On Canada-China investment protection

The Canada-China FIPA has problems but let’s be clear about what they are.

I was asked today what I thought of Canada’s recent agreement with China on an investment and promotion agreement (FIPA). The individual noted that he had read that we were “selling our souls for short-term gain.” This view is being promoted by some, notably Green Party leader Elizabeth May, who note that the FIPAwith China is tantamount to the undermining of Canadian sovereignty. That’s a rather loaded statement, and given my friends question, I thought it might be helpful to review the agreement and some of the more controversial aspects of it to see if May’s views hold.

First, on all incoming investment, the Investment Canada Act applies and allows for the review and refusal of such investment if it is not found to be of net benefit to Canada. As I’ve written before, this is purposely vague and allows policy makers significant leeway in making this decision. This agreement changes nothing with respect to this.

Second, once an investment is made, does this FIPA mean that Canadian policy makers will be unable to regulate or protect the environment, or other elements of our society such as financial stability or cultural protection? No, not whatsoever. The agreement contains specific language that allows for regulation. Article 33 of the agreement explicitly states allowances for such. The agreement also contains language regarding expropriation, and the ability of the state to takeover private, foreign owned assets. The key to both of these areas is that if we chose to do so, we can’t discriminate against the firms such policies might affect, i.e., we can regulate to our hearts desire but we can’t simply regulate against firms from one place and not equally across all.

Third, while some have made a big deal out of the fact that the agreement would tie future Canadian governments for a term of 31 years, this is actually less than other agreements which have no end date. Article 35 of the Canada-China FIPA highlights a minimum length of 15 years for the agreement. This is, by my count, one of only two Canadian investment treaties that has a minimum length. The other is a recently signed agreement with Tanzania which has a ten year duration. All other agreements, all 26 of them, have no defined timeline for exit.  And some, in fact, have a longer term for the coverage of committed investments (sorry this is somewhat technical). Kuwait and Lebanon, for example, get 20 years of committed coverage versus 15 years across all others including China.

This takes us to the bigger issue of investor-state dispute resolution.  Many use Chapter 11 of NAFTA as a placeholder for the harm such forums of legal arbitration can take. Yet a review of cases submitted under NAFTA highlight that Canada has been ruled against once in 26 total cases.  The Canada-China FIPA allows for arbitration via the International Centre for Settlement of Investment Disputes (ICSID).  Some have stated that the ICSID favours corporations over the rights of states. Is this accurate? A review of case rulings at the ICSID should lead one to say no. As of June 2014, across 473 cases, in approximately 70 percent of cases, the claims against states are rejected through either final arbitration ruling or the rejection of the claim (see this). While that leaves 30 percent of rulings against the state, I’m not in a position to say whether or not those were justified.

If you believe that a government should be able to do whatever it wishes to firms on its territory with no need to pay compensation, then you’ll view the above as a sign that we should never sign up to such a system. If, however, you think that firms require predictability and or compensation in order to attract investment then you’ll see the value of such systems.

Okay, so all this said, am I a fan of the FIPA with China? That’s a complicated question. On one hand, I’m very concerned that we do far too little business with China. Beyond resources our relationship is very limited. Increasing two-way investment is one definite means of increasing the trade of higher-value goods. Now, that said, there is language in the FIPA that I am concerned about.

First and foremost, the agreement has some  language regarding the public nature of arbitration hearings that should be clarified. Every single one of our other agreements begins with the presumption that such hearings will be public. Yet as noted in Article 28 of the Canada-China FIPA, this agreement reverses course and begins with a presumption of privately held hearings. This is both strange and, for want of any explanation from the government, a bit concerning. An allowance is made for the transfer of hearings into a public setting if one of the “Contracting Part(ies) determines that it is in the public interest to do so.” While this presents the opportunity for public hearing, the fact that a party must request proceedings to be made public, creates some possibility that the public will not know if/when potentially important precedent/cases are being arbitrated. This needs to be clarified and all hearings should begin on the assumption of being public.

Second, while China has signed over 100 bilateral investment treaties with trade partners around the world, it has very little experience in defending/arbitrating claims. In fact, the country has been sued only once under the investor-state system and this suit was subsequently dropped. Whether China will respect the findings of an international arbitration panel is unknown. While signing up to a FIPA infers that it will, the country’s domestic laws don’t actually commit to this.

As Julien Ku, professor of law at Hofstra notes in a research paper on the “enforcement of ICSID awards in the PRC”

“the PRCs enthusiasm and interest in the ICSID-BIT system of investment protection and investor state arbitration has not been matched by the creation of a clear domestic mechanism for living up to its obligations under these international agreements.”

He goes on to note that a Supreme People’s Court interpretation and ruling is necessary to “clarify the lower courts’ authority to enforce awards.” Without this interpretation, there is significant ambiguity regarding the country’s actual commitment. This needs to be clarified.

Now, these issues notwithstanding, what remains to be discussed is whether we need BITs / FIPAs in order to attract investment. The recent Australia-Japan BIT highlights that the inclusion of investor-state arbitration is by no means necessary, though as this post notes the reasons for why it was omitted are complex and part of a very healthy/reciprocal relationship between the two parties. Would Australia have omitted investor-state provisions with a trade/investment partner with a less mature judiciary system? Given the prevalence of such arbitration systems across the country’s other agreements, it’s impossible to know yet. I also don’t have a window into the negotiations and as to what would happen should we say no to the negotiation of such deals. Once I’m around the table I’ll let you know.

Ultimately this is a long-winded way to show that we shouldn’t irrationally fear investment agreements such as FIPA without digging into the details.