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Canada-China investment: Big risk in the fine print


 

This is long but it’s important. Bear with me.

Stephen Harper sounded concerned in Vancouver earlier this month as he discussed Chinese investment in Canada and Canadian investment in China. “We want to see this economic relationship continue to expand,” he said, “but we want to see it expand in a way where it’s a clear two-way flow and clear benefits for both sides.”

This is an odd thing to say because in February Harper asserted he had locked in assurances of clear two-way flow with clear benefits. He was in Beijing and he announced the conclusion of negotiations toward a Foreign Investment Promotion and Protection Agreement (FIPA) with the Chinese. “Today’s landmark agreement will further facilitate these flows by providing a more stable and secure environment for investors on both sides of the Pacific,” he said then.

This was a big deal, proof that Harper could get results where his predecessors had face-planted: Canada-China FIPA negotiations had been underway since 1994 and never concluded. Until now.

February’s announcement did not include release of a text of the proposed agreement. Neither did the announcement, early this month, that Canadian and Chinese officials had signed formal texts of the FIPA. We had to wait until Trade Minister Ed Fast tabled the text in the Commons yesterday to see it.

The text suggests there are good reasons why the Prime Minster should not feel reassured about Canadian access to Chinese markets.

Here’s the text of the Canada-China FIPA. These things are common in international relations. They amount to promises to play fairly between two countries, with mechanisms for settling disputes if one country feels slighted. Canada has more than 20 with other countries. China has many of its own (under a more common generic name, Bit or Bilateral Investment Treaty). The heart of a FIPA is a promise to treat the other countries’ investors at least as well as you treat any foreign country’s investors (“Most Favoured Nation Treatment”) or, better still, as well as you treat your own country’s investors (“National Treatment.”) Here’s the relevant section of the Canada-China FIPA, with bold-face emphasis added.

Article 5

Most-Favoured-Nation Treatment

1. Each Contracting Party shall accord to investors of the other Contracting Party treatment no less favourable than that it accords, in like circumstances, to investors of a non-Contracting Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory….

Article 6

National Treatment

1. Each Contracting Party shall accord to investors of the other Contracting Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the expansion, management, conduct, operation and sale or other disposition of investments in its territory.

One of these things is not like the other.

Most of the news coverage about Canada-China investment has centred on Chinese attempts to buy into Canada, especially on the Nexxen deal. But Canadians are also trying to buy into China and they have had a hard time of it. That’s what was making Harper nervous in Vancouver (and former Harper cabinet minister Jim Prentice borderline apoplectic). And the vaunted FIPA provides prospective Canadian investors (of which there are many) very limited protection compared to what it provides existing Canadian investors (of which there aren’t enough).

How on earth did an itinerant Ottawa columnist know to look for this language? In February, while I was waiting for a text, I found this paper (opens a .pdf) by a former UBC prof named Justin Carter. Carter asked the $64 question: “So why has it taken so long to reach an agreement?”

What Carter found was that negotiations had hung up over substantive differences between Canada’s model for FIPAs and China’s standard BIT template. “First, Canada’s FIPAs use a preestablishment model, which grant protections to not only already admitted investment, but also those seeking admission,” he wrote. “These standards apply to both national treatment and most-favoured nation protections. In contrast, China does not include any pre-establishment language in its BITs.”

So on this vital measure, the Canada-China FIPA uses the Chinese instead of the Canadian standard for protection. Contrast with the FIPA Canada negotiated with Jordan in 2009, while Stockwell Day was trade minister. That treaty extends national treatment at the establishment and acquisition stage.

(I haven’t been able to check in with Carter since he wrote that piece because, according to Linkedin, he has since left UBC to seek his fortune in China. This is a bit of an occupational hazard among academic and diplomatic China hands.)

Carter also wrote: “Canada has taken a very aggressive approach on dispute resolution and procedure in its FIPAs, notably surrounding public access and allowances for amici in the arbitration process. The procedural provisions of China’s investment treaties are patently broad, and do not afford the same level of transparency.”

Here again, the language in the final treaty is very restrictive. “The treaty does not require that arbitration of disputes be done in a manner that is open to the media and the public,” Luke Eric Peterson told me. He’s a reporter in New York City with this investment arbitration newsletter.  “This is a huge concern,” he added — especially because the arbitration process is designed to supplant the previous forum for such disputes, which is the courts. “Journalists that want to cover this beat in future may be deeply chagrined to discover that they are barred from arbitration hearings and may not be able to access the ‘court file’ related to major disputes — unless the states decide that it is in the ‘public interest’ to allow such access.”

So when massive commercial disputes are arbitrated under this FIPA, they will be arbitrated out of public view unless both Canada and China agree. Again, this is a departure from Canadian practice and an embrace of Chinese practice.

Peterson’s bottom line: “It will be interesting to see if this is spun as an agreement that ‘liberalizes’ or opens markets for Canadians. If it is, that will not be true.”

Why am I dragging you through all this business about dispute-settlement arbitration? Because things are getting crazy out there, and by “out there” I mean “wherever China doesn’t like the way a business deal turns out.” Say hello to Belgium, where on Monday the Chinese insurance company Ping An filed an arbitration claim worth $3 billion. In 2008 a Chinese SOE bought a Belgian bank. The global economy went through the ensuing turmoil and the Chinese firm lost its shirt. Which is, you know, life, but the Chinese firm figures the government of Belgium owes it the $3 billion it lost, and the arbitration mechanism will now consider the claim seriously.

“This might signal the beginning of a wave of Chinese claims if you think about the commodities they’ve been buying, and the investments they’ve made in commodity-related companies around the world,” a British trade lawyer told Reuters, while freaking ominous music played in the background if you’re reading his quote in Canada. “There are bound to be any number of outward investments they have made in the last five to ten years which may now be starting to run into problems.”

So, you know, good luck. The FIPA, tabled yesterday, is available for consultation at the link above for 21 Parliamentary sitting days, at which point it comes into force without need for a vote in the House of Commons.

 


 
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