Canada-China Investment Treaty Wont Open Floodgates

By | October 2, 2014
Here is a commentary of mine that was published in the Financial Post on October 2, 2014.
To see the actual FP piece, click here.
October 2, 2014

China investment treaty no sell-out

Special to Financial Post

Lawrence L. Herman: Predictions of doom over the Canada-China deal aren’t borne out by real-life experience

Predictions of doom over the Canada-China deal aren’t borne out by real-life experience

The Canada-China investment treaty – what Canada calls a Foreign Investment Protection Agreement or “FIPA” – officially entered into force yesterday.

The treaty has been opposed by a number of interests groups, mostly on the left of the political spectrum such as the Green Party and the Canadian Centre for Policy Alternatives. One of their main targets is the investor-state dispute settlement (ISDS) provisions of the treaty.

Opponents claim that ISDS amounts to a sell-out by governments, giving a huge advantage to foreign investors by enshrining the right to bring binding arbitration against host governments that allegedly infringe the treaty, thereby thwarting policies or legislation enacted for genuine public policy reasons.

They argue that increased investment by Chinese enterprises means it’s only a matter of time before a Chinese investor initiates a dispute against Canada or one of the Canadian provinces for measures that it doesn’t like because it has some impact on its Canadian assets.

The reality is that the Canada-China FIPA is merely the last in line of almost 3,000 bilateral investment protection agreements around the world. Many hundreds of these contain ISDS provisions of one sort or another.

The implication in the opponents’ arguments is that dozens of governments from countries large and small, rich and poor, don’t know what they’re doing and have unwittingly signed away their rights to regulate by giving arbitration advantages to foreign investors, often being large and deep-pocketed corporations from rich industrialized countries like the United States.

While there are some aspects of the ISDS process that could be improved on, overall the oppositions’ arguments are highly overblown.

For one thing, China already has, believe it or not, bilateral investment agreements with over 70 countries, going back to the mid-1980s, including with a number of European countries, such as Switzerland, Austria, Germany and the United Kingdom. These agreements, particularly the more recent ones, contain ISDS clauses not much different than those in the Canada-China FIPA.

For example, the 2010 China-Switzerland and the updated 2003 China-Germany agreements contain full-scope ISDS provisions, just like the agreement with Canada, allowing Chinese investors the right to invoke binding arbitration for alleged breaches under the treaty, including allegations that the right to non-discrimination and “fair and equitable treatment” have been infringed.

So the Canada-China FIPA simply follows a 20-year-plus history of China’s bilateral investment agreements with other industrialized countries. Although it’s more detailed than some of these, the basic thrust of the Canadian FIPA is in line with China’s investment protection treaties since the mid-1990s.

There is no doom and gloom here. There isn’t anything in our FIPA with China that’s wildly out of line with investment protection treaties that China has with a host of other industrialized countries.

Another argument against the China FIPA is that it will unleash a litany of arbitration claims by aggressive Chinese companies, claiming that this or that regulation harms their Canadian investments and somehow breaches Canada’s treaty obligations.

Again, that argument is highly dubious. With more than 70 Chinese bilateral investment treaties, some over 20 years old, there is only a single registered arbitration claim by a Chinese company, a case involving financial services regulations in Belgium. While this doesn’t necessarily foretell the future, the record suggests that a flood of Chinese investor arbitration claims is just not going to happen.

One of the overlooked gains in the Canada-China FIPA is that China is now legally bound to strict standards of conduct toward Canadian investors, such as non-discrimination, “fair and equitable treatment” and rules against expropriation without full compensation.

Some argue that this is a sham, that Canadian investors won’t be able to successfully challenge unfair Chinese measures because of the opaqueness of the Chinese system. In other words, the investor playing field isn’t level.

To the extent there is merit in these arguments, they miss a vital point. By signing on to the deal, China becomes legally bound to Canada to accord a defined standard of treatment to Canadian investors. Quite apart from the whole ISDS debate, if the Chinese government or any one of its sub-units fails to live up to these obligations, the Canadian government can invoke dispute settlement proceedings against China directly.

The symbolic – let alone the legal – value of China’s investment treaty with Canada is therefore of immense importance. It binds the two countries legally and morally to a system of rules.

While there are aspects of the standard ISDS model that merit closer examination and possibly improvement, the broad sky-is-falling attack on the Canada-China FIPA is wide of the mark.

Lawrence L. Herman, Herman & Associates, practices international trade and investment law and policy and is a Senior Fellow of the C.D. Howe Institute, Toronto.