The conclusion of the Canada-China Foreign Investment Protection and Promotion Agreement (FIPPA) is an important step in Canada's relationship with China. It is something of a coincidence that the agreement was signed around the same time that the federal government is reviewing the proposed acquisition of Nexen by CNOOC, a Chinese state-owned enterprise (SOE). Yet these events, while unrelated, raise two important questions for Canada's foreign investment policy. First, what is the right approach to reviewing SOE acquisitions, regardless of their nationality? Second, what is Canada's interest in relation to growing foreign investment by Chinese state-owned enterprises and private companies alike?
Foreign Investment by SOEs
In a concurrent development, Industry Minister Christian Paradis recently announced that Petronas (a Malaysian state-owned enterprise) has not yet satisfied the government that its proposed acquisition of Progress Energy is of "net benefit to Canada." While not about China, this decision must nevertheless be viewed in the context of the CNOOC/Nexen transaction, and the government can be expected to be co-ordinating its reviews of the two transactions. That is entirely appropriate in our view.
The long-term consequences of these decisions are of immense importance to Canada and should not be rushed. Canadians believe in the rule of law – at home as well as abroad. It is therefore important that we make decisions based on principle. The Canada-China investment agreement includes a most-favoured-nation (MFN) commitment that will not allow discrimination against Chinese investors relative to other foreign investors. Nor would we want to discriminate, given China's importance as a source of foreign investment for the foreseeable future.
Chinese state-owned enterprises have also been singled out for the possibility that their investments may be made on non-commercial grounds in pursuit of "political" ends. That possibility, real or imagined, also applies to other countries. Canada's response must therefore be to treat investments by SOEs of different nationalities – Chinese, Malaysian or any other country – in an even-handed manner. Each SOE should be considered on its own merits, including its business orientation and the extent of political influence over its affairs. What that means for any particular transaction will be up to the government of the day to assess on a case-by-case basis.
Canada's Interest and the FIPPA
Apart from the most-favoured-nation obligation, which applies to both prospective and existing investments, the FIPPA focuses on the treatment of investments that have already been made. It offers protections to investors against such risks as discrimination, expropriation without compensation, and arbitrary decisions by governments, once they are established in the other country. This distinction highlights an important point: that the FIPPA will not change the ability of either country to review or reject investments from the other when it determines that they are not in the national interest. "Net benefit" decisions under the Investment Canada Act (ICA) are expressly excluded from the FIPPA.
Prime Minister Stephen Harper has announced the federal government's intention to add further clarity to the "net benefit" test and the review of investments by state-owned enterprises. The FIPPA will not change anything in this regard, and Canada will retain the power to approve, impose conditions or block SOE or private investments when they are not of benefit to Canada.
Some critics have nevertheless criticized the FIPPA because it is not "reciprocal." Others have asserted that its investor-state dispute procedure will open the door to Chinese investor claims that will overrule the decisions of democratically elected governments or expose Canadian governments to ruinous liability awards. Both of these claims are misguided.
Quite apart from the fact that the obligations in the FIPPA apply to both China and Canada, the reciprocity argument ignores two obvious realities. One is that the benefits of a predictable, rules-based environment for investment under the FIPPA are far more likely to accrue to Canadian investors in China than to Chinese investors operating in Canada, who already take a predictable, rules-based environment for granted. The other is that growing Chinese investment in Canada is virtually certain (and desirable) with or without the FIPPA.
Nor can investors ask dispute tribunals to strike down government decisions. All they can ask for is monetary damages for breaches of the agreement. The critics ignore Canadian experience with investment disputes under the NAFTA where, over 18 years, claims against Canada have resulted in awards totalling only about $8-million. Canada did choose to settle two other cases for about $150-million, mostly relating to Newfoundland's expropriation of AbitibiBowater's assets, but investment rules exist precisely to provide redress in such cases.
Canada has the tools under the Investment Canada Act to determine whether investments beyond the statutory financial threshold are in its economic interest. To the extent that Canadians believe additional clarity and transparency in the investment review process is beneficial, the Canada-China investment agreement does not preclude that. Moreover, the fact that China has chosen to protect some of its markets from foreign investment is not a cogent reason for denying Canadian businesses the protections that the FIPPA will provide when they make investments in China. In our view, the FIPPA is clearly of benefit to Canada and Canadian investors in China.
Milos Barutciski and Matthew Kronby are both partners of Bennett Jones LLP. Mr. Barutciski co-chairs the firm's international trade and investment practice. Mr. Kronby was formerly the head of the federal government's Trade Law Bureau.