Author Archives: Lawrence Herman

About Lawrence Herman

Counsel on International trade and investment, global business transactions & public policy

More on Brexit

See my short commentary on Brexit’s procedural complexities here. https://www.cdhowe.org/intelligence-memos/lawrence-herman-brexit-primer

A Short BREXIT Primer – What It Means for Canada

With the unthinkable – being increasingly discussed – of Britain withdrawing from the EU, questions are asked as to what this means for Canada. What are the implications for the Canada UK trade? And how does it affect the Canada-EU trade agreement?

The answer is simple. Brexit will mean a lot of uncertainty on the trade and investment front – and years of it.

Tariffs and Duties

If Britain exists, it will no longer apply the EU’s common external tariff. So Canadian exports to the UK will face a different set of duties. Those would be the same duties imposed on imports from other countries into the UK under a separate UK tariff schedule, including imports from the remaining EU countries.

Pretty simple? Not really.

First, the EU as an entity has bound its tariff rates under the WTO Agreement. The UK has no separately bound WTO tariff schedule. It would have to re-negotiate to bind its newly independent duty rates as part of the WTO process. Really complicated.

For Canada, unless the new UK tariff schedule replicated the existing EU tariff (unlikely), some Canadian exports could face higher tariff rates in the UK than on Canadian goods that are shipped into the European Union. Under WTO rules, any loss of concessions with Brexit requires compensation from the UK. This would take some time to sort out.

Equally problematic, UK companies will no longer have free access to the European market, whether we’re talking about duties on goods or access to EU financial and capital markets. So any Canadian companies based in the UK, including Canadian banks, will face new market impediments.

It is likely that there will be quick attempts to resolve these issues between Britain and the EU. Certainly both sides would try their best to avoid uncertainty in capital and financial markets. But until these are resolved between a departing Britain and the EU headquarters in Brussels, uncertainty will reign.

New Trade Agreements

The Leave Campaign argues that if the UK left the EU, it would negotiate a whole slew of new bilateral trade agreements with other parties, including with EU, Canada and the United States. Yes. Entirely possible. But these deals take time, even assuming the other side is open to sitting down. More uncertainty.

Impact on CETA

Brexit will cause no end of complications for the future of CETA, as that trade agreement awaits signature and ratification (and currently stalled in Europe for a variety of reasons).

Trade agreements are the product of negotiations. I give you something in my market in return for something you give me in yours. These aren’t necessarily in the same area or sector but overall, after all the horse-trading is over, each side has to feel confident that the exchange of concessions makes for a balanced deal.

For Canada the CETA deal was all about access to a large market of 28 countries, including the UK, in exchange for which Canada gave EU parties access rights to the Canadian market. These included duty-free entry of goods but a whole range of other things, such as access to financial, consulting and other services, to government procurement, to preferential treatment of electronic commerce, intellectual property, etc.

If Brexit occurs, however, the UK will not be bound by any of the preferences that Brussels agreed to. So Canada will lose out on the concessions it made in the CETA negotiations which presupposed the large UK market was part of the agreement.

At the very least, there will have to be a “re-balancing” of concessions between Ottawa and Brussels. That would overlie any rebalancing needed between Ottawa and London.

Even if this doesn’t mean going back to the negotiating table and opening the entire CETA in a formal sense, this kind of rebalancing will take time.

In the meantime, ratification of the CETA by the remaining 27 EU member countries will be held up even longer. Whether treaty ratification – without the UK – will be at risk across the Atlantic remains to be seen. At the very least, we’ll have a lot of uncertainty here as well.

These are just a few of the major questions surrounding Brexit. And this only scratches the surface.

With the unthinkable – being increasingly discussed – of Britain withdrawing from the EU, questions are asked as to what this means for Canada. What are the implications for the Canada-UK trade? And how does it affect the Canada-EU trade agreement?

The answer is simple. Brexit will mean a lot of uncertainty on the trade and investment front – and years of it.

Tariffs and Duties

If Britain exists, it will no longer apply the EU’s common external tariff. So Canadian exports to the UK will face a different set of duties. Those would be the same duties imposed on imports from other countries into the UK under a separate UK tariff schedule, including imports from the remaining EU countries.

Pretty simple? Not really.

For Canada, unless the new UK tariff schedule replicated the existing EU tariff (unlikely), some Canadian exports could face higher tariff rates in the UK than Canadian goods that are shipped into the European Union. Under WTO rules, any loss of concessions with Brexit requires compensation from the UK. This would take some time to sort out.

New Trade Agreements

The Leave Campaign argues that if the UK left the EU, it would negotiate a whole slew of new bilateral trade agreements with other parties, including with EU, Canada and the United States. Yes. Entirely possible. But these deals take time, even assuming the other side is open to sitting down. More uncertainty.

Impact on CETA

Brexit will cause no end of complications for the future of CETA, as that trade agreement awaits signature and ratification (and currently stalled in Europe for a variety of reasons).

If Brexit occurs, however, the UK will not be bound by any of the preferences that Brussels agreed to. So Canada will lose out on the concessions it made in the CETA negotiations which presupposed the large UK market was part of the agreement.

At the very least, there will have to be a “re-balancing” of concessions between Ottawa and Brussels. That would overlie any rebalancing needed between Ottawa and London. Even if this doesn’t mean going back to the negotiating table and opening the entire CETA in a formal sense, this kind of rebalancing will take time.

These are just a few of the major questions surrounding Brexit. And this only scratches the surface.

Private Rule-Making & International Trade

Recent episodes such as the Earls Restaurant issue over so-called “humane beef” illustrate the impact of private sector standards, rules and best practices on international trade, outside the realm of governments and free-trade agreements. These industry-driven rules and “regulations” are having an increasing impact on international business.

See my commentary, 13 May 2016, in the Globe and Mail here.http://bit.ly/23N5kF8

House of Commons Trade Committee – TPP Presentation

Lawrence Herman appeared before the House of Commons Trade Committee, at their request, on 5 May 2016, to present testimony on the Trans-Pacific Partnership Agreement (TPP). The following are notes from Mr. Herman tabled with the Committee.

Lawrence L. Herman

Notes for Presentation, 5 May 2016

Introduction

The following are general comments on the TPPA to assist the Committee in its evaluation. Given the broad scope of the Agreement and the limited time available to testify, these notes cover only some of the many key parts and address some selected, albeit important, issues.

Negotiating Context

The TPPA is the product of a US-led initiative. During over five years of negotiations, the Americans were the dominant force and in many respects the most determined leaders in the IPP process.

The fact is that the TPP treaty is mostly a US-led and US-inspired document doesn’t detract from the role that smaller countries like Canada, Australia and New Zealand played in the negotiations or diminish the potential benefits that can be obtained under the Agreement once it enters into force.

Suggestions have been made that Canadian negotiators dropped the ball and that Canada agreed to a final negotiated TPP text that sacrificed Canadian interests. That argument must be rejected.

Even though Canada joined the TPP table late, the Canadian team, among the best and most experienced in the world, did a first-class job in pursuing and defending Canadian interests. We should commend them.

Domestic Context

The TPP text has elicited some negative comments from a variety of quarters, including organizations and NGOs that seem congenitally predisposed to oppose any and all international trade treaties.

That seems odd, given that agreements like the TPPA, inspired by the multilateral system, represent progressive development of international law that has evolved since World War Two.

Business organizations like the Canadian Business Council and the Canadian Chamber of Commerce voiced strong support for the TPP. Provincial governments have been strongly supportive across the board.

While the Canadian private sector was somewhat less engaged compared to their American counterparts, that doesn’t diminish the value of the TPPA for Canada’s international trade and investment interests at large.

Assessing the Overall Balance

Every trade agreement involves concessions. Evaluating the TPPA is not just a matter of compromises made in specific domestic That views the exercise from a defensive perspective only.

The proper question is whether, on balance and taken as a whole, the treaty is consistent with and protects Canadian foreign – i.e., offensive – interests, meaning the benefits to be derived for Canadian outbound trade in goods, services and investments.

The TPP is a large, ambitious and complex treaty, the most ambitious and complex trade agreement to date, anywhere. It covers a vast panoply of subjects, as a glance at the table of contents reveals.

While IP has been the focus of much media commentary, as is evident, the treaty involves much more than patents, trademarks, copyright and e-commence issues.

Any assessment must include the potential advantages for Canadian companies in increasingly complex supply-chains – as service providers, suppliers to government procurements, industrial manufacturers and exporters of agricultural products and a host of other foreign business activities.

As well as addressing conventional access issues, the TPPA aims to reduce the trade-limiting impact of non-tariff measures (NTMs) and to move closer to some kind of convergence in national regulations of a variety of sorts.

The broad scope of the Agreement makes it difficult to encapsulate the costs and benefits of Canadian participation in one analysis. The task is perforce a complicated one that behooves deeper study. These notes address some of the key factors at play.

Grounded in Multilaterally-Tested Rules

The TPP is a progressive trade deal, inspired by the rules in the General Agreement on Tariffs & Trade (GATT) and the World Trade Organization (WTO) Agreement. Canada has been a leader in developing those rules.

The most fundamental of these GATT based rules – namely MFN treatment and national treatment – run throughout the Agreement.

Rights and obligations of non-discriminatory treatment (subject to some carefully-defined limitations) are of great benefit to Canadian suppliers of goods and services, but equally to Canadian exporters of capital under the investment provisions.

Non-discriminatory treatment is of particular advantage to Canadian businesses in countries such as Japan, Vietnam, Singapore and Malaysia, with whom Canada does not have trade agreements.

But it also means that Canadian suppliers will not be disadvantaged in TPP markets vis-à-vis competitors from other participating countries.

Preferential Treatment

The essence of the TPPA is that it is preferential in nature. It means that Canadian suppliers get better treatment in TPP countries than the MFN-level treatment these countries provide to non-TPP member countries under the WTO Agreement.

In respect of the US market, the TPPA covers a wider range of subject areas than under the NAFTA. Because it is preferential, the benefits for Canadian suppliers into the US market will be better than under the NAFTA. Key examples are financial services and government procurement.

Should Canada not join the TPPA, it will of course retain its NAFTA benefits. However, suppliers from TPP participating countries will be accorded a higher degree of preference than Canadian suppliers because of the broader reach and preferential basis of the TPPA.

Environment and Labour

While not supplanting the UN Framework Convention on Climate Change (UNFCCC) and the recent Paris Agreement, the ground-breaking provisions on environmental protection (Ch. 20) are arguably the most robust and extensive in any trade agreement (even if no hard targets are specified).

The TPPA advances labour rights well beyond existing trade agreements, requiring Parties to adopt and maintain international standards for workers’ rights based on the ILO Declaration of 1998. There are a host of other labour standards in the Agreement

These provisions become State-to-State obligations binding under the treaty. They reinforce the legal relationship Canada has with other countries, such as Japan. Like other parts of the TPPA, it means Canada can bring State-to-State claims against any other TPP Party that fails to live up to these obligations.

Investor-State Dispute Settlement

Provisions on ISDS (Ch. 9) follow the standard model, including under the NAFTA, with important adjustments to clarify treaty obligations and to reduce somewhat the coverage for which investor claims will be allowed.

The concepts of minimum standard of treatment and fair and equitable treatment are given additional clarity and are drafted so as to comport with international law and not just a matter of what a panel thinks is fair under the circumstances. There must be a breach of a “general and consistent practice of States” based on recognized legal obligations.

Measures merely inconsistent with an investor’s expectations are deemed to not constitute a breach of the Agreement.

Non-discriminatory measures to protect legitimate public welfare objectives such as public health, safety and the environment are not subject to ISDS as long as they are not disguised trade restrictions.

Other carve-outs are included to clarify what is in the NAFTA and bilateral FIPAs, such as the non-applicability of the investment chapter to government procurement or to local training requirements (important for Canada in term of aboriginal issues).

Other provisions ensure greater transparency and public access to arbitration proceedings.

It is important to consider the benefits of ISDS for Canadian investors abroad, not only the likelihood of claims by foreign investors against Canada.

IP Provisions

The IP provisions (Ch. 18) are not radical or revolutionary but, with a few modern adjustments, essentially reinforce the status quo. They are designed to bring the TPP area as a whole up to current international standards as codified in multilateral treaty obligations.

Some claim that the TPP provisions are a sell-out of Canadian interests but most knowledgeable commentators agree with the former Conservative government’s commentary that the TPP is “in-line” with Canada’s exiting IP regime and that all exceptions under the WTO TRIPS Agreement will continue to be available “in line” with Canada’s existing laws.

The TPP incorporates rules under existing patent treaties to which Canada is already a party, such as the WTO TRIPS Agreement, the Paris Convention, the Patent Cooperation Treaty and the Budapest Treaty.

It thus ensures international standards of patent protection and guarantees rights of the patent owner thorough the TPP area, just as existing international treaties do. This is of benefit to Canadian innovators.

With respect to copyright, the TPP incorporates the principles of the Berne Convention, to which Canada is also a party, and requires protection for 70 years following the death of the creator, as opposed to Canada’s current system of 50 years.

Experts have said this will have minimal if any economic impact, other than ensuring that the estates of Canadian artists receive royalties over an extended period.

These provisions will not limit access by Canadians to artistic works (music, art, literature) whether in physical or digital format.

Economic Impact

Some economic studies, such as one recently issued by the C.D. Howe Inst., suggest that the direct GDP gains for Canada will be relatively modest. Those models are based largely on assumptions from industrial exports based on performance under existing treaties (the NAFTA and the WTO Agreement).

Not adequately addressed are the gains for the Canadian services sector, for example, in Japan and in other Asian economies. As well, revenue impacts for Canadian corporate headquarters derived from organizing and directing supply chain activity may not be reflected in these models.

Even if the conclusions from these data can be supported, the real question is the magnitude of loss and market disadvantage from Canada not participating in a preferential trade agreement as vast as the TPP.

In other words, can Canada realistically rely on WTO level and NAFTA level market access provisions (and the limits of sectoral coverage in those agreements) while TPP participants gain superior preferential treatment into the US as Canada’s major market, but also in Japan?

Strategic Factors

Other factors that have a major bearing on any evaluation of the TPP entails an assessment of Canada’s strategic interests in TPP accession.

With Canada’s objectives in the Asia-Pacific region, the long-term strategic implications of Canada not being a party to the Agreement that includes the US, Japan, Australia, New Zealand, Indonesia and other Pacific states must be carefully considered.

Finally, the Canadian position on ratifying TPP must be looked at in terms of the situation in Washington. Failure of the US Congress to approve the TPP or, should it be approved, if US treaty obligations are somehow conditioned in the US implementing bill or in the Executive’s Statement of Administrative Action, will have a bearing on Canada’s ultimate position.

Investment Disputes: The Mesa Power Case and What It Says

Canada won another NAFTA investment dispute launched by a US investor under Chapter 11 of the NAFTA, the full 26 March 2016 decision recently being released.

Observers of these investment cases are keen to search the dense wording (and this decision is no less dense than many others) to find some golden mien that will magically point the way to the future.

That is not always easy. Cases like these are one-off and fact-oriented. In addition to parts of the award that were largely fact-driven, there are some key aspects that will likely influence future interpretations of the NAFTA – and possibly other treaties like the CETA and TPP as well.

The claimant argued that its failure to secure a contract to supply wind-generated electricity under Ontario’s Green Energy Act was the result of discriminatory and arbitrary behavior on the part of the Province.

Rummaging through the 700-odd paragraphs, here are what can be regarded as some of the key parts of that decision.

First, the claimant’s case was seriously weakened because the panel said this was a government procurement case, meaning Canada’s non-discrimination obligations were inapplicable under the NAFTA:

Article 1108 excludes the application of non-discrimination standards and performance requirements in the event of “procurement by a Party or a state enterprise”. . . .

. . . the Tribunal comes to the conclusion that the FIT Program constitutes “procurement.” By way of the FIT Program, the Government of Ontario purchases electricity through the OPA for the use of and for the ultimate benefit of the people of Ontario. The FIT Program bears all the hallmarks of procurement that have been described above. It was introduced to create a green economy and stimulate job creation. It was designed following extensive consultations with stakeholders, and launched by formal announcements of the Government. Applicants to the Program were rigorously screened through prescribed (and publicized) criteria in a competitive, open process to which any interested person could apply.

Second, regarding the claimant’s other argument that it was still entitled to “fair and equitable treatment” (FET) under international law – as per NAFTA Article 1105 – the panel said, essentially, there was nothing in the evidence to suggest that this obligation was offended by the FIT Program.

Reviewing NAFTA and other recent arbitration decisions, even though these do not bind successor panels, it said,

. . . . the Tribunal considers that the following components can be said to form part of Article 1105: arbitrariness; “gross” unfairness; discrimination; “complete” lack of transparency and candor in an administrative process; lack of due process “leading to an outcome which offends judicial propriety”; and “manifest failure” of natural justice in judicial proceedings. Further, the Tribunal shares the view held by a majority of NAFTA tribunals that the failure to respect an investor’s legitimate expectations in and of itself does not constitute a breach of Article 1105, but is an element to take into account when assessing whether other components of the standard are breached.

. . . while Mesa has challenged many actions, these acts are essentially steps in the implementation of Ontario policy and the Tribunal finds the policy unobjectionable. And where the challenged acts involve an allegation of collusion or unfair preference, there is simply insufficient evidence to establish the same.

Making an important point which should influence successor panels, it went on to say,

. . . Article 1105 provides no guarantee against regulatory change. This is all the more so in the present case where the FIT Rules expressly state that they may be reviewed and amended, particularly in response to “significant changes in market conditions or other circumstances as required.” The Claimant was fully aware of and accepted these provisions when it filed its FIT Applications with the OPA.

. . . .the Tribunal comes to the conclusion that Canada’s [i.e., Ontario’s] conduct has not breached Article 1105. While reaching this conclusion, the Tribunal nevertheless notes that at least some criticism may be levelled at Ontario’s decision to run two renewable energy programs in parallel without clearly articulating the relationship of the two and without spelling out their interaction in the event of shifts in demand and supply and other changes in the energy market. In the event, this choice and the manner in which it was implemented created certain problems, and might well been handled differently. But judged in all the circumstances, this is not criticism that reaches the threshold of a violation of Canada’s international obligations.

Finally, of note in the case is the huge cost award, laying the burden entirely on the complainant. Perhaps a signal to others that might want to challenge governments, the panel did not split costs as is often done:

Article 40(1) of the UNCITRAL Rules provides that the unsuccessful party shall “in principle” bear all of the costs of the arbitration. The Claimant too agrees that, in general, costs should follow the outcome of the case.

The Respondent has prevailed in the present proceedings and the Tribunal sees no reason to depart from the general rule set in Article 40(1) of the UNCITRAL Rules. Indeed, it finds it fair and appropriate that the Claimant bear the entire costs of the arbitration, i.e. EUR 1,551,343.80.

There is much more to the decision than this. There always are. The foregoing are just a selection of what struck me as some of the more noteworthy elements.

TPP – Brief to the House of Commons Trade Committee

Below is a Brief filed with the Standing Committee on International Trade on its examination of the Trans-Pacific Trade Agreement.

HOUSE OF COMMONS

STANDING COMMITTEE ON INTERNATIONAL TRADE

TRANS-PACIFIC TRADE AGREEMENT – WATCHING WASHINGTON

LAWRENCE L. HERMAN

Herman & Associates

Toronto

13 April 2016

While the Standing Committee examines the intricacies of the Trans-Pacific Partnership Trade (TPP) Agreement, it’s important to closely watch what the Americans are doing, both in the Executive and the Congress.

The Committee should proceed diligently with its evaluation, but Canada should not commit to the Agreement and proceed down the path to ratification until it is clear whether, and under what conditions, the US government will agree to ratify the deal.

Obviously, if the Congress refuses to ratify, the whole TPP project will come to an end. Clearly Canada – and the other TPP countries – won’t approve a trade deal if it’s rejected by the US Congress. But even if the Congress eventually approves US ratification, there are some riders that could have major implications for Canada.

Timing Issues and Canadian Ratification

At this point, it is not clear when Congress will even act on the TPP Agreement. Reports out of Washington are fairly certain that the Agreement won’t be tabled before the Presidential election in November. Leaders in both the Senate and the House of Representatives have made that fairly clear.

After the election, the current Congress will reconvene in what’s known as the “lame duck” session, which will last from November to the end of January 2017 when the new President and the newly-elected Congress take office. It is far from clear whether the lame duck Congress will take up the TPPA.[1] There are many politicians, both Democrats and Republicans, who oppose any action until the new administration and the new Congress are in place.

The Republicans control both houses and will continue to in the lame duck session. It’s to be remembered that these Republicans won’t even consider Mr. Obama’s Supreme Court nominee, saying that filling the Court vacancy is up to the new President and the new Congress in 2017. So it’s difficult to see Congress addressing the TPPA until then. This means that matters could remain fluid in Washington for close to another year.

The Implementing Bill Can Move the Goalposts

Under the President’s Trade Promotion Authority (so-called “Fast-Track”), the Congress can only approve or disapprove the TPPA as submitted by the President. It can’t insist on changes to the treaty. It has to vote either year or no for the entire deal.

However, there are other aspects to fast-track that are important. The first is the content of the implementing bill that the President must send to the Congress as part of the TPP package. That bill provides for the necessary changes to US laws and a host of other matters that implement the treaty domestically in the United States. It’s one thing for the US to sign and ratify a treaty. It’s another thing as to how US laws will deal with the treaty and what conditions and caveats are contained in the implementing legislation.
It works in this way. When the President transmits a trade agreement like the TPPA to Congress, the majority leaders of the House of Representatives and the Senate must then introduce the President’s implementing bill on the first day on which the Senate and the House are in session.[2] Neither the Senate nor the House can amend the bill. Their respective committees have 45 days after its introduction to report the bill, or be automatically discharged, and each body must vote on it within 15 days after the bill is reported or discharged.[3]

At this juncture, we don’t know the contents of the President’s bill. We know the Executive and Congressional staffers are working on drafting it but we have no idea what it will eventually contain. Canada needs to know this before it can take a final decision on ratification.

It is possible for the US Congress to agree to approve the TPPA as a treaty but with provisions in the bill that condition that approval through the changes it makes to US laws that somehow alter the negotiated balance in the terms of the treaty. It’s the contents of that legislation, therefore, that are critical. This is something that Canada must examine carefully before it proceeds with its own TPPA ratification.

Executive Action Can Affect the Balance

Even if US implementing legislation itself is consistent with the TPPA, there are aspects of follow-up Executive action that Canada has to be certain about. Congress can separately require the Executive to act in certain ways, regardless of the legislation, that could alter the negotiated gains and concessions in the TPPA and indirectly impose conditions on US compliance with its treaty obligations.

This is illustrated in a report called the National Trade Estimates Report, issued annually by the US Trade Representative.[4] That report lists all of the alleged trade barriers to US commerce in each of the countries where the US does business. The section on Canada[5] contains a list of Canadian measures that the US doesn’t like, such as supply management, provincial wine and beer monopolies, government support to Bombardier and other Canadian laws and policies.

Buried in the 2016 NTE report is a pledge from the USTR to use TPP implementation to pressure Canada on what the US claims are shortcomings in Canada’s intellectual property (IP) protection. The USTR has flagged the patent utility requirements adopted by Canadian courts and complaints by Eli Lilly that their patents have been revoked due to a judicial interpretation for patentability that requires drugs to demonstrate their utility promised by the manufacturer.[6]

There is nothing in the TPPA that requires Canada to alter its patent laws in this area. However, there are many access points in the US system whereby vested interests and their Congressional supporters pressure the administration to support US industry in a variety of ways. The implication is that, bowing to industry lobbying, the USTR will pressure Canada on this front once the treaty enters into force, irrespective of any actual obligations imposed on Canada under the treaty.

This is one of a number of signals that the US intends to press TPP countries following treaty implementation to address irritants the US has, not only with Canada but with other partner countries, whether there is a treaty obligation or not.

All TPP parties can legitimately expect their counterparts to fulfill treaty obligations. That’s fair game. But there are aspects of the TPP and US policies that Canada needs to be clear about. It’s one thing to sign onto a treaty with the United States. It’s another to be told by the US government in advance that it expects Canada to deliver in accordance with US demands and, if not, to be subjected to US pressure in a variety of ways to secure compliance.

Conclusions

The conclusion from the above is that the Standing Committee and the House of Commons at large should review the TPPA in depth and determine whether it meets Canadian negotiating objectives and is in Canada’s interests to ratify. Whether Canada proceeds to this final step, however, should only be taken when the US position on ratification is clear and in full view of the implementing bill and related Congressional and Executive commitments on the matter.

Submitted, 13 April 2016.

Footnotes

[1] “Sources on both sides of the debate said the possibility of a lame-duck vote on TPP remains hard to predict. It depends on the outcome of the election, as well as which party will controls the Senate and the House in the next Congress, one congressional source said. It is impossible to handicap these factors, he said.” TPP Supporters Gear Up Lobbying Campaign Touting Benefits, Avoid Timing, World-Trade On Line, 13 April 2016.

[2] Bipartisan Congressional Trade Priorities Act of 2015, 19 U.S.C. §2191(c)(1).

[3] Ibid., paragraph (e)(1).

[4] https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2016/2016-national-trade-estimate.

[5] Ibid., p. 69 et seq.

[6] The NTE report says that it “continues to have serious concerns about the impact of the patent utility requirements that Canadian courts have adopted.” This issue is also the subject of a NAFTA investment dispute filed by the company against Canada: Eli Lilly and Company v. Canada, http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/eli.aspx?lang=eng.

Canada and Investment Disputes-Tallying the Numbers

Canada Pays Out

The federal government just announced that it was paying Mobil Investments and Murphy Oil some $19 million to satisfy a decision of a NAFTA investment arbitration panel last year.

The tribunal found that certain guidelines of the Canada-Newfoundland Offshore Petroleum Board were discriminatory and thereby breached Canada’s NAFTA obligations.

Although the government is disappointed with the decision, the $19 million payment is a small amount measured against the $66 million originally claimed by these two companies.

While not earth-shattering in dollar terms, the case raises significant issues these investor-State dispute settlement provisions (or ISDS), not only under the NAFTA but replicated in the Trans-Pacific Partnership (TPP) Agreement now under active discussion in Ottawa, Washington and other capitals.

Canada a Top Target

It’s a shock to find that Canada is close to the top of the list of countries targeted in these international investment disputes. The UN Conference on Trade and Development’s annual report (2015) puts Canada in fifth place as a respondent state, behind Argentina, Venezuela, the Czech Republic and Egypt.

And all of these cases have been brought under the NAFTA by US investors. There are no arbitrations against Canada under any of our thirty bilateral investment treaties with other countries (that we call Foreign Investment Protection Agreements, or “FIPAs”).

Why is this? Is our legal system so devoid of respect for the rule of law and our policies so bereft of respect for our international treaty commitments that outside investors have no choice but to invoke binding arbitration against Canada more often than against Mexico, Ecuador, India and Ukraine, for example?

Checking the Numbers

Before going too far down this path, there are some things to clarify. First, while Canada is listed a frequent respondent, many of these investor claims have been either dismissed or haven’t been pursued by the claimants. So the numbers have to be adjusted to the actual cases where NAFTA arbitrations have been decided or are continuing to final disposition.

Even with this, Canada still comes out at the top as a respondent under the NAFTA, with some nine active arbitrations on the roster and twelve cases where final awards have been issued – about half of which have been in Canada’s favour.

In terms of the amounts awarded, one also has to be careful with other numbers. Billions of dollars have been claimed by American investors but only a very small amount all totalled has actually been awarded in their favour.

Even with the latest $19 million decision in Mobile Investments/Murphy Oil, the total awards against Canada, in over twenty years of NAFTA litigation, comes to about $37 million. This includes some cases where Canada and the investor settled out of court.

Excluded from this total is the $130 million settlement with Abitibi-Bowater following Newfoundland’s expropriation because it was accepted by the Province from day one that compensation would be paid. The case never reached the active stage.

So the NAFTA totals, while not negligible, aren’t particularly dramatic. And Canada has won some very impressive victories, including the recent dismissal of an $800 million claim by Mesa Power involving Ontario’s Green Energy Act.

Admittedly there are some pending cases that could change the balance, including hundreds of millions claimed by Eli Lily in a patent case and by Lone Pine Resources regarding Quebec’s moratorium on fracking operations under the St. Lawrence River.

Why Canada?

Coming back to the question as to why Canada is such a frequent respondent in these ISDS claims, there are several possible reasons.

The first is that it’s relatively easy for a US investor to sue Canada. We have the same legal traditions – common law – and speak the same language, unlike a claim against Mexico, for example, which would have to be pursued in Spanish and where there’s a civil law tradition.

Second, the Canadian system is open and transparent. Canadian government documents, even where confidential, can be discovered without too much hindrance and, where not immediately available, our access laws make these available to US claimants without too much fuss.

The third factor is a combination of the generally litigious nature of US companies, who see litigation more than their Canadian counterparts as a cost of doing business, and the fact that retaining Canadian counsel to pursue a NAFTA claim is generally less costly than hiring a US law firm and, as an added bonus, there’s the exchange rate factor that’s advantageous when it comes to paying legal bills in Canadian currency.

A final factor is the availability of third-party financing of these investor claims through different mechanisms, a phenomenon that has a growing influence on stimulating investor claims, not only against Canada but in other jurisdictions around the world.

Where Does All This Lead?

The foregoing suggests that, given the existing ISDS provisions in both the NAFTA and the TPP, the exposure of Canada to binding arbitration claims by US investors will not be changed in any substantive way going forward.

While recent improvements have been made to the system in the Canada-EU trade agreement, those won’t change the NAFTA or the TPP investment provisions.

What is of significance, however, is the trend in investment arbitration, including under the NAFTA, showing that tribunals increasingly require investors to discharge a very heavy burden in proving that international treaty obligations have been violated.

While it may not give perfect comfort, there is a clear tendency in these decisions to dismiss investor claims and uphold non-discriminatory government regulation where there is a demonstrable public interest at stake.

…

This piece was published in the Globe & Mail Report on Business, 6 April 2016. To view the published version, click here. http://bit.ly/22bMgiN

Canadian Trade Policy under the Liberals-Some Ideas

As Canada becomes more and more assertive in international markets, particularly the expanding export reach of our SMEs, we need to consider aspects of our strategy aimed at dismantling foreign trade barriers. Preferential trade agreements like the Trans-Pacific Partnership Agreement (TPPA) and the Canada-EU Comprehensive Economic and Trade Agreement (CETA) are one way but there are other instruments and mechanisms that can be employed, including efforts at the political and diplomatic level.

The first step in opening some of these markets is to understand the nature and depth of barriers to Canadian goods, services and investments around the world.

The Department of International Trade, now part of Global Affairs Canada, used to publish an annual compendium of these but hasn’t for several years. Examination of such barriers, to the extent it is done, is now wrapped up into the Department’s Global Markets Action Plan (GMAP).

GMAP was developed under the former trade minister (Ed Fast) but has been adopted by the current minister (Chrystia Freeland) as part of her mandate. The Department’s web-site site still lists GMAP as “The Blueprint for Creating Jobs and Opportunities for Canadians through Trade” and has been updated as recently as March 2016. The update includes the signing of the TPP Agreement on 4 February 2016.

The conclusion is that GMAP, at least for now, remains the official, non-partisan, consolidation of Canada’s trade priorities and, even if promulgated by a previous government, is testimony to its soundness as a policy document.

As noted above, the GMAP doesn’t turn the spotlight on actual foreign trade barriers, even though this is often the first step in identifying problems faced by Canadian companies doing business abroad. This differs, for example, with the approach in the United States, where the US Trade Representative (USTR) reports annually to Congress on barriers to US trade and commerce in its National Trade Estimates Report (NTE).

The USTR report is a combination administrative/legal document and a political document. It serves several purposes, rolling up US trade policy into a comprehensive report but – importantly – shining the spotlight on those countries USTR identifies as impeding American business and commerce in foreign markets.

To some extent, it’s a pro forma exercise but in another sense it provides ammunition to American exporters to press for action at the diplomatic and political level in addressing specific market access problems.

Take the section in the 2016 report on Canada. It reviews Canadian trade policy in general terms, then lists the differences the US has with Canada on things such supply management, aspects of the CETA the US doesn’t like (Canadian recognition of EU geographic indications), provincial support to Bombardier, etc.

None of this is particularly concerning, other than that it focuses attention on some Canadian measures the US doesn’t like and provides opportunities for affected industries to press their political representatives for action.

Interestingly, nothing is said in the 2016 report about softwood lumber or other Canada-US trade irritants or, on the positive side, about the advances made in coordinating bilateral border measures in the Beyond the Border initiative.

That being said, the NTE report can be part of the arsenal available to US companies in pressing for governmental action, leading to the suggestion that Canada’s Trade Department, in spite of resource constraints, should consider re-instituting something similar.

While this in itself won’t reduce barriers faced by Canadian business, it would provide a helpful compendium, particularly SMEs, in gaining insights into where the most serious problems are encountered. Over time, this could help focus Ottawa on the need for governmental action to reduce or eliminate those barriers.

TPP – It’s a Matter of Canadians’ View of the World

Here is a commentary of mine in the Globe and Mail, 16 January, 2016 about how Canadians should consider the value of the TPP Agreement and whether it’s in Canada’s national interest. I say it comes down to how we view the world. http://bit.ly/1J8KDze

Looking Ahead – The WTO in 2016

The collapse of the Doha Round a couple of years ago left the World Trade Organization with an unfortunate legacy, a wounded reputation as a negotiating forum as 10 years of effort essentially went up in smoke. Funeral rites for the Doha Round are now accepted by all save the most steadfast of believers.

This begs the question whether the multilateral trade negotiating system has run its course, ending an enviable success record, beginning with the 1947 General Agreement on Tariffs and Trade (GATT) through a successive series of rounds, culminating with the historic Uruguay Round and the launching of the WTO in 1994.

Some observers say the international community will never again replicate this degree of multilateral consensus. The result has been a turning away from multilateralism and greater reliance by governments on regional and bilateral trade initiatives, such as Canada-Europe and the recently-concluded Trans-Pacific Partnership (TPP) Trade Agreement.

While the multilateral system is under stress, it’s too easy to write off the WTO as a negotiating forum. Without being overly optimistic and recognizing the challenges, in fact the organization remains surprisingly robust. In spite of the many diverse and often opposing interests among its 162 member States, the WTO manages to make advances, incremental and less dramatic than the Doha Round, but noteworthy nonetheless.

Consider these four WTO-related initiatives.

A WTO Trade Facilitation Agreement (TFA) was concluded in 2013 and is slated for entry into force, possibly in 2016, once two-thirds of WTO members ratify. So far the number is 63, still some way to go. However, there is momentum here. Not a fancy bells and whistles kind of agreement but one that sets global rules to ease entry of goods across borders.

The Information Technology Agreement (ITA) was concluded in December at the WTO’s Nairobi Ministerial. The deal lowers duties on roughly $1.3 trillion in trade in high-tech informatics products, accounting for a remarkable 10 per cent of world trade in all goods. While less than a fully multilateral deal and awaiting entry into force, the ITA’s successful conclusion is another WTO achievement.

The Environmental Goods Agreement (EGA) continues under negotiation among major WTO member economies, including Canada, US, EU, Japan. It aims to reduce tariffs and improve market access on green products that contribute to reducing fossil fuels and carbon emissions. While a plurilateral – as opposed to multilateral – effort and not officially under the WTO umbrella, if it succeeds, reduced tariffs will be available to all WTO members on an MFN basis. Progress is slow but is being made.

Conclusion of a Trade in International Services Agreement (TISA) also making progress. It’s not been much in the limelight but is potentially a very big deal, covering telecommunications, financial services, computer services, retail distribution, transportation, environmental services, express delivery, energy services and professional services (e.g. accountants, lawyers, architects and engineers). The 23 participating countries agreed to hold more rounds in 2016 in hope of resolving remaining issues. The agreement envisages an accession process to allow other WTO members to join in the future.

None of these smaller-scale activities are earth-shaking in themselves. However, if these treaties ultimately do come into effect, they will be milestones of achievement in opening specific markets based on WTO-inspired principles of non-discrimination, national treatment, bans on import restrictions and discriminatory treatment for foreign investments and prohibiting unfair preferences for local goods and services.

These efforts are all within the framework of the WTO’s norm-creating (some might say “parliamentary”) functions. Even if comprehensive efforts such as the Doha Round have proven impossible, these smaller-scale initiatives add to the corpus of international trade law.

While focusing on these norm-creating efforts, not to be forgotten are the WTO’s adjudicative functions, deciding trade disputes among members through binding rules applied by neutral panels. While the process is lengthy and cumbersome, at the end of the day it (mostly) works.

Look at the latest Canada-US flare-up over the discriminatory American country-of-origin labelling requirements for Canadian agricultural exports. Canada could have applied retaliatory duties on American imports after winning a succession of WTO panel rulings but the case was settled and a trade war was averted. That’s the way the WTO system is supposed to work.

As the Trudeau government moves ahead on its trade policy agenda – not yet fully articulated– my sense is that Chrystia Freeland will continue Canada’s long-standing support for the multilateral system and for the WTO as an institution, a policy that was largely followed by her Conservative predecessor, Ed Fast.

In this one area at least, Canadian policy has shown a steady course in strong support of the WTO as an institution and demonstrated that it is possible to circumvent partisan politics in pursuit of a larger set of national objectives.