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.

By Gus Van Harten 5 Nov 2012 | TheTyee.ca

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.

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]

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