-A A +A
January 14, 2021

There’s concern in Washington – even consternation – over December’s conclusion of the European Union-China investment treaty, with some commentators saying it was engineered by China to create a political wedge between the United States and its European allies, coming at a sensitive juncture that can only embarrass the incoming Biden administration.

Whether this is the case remains to be seen. But the fact is that a tough position on China has strong bipartisan support in Washington. Foreign initiatives seen to be cozying up to China would be looked upon negatively by the White House – at the very least, complicating life for the new president and his team.

Erroneously described as a trade agreement, the deal is a more restricted investment treaty, covering the way each side is to treat foreign investors and their investments, ostensibly preventing discrimination and ensuring fair and equitable treatment. According to the EU press release, however, it is “the most ambitious [investment] agreement that China has ever concluded with a third country”.

That gives it a march over Canada’s own investment treaty with China. Often lost sight of, the Canadian deal was concluded almost 10 years ago, in a different era, when both China’s approach to the world and Canada’s attitudes to doing business with that country were much different than they are today.

Since signing the treaty, Canada’s attitudes toward China have hardened, especially after the hostage-taking of the two Michaels, but also from China’s human-rights abuses, including those in Hong Kong, and the country’s overall geopolitical aggression in other areas such as the South China Sea. It is highly unlikely any Canadian government would have the political support to sign such a document today. And yet, the treaty will be binding on Canada until the end of this decade.

While the Americans are concerned about the inappropriateness of the deal signed by the European Union, if they took another look at the Canadian treaty, they might reach the same conclusion.

Even before the Canada-China deal came into effect in 2014, opinions were divided. Some said it was the right thing to do to ensure that China was held to a set of binding legal obligations and that Canadian investors were given non-discriminatory treatment and recourse to binding third-party arbitration if China, including its subnational governments, breached these obligations.

On the other side were critics, including professor Gus Van Harten of Osgoode Hall Law School, who argued that China got far more than it gave up, especially when the many loopholes in favour of the Chinese side were considered. Looked at today, it’s hard to disagree. While these objections were signaled at the time, it’s worth mentioning some of them again.

For starters, China’s opaque and non-transparent governance and legal systems put Canadian investors there at a huge disadvantage. Canada’s system is a paragon of transparency in contrast, accessible and understandable, making it far easier for China to challenge legal, administrative and policy measures, compared with the situation for Canadian investors in China. This alone means that Chinese investors have an advantage. And if, as is often the case, those investors are state-owned or controlled, it gives corresponding leverage to the Chinese government.

This leverage is reflected in the substantive provisions in the treaty. For example, while each side is required to provide non-discriminatory treatment to investors from the other country, those obligations don’t apply to subsidies, grants or other preferences handed out to local companies. This means that an investor from Canada has no recourse if its Chinese competitor is given a huge array of government benefits that destroy the value of the Canadian investment. No Chinese investor would face a similar situation in Canada.

Another provision in China’s favour are rules that permit any expropriation “for a public purpose.” That term is undefined in the treaty, meaning the exemption works in favour of the Chinese one-party state, where any kind of expropriation can be claimed to be in the broad, undefined, public interest. Other provisions “grandfather” any laws inconsistent with the treaty as of 2014 when it came into effect, which some say shields a much wider array of Chinese measures from challenge.

Some governmental measures that have been excluded from the treaty altogether, including environmental measures designed to protect human or animal life and health, but only if proven to be “necessary” and applied in a non-discriminatory way. While ostensibly evenly balanced, there is at least a looming possibility of Chinese investors challenging federal or provincial climate change laws as either unnecessary or discriminatory investment restrictions. While Canadian investors can do the same, this right is more valuable to Chinese parties, given Canada’s increasingly activist climate-change agenda.

Finally, on the national security front, governmental measures are excluded from investor arbitration under the treaty. However, in Canada’s case, the exclusions are highly specific, applying only after a formal review is completed under the Investment Canada Act. In China’s case, the exclusion is far wider, allowing an investment to be restricted after a review under any Chinese national security “laws, regulations and rules,” whatever those are.

The treaty is to last for at least until 2029, but even if some critics have complained that Canada has tied its hands for far too long, there’s not much that can be done. It means that how Canada manages the treaty relationship, particularly in the face of Chinese aggression that has increased over the past decade, will be a significant challenge.

Published in the Globe and Mail

Lawrence Herman, a former Canadian diplomat, is counsel at Herman & Associates and senior fellow of the C.D. Howe Institute in Toronto.