Author Archives: Lawrence Herman

About Lawrence Herman

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

Investment Disputes – Hot-Button Topic

I confess I’m not a fan of the Canadian Centre for Policy Alternatives. I find much of their stuff to be ideologically-driven and one-sided. I’m put off by their anti-free trade rhetoric and their congenital hostility toward the WTO and liberalized trade generally.

As a believer in the progressive development of international law, I don’t agree with those that dismiss the efforts of the global community to conclude legally-binding codes of conduct, whether in trade or other economic matters.

But I must say, the CCPA’s August 2015 report on Investor-State Dispute Settlement – “A Losing Proposition – The Failure of Canadian ISDS Policy at Home and Abroad” – is an interesting document.

Whether one agrees with its overall conclusion, and while some of its analysis can be questioned, it makes a useful contribution to the growing debate over ISDS. It’s definitely worth reading.

After reviewing the recent history of investment disputes involving Canadian investors around the world, the report says that Canadians have lost a high percentage of those cases. It concludes that ISDS hasn’t been particularly helpful in that regard and dismisses its utility as an instrument of Canadian policy.

In the reverse situation, it notes that Canada has been targeted in more investor-driven arbitrations under the NAFTA than the US and Mexico combined – a valid point. Because arbitrators found against Canadian environmental regulations, notably the recent Clayton/Bilcon decision, the report says Canadian policy in signing investment protection treaties is wrong-headed.

Typical of opponents of investor arbitration, there is questionable use of some of the data and the historical record in the document.

It throws in the Abitibi-Bowater settlement of $130 million in the list of NAFTA cases Canada has lost, when in fact that was a negotiated settlement and Newfoundland had made it clear at the very outset, when it expropriated Abitibi’s assets, that it would pay compensation.

Apart from the recent NAFTA panel award in the Clayton-Bilcon case where the damages haven’t yet been assessed, the amount paid out by Canada under NAFTA awards is less than $20 million, in comparison to the hundreds of millions of dollars claimed by disputing investors.

In typical CCPA fashion, the report raises the spectre of Canada being threatened in future investor claims under the NAFTA and other bilateral investment treaties, predicting that Canada will come under assault in a range of public policy areas, including environmental and public health and safety measures.

In its selective use of the record, the report doesn’t mention important NAFTA cases Canada has won such as Chemtura Corporation v. Canada, where the arbitrators dismissed the claim involving Canadian pesticide regulations, saying nothing in the NAFTA prevented governments from legislating or regulating for the public good. Or Dow Agrosciences v. Canada, where the case was withdrawn, the company conceding the right of Quebec to regulate the use of 2,4-D.

That being said, and whether one agrees entirely with its overall thesis, the report raises legitimate questions about the value of ISDS for Canadian investments abroad, given the record of Canadian losses over the last decade or so. Whether or not the scorecard is 100% accurate, it’s a valid question.

The irony is that, by pointing to the number and scope of unsuccessful Canadian investor arbitrations against foreign governments, the report implicitly recognizes that arbitrators have tended to side with governments as opposed to foreign corporations.

With those reservations, I find the report to be a useful document. It addresses growing interest – and concern – in the legal and trade policy community about the dramatically increased use of investment litigation and the enlargement of the scope of measures that are being challenged, not only in Canada but around the world.

Parenthetically, I guess when an investment treaty is concluded where governments say to corporations “You can sue me”, it’s not hard to understand why that option is taken advantage of.

The real shortcoming in the report is that it doesn’t come to grips with the central challenge governments are facing. With over 2,500 or so of these investment protection treaties around the world, it’s impossible to roll them back, cancel and re-negotiate them. Governments could choose to abrogate these treaties en masse but that just isn’t going to happen.

So what’s the solution? What can be done to re-calibrate ISDS going forward, to improve the process, enhance procedural transparency and, importantly, to allow appeals from arbitration decisions on matters of law?

The debate in legal and policy circles has taken us to the point where there is a fair degree of consensus over need re-balance ISDS, between the interests of foreign investors to be safeguarded against arbitrary governmental measures and the legitimate right of governments to legislate for the public good.

That’s really what we need to be talking about.

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There was an article about the CCPA reports in the August 5 edition of Embassy where I offered some comments. Click here

Supply Management – Begining of the End or End of the Beginning?

This blog was re-printed with some additions in the Toronto Globe & Mail’s Report on Business, 5 August, 2015. To read that op-ed commentary, click here.

The TPP talks in Hawaii last week – with much hoped-for anticipation – unfortunately didn’t reach agreement. The 12 countries were getting pretty close but some tricky issues remained unresolved – autos, patent rights, agriculture, among others.

Ministers will meet again to try to break the logjam, probably in Kuala Lumpur around the time of the APEC meeting near the end of August. It’s getting pretty close.

All eyes are on the Americans. Governments recognize that a deal has to be done by September-October to allow Obama to present it to Congress before the US election period starts in earnest.

In the Hawaii meetings, Canada came under repeated fire from the US, Australia and New Zealand because of the government’s refusal to make offers to reduce Canada’s prohibitive dairy tariffs. Canada prevents all but a very small volume of dairy imports to protect its regressive supply management system.

But at the 11th hour, Ed Fast, Canada’s trade minister, did something important. He put an offer out to those three countries to reduce Canada’s dairy tariffs and open up import quotas (called tariff-rate quotas or TRQs). This would apply to fluid milk and fluid milk equivalents with a phase-in period so that allowable duty-free dairy imports would expand over time.

Those three countries didn’t think Canada’s offer went far enough. But they didn’t reject it either. Negotiations will be continuing between now and the next ministerial meeting and Canada will be pressured to do better. So we’re now talking about numbers, not concepts.

Once an offer like this is made, the principle is established, the die is cast, and there’s no turning back. The concept of supply management (at least for dairy) is now on the table in a real sense. In the ongoing talks in TPP, Canada will be negotiating over volumes, tariff levels and timing.

The idea of Canada refusing to negotiate with trading partners over supply management has now been jettisoned. It’s just a matter of time – maybe longer or shorter – but the system’s days are numbered.

Trans Pacific Trade – Hold Your Horses

Many of us are hopeful that the Trans-Pacific Partnership (TPP) negotiations will wrap up sometime soon and that the deal will require Canada to open up its highly-protected dairy, poultry and eggs sectors – dairy being the most egregiously protected, outmoded Soviet-style regime.

Trade negotiations aren’t a zero-sum game, and if Canada has to compromise and possibly phase out supply-management over time, it will be in return for a forward-looking, comprehensive deal that gives Canadian exporters of goods and services major benefits of preferential access to markets in other TPP countries.

There’s been a lot of hype recently about the pressures on Canada to make concessions on supply-management because the TPP negotiations are moving to their final phase, now that Obama finally has trade negotiating authority from the US Congress.

Some of these comments haven’t looked closely at what that Congressional authority entails and how it will work. Timing in all of this is crucial and the timing is far from cut and dried. It certainly isn’t “fast track”.

If a deal on TPP is achieved at the Ministerial in Hawaii later this month, it will be a political agreement. If achieved, it will be an endorsement by trade ministers of all the key elements and, while not the final treaty text, we’ll know what Canada will have to give up on supply management in return for – we expect – major gains in other areas that make it a good deal for us overall.

That being said, it will be many more weeks before the text is finalized and put in legal form ready for formal signature by all TPP participants. I predict that won’t be until sometime next fall, maybe even late fall.

This raises critical timing issues.

Under fast-track, Obama has to give Congress 90 days’ notice of his intention to sign a TPP agreement. That means that even if the treaty text was fully scrubbed and finalized by September, the 90-day period would take us to December at the earliest.

But that’s only for Obama’s signature. Signature and implementation – followed by ratification – are very different things. A signed treaty like this one will need domestic legislation before it can be ratified and enter into force among all parties.

In Canada, ratification is fairly straightforward. Even when implementing legislation is needed, a majority government can table a bill in the House, get it passed and follow through with formal ratification in fairly short order.

It’s just not that simple in the United States. Once Obama signs the treaty – after the 90 day advance notice period – the US International Trade Commission has to complete an economic assessment of the deal and submit its report to the Congress. It has 105 calendar days to that. Only when that ITC assessment is done can an implementing bill be tabled by the president.

Both houses of Congress then have to consider and pass the TPP bill. That could take months. USTR Michael Froman has indicated previously that Congressional consideration of trade agreements typically take up to five months and even more.

All of this could bring us well into 2016, a period when the US will be fully engaged presidential election politicking — where nothing is predictable.

And there are eleven other TPP participants that will have their own internal treaty implementation processes to go through once the treaty is complete and the final text is available.

None of this doesn’t mean things couldn’t move quicker. But, even with a final TTP agreement, I think it will be many months go by before we get a clear sense of where matters stand in terms of timing.

The regrettable aspect  of this is that, if a TPP trade agreement is held hostage to political fortune for many months, it will give nay-sayers such as the Canadian dairy lobby time to use their deep-pocketed bank account to lobby against the deal.

Trans-Pacific Trade – Canada Under Pressure

With the passage by the US Senate of Obama’s long-sought-after trade negotiating authority this week, the Trans-Pacific Partnership (TPP) effort will start to move to its final wrap-up. Other countries were holding back until the necessary bill (called Trade Promotion Authority or “fast-track”) was enacted.

This will put tremendous pressure on Canada to open up its Soviet-style, protected supply-managed sector for dairy products, poultry and eggs, making it extremely tricky for the Harper government in an election year.

See my comments on all of this in the June 25 Globe & Mail Report on Business here.

More Criticism About Supply Management

There is no end to the thoughtful critics of Canada’s Soviet style supply management system for the dairy, poultry and eggs producing sectors.

Not only have leading Canadian think-tanks like the C.D. Howe Institute, the Conference Board and the School of Public Policy at U. Calgary produced reports highly critical of this antiquated system, here is what the WTO has to say, in a nutshell, about the serious defects of the system in its most recent Trade Policy Review – Canada (April 2015):

One of the weaknesses described regarding the supply managed system is the priority it gives to farmers over consumers. Supply management results in limited competition, both domestic and international. The target price to producers is largely based on average production costs and the system has not created incentives for producers to lower their production costs over the years. It therefore guarantees stable revenue for producers while transferring the cost onto consumers. In a context of growing global demand for dairy products, the system also hinders the competitiveness of the industry and may be preventing it from taking advantage of international markets. Finally, the system is maintained at the cost of trade barriers (quotas, and very high out of quota tariff rates).

It couldn’t have been better stated in such a succinct way – not only do Canadian consumers suffer from the system, Canada is losing out on major opportunities in global dairy markets. The question is this – why doesn’t the dairy industry wake up?

Some Recent Comments in the Press

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.

Looming Possibility of TPP Deal

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.

Investment Disputes – New Ideas Percolating

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.

Exchange Rates and Trade Negotiations

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.