October 31, 2014

China investment: Deal a big step forward: Financial Post Op-Ed

Published in the Financial Post on October 27, 2012

By Lawrence Herman and Daniel Schwanen

The recent agreement between Canada and China for the Promotion and Reciprocal Protection and Investments, which is to be ratified by Canada on Oct. 31, has given rise to a debate characterized by more heat than light.

There are some two and a half thousand such agreements in force around the world today, including well over 100 signed by China. True, an earlier vintage of Chinese investment treaties did not allow for an impartial investor-state dispute settlement mechanism, such as the one contemplated between Canada and China. But all recent ones signed by China — including with such advanced Western nations as Germany — include such a mechanism.

Much has been made of the fact that Canada is a net recipient of Chinese investments, suggesting that somehow this makes Canada particularly vulnerable to future investor-state arbitration rulings in favour of Chinese investors. But this view disregards the fact that Canada is now a net exporter of direct investment overall — Canadian businesses have grown by expanding globally, and this is a key reason why Canada seeks such agreements. It would be disingenuous of Canada to say it wants protection against discrimination and uncompensated expropriation for our investments in other countries without being willing to afford the same standard of treatment to foreign investors in Canada.

With respect to China in particular, let’s remember that Canadian investors are better off investing in China within a rules-based framework, than without such a framework. The alternative, in the event of a dispute, is the Chinese court system, or political intervention by the Canadian government. In any event, both Canada and China retain under this agreement their existing capabilities to screen for foreign investment — an investor is protected by the agreement only once it is allowed in.

Critics of the agreement have brought back to the fore the notion that any measure by a government that may impose costs on a foreign investor, such as a tax or an environmental regulation, can give rise to compensation claims under these types of agreements. This is false. These agreements explicitly exclude such measures taken for a public-policy purpose and that do not discriminate against the foreign investor. The Canada-China agreement states that a government really has to have acted in bad faith and the impact on the investor or investment must have been really severe, for a measure to be construed by a tribunal as constituting expropriation.

Canada’s experience with the investor-state dispute settlement mechanism of the North American Free Trade Agreement is instructive. Most claims by U.S. investors since that agreement was instituted in 1994 have been rejected. The few arbitral awards have been on minor points and under these Canada has paid a mere $16-million in total. This compares to hundreds of billions of dollars of investments in Canada by U.S. investors. A $130-million settlement with AbitibiBowater in 2010 was required under the agreement and rules of international law in compensation for expropriation of the company’s assets in Newfoundland. It was not an arbitral award against Canada.

Awards under these investment agreements have typically been anything but a boon to investors challenging bona-fide regulatory actions by governments consistent with the public interest. They do, however, provide a degree of comfort and recourse to Canadian investors venturing abroad, often operating in unfamiliar legal or institutional settings.

The Canada-China agreement has also been criticized for the length of time that must elapse before either country can terminate it — 15 years, plus 15 years’ additional coverage for investments established prior to termination. But if the agreement is meant to encourage long-term investments, it is apparent that a treaty which can be denounced on very short notice will not do the trick. That is why long-term notice provisions are fairly standard. For example, the China-Germany investment agreement can be terminated after 10 years, but continues to apply for 20 years for investments established prior to termination.

To be sure, the worth of bilateral investment treaties providing for investor-state arbitration is being debated in a number of countries right now. And this agreement, a hybrid between typical Chinese and typical Canadian investment agreements, may not be perfect. But critics vastly overstate its potential downside while overlooking its concrete benefits. Canadian negotiators managed to craft a deal that cements China a bit more to a rules-based investment regime, and that is a meaningful step forward for this enormously important economic relationship.

Lawrence L. Herman is counsel, Cassels Brock & Blackwell LLP, and senior fellow, C.D. Howe Institute. Daniel Schwanen is C.D. Howe’s associate vice-president, international and trade policy.

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