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Don’t be fooled by the spin on the Canada-China treaty

There is a lot of spin about the Canada-China investment treaty (or FIPA). Canadians should not be fooled into the deal. They should insist on an independent review of the government’s claims, before the treaty is locked in for 31 years.

Recently, National Post columnist Andrew Coyne analyzed the treaty and pronounced it safe. However, Mr. Coyne missed key elements of the treaty, did not compare it to other agreements, and failed to appreciate the record of arbitration awards. Here is a more accurate overview of the treaty's significance for Canada.

On levelling the playing field, the treaty requires non-discriminatory treatment of each country’s investors (Articles 5 and 6). But the treaty exempts each country’s “existing non-conforming measures” from this obligation (Article 8(2)(a)(i)). This benefits China, assuming that China has more existing discriminatory measures – including any law, regulation, rule, or practice – than Canada.

Importantly, Canada’s negotiators have not produced a list of China’s existing nonconforming measures. Without an agreed list, it will be very difficult to hold China to its commitment to non-discrimination, going forward. On the other hand, Canada’s existing measures are relatively well-documented in our domestic law.

On market access, Annex D.34 allows Canada to block Chinese investment in Canada under the Investment Canada Act. However, China has more flexibility to block Canadian investment in China, based on any of China’s “Laws, Regulations and Rules relating to the regulation of foreign investment”. This language will allow any level of government in China to block Canadian investment, while Canada is limited to the federal government’s role under the Investment Canada Act only.

On investor protection, the treaty protects investors from governments in various ways, although each clause has a catch. Investors are protected from expropriation (Article 10) but it is unclear how far this extends to measures “equivalent to” expropriation. This concept can require public compensation for Chinese investors if the value of their assets is reduced by general laws that affect the Canadian economy and society as a whole. Based on many awards under similar treaties, the concept has been taken beyond analogous rules in Canadian law, thus advantaging Chinese investors over Canadian companies in Canada.

Investors are also entitled to fair and equitable treatment and to full protection and security (Article 4). The requirements sound innocent. But the arbitrators rely on these clauses more often than any others to order compensation and have taken the concepts in a very expansive direction. Notably, the arbitrators are for-profit adjudicators, not tenured judges, and so there is a reasonable basis to suspect they will favour claimants and major states to expand business for the arbitration “club”, as it is called in the literature.

A key clause is Article 23. It allows the arbitrators to oversee sovereigns. The clause looks arcane but is a major concession of sovereignty. A related clause, Article 22(1), allows the investors to bring claims under arbitration rules that allow confidential proceedings and that limit or preclude judicial review of the arbitrators’ decisions.

Unlike other FIPAs, documents and hearings in the arbitrations can be kept confidential at the option of the government that is sued (Article 28(1) and (2)). This means that Canada could be sued by a Chinese company, and pay out money, without public knowledge. Also, the threat of a lawsuit behind closed doors could cause a government to change decisions. Because the arbitrators make backward-looking awards against sovereigns for vast amounts of money (Article 31(2)(a)) – a highly exceptional power in law – governments would not know, when bargaining with a Chinese company, whether the decision could lead to potentially catastrophic liability.

Thus, the issue is Chinese investors’ bargaining power when decisions are made, not just whether an investor would win a case (although they do about half the time). For big companies and big projects, governments take on more financial risk under this treaty.

The government likes to emphasize the treaty’s exceptions. Article 33(2) has exceptions for health, environmental, and conservation measures (but not economic measures or a general “right to regulate”, as the government often says). These exceptions are drawn from Article XX of the General Agreement on Trade and Tariffs, although, interestingly, another GATT exception for restrictions on prison labour is not in the Canada-China treaty.

The catch is that these exceptions are always uncertain and, ultimately, in the arbitrators' hands. Arbitrators have often decided that a measure was not “necessary”, for example, where a less restrictive option was available to a government. This heightens the fiscal risk for governments if an investor objects to a proposed regulation.

These are a few key clauses in the treaty. If the government was serious about vetting this treaty, it would allow an independent and public assessment. Commentators like Mr. Coyne are far too quick to dismiss the need for careful study. This treaty could lead to billion-dollar awards against Canada and is too important to be reduced to spin. As Article 35 lays out, if put into effect by the government, the treaty will be beyond the authority of any Canadian legislature or court for over three decades.

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