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Taking apart Tories' Party Line on China-Canada Treaty

A Conservative MP's letter attempting to soothe citizens worried about FIPA is misleading says expert Gus Van Harten, who breaks it down item by item.

Gus Van Harten 5 Nov

Gus Van Harten is an associate professor as Osgoode Hall Law School and author of Investment Treaty Arbitration and Public Law (Oxford University Press, 2007). His research is available here and here.

[Editor's note: Opponents of the Canada-China investment treaty (FIPA) continue to hammer the Harper government in an effort to delay the agreement's ratification, which could happen anytime. According to a report last week by the Globe and Mail, the government was in a position to ratify the agreement Thursday, Nov. 1 through an order-in-council. However it has not yet done so, and "it now appears that ratification will wait until Mr. Harper returns from an eight-day trip to Asia," which began Saturday [Nov. 3], the Globe reported.

Critics have called FIPA a "31 year ball and chain on Canada" that would hand over unprecedented control over the country's pace and scale of resource development to China. "Ottawa capitulated to China on everything," concluded Conservative commentator Diane Francis. Many Canadians have written to the government with concerns. (As of Sunday night, 74,000 people sent messages asking specifically for a rejection of FIPA, as well as the sale of Nexen to the Chinese National Offshore Oil Corporation, through a Leadnow campaign.)

Bev and Cole McKay sent one of those messages. They received a response from Alberta Conservative MP Blake Richards. The Tyee forwarded the response for analysis to Gus Van Harten, associate professor at Osgoode Law School and a critic of the agreement who's written letters outlining his concerns to Prime Minister Harper and B.C. Premier Christy Clark, both published on The Tyee. Van Harten responded to 11 claims made by government in Richards' letter. We publish them below.]

Government claim #1:

Our Conservative Government is committed to creating the right conditions for Canadian businesses to compete globally. Canada's Foreign Investment Promotion and Protection Agreement (FIPA) with China -- the world's second largest economy -- will provide stronger protection for Canadians investing in China, and facilitate the creation of jobs and economic growth here at home. 


Chinese investment may facilitate the creation of jobs and growth in Canada. On the other hand, if it removes value-added benefits from Canada's resource sector or other areas of the economy, then it may undermine jobs and growth. A problem with the treaty is that it will hamper the ability of Canadian governments to ensure that benefits of resource extraction in Canada accrue reasonably to Canadians. On the other hand, China will retain a wider range of policy tools to discriminate in favour of its own companies in China.

Also, the potential role of the treaty in protecting Canadian companies in China is being overstated by the government and other proponents of the deal, some of whom are lawyers at firms that offer investor-state arbitration services. No foreign investor has ever sued China in a known case under one of these treaties since the explosion of investor lawsuits against countries began about 15 years ago. This may be because companies fear jeopardizing their relationship with the Chinese government. On the other hand, Canada has been sued many times by U.S. companies under NAFTA and has lost important cases on economic measures and environmental regulations (Ethyl v Canada, SD Myers v Canada, AbitibiBowater v Canada, and Mobil/ Murphy Oil v Canada), and the lawsuits against Canada keep coming. If anything, Canada appears more vulnerable to being sued and having to pay compensation to Chinese investors under the treaty.

Notably, at the time of NAFTA, Canadians were told that NAFTA was needed to protect investors in Mexico. Since then, U.S. investors have sued Canada dozens of times under NAFTA and a Canadian investor has sued Mexico in just one case. Meanwhile, Canadian investors have lost all of the 16 cases they have brought under these treaties, usually against the U.S.

The arbitration mechanisms under these treaties enrich lawyers and arbitrators, but there is little evidence that they can protect Canadian business in a meaningful way against a major player like the Chinese government, especially when China has retained the right to continue to discriminate in favour of its own companies.

Government claim #2:

Our government's ambitious pro-trade plan is opening new doors for Canadian businesses in dynamic, high-growth markets like China, and our FIPA with China provides important benefits for Canadian investors.


Unlike NAFTA, the FIPA is not a trade agreement and does not reduce tariffs for Canadian exports to the Chinese market. Its main role is to protect Chinese-owned assets from legislatures, governments, and courts in Canada, and vice versa. Because there is more Chinese investment in Canada than Canadian ownership in China, the treaty's investor protection mechanism puts disproportionate risks and constraints on Canada.

To illustrate, if current trends were to continue (tracking from inward Foreign Direct Investment flows during 2008 to 2011), the ratio of Chinese investment in Canada to Canadian investment in China would increase from about 2 to 1 now to 10 to 1 in approximately 10 years. Also, Chinese investment in Canada would exceed U.S. investment in Canada after roughly 17 years. Incidentally, this is just over halfway through the minimum 31-year lifespan of the Canada-China treaty. These investment outcomes are highly speculative and may not come to pass. But it is the governments' responsibility to indicate how much Chinese investment is anticipated under the treaty and in what areas so that the treaty's risks and constraints can be assessed and debated in an informed way.

Government claim #3:

For businesses looking to set up in China, China cannot treat a Canadian company less favourably than they would any other foreign company looking to do the same.


This is misleading. The treaty does very little to protect Canadian investors from discriminatory treatment in China and, in fact, it locks in an uneven playing field. Under the treaty, both Canada and China can keep their existing laws and practices that discriminate in favour of their domestic companies, and these existing laws and practices are then locked in. Because China has more discriminatory laws and practices than Canada, the treaty freezes an unlevel playing field in China and a relatively level one in Canada.

To illustrate, in a recent report the U.S.-China Business Council reported that foreign investors in China complained they had to obtain licenses where local companies did not and that they had to pay higher tax rates than domestic investors. The Canada-China treaty exempts these existing discriminatory practices in China from the requirement not to discriminate against Canadian companies (see Article 8(2)(a)(i) of the treaty).

Incidentally, other countries that have signed these treaties with China, such as Germany, obtained a commitment from China to not discriminate after the other country's investments were allowed in, without an exception for existing discriminatory measures like that in Article 8(2) of the Canada-China deal. Canada failed to get the same protection for its investors in China, even assuming that the treaty's arbitration mechanism is reliable to enforce China's commitments.

Government claim #4:

Fundamentally, this investment treaty will help protect the interests of Canadians.


Perhaps the treaty will protect Canadian interests. But on each of the key issues of market access, investor protection, and leveling of the playing field, the treaty favours China. The federal government needs to acknowledge this and explain why it is in Canada's interest. And before locking in the treaty for 31 years, the federal government and other governments in Canada should make public their risk assessments and cost-benefit analyses of the treaty in order to allow independent scrutiny and informed debate. If they have not done those assessments, then frankly it would be negligent for the federal government to ratify the treaty.

Notably, when the Australian Productivity Commission in 2010 assessed the role of the investor-state arbitration mechanism that is replicated in the Canada-China treaty, it recommended that Australia not include this mechanism in future treaties. The Australian government accepted this recommendation after being sued under an investment treaty by Philip Morris for Australia's national anti-tobacco legislation.

In recent weeks, the federal government has indicated that state-owned entities should be treated differently at the stage of admission to Canada's economy. However, similar issues arise in relation to the treaty and its extensive protections for state-owned entities after they are admitted to Canada. The treaty will allow Chinese companies to challenge democratically-authorized decisions in Canada via arbitration processes that are not open, fair, and independent in the manner of a domestic or international court. Canadians deserve an opportunity to learn more about these arbitrations and the lawyers who control them before their sovereignty is conceded to the arbitrators for 31 years, for the purpose of protecting Chinese state-owned firms from governments in Canada.

Government claim #5:

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. The Canada-China FIPA is very similar to the other FIPAs that Canada is a party to. It contains all of the core substantive obligations that are standard in our other FIPAs. 


The Canada-China treaty is vastly different from Canada's other FIPAs with countries like Armenia, Costa Rica, and Romania, all of which invest relatively little in Canada (notably, the only other FIPA with a major player, Russia, does not contain the same broad investor-state arbitration mechanism as the post-NAFTA FIPAs). Chinese ownership of assets in Canada will dwarf that of these other countries. Thus, the FIPA's liabilities and constraints are much greater for Canada. Unlike all of Canada's other FIPAs, Canada is the capital-importer, and to a very significant extent, in the relationship with China.

Before ratifying the treaty, the government should make clear whether it could admit tens or even hundreds of billions in Chinese investment in Canada over the foreseeable future. It should allow for independent assessments of the risks and constraints that will be put on Canada in relation to Chinese-owned assets in different scenarios. These risks and constraints, and the costs of the treaty's unlevel playing field on both market access and discriminatory practices, could then be weighed against the purported benefits of investor protection to Canadian-owned assets in China.

Government claim #6:

Our Conservative Government has introduced an unprecedented process for putting Canadian international treaties to the scrutiny of the House of Commons. In 2008, our Government announced that treaties between Canada and other states or entities, and which are considered to be governed by public international law, will be tabled in the House of Commons. Accordingly, the Canada-China FIPA was tabled in the House of Commons on September 26, 2012. This reflects our government's commitment to transparency and accountability.


The treaty's constraints on Canada will last for 31 years, with major implications for Canada's relationship with one of the largest economies in the world. It is as yet unclear how China will act as a major capital-exporter and how it will use these sorts of treaties to protect its interests. Rather than release assessments and analyses of the treaty, however, the government has limited Canadians to about five weeks' notice of the treaty text with little opportunity for scrutiny and debate. If the government were serious about making a well-informed decision, it could, for example, establish an independent commission to study and report publicly on the costs and benefits of the treaty for Canadians.

Government claim #7:

With regards to investor-state dispute settlement, it is Canada's long-standing policy to permit public access to such proceedings. Canada's FIPA with China is no different. As we do with all other investor-to-state disputes, this FIPA allows Canada to make all documents submitted to an arbitral tribunal available to the public. All decisions of the tribunal will be made public.


The federal government still has not released a NAFTA award in an important case that Canada lost in May 2012 (Mobil/ Murphy Oil v Canada). This undermines the government's credibility when it says that it will make decisions and documents public under the Canada-China treaty. It also raises the question of why the government in this treaty, unlike other FIPAs, retained the right to withhold documents relating to Chinese lawsuits against Canada (see Article 28 of the treaty). By retaining this right, the government will be able to shield itself from embarrassment by not telling Canadians about cases in which a Chinese company has sued Canada. The government's response, in the face of the clear language in the treaty, is to ask Canadians to trust that the government will release all documents in all cases over the next 31 years.

Government claim #8:

Ultimately, access to international arbitration will provide Canadian investors with the confidence that comes from recourse to an independent, international body to adjudicate any disputes.


Again, no foreign investor has ever resorted to these arbitration processes in a known case against China, despite hundreds of lawsuits against other countries over the last 15 years. Also, the arbitration process lacks institutional safeguards of independence that apply in courts. Based on the arbitrators' decisions to date, there is reason to suspect that the arbitration mechanism may favour major capital-exporting countries and their investors to the detriment of Canada under this treaty. (More here.) Canada should have insisted on a dispute settlement process that accords with the rule of law and ensures a fair, rules-based system.

Government claim #9:

It is also important to note that under this treaty, both Canada and China have the right to regulate in the public interest. Chinese investors in Canada must obey the laws and regulations of Canada just as any Canadian investor must.


This is misleading. Both countries maintain the right to regulate in the public interest only to the extent that the arbitrators agree with how that right was exercised. The arbitrators are largely a power unto themselves and have regularly rejected interpretations of these treaties that were proposed by governments, including by Canada. In many ways, they have expanded their own powers to award public compensation for foreign investors. It should also be kept in mind that these are for-profit adjudicators who are paid by the case, not tenured judges who receive a set salary from the state.

Further, a government may face intense pressure not to exercise its right to regulate, due to the power of foreign investors to threaten lawsuits for hundreds of millions or billions of dollars. Even if the government thought it had a strong defence in a case, it would run the risk of being ordered to pay massive compensation to an investor. Unlike at the World Trade Organization, the compensation order tracks back to the government's original decision, creating uncertain but potentially catastrophic fiscal risk for governments. Although governments maintain the right to regulate, subject to the arbitrators' authority, their bargaining power can be undermined significantly in closed-door discussions, especially in relation to expensive projects.

Finally, Chinese investors, by their access to arbitration tribunals outside of the Canadian legal system, may obtain a competitive advantage over Canadian investors who are limited to Canadian courts. This favouring of foreign investors over domestic companies is one of the reasons that the Australian Productivity Commission and the Australian government decided against including these arbitration mechanisms in future treaties, let alone in a treaty where Australia occupied the capital-importing position and appeared especially vulnerable to lawsuits.

Government claim #10:

At the same time, Chinese investment in Canada will continue to be subject to the Investment Canada Act for both the net benefit test for acquisitions above the applicable threshold and for national security concerns with respect to any investment. Decisions by Canada under the Investment Canada Act are excluded from challenge under the provisions of the FIPA.


This is true; indeed, if the treaty comes into effect, the primary protection for Canadians from the treaty's risks and constraints will be the federal government's power to limit Chinese investment under the Investment Canada Act. That said, there are weak points that could potentially be exploited by Chinese firms to buy assets in Canada outside of the framework of the act. Also, on this point, Canada excluded only the Investment Canada Act from the treaty, whereas China excluded unspecified "Laws, Regulations and Rules relating to the regulation of foreign investment" (see Annex D.34 of the treaty) that allow China to block Canadian investments. As a result, in Canada -- but not in China -- a sub-national (e.g. provincial) government could not rely on this clause to block takeovers by foreign investors, if the federal government approved the takeover. This is another example of how the treaty is lopsided in China's favour.

Government claim #11:

We've been clear that Canada wants to continue to expand its relationship with China, but we want to see it expand in a way that produces clear benefits for both sides. By ensuring greater protection against discriminatory and arbitrary practices, and enhancing predictability of a market's policy framework, this FIPA will allow Canadians to invest in China with greater confidence.


What are the benefits for Canada? The treaty does not lower tariffs for Canadian exports to China's market. It does not open China's economy to investment by Canadian companies, beyond what governments in China already allow. It does not level the playing field for Canadian companies. On the contrary, the treaty allows China to continue to discriminate in favour of its own companies in China, while locking in the relatively even playing field in Canada.

On investor protection, the treaty favours China because Chinese investment in Canada is more extensive than Canadian investment in China and because Canada appears more vulnerable to being sued in arbitration proceedings. Thus, Chinese companies -- and presumably the Chinese government -- will have more bargaining power over governments in Canada and, in turn, an apparent competitive advantage over Canadian companies in their own country. It is dubious to claim that the treaty's arbitration mechanism, which has never been invoked by a foreign investor in a known case against China, will offer meaningful protections or enhance predictability for Canadian companies in China.

A final note

Why would the federal government agree to such a lopsided deal? One reason could be that this is the price demanded by the Chinese government in return for allowing large flows of Chinese investment into Canada. Whatever the reason, the federal government should acknowledge that the treaty is lopsided and explain how it will nevertheless benefit Canada. This would allow public debate to focus appropriately on the terms that will accompany Chinese ownership of assets in Canada, the extent to which those terms may shift value-added benefits of resource extraction and other economic activity in Canada to China, and the government's strategy for avoiding this outcome in spite of the constraints imposed by the treaty.

These questions are important because the treaty will undermine the bargaining power of Canadian governments and the competitiveness of Canadian companies in relation to Chinese state-owned companies for at least 31 years. Once the treaty comes into effect, no future Canadian Parliament or court will be able to change any of its terms without China's consent.

Faced with public concern about the treaty, the government has released misleading information about the treaty and has pointed fingers at critics. For example, I have been called by the government or other proponents of the treaty: alarmist, protectionist, totally wrong, fear-mongering, and xenophobic. This avoidance of the substantive issues at stake heightens my own concern that governments in Canada have not considered carefully the pitfalls and risks of this imbalanced deal for Canadian voters, taxpayers, businesses, and workers. The treaty should not be ratified, at least until after a thorough, independent, and public review of the government's claims.  [Tyee]

Read more: Politics

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