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Don’t fear the FIPA

Excitable nationalists and their wild imaginings about the Canada-China foreign-investment deal have led to all manner of silly arguments


 
Prime Minister Stephen Harper with China's then- Premier Wen Jiabao in 2012, when the FIPA was signed

Prime Minister Stephen Harper with China’s then-premier Wen Jiabao in 2012, when the FIPA was signed

There is an enormous chasm between what a Foreign Investor Protection Agreement (FIPA) does and what excitable nationalists claim such agreements do. Unhappily for the standards of public discourse, excitable nationalists make good copy, so their wild imaginings, as with the Canada-China agreement ratified last week, are invariably quoted without examination. After all, who wants to read through the dull business of understanding why FIPAs exist and what they say?

I hope you do, dear reader, because that’s the ground I’m going to cover here.

First, though, there have been any number of objections to FIPAs in general and to the Canada-China FIPA in particular, none of which I find convincing.

1. Any argument citing a loss of sovereignty. All international agreements involve ceding sovereignty. Wanting to retain the power to expropriate foreign-owned assets is probably the most petty and diminished notion of what sovereignty means.
2. Foreign-owned corporations can sue Ottawa if a new policy reduces their profits. As we’ll see shortly, that’s not true. Foreign firms have to show that they’ve received different treatment than their Canadian-owned competitors.
3. Foreign-owned corporations can sue Ottawa, full stop. Initiating a lawsuit is not the same thing as winning one. (Andrew Leach makes the point more entertainingly here.)  In this archive of NAFTA Chapter 11 lawsuits, I count 15 lawsuits that were withdrawn or abandoned, 10 cases where Canada’s position was upheld (often with costs), and one defeat. The defeat was the S.D Meyers case, in which the federal minister for the environment (Sheila Copps, if you must know) overturned a contract won by S.D. Meyers to dispose of PCBs in favour of a Canadian competitor. No one—including her own advisers and the arbitration panel—could see what public purpose was served by shipping PCBs 3,500 km from Toronto to Edmonton instead of 500 km to Cleveland.
4. The 31-year lead time for abrogating the treaty. Makes sense to me, if you’re talking about 30-year investment projects.
5. Secret negotiations and secret hearings. To the extent that the treaties and decisions are made public, I don’t see the problem.
6. Red China! It’s rather late in the day to be playing this card. It is impossible be simultaneously open to accepting Chinese goods while refusing to accept Chinese investment.

Et cetera, et cetera. My pearls remain unclutched.

In order to understand why these arguments are so flawed, though, you have to step back and think through some of the basic mechanics of international trade and where FIPAs fit in.

We’re used to thinking of trade as a matter of exchanging goods and services produced in one country for goods and services produced in another, but these sorts of exchanges almost never happen. A far more typical transaction takes the form of goods produced in one country that are traded for assets owned by residents of another. It’s useful to think that this asset is money, but it could take any form. A couple of centuries ago, the asset would have been gold: All imports (exports) of goods were offset by exports (imports) of gold.

This leads us to the key national income accounting identity that is behind the logic of FIPAs (I told you this was a dull business):

Current Account balance  + Capital Account balance = 0

Changes in the current account balance are mainly driven by the trade balance, so I’m going to simplify a bit and assume that the current account is the same as the trade balance (for more on when this is, and is not, a good simplifying assumption, see here.) So the current account balance is the difference between the value of goods being sent out of the country less the value of goods being brought into it.

A couple of centuries ago, the capital account would correspond to physical flows of gold: A country that ran a capital account surplus would be exporting more gold than it took in. Countries that ran a trade deficit (exports of goods < imports of goods) would necessarily be running a capital account surplus (exports of golds > imports of gold). In modern economies, this exchange needn’t involve a physical relocation of an asset; it’s enough to transfer ownership.

So the first point I want to make here is that capital flows are the obverse side of trade flows. It makes no sense to claim to be in favour of international trade but against international flows of capital. You can’t have trade flows without corresponding flows of capital.

As it happens, Canada runs a fairly large trade deficit with China: roughly $30 billion per year. This means that as far as China is concerned, trade with Canada is essentially a matter of them accumulating large amounts of Canadian assets.

Once you realise that capital flows are essentially the same thing as trade flows, the logic behind FIPAs become clear. Countries that are exporting goods in return for assets can reasonably expect to ask that these assets won’t be effectively expropriated by governments pandering to anti-foreign bias.

It’s not enough to simply promise to treat foreign-owned firms the same as domestically owned firms. Even if discriminatory regulations and/or fees are subsequently overturned, the lost revenues—not to mention the legal costs—still amount to an effective expropriation. What FIPAs do is ensure that governments can’t expropriate foreign-owned assets without compensation. (Domestic laws already ensure that governments cannot expropriate domestically owned assets without compensation.)

The above explains why FIPAs exist, and what they are designed to do. Once you understand these points, you start to see that much of the criticisms of FIPAs consist of fantastical nonsense, especially when you take the trouble to read the text of the treaties. For example, this is from NAFTA’s Chapter 11:

Article 1106 (6):

Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1(b) or (c) or 3(a) or (b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures:

(a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement;

(b) necessary to protect human, animal or plant life or health; or

(c) necessary for the conservation of living or non-living exhaustible natural resources.

And this is from part D of the Canada-China FIPA:

Article 33 (2):

Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures:

(a) necessary to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement;

(b) necessary to protect human, animal or plant life or health; or

(c) relating to the conservation of living or non-living exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

It should be abundantly clear that claims to the effect that “FIPAs give foreign-owned companies the power to veto laws aimed at protecting the environment” (or public health, or whatever) are wrong. Governments retain their power to regulate in the public interest; what they cannot do is have a separate set of rules for foreign-owned and domestically owned firms. On this point, I think the burden of proof is on anti-FIPA activists to explain how and why the public interest would be served by this sort of regulatory discrimination.

There are some valid concerns about ensuring that FIPAs are enforced in a way consistent with the intentions of the treaty, but these are concerns shared by virtually any attempt to legislate for the public good. For example, there’s always the possible risk of regulatory capture: Agencies whose goal is to oversee firms involved in such activities as resource extraction or banking may end up acting on behalf of the private interests they are monitoring. But the solution here is to monitor enforcement, not to throw up one’s hands.

It’s time to tone down the rhetoric. FIPAs are not so scary when you take the time to look at them.

 


 

Don’t fear the FIPA

  1. Even if all of this is true and there is no threat to Canadians from the agreement, making it in private, refusing to bring it to the floor for information and debate, and ramming it through in silence at the end of a busy a Friday afternoon agenda while the Supreme Court decision is not yet made shows bad judgement, a complete disregard for our democratic process and systems of checks and balances in place for our protection from totalitarian decision making, contempt for parliament, a sense of entitlement that places himself outside and above the highest laws governing the actions of every Canadian (his personal feud with the Supreme Court a primary example), and extreme disrespect for the people of Canada, the very constituents he was elected to represent. His flauting the courts and the First Nations rights is reprehensible.

  2. OK, I have a beef with certain economists who appear to be defending this agreement with China (personally, I think these types of agreements are a worthwhile/necessary step – especially for protecting Canadian investment overseas).

    But, some time ago, amidst the announcements of an imminent trade agreement with Europe, Andrew Coyne in nat Post, you in Macleans and Chris Ragan in the G&M all argued that why wait for these complex trade agreements, just unilaterally lower tariffs for imported goods to benefit Canadian consumers.

    So, has your thinking evolved once we are close to signing such agreements? If not, shouldn’t you and others, to be consistent, advocate rejecting said trade agreements, and act unilaterally as previously stated?

    I fail to see the consistency here.

    • Dot, you’re conflating free trade agreements (i.e. the removal of trade barriers like tariffs) with foreign investment protections. Theoretically Canada could unilaterally enact laws to protect a country’s firms, but there is no benefit to acting unilaterally with such protections if Canadian firms don’t receive equal treatment abroad. By contrast, acting unilaterally to reduce *trade* barriers would have lots of immediate and direct benefit.

      • Well, admittedly, I haven’t bothered to read the current document – was relying on memory of US Canada FTA which did both (reduce tariffs, provide trade protection).

        This not the case with the China deal? In other words goes further than tariff reductions. Both are linked, no?

  3. Maclean’s editors might want to fix the typo in the subhed. Should be “have led,” not “have lead.”

    • Thanks! We’ve fixed.

  4. The author of this article provides a grossly oversimplified and inaccurate portrayal of the very legitimate concerns that many Canadians have with the China FIPA. Let’s start with the assertion that foreign investors have prevailed against the Canadian government on only one occasion in NAFTA tribunals (S.D. Meyers).

    Since NAFTA’s entry into force in 1994, tribunals have awarded damages to the complaining investors in 3 instances: S.D. Meyers ($6 million CAD), Pope & Talbot ($408,000 USD), and Mobil Investments (still pending). Canada has also had to settle four claims “out of court” and in two instances agreed to pay damages to investors ($20 million CAD to Ethyl Corp. and $130 million CAD to AbitibiBowater). So even though Canada was not “defeated” per se in some of these cases, Canadian taxpayers were still forced to cough up $150 million to just two companies just to avoid going to a tribunal. Is this a victory?

    As an example of one of these out of court settlements, Dow AgroSciences brought a Chapter 11 claim against Canada after Quebec banned certain chemical pesticides designed for cosmetic lawn care in 2006. In 2011, both parties agreed to a settlement without reaching arbitration.

    The author makes another dubious statement when he writes “It should be abundantly clear that claims to the effect that “FIPAs give foreign-owned companies the power to veto laws aimed at protecting the environment” (or public health, or whatever) are wrong. Governments retain their power to regulate in the public interest; what they cannot do is have a separate set of rules for foreign-owned and domestically owned firms. On this point, I think the burden of proof is on anti-FIPA activists to explain how and why the public interest would be served by this sort of regulatory discrimination.”

    You are missing the point. Those concerned about the China FIPA (and others) are not arguing that regulatory discrimination is necessary, it is that foreign companies have abused provisions in FIPAs and trade agreements to undermine legitimate regulations when their economic interests are compromised. Because tribunals have ruled in favour of investors on several occasions while other cases have been settled before reaching arbitration, it is feared that the mere threat of a claim may lead governments to roll back or delay the implementation of regulatory measures.

    As you point out, NAFTA and the China FIPA do have provisions that allow for governments to enact policies “necessary” for the protection of human health or the environment, but it is not at all clear what burden of proof is required to demonstrate that a policy is “necessary”. Take carbon taxes for instance. If a future government decides to implement a carbon tax or an emissions trading scheme to address climate change, presumably a Chinese company operating in the oil sands could sue the government for enacting a policy that would hurt their profits and is not explicitly “necessary to protect human, animal or plant life or health”. The government would then be in the position of either not proceeding with the regulation in the first place (to avoid litigation) or making its case in front of a 3-member tribunal that the proposed regulation was indeed “necessary” and that there was no other policy solution that would have been more appropriate or effective. It should be noted that the right to sue the Canadian government in a case such as this is NOT granted to Canadian companies in these FIPAs, only to foreign ones. It is precisely these sort of investor protections that many Canadians across the political spectrum feel undermine the sovereign power of our federal government to enact laws or regulations for the benefit of our own citizens and the environment.

    • Good points. It is pathetic that the burden of proof to the profits of foreign investors is not on those investors, and not the other way around. But you wont get much of an argument or hearing from economists like SG, who seem to find such hurdles for business, and basic protections for local and national populations to be nothing more than an unnecessary irritant to effective economic global modelling.

  5. The Canadian benefits of FIPA must be why the Conservatives, who never miss a chance for economic self-promotion, released the news on a Friday afternoon.

    Maybe the “burden of proof” should be on FIPA’s supporters to explain why they would do that, after China signed it immediately when it was drawn up 2 years ago, and the Conservatives allowed one hour of debate on it in the House during those 2 years.

  6. . “Foreign-owned corporations can sue Ottawa if a new policy reduces their profits. As we’ll see shortly, that’s not true. Foreign firms have to show that they’ve received different treatment than their Canadian-owned competitors.”

    Just fact checking here. I’m not necessarily one of those pearl clutching nationalist, but…i vaguely recall us losing a case against a US corp that isn’t we had no right to put their lead substitute additive[ MDM or some such thing] into our gas. I believe we ended up paying out millions on that one. Missed that one did you?
    I also hear FNs activists claiming there is zero recognition of Aboriginal treaty rights in this deal??

    • http://www.commonfrontiers.ca/Single_Page_Docs/PDF_Docs/Jan08_14-AUSFTA-paper.pdf

      Here it is and a good deal more if anyone is inclined.[i’ve barely started]
      Personally i object to FIs not using our courts to sue if they feel wronged; we can pass legislation that enshrines the principle that Canadian companies ought to play by the same investment rules. I assume the reason they went this route is that not all foreign courts are as fair as ours. But by setting up panels that contain experts that only have a passing familiarity with the Canadian milieu, we have set ourselves up for a lot of nationalistic rancour and posturing by the usual suspects…dumb way to go about it imo.

  7. This excitable nationalist would like to know why you didn’t explain this two years ago, when Harper first ratified this deal (secretly) in Russia? Where’s the public discourse? I’m going to assume you knew about it as long as I did. Up until a week ago, only obscure publications spoke of this and they were alarmists. And so I will further assume the main media helped Harper along in keeping us in the dark, until you were given allowance to write this crud- only “after” the deal was signed. We were not given a choice in this, and so I really don’t care what anyone’s reasoning is, now. I might have listened a year ago, or a month ago…but now it rings hollow, now that it’s to late for us to have a choice. This is not Canada’s choice. This is not our decision. This is the decision of one man who forgot what the word “Government” means: The People. The People of Canada were not even informed of this properly, let alone given any choice in the matter. This is treason and an attack on our Democracy. What’s more, there’s hints he conceded under pressure. Harper should resign and the media (you, among many other’s, Macleans) failed us. It’s shameful and makes me weep for the future of this country. This is no longer the country I know.

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