has sent a letter to Prime Minister Stephen Harper (published here on The Tyee) and another to British Columbia Premier Christy Clark laying out his critical analysis.

Given its fast tracked approach to finalizing the deal, the Harper government will not have completed an assessment on the treaty's environmental impacts on resource development until a week after the treaty is approved without parliamentary debate.

Green MP Elizabeth May has called for an emergency debate on the treaty but has been ignored by the Harper government. The NDP has also raised criticisms of the treaty soon to automatically become law.

Chinese poised to trump provincial powers

Provincial governments, too, have reason to want the ratification countdown slowed if not halted, says Van Harten. The deal encroaches on provincial powers by giving Chinese investors the right to contest them. "And the federal government is not allowed to sign treaties that do that," adds 41-year-old Van Harten who teaches investment law at Ontario's Osgoode Law School. "Ottawa should be seeking provincial consent and I've written to all the premiers and urged them to stop the rushed ratification of this agreement."

Under Article Four of the agreement, vague yet broad powers are given to Chinese investors to sue provincial governments if they find standards, rules or regulations discriminatory.

If the National Energy Board, for example, approved the Northern Gateway Pipeline, which is largely funded by Chinese state-owned enterprises, and the British Columbia government was to impose new restrictions or reject the project, Chinese investors could sue under the treaty. The issue would then be resolved in a quasi-secret arbitration court administered by corporate lawyers and other arbitrators.

"The Chinese could say we got approval and it's not right to change the rules now they've invested their money," explains Van Harten.

In recent years Bilateral Investment Treaties (BITS) have become a global economic fashion as the United States, Europe and Canada have signed a series of free trade agreements among themselves or with smaller trade partners. (The North American Free Trade Agreement was a BIT.)

BITS have changed international law by giving private investors the right to sue host states for alleged breaches of investor rights, says the Canadian Council for International Cooperation.

"The mere threat of such a suit, which can lead to an award for hundreds of millions of dollars, can have a 'chill effect' on governments looking to raise regulatory standards or consider new policies in the public interest."

To date, some 300 BITs have led to compensation claims by corporations against governments, and "that's only part of the iceberg," says Van Harten.

Virtually no reciprocity

But signing a deal with China, a global superpower on a strategic buying spree of energy, land and resources, is not like signing a treaty with Romania or Senegal adds Van Harten.

For starters there is no actual reciprocity. Little capital investment flows into China from Canada because China's "authoritarian capitalism" doesn't permit it.

The Organization for Economic Cooperation and Development, for instance, regards China as the most restrictive place to invest in the G20 and China has just passed a new security law restricting foreign investment. Both the American and European Chambers of Commerce have issued scathing reports on China’s corrupt and closed economy.

Officials at the American Chamber of Commerce recently told Reuters that "China uses a number of discriminatory policies aimed at promoting domestic innovation that prevent foreign companies from competing on a level playing field against Chinese companies."

More importantly businessmen with a long history in China such as James McGregor have warned that the greed and corruption that now dominates China’s state corporations is gaming the international trade system.

"The much-vaunted China Model has morphed in the past decade into a one-of-a-kind system of authoritarian capitalism that is in danger of terminating itself -- and taking the world down with it," warned McGregor in an editorial last week.

The Canadian government reflects no such concerns. According to Harper, "This agreement with China -- the world's second largest economy -- will provide stronger protection for Canadians investing in China, and create jobs and economic growth in Canada."

But the treaty will make it extremely difficult if not impossible to contest the controversial employment of thousands of Chinese miners by Shougang Group, China’s largest steel producer, and the Kailuan Group, a major coal-mining firm, in a string of coalmines in northern British Columbia.

Locking in Bill C-38's gutted regs

Moreover the agreement may thwart the restoration of three critical pieces of environmental legislation that the Harper government recently gutted in its Omnibus Bill C-38 last spring in order to speed up and enhance pipeline and mining project approvals for mostly Chinese investors.

The government removed the protection of fish habitat from the Fisheries Act; curtailed the scope and breath of environmental assessments and even changed the Navigable Waters Act to make it easier to build pipelines.

Restoring the integrity of these regulations may now be impossibly expensive says Van Harten. "Chinese investors will say you can't change the rules after we've put our money in. We made these investments on the understanding that those environmental rules won't be there."

"The Chinese have a very clear strategy. They want to vacuum up all value-added from resources extracted from Canada from top to bottom."

The treaty opens the door for tens of billions of dollars of investments in Canada's resources such as the controversial Nexen deal, which most Canadians oppose.

Ed Fast gets it wrong says Van Harten

CNOOC, a national oil company, has offered the Canadian owned oil and gas producer with valuable global assets, a stunning 60 per cent premium in a $15-billion cash deal. Yet Ed Fast, Minister of international Trade and an Abbotsford MP, has called the offer a boon to the economy.

"We want to be one of the most attractive investment environments in the world because foreign investment does drive economic growth within Canada, and it does ensure our long-term prosperity," Fast told Maclean's last week.

In the same interview Fast, a corporate lawyer, denied that the treaty will surrender Canadian sovereignty or diminish transparency:

"We are not giving up transparency. Those who are suggesting otherwise are anti-investment and anti-trade. We have gone through this agreement with a fine-toothed comb to ensure it promotes Canadian interests."

Van Harten says that's false. "The treaty states clearly that it allows the government to withhold documents from the public, when Canada is sued by a Chinese investor, where the government consider this 'in the public interest.'"

Other FIPA-like deals state clearly that all of the documents will be made public. "Why the change if the intent is full transparency?" asks Van Harten. "Canadian taxpayers are entitled to know the arguments that their government is making in Chinese lawsuits against Canada under the treaty, in all cases not just the ones opened up by the government at its wide discretion."

"The issue is not whether one is anti-trade or anti-investment," adds Harten. "I am pro both, speaking personally. The issue is whether this treaty is a good deal for Canada. If it is a good deal, why the rush? Why not allow careful study by the provinces and by other constituencies before finalizing it about five weeks after it was announced?"

Canada mirrors developing country status

The Canada China Business Council, founded by the Montreal-based Power Corporation of Canada, unwittingly describes Canada's trade relationship with China as that of a Third World nation with a massive trade imbalance.

"Trade between Canada and China is becoming increasingly specialized. Canada is a small, but growing, net exporter of resource-based goods to China. For its part, China holds a considerable, and growing, trade surplus with Canada in manufactured goods."

Canada now exports $17-billion worth of canola seeds, wood pulp, nickel and coal to China. In contrast China exports $50-billion worth of laptop computers, digital games and cell phones to Canada.

To Van Harten it's clear that the Chinese government or what experts like McGregor call "authoritarian capitalism" want Canada's raw resources including bitumen, shale gas, wheat, wood and coal.

"They will process and manufacture these products in China because they have the cheap labor and they have a strategic plan to develop competitive industries. They are playing the same game other industrial powers have played."

State owned enterprises run by the Communist Party now dominate a third of China's economic output. "Canada is being asked to play the role of peripheral supplier of raw materials and this treaty locks us into that role and stops us from making decisions or exercising sovereign authority to move away from that role," says Harten. "It's a win for China."

"Why would the Canadian government provide protection to Chinese investors without insisting on fair access by Canadian investors to the Chinese economy or preferred access by Canadian exports to the Chinese market? We have given the Chinese government everything they wanted."

Economist magazine slams China’s state-owned corporations

Van Harten also believes "the opaqueness of some state-owned companies and their relative imperviousness to regulation by Canadian authorities" should raise alarm bells across the country. "It’s one thing to deal with companies that come from the same regulatory environment but it's another to deal with companies that don't and then give them special protections for potentially massive investments in this country."

The Oct. 6 issue of the Economist reports that China's state owned enterprises, (SOEs) now run by the Communist Party, harvest wealth to cement power and now stand as dangerous obstacles to democratic reform and international trade. According to one Chinese study, government grants and subsidies to large state owned enterprises such as Sinopec, CNOOC and Petro China (and these three firms alone have invested $20-billion in the tar sands) are so large that if the government removed them, these firms would all lose money.

Much of the wealth generated by companies like Sinopec, a funder of the Northern Gateway pipeline, has ended up "enriching SOE's chiefs and political patrons, frequently sons and daughters of Communist Party leaders, who are so powerful that they often outrank the heads of bodies supposed to regulate them," adds The Economist.

"Money that could be much more efficiently allocated is instead reinvested into SOEs, reinforcing their strength and their bosses' fortunes. These vested interests are in turn some of the most strident opponents of political and economic reform, since they are the ones with the most to loose." Yet the China treaty signed by Harper empowers these very companies in Canada.

'Land grabbing'

"This agreement needs to be studied in the public sphere before this deal is locked in for 31 years," adds Van Harten.

The treaty also has implications for the purchase or "land grabbing" of Canadian farmland by Chinese investors or proxies acting for Chinese companies in Saskatchewan. In Africa and New Zealand such investments have sparked bitter debate about land sovereignty and food security.

Should farmland and agricultural production capacity, such as potash, be regarded as something of "national strategic interest"? asks University of Calgary anthropologist Josephine Smart in a paper entitled "Dancing with the Dragon."

"If so, the current absence of policy in most provinces and territories regarding foreign ownership of farmland merits discussion, debate and reformulation, if necessary."

But the Canada/China trade deal, once enacted, makes such discussions and policy decisions mute if not impossible.

"The Canada-China treaty would extend special protections to Chinese investors if they, for example, bought up large amounts of agricultural land under the radar," explains Van Harten.

The real question Canadians now must ask themselves, adds Smart in her paper, "is whether all foreign direct investments in Canada should be welcomed in the spirit of globalization" or whether Canadians should define what's in the best interest for Canadians.  [Tyee]

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