Author Archives: Lawrence Herman

About Lawrence Herman

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

Brexit and CETA – The Way Forward

CETA Held Hostage

On Brexit again, what’s clear is that even with a new U.K. government in place, things are still unclear. There’s no roadmap on how all of the issues surrounding the UK leave scenario will be sorted out.

In the meantime, the Canada-EU Comprehensive Trade and Economic Agreement (CETA) is held hostage to fortune, languishing in treat limbo following a decision by the EU Council that the CETA is a “mixed agreement” and requires approval by the 28 EU member states to enter into force.

What complicates things is that, as long as the UK remains a member of the EU, it is included in the 28 member CETA ratification process. And indications are that it will take many months – possibly years – for the groundwork to be laid before Britain triggers the formal withdrawal notification process and the two-year cut-off in the Lisbon Treaty begins for completing that withdrawal.

This has implications for the future of the CETA, with indications in European capitals that final EU action on the CETA has to be suspended until the UK situation resolves itself.

Provisional Application

Some suggestion of progress on the CETA front, however, was indicated last month when Canada’s trade minister, Chrystia Freeland, and her European counterpart. Cecelia Malmstrom, talked about possible provisional implementation of the deal, pending member country ratification.

Clearly, provisional application is the way to go. Here are some further points of clarification on this idea.

Provisional application means all or parts of a treaty can be applied by the parties while the full ratification process remains to be completed. This is specifically allowed under international law. The Vienna Convention on the Law of Treaties – yes, there’s a treaty that even deals with treaties – provides for this. It’s fully legal.

There are good examples of treaties that have been provisionally implemented for years without being fully ratified. The most noteworthy is the General Agreement on Tariffs and Trade (GATT), which had been included as part of a larger multilateral agreement concluded in 1947 called the Agreement on the International Trade Organization (ITO).

The ITO was never approved by the U.S. Congress (sound familiar?), so the GATT was applied provisionally by all signatories, thereby by-passing the U.S. system. This situation lasted for almost 50 years, until the World Trade Organization Agreement came into being in 1994.

This illustrates that parties have a pragmatic option when it comes to treaty implementation, a way to avoid getting bogged down in technical, jurisdictional issues and allows for forward progress where mutual interests dictate. This should apply in the case of the CETA.

Critical Mass Within Brussels’ Competence

Comment has been offered to the effect that something like 90% of the CETA is within the exclusive competence of the EU organs – European Council and Parliament – and that these parts don’t require member State approval.

I’m not sure about the 90% figure, but under Article 3 of the Treaty on the Functioning of the European Union (TFEU), the EU bodies in Brussels have exclusive authority over the following matters: customs and tariffs; competition rules; monetary policy for the Euro area; conservation of marine biological resources under the common fisheries policy; and, importantly, all aspects of commercial policy.

While those specific aspects of the CETA that fall within these domains would have to be sorted out, there’s enough here to allow for significant parts of the CETA (maybe even 90%) to be provisionally implemented by Ottawa and Brussels alone.

Take customs matters. Brussels alone has the power to implement changes to the EU Common External Tariff, meaning, of course, all tariff reductions agreed to in the CETA. So these could be put into effect now, without needing any action by the member States.

In commercial policy and competition law, CETA provisions in these areas are outside the competence of EU member countries and so Brussels aloe could legislate any needed changes to bring CETA obligations into effect throughout the EU.

Gains Across the Atlantic

On the Canadian side, the federal cabinet (i.e., the Governor-in-Council) alone has the constitutional authority to negotiate and conclude treaties and, where internal implementation is concerned, Parliament can enact the necessary legislation. In matters of trade affecting Canada as a whole, there is no constitutional requirement for provincial legislation for Canada to ratify an international treaty.

In any event, all 10 provinces and three territories were at the negotiating table and signed on to the deal two years ago, so there are few issues on the ratification and implementation side in Canada. The problems are on the other side of the Atlantic.

Provisional application of the CETA is the pragmatic solution. The potential gains for the EU are real, not only in securing preferential access to the Canadian market for European goods and services (not inconsiderable, even though Canada is a small economy in relative terms) but in showing the world that the Brexit turmoil doesn’t impede real progress on the trade front.

Another WTO Aircraft Battle?

According to the media, the Brazilian aircraft manufacturer Embraer is threatening another WTO case against Bombardier, challenging the $1 billion equity infusion provided for the C Series by the Quebec government and, possibly, another $1 billion under consideration from the Feds.

The following are some initial impressions from reading these recent reports.

Only Brazil Can Bring a Case to the WTO

First, Embraer itself can’t bring a case to the WTO. Only the Brazilian government can do that. Still, one suspects that Embraer executives wouldn’t be rattling sabres like this unless they had some solid assurances from the Brazilian government about a possible WTO complaint.

We’re probably a long way from an actual case being filed. Even so, statements like this indicate there’s fire where the smoke is.

The second point is a corollary of the first. If Brazil does launch a WTO dispute, it would be against Canada, not Bombardier. Canada would be the respondent, even if the money was provided by Québec.

That’s because Canada alone is a member of the WTO: as sub-federal units, the provinces are not. On the international plane, Canada at large is the responsible party. But WTO cases can still be filed against Canada for actions by the provinces.

These Cases Are Highly Political

Forget the niceties of trade law. WTO cases are always based on a country’s strategic interests. In this case, challenging Canada would be a signal to the world that Brazil will go to great lengths to defend its own geopolitical and commercial reach.

Should Brazil file a case against Canada, the Canadian government will certainly respond with a complaint against Brazil. Embraer is subsidized to the hilt by the Brazilian government. That’s a risk Brazil may be prepared to take, betting on the possibility that a WTO case will put a damper on Bombardier’s global sales activities.

Is It A Subsidy?

To succeed at the WTO, Brazil would have to demonstrate that the equity purchase by Québec or Canada is indeed a subsidy under the WTO Subsidies and Countervailing Measures (SCM) Agreement.

Most illegal subsidies are in the form of grants, tax concessions or concessionary loans given by governments. We don’t have that in the Bombardier case.

True, equity infusions are possible subsidies under the SCM Agreement’s definition. But the Agreement also stipulates that a benefit must be received by the equity provider that wouldn’t otherwise be there if the government hadn’t acted.

So the first question will be whether the equity purchased by the Quebec or Federal governments is a benefit to Bombardier as opposed to what it would have been if Bombardier has raised the cash on the market.

Any benefit wouldn’t be the total $1 billion (or whatever the total value of the infusion by both levels of government). The benefit would be the difference between the value of the equity infusion by the government versus what a private investor would have paid.

Equity infusions aren’t like recurring tax concessions or annual grants, for example. As a one-time cash infusion, assuming there is one, its value would be amortized over the life of the C Series program and applied to each aircraft sold.

So, even if the first number of hurdles facing Brazil could be overcome, the extent to which the $1 billion in equity is a benefit over the course of the project will have to be calculated.

Has Brazil or Embraer Been Materially Injured?

Assuming the case went so far as a Brazilian victory, Brazil’s rights against Canada would be circumscribed by the impact that benefit had on Brazil’s trade interests. Subsidies are not actionable under the SCM Agreement unless they cause serious prejudice to another WTO member or material injury the domestic industry of that member.

That requires Brazil to show that the equity purchased by Canadian governments has been the direct cause of damage to Embraer – by either taking sales from Embraer or by causing significant price reductions to Embraer’s own aircraft sales.

The point is it’s not a matter of simply alleging that a subsidy exists. There has to be injury to the complainant’s trade interests, meaning not only a direct causal connection between the subsidy and the alleged injury, but injury to the same or directly competitive product.

If lost sales or price reductions are the result of other factors, there is no such causal connection.

And whether any of these “serious prejudice” effects exist can only be shown if the alleged prejudice involves Brazilian like products.

It’s true that, at first blush, Bombardier’s CS-100 and CS-300 occupy much of the same commercial space in the industry as the Embraer E195, in either its 100 or its 124 passenger configurations.

However, with the major technological advances in the C Series, including its high percentage of sophisticated composite materials and the improved Pratt & Whitney PW1500G geared turbofan engines, there’s an argument that the E195 and the C Series are not like products. i.e., not directly substitutable in the market. If that can be shown, Brazil would not be able to sustain its WTO case.

A Long Way to Go

The obvious conclusion – there’s a long, long way to go before anything is settled through WTO litigation. In the Canada-Brazil aircraft battles two decades ago, there was an eventual standoff and in the end, neither government retaliated. The cases were settled with changes to each sides’ government loan programs.

The difference in the Bombardier case this time is that we’re not dealing with government grants or loans but with equity infusions, a different beast altogether,

With this history as a guide, should Brazil proceed and file a case, we can expect five years of WTO litigation. Whether that will have any effect on the C Series and its sales prospects is highly unlikely.

Investment Arbitration – Important Developments in Tobacco Litigation

The huge multinational tobacco conglomerate, Philip Morris (PM), was bounced out of court on 14 July 2016, in a highly controversial investment claim against tiny Uruguay, a country with a population of 4.5 million and GDP a fraction of the US$80 billion annual revenues of the US-based tobacco giant (Philip Morris v, Uruguay, Award: http://www.italaw.com/cases/460)

Although headquartered the US, pm used a Uruguay-Switzerland bilateral investment treaty (BIT) to launch its claim against that country’s tobacco control measures. This was possible because PM had subsidiary Swiss companies that could file the case, invoking the rules of the International Convention for the Settlement of Investment Disputes (ICSID).

The litigation centred on Uruguay’s cigarette packaging rules, requiring that only one variant of cigarette brand per family could be sold (the so-called Single Presentation Requirement or SPR) and that 80% of the package had to consist of health warnings.

PM argued that these regulations irreparably harmed its cigarette distribution business in Uruguay, effectively expropriating its patent rights, and were arbitrary and discriminatory, offending the rule enshrined in the BIT requiring “fair and equitable treatment” (FET) of foreign investors and their investments.

In defense, Uruguay said that it was following the rules contained in the WHO’s Framework Convention on Tobacco Control (FTFC) and that the regulations were legitimate public health measures, were reasonable and proportionate and were fully within the FET concept.

Fair and Equitable Treatment

FET is embedded in literally hundreds, if not thousands, of bilateral investment treaties around the world. It is amongst the most highly-litigated concepts in dozens and dozens of investor-State dispute settlement (ISDS) arbitrations.

The FET obligation is in Canada’s foreign investment protection agreements (called FIPAs), including the NAFTA and the Canada-EU trade agreement (CETA) currently awaiting ratification by the European Parliament and the legislatures of EU member States.

As a treaty obligation, FET comes into play when State regulations are alleged to be arbitrary, discriminatory, unreasonable or disproportionate, impacting negatively on the proprietary rights and other guarantees for foreign investments recognized under these bilateral agreements.

Critics assert that FET as a legal concept is skewed in favour of private interests and that successive arbitration panels have interpreted the rule far too broadly and favoured those interests over the public good. Critics argue that laws and regulations enacted for legitimate public policy reasons shouldn’t even be subjected to claims under these ISDS treaty provisions.

In a carefully and thoroughly reasoned decision, the Philip Morris panel upheld the right of Uruguay to pass its regulations, deciding 2-1 that the measures didn’t offend the FET principle.

The decision represents an important precedent in these investment arbitrations, notwithstanding some commentators claiming that its significance is less because panel decisions are not biding on subsequent tribunals.

The panel concluded that the measures were not arbitrary. It said (in para. 390) that according to the International Court of Justice in the 1989 ELSI case (United States v. Italy), arbitrariness is defined as “a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety.” Nothing of the sort existed here.

Citing the ELSI decision, the panel said (at para. 353),

  • For regulatory measures to be deemed arbitrary, some important measure of impropriety [must] be manifest, reflecting the absence of legitimate purpose, capriciousness, bad faith, or a serious lack of due process. Consequently, measures undertaken in good faith cannot be considered arbitrary unless there is a manifest lack of rational relationship between the measure and its objective, i.e., unless there is no logical connection between them.

As demonstrated by Uruguay’s legal team, these measures were well-founded on scientific and public health grounds, were not arbitrary or discriminatory and were solidly within the FET ambit.

In light of the health-related evidence and internationally accepted standards, “the SPR was a reasonable measure, not an arbitrary, grossly unfair, unjust, discriminatory or a disproportionate measure” and that it “was an attempt to address a real public health concern, that the measure taken was not disproportionate to that concern and that it was adopted in good faith.”

With respect to the 80% package warning requirement, the panel concluded (at para. 418):

  • The fair and equitable treatment standard is not a justiciable standard of good government, and the tribunal is not a court of appeal. Article 3(2) does not dictate, for example, that a 50% health warning requirement is fair whereas an 80% requirement is not. In one sense an 80% requirement is arbitrary in that it could have been 60% or 75% or for that matter 85% or 90%. Some limit had to be set, and the balance to be struck between conflicting considerations was very largely a matter for the government.

Rejection of Investor’s So-Called “Legitimate Expectations”

PM had argued that Uruguay was bound under the FET clause by the concept of “legitimate expectations” that tobacco regulations wouldn’t be changed when it made its original investment. The panel rejected this argument as well. It cited the 2006 ICSID arbitration award in El Paso v. Argentina, which said,

  • Under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze.

In light of this and its factual analysis, this panel concluded (at para, 430) that,

  • . . . in light of widely accepted articulations of international concern for the harmful effect of tobacco, the expectation could only have been of progressively more stringent regulation of the sale and use of tobacco products.

Upholding Police Powers

The other important part of the decision is that it upholds the “police power” of the State to enact legitimate regulations for the public good. The panel rejected PM’s claim that its regulations improperly expropriated the company’s patent rights. Citing the 2010 NAFTA case of Chemtura v. Canada, it concluded that the measures were a valid exercise of its “police powers” by Uruguay for the protection of public health.

Deference to Legitimate State Regulation

The award also refers in numerous places to the doctrine of deference – i.e., that it is not the role of international arbitration panels to substitute their views for those of the governments concerned where there is evidence that an impugned measure is not unreasonable or arbitrary and has been based on sound public policy underpinnings:

  • 488. . . the present case concerns a legislative policy decision taken against the background of a strong scientific consensus as to the lethal effects of tobacco. Substantial deference is due in that regard to national authorities’ decisions as to the measures which should be taken to address an acknowledged and major public health problem.
  • 399. . . . .The responsibility for public health measures rests with the government and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health. In such cases respect is due to the “discretionary exercise of sovereign power, not made irrationally and not exercised in bad faith … involving many complex factors.” As held by another investment tribunal, “[t]he sole inquiry for the Tribunal… is whether or not there was a manifest lack of reasons for the legislation.”

Important Precedent

These and other passages supporting the Uruguay regulations as within applicable international law standards are extraordinarily important. Added to the legal weight of the decision is the fact that one of the panel members, James Crawford, is the highly respected British judge on the International Court of Justice.

While it is true that ISDS arbitration decisions are not strictly-speaking binding as precedents on subsequent panels, it can be expected that this decision will have considerable weight in future investment arbitrations.

The South China Sea Dispute – China Offends International Law

In the 1970s, as a young diplomat, I was a member of the Canadian delegation to the UN Law of the Sea Conference. Later in private law practice, I was on the Canadian legal team in the Gulf of Maine Case before the International Court of Justice. I have advised governments and international organizations on maritime claims and legal issues concerning offshore sovereignty. As a result, I have followed the current South China Sea dispute pitting several countries against China with interest.

There is little doubt – even without the benefit of the 500 page decision of the Permanent Court of Arbitration on 12 July 2016 – that China’s outrageous claims to vast areas of maritime space in the South China Sea lack legal validity.

It’s not a matter of parsing complex provisions in the Law of the Sea Convention, to which China is a party. The words in the Convention are convincingly clear. Article 121, paragraph 3 states,

 “[r]ocks which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone or continental shelf.”

Applying this to the facts in the case, the Court found that various shoals, reefs and other features surrounding the Spratly Islands – one of a group of islands claimed by China – are in fact and in law just “rocks” and not entitled to be recognized under the LOS Convention as islands themselves.

It reached this decision without deciding on the question of the sovereignly over the Spratly Islands, hotly contested by the Philippines. It didn’t have to.

Even if, for argument’s sake, China had sovereignty over the Islands, their surrounding reefs, shoals and and other features weren’t entitled to generate a vast surrounding economic zone and continental shelf under Article 121, paragraph 3 of the Convention.

This important paragraph was inserted during the LOS negotiations in the 1970s for good reason. The concept of seaward maritime jurisdiction – the exclusive economic zone and the resources of the shelf – is based on sovereignty over appurtenant land territory.

Negotiators agreed without much, if any, controversy at the LOS Conference that incidental geological or geographical features shouldn’t be allowed to generate massive, and indeed egregious, accretions of maritime jurisdiction.

As noted by the Court in several key passages,

The principal impetus for expanding such jurisdiction in the first instance  is unequivocally linked with the interest of coastal States in preserving         marine resources for the benefit of their people. . . .

As a counterpoint to the expanded jurisdiction of the exclusive economic zone, Article 121(3) serves to prevent such expansion from going too far. It serves to disable tiny features from unfairly and inequitably generating enormous entitlements to maritime space that would serve not to benefit the local population, but to award a windfall to the (potentially distant) State to have maintained a claim to such a feature.

After an exhaustive review of all the factors and their physical attributes, the Tribunal concluded that the shoals and reefs around the Spratlys that China claimed to be distinct islands were, in fact, no more than rocks.

The Court said that China’s aggressive activities involving land reclamation and construction of artificial islands, installations, and structures on these shoals and reefs has caused severe, irreparable harm to the coral reef ecosystem and offends various other provisions of the LOS Convention.

No-one is naïve enough to believe that the Chinese government will cave in to this decision and cease or retreat from its aggressive South China Sea activities. We’re involved in a serious game of raw power and geopolitics at its highest pitch.

The peaceful resolution of this issue, if there is one, will ultimately be based on the ability of the US to broker some kind of deal among China and the contending parties. In the final analysis, the Seventh Fleet is more critical than the Permanent Court.

That being said, the Court has done admirable service to the world community in its detailed analysis and firm conclusions about what governments can and cannot do in asserting sovereign claims and maritime jurisdiction. International law sets boundaries and serves a vital and overriding purpose in this regard.

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.

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 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.

 

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:

  1. Article 1108 excludes the application of non-discrimination standards and performance requirements in the event of “procurement by a Party or a state enterprise”. . . .
  1. . . . 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,

  1. . . . . 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.
  1. . . . 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,

  1. . . . 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.
  1. . . . .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:

  1. 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.
  1. 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.