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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Canada-China investment: Big risk in the fine print

  1. Harper couldn’t cave fast enough to the AMERICANs on softwood lumber, tossing out billions of dollars just to be able to say “I reached a deal.” Against the Chinese I imagine Canada would fare even worse. Furthermore, isn’t there a danger China would just sign anything and then continue illegal practices anyway?

  2. That Belgian lawsuit seems to be about more than just Chinese irritation at losing money. Here’s the Wikipedia entry for the Fortis bank:

    http://en.wikipedia.org/wiki/Fortis_(finance)

    The question appear to be about whether or not proper procedures were followed during the rush to bail out/break up/nationalise Fortis.

    • I offer no opinion on the matter but I encourage people to look at that Wikipedia entry, if only to see how complicated things get sometimes in Belgium.

      • You have written some interesting posts about Belgium and their internal divide, which when compared to Canada, makes Canada’s French/English divide look positively peachy.

    • I believe there has been some shady shenanigans all over Europe when it comes to the recent turmoil, particularly when it comes to preferred status and seniority of creditors.
      http://www.reuters.com/article/2012/06/26/us-eurozone-fund-germany-idUSBRE85P12W20120626
      In the case of Greece, the ECB, the EIB, the IMF and the European Union took senior positions and were not forced to take losses along with the private bond holders who lost their shirts. Can’t say I would appreciate that kind of treatment.

      • Obama/US ignored the preferred status and seniority of creditors in the auto bailouts, and forced senior creditors to take the same terms as less senior creditors.

        In the Dodd-Frank bill amongst all the headline stuff, US banks have created a whole bunch of new rules which gives them a competitive advantage in certain areas over foreign (i.e. Canadian and European banks).

        As Solyndra was going down, the Obama administration shifted the seniority conditions of the Solyndra loans so that the taxpayer took the major losses, and the friends-of-Obama who were running Solyndra came out relatively whole.

        China is a process. You have to start somewhere.

        Asian countries (apart from former colonies) don’t have the British common law tradition which allows one to do deals even with scoundrels because the law will protect you. Asia/China is still a much more relationship/trust based system.

        The British common law system did not spring into the world fully formed. The rule of law in China is going to take some time too.

        Constructive engagement is better than any alternative.

        • A relationship/trust system never works. South America has always used a relationship/trust system (until recent changes in a few countries like Brazil and Chile), and that’s why South America is like South America.

          I agree about Obama’s administration and their disdain for the rule of law. In the long run (sometimes short run) that kind of thing can undermine an economy and all the players in it.

  3. What! you’ve uncovered yet another case of Harper conducting deals on our behalf that no one can access without help from the NSA? and are already beyond the power of Parliament to recall, amend or just moan about? I’m immune to this kind of stuff by now. How desperate is he[ and the business community] to get us into the Chinese market, and how much of it is tied more to his future election prospects than it is to our shared prosperity?[ that's enough for now. A person shouldn't ought to tackle something like this while sleep deprived. I keep getting 80s flashbacks, hallucinating Brian, NAFTA and sell out all over again]

  4. From stories I hear from auto execs, it is wild west in China and North American companies are having tremendous challenges operating over there. Chinese are all about guanxi, and there is a lot of what North Americans would call influence peddling, corruption, shakedowns …. in China. It would not surprise me at all if Canadian government and business prefer the no public scrutiny option because North American and European companies finding it difficult to operate ethically in China. It is interesting because Japan and South Korea have mostly adapted Western way of doing business but China is much larger and is throwing its weight around more.

    • I am skeptical to lump a billion people together as one, but I have heard similar tales from several different unconnected people who have done business in China.

    • Well…whose fault is that Mr. Prentice. You were chair of the government operations committee of Cabinet, were you not? You were also Aboriginal Affairs minister, and Industry minister, and Environment minister at some point, were you not?

      So arguably, the sleeping at the switch happened on your watch.

  5. So is this Harper’s failing or China’s success? Obviously a bit of both, but it sounds like China knows how to wait and get the deal done on their terms with other countries, so maybe it isn’t all Harper’s fault.
    Who am I kidding, Harper is awful at anything international…

    • He operates like Brian did, with one arm tied up around the other guys back. Maybe the 2nd worse negotiator we’ve ever had for a PM…in my not so humble opinion of course.

  6. This deal is toast fellow Canucks there is ZERO chance we can support this agreement as is at least. Canada must and always come first I don’t care which party governs us Canada is first over ever other nation on earth when we are doing the dealing at least eh. At least its the way it should be.

  7. I wonder how our veterans (past and present) would feel knowing the country they fought for, died for, risk their lives for, is being sold out like some cheap party favour. This Nov. 11th it’s worth remembering the sacrifices they made and still make on our behalf. Do we want to sacrifice sovereignty over land and sea resources so a few multinationals can curry favour with the Central Committee. Just who is standing on guard for us in Ottawa these days? Is this the Canada our veterans were striving to protect? Remembrance Day is fast approaching and the authors of this process will be shamelessly strutting round cenotaphs for flags and photo ops. Its long past the time that Canadians reminded them just who they are working for.

  8. The definition of investor seems to include *prospective* investors (see last sentence):

    2. “investor” means with regard to either Contracting Party:(a) any natural person who has the citizenship or status of permanent resident of that Contracting Party in accordance with its laws and who does not possess the citizenship of the other Contracting Party;(b) any enterprise as defined in paragraph 10(a) of this Article;

    that seeks to make, is making or has made a covered investment

  9. The Canada/China Fipa leaves us not only open and vulnerable to law suits on a whim from the Chinese but effectively allows the judicial process of any and all suits to be dealt with out-of-country and secretively from the Canadian people.
    Millions or billions of our tax dollars may be doled out for reasons unbeknownst to us over and over again for the next 31 years should this agreement come into effect.
    The Canadian government is beholden to us but they are about to give away all our rights under our constitution to the Chinese.
    This is NOT the Canada my uncles fought to protect 70 years ago!

  10. those who voted Conservative in the last election? eat my shorts!

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