There are some recent comments of mine picked up in the press over the last few days (24-31 May 2015). First is an editorial in the Toronto Globe and Mail on the state of Canada-Japan trade talks. To read the comment, click here.
Second is a piece by Mike Blanchfield of the Canadian Press on the TPP negotiations and pressures being exerted on Canada to open up its wine and spirits market (already very open to imported products). To read the piece, click here.
We are getting down to the wire on a possible Trans-Pacific Partnership (TPP) deal. Top negotiators from all TPP countries are meeting in Guam 15-26 May to try to put some of the final touches on the accord.
A lot of things still have to fall into place, notably the US Congress granting long-delayed negotiating authority to President Obama. As well, the US and Japan have to sort out their talks on agriculture and other market access issues, which if agreed, will the swept into the agreement.
It seems that Canadian business isn’t paying enough attention to this exercise, not being terribly vocal in support, in contrast to the strong endorsements given 25 years ago when Canada and the US were negotiating the Free Trade Agreement. This is leaving the field open to the opposition, like the Canadian dairy farmers, who are staunchly opposed to any agreement that weakens their protectionist supply management system.
Read my commentary in the Globe and Mail Report on Business 12 May 2015 by clicking here.
There are over 2,500 bilateral investment treaties that incorporate investor-State dispute settlement (ISDS) mechanisms. These allow foreign investors to bring binding arbitration against host-States for allegedly unfair or arbitrary actions (laws or other measures) affecting the value of their investments.
There’s growing concern among informed persons over this entrenched model, as I’ve commented on before.
This unease is permeating public policy debate in many countries (including the US) and will become more intense in the months ahead. Opponents are mustering their forces. Political leadership will eventually be called on to address these concerns.
While investment treaties were designed originally to aid capital flows from rich to poor countries, the availability of binding arbitration has led to a dramatic escalation of investor litigation over the last few years.
In the early days, ISDS was used by foreign investors to correct unfair, discriminatory or arbitrary treatment like expropriation. However, in the more recent period large corporations have challenged things like environmental protection, public health and other broad policy measures.
An example is the arbitration launched by the Swedish nuclear giant Vattenfall over the German government’s freeze of nuclear energy projects. Another is the dispute by the tobacco company, Phillip Morris, challenging Australia’s plain cigarette packaging laws.
Opponents tend rail against these treaties without offering practical solutions. The reality is that there’s no easy answer to the issues being raised. It’s impossible to wipe the slate clean and deal away hundreds of bilateral investment protection treaties around the world
But there are some practical approaches to consider.
One is to better define the legitimate role of governments and kinds of disputes that are allowed to be brought to arbitration, something Canada and the EU have done in their recently concluded trade and investment agreement (CETA).
Another would be to create a permanent investment court – in contrast to the ad hoc bodies used now – and a mechanism for appeal on points of law or factual error. These institutional changes would help assuage public concern – and the concern among a growing number of jurists – that these three-person investment tribunals have the exclusive power to decide on issues affecting a wider swath of policy with no mechanism of review.
A draft set of investment treaty provisions to address these issues was recently released by the German Economic Affairs Ministry. An excellent analysis has been prepared by Luke Peterson, editor of the Investment Arbitration Reporter. It’s a paper worth reading and can be found at: http://www.iareporter.com.
These kinds of changes could be looked at in current and future trade and investment negotiations, including in the Trans-Pacific Partnership (TPP) negotiations. Moreover, it’s not beyond possibility that protocols on these and other points could be drafted to cover existing investment treaties.
Whether these changes are possible in the real world of inter-State relations remains to be seen. But given the intensifying concerns, it’s important to at least discuss these points in an informed and dispassionate way, cleared from the rhetoric and political condemnation of ISDS we regularly hear.
I find it odd that the Canadian business community hasn’t said anything about the moves in the US Congress to use trade sanctions to counter alleged exchange rate manipulation by other countries as a way of stimulating their exports.
This issue has been a bug-bear to US politician for years, principally focused on China. The concern is that China (and others) undervalue their currencies to maintain positive trade balances with the United States.
Trade Promotion Authority (TPA) legislation now under debate in the Congress could include a stipulation that any trade agreement signed by the US must have provisions allowing trade sanctions to be used to deal with these government-driven exchange rates – like defining currency manipulation as a form of subsidy.
US Treasury Secretary Jack Lew and former treasury secretaries have told sponsors of the TPA bill that adding such a condition in the Trans-Pacific Partnership (TPP) agreement and other trade initiatives could torpedo these talks.
I agree. The appropriate way to deal with currency manipulation (real or alleged) is to use other means, such as diplomacy and the Basel process, not to try to insert new and inappropriate rules in trade agreements. For one thing, the WTO Agreement, which is the gold standard for multilaterally-agreed rules, doesn’t allow use of trade sanctions for this purpose.
What the current debate in the US Congress shows is that many US politicians are more interested in using TPA to grind their own axes and less interested in showing true US leadership in bridging differences and securing a meaningful, if less than perfect, Trans-Pacific trade deal.
It’s called “fast-track” but it’s no such thing. What’s unfolding in the US Congress is bizarre.
The rationale behind fast track – or Trade Promotion Authority – is to give the President a Congressional mandate to negotiate and sign trade agreements with the assurance that, once signed, the Americans wont then come back to the negotiating table demanding more concessions to secure Congressional approval of the deal.
Without fast-track, other countries won’t sign a deal with the Americans, knowing that domestic US interests will push the Congress to insist on even more concessions.
To avoid this, fast-track authority restricts the Congress to either approve or vote down the entire agreement. There is no right to insist on amendments to a signed treaty. It’s either yes or no.
Now, with the games being played between Republicans and Democrats, fast-track is being twisted out of shape, with all sorts of riders are being attached that distort the very reason for fast track in the first place.
The latest TPA bill was tabled in the Senate Finance Committee last week. It contains provisions allowing Congress to remove fast-track, ex post facto, if the Executive doesn’t meet stiff consultation requirements, fails to meet some as yet undefined congressional negotiating objectives or for other reasons that Congress doesn’t approve.
In other words, it’s a pig-in-a-poke.
Other countries negotiating with the Americans in the crucial Trans-Pacific Partnership trade negotiations, for example, will have no idea, once final comprises are made and a deal is concluded, whether the Congress will unilaterally determine that it fails to pass muster and fast-track authority will be cancelled.
What a mess.
It’s a regrettable reflection of the intensity of partisan politics in Washington and the fact that American politicians have little regard for US leadership in international trade or what the rest of the world expects when they sit down to the negotiating table with the United States.
Further to my post below (23 March 2015), there is growing concern in well-informed legal and public policy circles over the recent Bilcon v. Canada arbitration award under NAFTA Chapter 11.
These concerns are fueling opposition to investor-State dispute settlement (ISDS) as constituted in the NAFTA and a wide array of other investment treaties, with three-person arbitration panels having the authority to make virtually iron-clad and un-appealable decisions involving domestic regulatory measures.
In Bilcon, as noted in my previous post, the arbitration panel split 2-1, the majority holding that the Canadian environmental review process, which turned down a large quarry and marine project in Nova Scotia, breached the minimum standard of protection Canada owed the investor under NAFTA article 1105.
A strong dissenting opinion by highly-respected panel member Donald McRae said that irregularities of procedure and even breaches of domestic law in themselves do not give rise to breaches of the international standard of protection under the NAFTA. That international standard, he said, is of a higher order.
McRae said that the majority risks turning investment arbitration panels into supra courts of appeal, giving investors access to remedies that are not available to investors under local laws. This, he said, goes far beyond what investment protection agreements are set up to do.
Challenges under these treaties have been proliferating in recent years, with some law firms set up to take on these cases on a contingency basis. A case being followed with great interest is the arbitration launched by Philip Morris over Australian laws requiring plain cigarette packaging.
Unease over ISDS is being increasingly voiced by both left-wing and conservative circles in Canada, in the EU and in the US, largely centred on the unassailable power of arbitration panels, appointed on an ad hoc basis to determine the legitimacy of public policy and regulatory measures and not subject to appeal.
To the left, this gives unacceptable advantages to large, aggressive corporations. To the right, this is an assault on national sovereignty. It will be interesting to see how these opposing views play out in the days ahead, notably in the context of the Trans-Pacific Partnership negotiations and in the European Union’s ratification of the Canada-EU trade deal.
A lot of media discussion about international trade gets caught up in process – the events at the WTO in Geneva, the next meeting of trade negotiators, plans for the next ministerial gathering, what’s happening in the various forums with confusing acronyms – TPP, CETA, NAFTA, ASEAN, APEC, and on and on.
Trying to make sense of all of this complexity, we lose sight of the broader picture.
First and foremost, trade agreements aim to carve out a rules-based system in global commerce from what was in the 1920s and 1930s a chaotic beggar-thy-neighbour free-for-all.
The old GATT that emerged from the war in 1947 and its laudable successor, the WTO Agreement in 1994, represent singular achievements in this regard — creating a rules-based framework for open markets and fair and non-discriminatory dealings in international commerce.
Even with regrettable setbacks in the WTO negotiating processes, the guiding rules in the Agreement remain, requiring that national laws and regulations be free from discrimination and unfair treatment that inhibits the movement of goods, services and capital.
There is no doubt that this entails a sacrifice of national sovereignty to that extent. But trade agreements, like all contracts, entail compromises, giving up uninhibited rights of action for gains in other respects.
It’s not a zero-sum game, however. In today’s world, governments are increasingly sensitive to ensuring that trade and investment agreements simultaneously give them room to legislate for the common good, be it to protect the health and well-being of their citizens or to protect against environmental degradation. This is a hard to achieve, but this critical balance must be maintained.
Within this balance, measuring success in these agreements – be they multilateral, regional or bilateral – is not just about non-discrimination and freeing up the movement of goods across national borders. Success is measured equally in promoting technological development, innovation and entrepreneurial activity across the globe.
For Canada, what does this entail? Here are three guiding elements that should be given greater prominence and that, if realized, will support Canadian innovation and entrepreneurship and, ultimately, improve the well-being for all our people.
First, services. Like the Canada-EU agreement (CETA), other regional agreements, including the proposed Trans-Pacific Partnership (TPP) agreement, must ensure the freest possible market access for Canadian service providers, giving them fair, equitable and non-discriminatory treatment abroad.
That will create new opportunities for Canadian enterprises – bankers, insurers, engineers, transportation industries, architects, computer software design specialists and scientists – in expanded global activities and thereby stimulate entrepreneurial activity and innovation at home.
Of course, Canadian service industries will have to compete against fierce global players from other countries, including from emerging economies. Our service industry is already achieving notable international success but being measured fairly and objectively against the competition through rules that are clear, objective and non-discriminatory will assist Canadians in achieving entrepreneurial successes abroad.
Secondly, procurement. Canada’s trade agreements must provide non-discriminatory opportunities for Canadian bidders in foreign public procurement projects at the national and, importantly, at subnational levels. Canadian public authorities, federal, provincial and even at the municipal level, will do the same on a reciprocal basis.
Guaranteeing a level (or mostly level) procurement playing field in and of itself isn’t a guarantor of competitiveness or a stimulator of innovation. But if Canadian companies enter bidding races abroad assured they will be judged on the basis of their competence, innovation and cost-effectiveness and not inhibited by local market preferences, success abroad will follow from innovation and improved performance at home.
Third, intellectual property. Prospective trade and investment agreements must guaranty intellectual property protection for Canadian companies based on the highest international standards. Some of this is already assured in the NAFTA, the CETA and other agreements recently concluded. Improvements in IP protection are forecast in the TPP negotiations as well as in Canada’s ongoing bilateral initiatives.
While Canada has not been a world leader in patent filings, strong international guarantees for Canada’s offshore-related IP activities will mean Canadian companies can exploit foreign markets with a high degree of certainty — and legal recourse — that their innovations will not be high-jacked by unscrupulous foreign operators.
While this also isn’t a guarantor of Canadian entrepreneurial activity on its own, a more secure international playing field in intellectual property protection is a key ingredient in spurring innovation in here in Canada.
These three elements are often neglected in public discussion, which often pays undue attention to the more political aspects of trade negotiations such as, in recent days, the investor-state dispute settlement (ISDS) regime. There has been talk, for example, about European opposition to ISDS in the recently concluded agreement with Canada (the CETA) and the possibility that this might jeopardize ratification of the agreement by the European Union.
These arguments miss the point. In my view, ISDS could be modified, adjusted and even sacrificed without diminishing the importance of the CETA or other international trade agreements in stimulating global prosperity and innovation in the three central areas mentioned above – services, intellectual property and procurement.
If these three goals are realized in a balanced set of treaty rights and obligations, the compromises will have been worth the candle.
I was quoted in a Globe and Mail article by Shawn McCarthy, 24 March 2015, reporting on Canada’s loss in a NAFTA arbitration over a quarry and marine terminal that the Province of Nova Scotia refused to approve:
There is a growing concern in legal circles that the arbitration panels are expanding their mandate – including substituting their decision-making role for domestic courts – and that they cannot be appealed, Toronto trade lawyer Larry Herman said Tuesday. The Bilcon decision “will feed ammunition to those who oppose international arbitration as a form of dispute settlement,” he added.
It’s the second high-profile NAFTA loss for Canada. Last month, Ottawa was ordered to pay Exxon Mobil Corp. and Murphy Oil Ltd. $17.3-million after a NAFTA panel ruled that Newfoundland and Labrador had violated the trade agreement by imposing retroactive research-spending requirements on its offshore oil producers.
The ruling will also serve as a precedent should TransCanada Corp. decide to launch a NAFTA challenge against the Obama administration’s handling of the Keystone XL pipeline review.
“The fact that the Keystone XL project has been subject to purely political delays … in my view, gives TransCanada a good argument that the U.S. has breached the international standard of full protection and security,” Mr. Herman said.
To read the full article, click here.
I was also quoted a few days earlier in another article in the Globe, 23 March 2015, by Bertrand Marotte, about the NAFTA arbitration award in the Murphy Oil v. Canada case, referring to the need for some kind of internal agreement between the federal government and the provinces whereby awards involving provincial measures should be re-paid to Ottawa by the province concerned:
“Ottawa and the provinces need to get together to resolve this issue so that it doesn’t continue to be a problem in the future,” Toronto trade lawyer Lawrence Herman said.
“It’s a political issue rather than a legal one, it seems to me, and requires Ottawa and the provinces to settle it amongst themselves.”
To read this article, click here.
Campbell Clark quoted me in a story in the Globe, 18 March 2015, about the chill in Canada-US relations and the implications for Canada from the fact that the Congress has not yet given President Obama that required authority to negotiate trade deals. Here’s what I said, in part:
Mr. Herman said it looks as if Congress wants to impose conditions on what is to be negotiated before granting the authority – in other words, it might say going in that the deal must include concessions from certain countries, such as asking Canada to give on supply management.
Those things might just be bumps in the road, Mr. Herman said. “But in this case, we’ve got a kind of political overlay.” The chill makes it more likely irritants colour the government-to-government relationship anew, he said, and that in turn makes it harder to smooth away disputes that can hurt.
This article can be read in full by clicking here.
A NAFTA arbitration panel has decided against Canada in a long-standing investment dispute over a large coastal quarry and marine project in Nova Scotia that had been turned down over environmental and social concerns (Clayton/Bilcon v. Canada).
A majority of the panel said that Canada and Nova Scotia breached the minimum standard of treatment under international law, as required under Chapter 11 of the NAFTA.
The case was launched by the US investors in 2007.
No decision has been made on the amount of compensation, which the investors claim at $300 million.
The decision is likely to stir up considerable controversy, notably because of a strong dissent by one of the panel members, Prof. Donald McRae, who said that the NAFTA panel went far beyond its jurisdiction under the treaty in questioning the reasoning of the federal-provincial environmental panel. Prof. McRae said that even if the review panel had breached some aspects of domestic law , that didn’t mean that the matter could be reviewed under the high thresholds set out in the NAFTA.
This decision, together with another NAFTA award against Canada and Newfoundland in the Murphy Oil Case, seems to reverse a trend where NAFTA investment panels have sided with governments, holding that they had the legitimate right to regulate economic activity and legislate for the public interest as long as their laws and other measures weren’t unfairly discriminatory or arbitrary.
Apart from these Canada-US cases under the NAFTA, there is growing debate in legal and trade policy circles generally over the role of investor-State dispute settlement panels (ISDS), including the dramatically increased use of investor litigation in challenging governmental regulations, many of which concern resource development and environmental protection.
One of the items of focus is that foreign investors have much larger rights under investment treaties than do local investors under domestic law. Another issue concerns the absence of an appeal mechanism, leaving investment panels with essentially un-challengeable authority in deciding these disputes.
It is not beyond legal ingenuity to resolve some of these issues. A few international organizations have even put these points on their agendas for future discussion (e.g., UNCTAD and ICSID). However, in reality, given that there are over 2,500 bilateral investment treaties around the world already in existence, finding a solution to these concerns remains a distant dream.
In an op-ed piece in the Financial Post (Toronto) on March 19, 2015, I discuss the machinations in the US Congress and the implications of the various political aspects surrounding the lack – so far – of the US administration’s authority to negotiate free trade agreements. This has a major bearing on the current Trans-Pacific Partnership negotiations, entering their final delicate phase.
To see my article, click here.