Fears over new investment deal with China are unwarranted
R emember 1994? OJ? Karlheinz? Elvis Stojko? A lot has changed since we negotiated the North American Free Trade Agreement, but what hasn’t changed is hysteria surrounding foreigninvestment protection agreements (FIPAs).
Anti-NAFTA zealots in the 1990s warned that by providing legal protection for investors, we were opening the door to U.S. takeover of health care, education and fresh water. FIPA Mania 2.0 is a replay of all the old hits, but the new villain is China.
Let’s replace the rhetoric with some facts.
Canada has FIPAs with more than 30 countries, from Barbados to Croatia to Senegal. What these agreements provide are some basic assurances that if a Canadian investor establishes or acquires a company in another country, then the investor has a right to legal recourse if that company is expropriated without compensation (or if the country changes its rules, making it impossible for the Canadian investor to continue doing business). In exchange, we offer these same rights to foreign investors in Canada.
That’s all. A FIPA does not provide permission to invest, nor does it exempt an investor from the laws of the land; it just provides legal options for companies who believe they have been treated unfairly.
Canada is particularly keen to negotiate these agreements with developing countries because they give Canadian investors the option to use international arbitration panels in countries where local courts are weak or corrupt.
NAFTA added an investor-state dispute settlement mechanism to the investment-protection tool box. This means that a company that feels it has been wronged can initiate legal proceedings against a government on its own. It does not have to wait for its home government to take up the cause on its behalf. Early on, there were fears that investor-state dispute settlement would result in big U.S. multinationals overturning Canadian public policy and reaping big rewards. Since 1994, Canada has had a couple of cases filed against it every year and Canadian companies have done the same in Mexico and the U.S. Most cases are withdrawn, but some move ahead to arbitration.
Canada wins some and loses some. In the 2010 Chemtura case, Canada successfully defended its right to ban a hazardous pesticide, but, that same year, paid compensation to Abitibi Bowater for water and hydroelectric assets expropriated by the government of Newfoundland. (Ottawa offered the settlement voluntarily rather than let the case drag for years.)
After nearly 20 years of investor-state dispute settlement, Canada’s sovereignty is just fine and so is Canada’s right to regulate in the public interest. Our hospitals, education and freshwater are just as good (or bad) as they ever were, and they remain firmly under Canadian control.
Foreign investors are like tenants. Good landlords attract good tenants. Crummy landlords with slipshod rules attract low-rent investors. Canada has established a reputation as a credible host of foreign investment, with strong respect for the rule of law. We demand the same from the countries we seek investment in.
So, if the 30 other FIPAs we’ve negotiated haven’t killed us, what’s different about China?
It’s big. And it’s true that any relationship with China is an unequal one as long as the entire population of Canada is about the same as that of a middling Chinese city.
So how do we level the playing field? Rules. The FIPA replaces uncertainty with a rules-based framework for solving disputes. The Canada-China agreement is pretty specific: First you try to settle a dispute through consultation. If that doesn’t satisfy both parties, then you must establish an arbitral panel with panellists from both countries, and with oversight from international bodies such as the United Nations and the International Court of Justice.
Will China follow the rules? Since it has only been a full participant in the global trading system since 1999 (when they entered the World Trade Organization), it’s hard to know for sure. It is transitioning at warp speed, but there are clearly growing pains. Nevertheless, China’s compliance with WTO transparency and reporting requirements has been very good. Where there are rules, China has given strong indications it will follow them.
In the absence of rules, however, Canada will always find itself out of its weight class. Working with China within a rules-based framework that allows for dialogue and confidence building is the only way forward.
Canada’s traditional trading partners are shrivelling on the vine. This is not 1994 and we don’t have the luxury of a wealthy U.S. market providing all the investment and export purchases we want. If Canada is to provide an economic future for future generations, we must expand to emerging markets swiftly and intelligently. Rather than judging investors on the basis of nationality and rejecting engagement until they look and act like us, we must implement mechanisms to monitor the behaviour of investors — all investors — to ensure our laws are respected.