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The Hanjin Geneva container ship prepares to pass underneath the Lions Gate Bridge as it tavels to China after leaving the Port Metro Vancouver in on Feb. 20, 2013. (Rafal Gerszak For The Globe and Mail)
The Hanjin Geneva container ship prepares to pass underneath the Lions Gate Bridge as it tavels to China after leaving the Port Metro Vancouver in on Feb. 20, 2013. (Rafal Gerszak For The Globe and Mail)

Lawrence Herman

Time to rethink foreign investment protection agreements? Perhaps Add to ...

It may be time to rethink an important part of Canada’s policy on foreign investment promotion and protection agreements (FIPAs).

Many in the legal and trade policy communities, myself included, have strongly supported these investment agreements as good for Canada and as a triumph of pragmatic internationalism. After all, as the global economy evolves, what could be more progressive than treaties among and between states that set standards of non-discrimination and guarantee the rule of law in the case of disputes?

Canada has 21 FIPAs in force with countries as far afield as Russia and Argentina, Thailand and Armenia. Many more are awaiting ratification or are currently being negotiated.

The FIPA model has been enshrined in the North American free-trade agreement.

The Harper government recently concluded a FIPA with China. The agreement has yet to be implemented but it follows the standard Canadian model. It has attracted criticisms from various circles.

Opponents claim these treaties respond to a global corporate agenda, whether based on the FIPA model or some variation. These same groups have now set their sights on Canada’s negotiations with the European Union and our participation in the Trans-Pacific Partnership talks.

The common argument is that these FIPAs provide a vehicle for foreign companies to use binding arbitration to have legitimate Canadian laws – environmental, social or other – struck down as inconsistent with the protection guaranteed in the treaty.

There is a lot of rhetoric and exaggeration here. But there is something in these concerns that at least requires examination.

First, these FIPAs were developed on the premise that Canada was an exporter of capital to the developing world. Canadian investors in less mature jurisdictions could be comforted by having a framework that guaranteed the right to recompense through international dispute settlement if the treaty were infringed.

But the world has changed. Canada is increasingly becoming a capital importer from emerging markets such as China (for example, Nexen), Brazil (Inco) and Argentina (Prudential Steel).

In the case of China, it’s Chinese investors such as CNOOC that will have FIPA rights – equal, of course, to those of Canadian investors in China – including the right to bring binding arbitration if they believe Canadian laws have violated the standards in the agreement.

A repeated criticism is that FIPAs grant foreign investors greater rights than those available to local companies under domestic law. This may not have been a concern when Canada was a capital exporter. But now that things have changed, how do we feel about this?

A related factor is the number of investment claims under NAFTA that have been launched by U.S. companies against Canada over the years, some opponents arguing that this is a harbinger of future investment disputes targeting Canadian policies.

While FIPA opponents always exaggerate the record of successful NAFTA claims, it is a fact that many more claims have been filed against Canada than against either the United States or Mexico. Canada seems to have become the target of choice for U.S. investors, not Mexico, as had been expected.

A concern I have is that these arbitration decisions are rendered by ad hoc tribunals, appointed for a given dispute only. The members are drawn from a variety of places around the globe and have different backgrounds. Yet these impermanent tribunals are often deciding issues of social or economic policy of national importance.

Australia – a country that shares many interests with Canada – now says it will no longer sign such investment protection agreements, arguing that if Australian businesses are concerned about sovereign risk in other countries, they should make their own assessments about whether they want to invest in those places.

It isn’t suggested that Canada necessarily reverse decades of trade and investment policy and follow the Australian approach. For a variety of good reasons, some form of protection for Canadian foreign direct investment seems desirable. The Canada-EU trade deal being negotiated will probably follow the NAFTA model.

Even so, the Australian view can’t be totally dismissed.

The problem is that Canada has proceeded down the FIPA path for years without a critical look at how these agreements really help us, both abroad and at home.

Whatever happens with the EU agreement, it’s still not too late to re-examine Canada’s policy on these investment agreements to satisfy ourselves that they answer Canada’s long-term national interests.

Lawrence Herman is counsel to Cassels Brock & Blackwell LLP and a senior fellow of the C.D. Howe Institute.

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