Already taking heavy flak from business groups over its tough anti-corruption rules, Ottawa faces a new threat – a possible showdown with key trading partners.
Canada risks being hit with a World Trade Organization challenge and NAFTA investor lawsuits over its threat to bar some companies from selling to the government for up to 10 years, warns a report commissioned by the Canadian Council of Chief Executives (CCCE) and delivered to federal officials.
And a number of foreign multinationals are already exploring possible trade action, according to an industry source, who declined to be named.
Hewlett-Packard Inc., BAE Systems PLC and Siemens AG are among the companies facing sanctions in Canada for crimes committed in other countries.
Of those, Germany-based Siemens is the first to get official confirmation of its debarment by Public Works and Government Services Canada (PWGSC) – the official government purchaser – for violating the department's Integrity Framework. Siemens paid a $1.6-billion (U.S.) fine after pleading guilty in 2008 to corruption-related offences in the United States and Germany.
"Officials have been in communications with Siemens officials to inform them of the application of the Integrity Framework," PWGSC spokeswoman Annie Trépanier said.
Under the newly revised federal regime, companies seeking to bid on federal contracts must certify that neither they nor their affiliates have been charged with a long list of criminal offences anywhere in the world, including bribery and fraud, dating back 10 years.
The strictness of the Canadian regime exposes Ottawa to a number of potential trade risks, according to the report, written by economist Dan Ciuriak and trade consultant Laura Dawson.
One concern revolves around Ottawa's application of the rules to affiliates, which may have little or no connection to the Canadian subsidiary. These rules are much broader than the standard set by the United Nation Commission on International Trade law or those of its key trading partners, including the U.S., Britain and Germany.
"Since debarment can be considered a restraint on trade, the Canadian measures may be challenged by foreign partners on grounds of unreasonable extension of the provisions to entities that are not under the control of the supplier," the report said. "This could be construed as unnecessarily restrictive of trade and result in trade disputes."
The authors also warn that the Canadian rules could open the door to lawsuits by the companies, under the North American Free Trade Agreement and eventually the Canada-European Union Comprehensive Economic and Trade Agreement. Both deals contain investor-state provisions, giving companies the right to sue governments for unfair treatment.
The report pointed out that "administrative decisions," such as bans on selling to the Canadian government, are particularly vulnerable to investor-state challenges. Canadian companies could become collateral damage, even if no formal trade dispute is launched, according to the report. It said companies could face "tit-for-tat retaliation" by countries where banned companies are headquartered.
"The debarment by Canada of a foreign company on the grounds of a tenuous affiliation could expose Canadian companies to legal retaliation abroad," the authors said. "Given the pronounced home bias in government procurement worldwide, the home bias against Canadian companies soliciting business abroad may end up being intensified."
The CCCE-commissioned study says the economic fallout could be quite severe in Canada. A "typical" major foreign-based supplier would lose sales worth more than $350-million (Canadian) a year and lay off 400 workers if it's blocked from selling to the federal government. That's a net loss to the Canadian economy of $1-billion over 10 years.
Spokeswoman Annie Joannette said the government's integrity framework is consistent with Canada's trade and investment obligations.
Officials of Hewlett-Packard, Siemens and BAE Systems did not respond to requests for comments.