Author Archives: Lawrence Herman

The fallout from the clothing factory collapse in Bangladesh – which caught media attention for a while – has subsided. However, it has left western industries scrambling for a solution and for very real and effective safeguards against this thing happening again. There’s commercial self-interest involved, sure.

Companies can’t afford the public opprobrium in ther key markets when their brands are associated with sub-standard condiditions in the developing world. There’s also general concern about trying to effect improvements in local conditions in low-cost countries where western goods are made.

The response has been to formulate a set of industry standards to which many manufacturers have signed on. The interesting thing about these standards is that they represent another example of what’s been called “private industry regulation”.

In fact, private standards with global impact have been around for many years. They are gathering momentum in today’s fast-paced, dizzying global economy, where commercial events move far too quickly for governments to keep pace.

Hence, the private sector often steps in. A good example is the development of standards of social (including environmental) responsibility under the CSR rubric. Many of these CSR norms and standards are industry-formulated and applied outside of governmental regulation or treaty.

The question raised by the Bangladesh tragedy is whether there is a role for governments – including some kind of intergovernmental agreement – to make sure these industry rules and norms are in accordance with the public interest.

Joe Oliver, Minister of Natural Resources, fired a shot across the European bow last May over the possible enactment of the proposed EU Fuel Quality Directive (FDQ), saying that if it’s passed, Canada could march the Europeans to the World Trade Organisation.

This came at a delicate time, as Canadian and European negotiators are trying to put final touches on a ground-breaking, comprehensive economic and trade agreement (CETA). A high-profile controversy involving Canada’s oil sands certainly doesn’t help that process.

But the Federal government has no choice in avoiding a fight when it comes to anything that tarnishes the international reputation of Alberta’s oil but to get into the ring and take the gloves off.

In public relations terms, the fight is doubly challenging because of photo images of the physical impact of oil sands production on the Alberta landscape. This has been combined with effective public condemnations by media-savvy environmental groups.

For the Canadian government, this is shaping up as a fight for hearts and minds, not unlike the one Canada has been engaged over the years fighting foreign restrictions on imports of seal products or Quebec-made chrysolite asbestos.

While Oliver was in Brussels and using a European platform to make his comments, he and federal government are most concerned with Washington and the impending decision on Keystone XL.

Anything that looks like Canadian bitumen-made fuel is environmentally harmful plays indirectly into the Keystone file.
The fight over the FDQ, if it comes to that, will involve an air war and a ground war. The air war will be the ongoing PR battle, the fight for public sympathy in Europe and in the United States.

The ground war, the battle for the mind, will be the trade battle and that’s what Oliver’s statement was all about — preventing EU carbon offsets being imposed that differentiate between bitumen-derived products and conventional fuels.

These offsets are effectively a border tax on Canadian imports, to increase the price of Canadian oil-sands-made fuels as compared to conventional fuels.

There’s a fundamental WTO legal issue at stake in the ground war.

It concerns the WTO prohibition against governments discriminating against “like” goods from different countries.

This is the famous most-favoured-nation (MFN) treatment rule. It requires fully equivalent treatment to imports of “like” goods wherever they come from. And the equally famous “national treatment” rule means that you can’t discriminate against imports in favour “like” domestic products. It means that all duties, taxes or other border measures — such as carbon offset requirements –that differentiate between these like goods are WTO-illegal.

The question comes down to what is “likeness” in WTO terms.

Numerous WTO panel decisions have said that “likeness” is based on the intrinsic nature of the goods, not how they are made. Likeness is determined by physical properties, usage and, importantly, whether the goods compete in the same market. It is the direct “competitiveness” of the goods that is normally critical in determining likeness, according to these decisions.

How the goods are made – production and process methods (called PPMs) – is not a differentiating factor when the imported goods are like domestic products and other imports in every other respect. A 2011 WTO Secretariat Working Paper examined the jurisprudence in depth going back many years and concluded that border measures based on production methods that don’t affect the “likeness” of the final product would be in contravention of the WTO Agreement.

Coming back to the Canada-EU dispute, the issue is this: Can the EU apply differential border measures – such as carbon offsets – on fuel from Canada that is produced from bitumen but is “like” conventional fuels in terms of physical and chemical properties, end-usage and, importantly, that competes in the same market?

Canada says definitely not. Admittedly each case must be looked at on its facts but WTO jurisprudence leads to the conclusion that Canada is right.

Canada is being sued under the NAFTA investment arbitration regime (in NAFTA Chapter 11) more than Mexico and the US combined.

Today, there are eight active cases underway against Canada – all by American investors.

There are only two cases on the books against Mexico and only one underway against the United States.

Taking into account all these NAFTA investment disputes – active and completed – Canada has been the defendant in more arbitrations than the US and Mexico combined. While the claimants have usually lost, it’s puzzling that Canada has been taken before these arbitration panels so often.

Why is this? Why hasn’t Mexico been the most frequent defendant? After all, Chapter 11 was really designed to address Mexico where it was felt private American and Canadian investors needed a greater degree of protection from unfair, non-transparent and discriminatory laws.

There are some possible explanations for this. First, it’s a lot easier for American investors to sue Canada because of the common English language. Bringing a case against Mexico means working in Spanish.

Second, Canada has a common legal tradition with the US and an open and accessible governmental system where information is readily obtainable – either directly or through use of Access to Information legislation. Little can be hidden under the Canadian system. Not so with Mexico.

Third, US private investors have typically a bundle of available cash to spend on litigation and a long and abiding tradition of aggressive use of litigation as a commercial strategy. The intrinsic long-term value of a given investment may be considered greater in Canada than in Mexico.

While these points may not answer all the questions, the inference is that the fruits of a successful claim against Canada may be more cost-effective than a claim against Mexico. Whatever the reasons, it is interesting to see Canada being hauled before binding NAFTA arbitrations much more frequently than the other two countries.

Last May, the WTO Appellate Body turned down Canada’s appeal from the earlier WTO panel decision that found the local content requirements of the Ontario’s Green Energy Act and the Feed-in-Tariff (FIT) program offended the WTO Agreement.

The decision is a critical one for the WTO, the first directly dealing with a country’s green energy laws.

Canada was formally the defendant even though the case involved a provincial measure. That’s because Canada at large subject to WTO obligations even if in the case of laws enacted by a province.

Many observers of WTO disputes thought from day-one that Canada’s defense to the EU and Japanese complaint would face an uphill battle.

Basically, Canada (Ontario) argued that the FIT entailed government procurement of electricity and was therefore outside the normal obligations that prohibited conditioning market access on local content purchases.

This was a difficult argument to sustain from the get-go. Leaving aside the finely-crafted legal arguments advanced by Canada, history has shown that WTO panels really don’t like discriminatory market barriers of any kind, no matter how they may be dressed up in legal garb.

So the Appellate Body didn’t think much of Canada’s government procurement argument. It said that Ontario clearly wasn’t buying electricity to use on its own behalf – like desks, computers, pens and staplers – but was channelling renewable (“green”) electricity on to the commercial market.

Without that exemption, Canada was disentitled to treat solar equipment from Japan and the EU differently from Ontario-made products.

Where do we go from here?

Well, since the case was brought against Canada as the WTO member, Canada will now have to comply with the Appellate Body decision by Ontario bringing the Green Energy Act into conformity with our WTO obligations. Ontario has said it will do so and the WTO has agreed that it has until March 2014 to make the needed changes.

If this isn’t done, Canada will face the threat of compensatory measures – better described as retaliatory duties – applied by Japan and the EU against Canadian exports to make up the lost trade affected by the offending measure.

That may be difficult to quantify precisely but the threat is a real one. What usually happens is that the winning side chooses a list of exports to hit with punitive tariffs that hurt the most, as Canada is doing in its win against the US in the dispute over discriminatory beef and pork labelling requirements.

So, in the event that the Green Energy Act isn’t changed sufficiently to meet the WTO ruling, Japan and the EU will target those Ontario-made exports most likely to be hurt the most by retaliatory duties.

This WTO decision of course isn’t a total loss for Ontario. For one thing, these decisions are prospective, meaning that it doesn’t affect current FIT contracts but only future projects.

As well, the decision doesn’t affect other parts of the Green Energy Act. That means that higher prices can still be paid by the Ontario Power Authority for renewable energy generated from green sources, except that the qualifications for getting these rates in the future cannot be made contingent on meeting local purchasing obligations.

I suspect that, ultimately, Queen’s Park will make all the necessary legislative and regulatory changes to bring the law into line. The chances of Canada facing retaliatory duties on our exports seems unlikely.