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China investment deal raises red flags in Canada

posted 30-April-2013

Deutsche Welle 30.04.2013

China investment deal raises red flags in Canada

After a vote to block it failed this week, Canada’s controversial investment treaty with China could be ratified any day now. The government says it protects Canadian investments in China. Critics call it a sell-out.

It’s not exactly news that Canada ranks among the world’s top five energy producers. Currently, it is the third largest gas producer and holds the third-largest proven oil reserves.

What is new, however, is that Canada for the first time last year became the top destination for Chinese investments abroad, beating out its southern neighbor, the US, the world’s biggest economy. While Chinese firms spent more than $20 billion in Canada - almost all of it in the energy sector - the US received just more than $10 billion, according to finance data specialist Dealogic.

A large chunk of the Chinese money went into the contentious $15 billion takeover of Calgary-based Nexen alone, an oil and gas company with major assets in the Canadian oil sands, estimated to contain the third-largest reserves in the world.

The acquisition by state-owned energy concern CNOOC was the largest foreign takeover by a Chinese company ever. While giant deals like Nexen are the exception rather than the rule even for energy-hungry China, they highlight a logical trend: Canada’s huge oil and gas sector is increasingly viewed as an attractive target for Chinese investments.

Hushed treaty

With the Nexen take-over and China’s growing role in Canada’s energy sector as a backdrop, it seems only reasonable that an investment deal planned by the Canadian government with Beijing would lead to vigorous parliamentary and public debate.

And it has, sort of.

Until the signing of its bilateral investment treaty with China on the last day of an Asia-Pacific summit in the Russian city of Vladivostok in September 2012, the Canadian government had not published the specifics of the Foreign Investment Promotion and Protection Agreement (FIPA). That only happened some two weeks later when the deal was disclosed in parliament.

But even then - after the treaty was already inked - a real parliamentary debate about its merits didn’t get off the ground thanks to a unique quirk in Canada’s political system that grants the executive the formal ratification power of treaties. In practice, that means that all the government of Prime Minister Stephen Harper needs to do to ratify the treaty is make a cabinet decision after letting the FIPA sit in parliament for three weeks. Canada’s parliament is practically shut out off the whole process and has no official vote in it.

With the waiting period long expired, formal ratification by the Harper government could come any day. In a last ditch effort this week to block the treaty, a divided opposition forced a vote that would have nixed the deal, but the move was clearly defeated in parliament.

Done deal

So it’s looking increasingly likely that the Sino-Canadian investment deal will go through, despite opposition that includes environmentalists, native Canadians and regional politicians. Essentially, their shared concern was and is that the FIPA violates Canada’s best national interests and unduly favors China.

The Canadian government argues that this FIPA is basically no different than any of the 24 deals already in place with countries like Russia, Venezuela or Egypt. Proponents also point to the fact that many other industrialized countries like Germany have similar bilateral investment pacts with Beijing. They say the goal of this as of all the other treaties is to make it easier and safer for Canadian businesses to invest in China’s rapidly evolving economy.

"Critics fixate on Chinese investment in Canada but never think about Canadian investment in China and the protection the FIPA will provide," says Armand de Mestral, emeritus law professor at Montreal’s McGill University.

In 2011 Canadian companies invested $4.5 billion in China, according to the Canada China Business Council. While Canadian investments in China are expected to grow, it appears unlikely that they will keep pace with possible investments by Chinese firms in Canada - particularly in the country’s energy and natural resources sectors.

Crucial mistakes

Critics of the deal argue that this treaty due to the sheer size of China and its economic power makes it different than any other FIPA signed by Ottawa. They also highlight what they perceive as the two major flaws of the treaty: duration and secrecy.

Its guaranteed lifespan of 15 years sets the Canada-China FIPA apart from other treaties. "The requirement in article 35 that termination not be possible for the first 15 years is unusual," notes David Gantz, director of the International Trade Law Program at the University of Arizona in Tucson. "Most permit termination at any time subject to six months’ or one year’s notice."

To compare, NAFTA, arguably Canada’s most important trade deal, allows termination at any time with just six months notice. The fact that this FIPA will effectively bind future Canadian governments to the deal for at least 15 years with no way out is unacceptable, say critics.

Shrouded in secrecy

They consider the treaty’s focus on secrecy its second major flaw.

The Canada-China FIPA, like similar treaties, establishes an arbitration process to resolve legal issues instead of going through the courts. In practice, that means any disputes between two parties will be decided by an external three-person panel. While some critics reject the arbitration process as a whole because it foregoes the traditional court system, it is a regular and established feature used in most international trade and investment treaties.

But here again, the Canada-China FIPA deviates in one important aspect from Canada’s previous treaties. In contrast to Canada’s traditional stance of openness in its FIPAs, all Canada-China arbitration cases - except the decision - are private.

"Canada’s longstanding practice in investment arbitrations is to conduct the proceedings in a highly transparent manner," explains Gantz. "China presumably has different views and under article 28 (of the treaty - the ed.) is not required to allow the proceedings against them (other than the decision) to become public."

That means that Ottawa can make arbitration cases against Canada public while Beijing can keep cases against China under wraps.

Chinese norms

"For example, an arbitration hearing for a Canadian investor in China claiming damages would be private unless China decided it was in the public interest to make it public," write Patrick Gervais and Nailah Gordon-Decicieo in an analysis of the FIPA deal published in November 2012 by Toronto law firm Blaney McMurtry. "This is a departure from the general Canadian standard in other bilateral investment treaties and is more in sync with Chinese norms."

The arbitration process coupled with the treaty’s focus on secrecy has critics worried that Chinese companies could sue Ottawa should Canada decide to impose tougher environmental or public health laws that could hurt Chinese business interests. To counter that threat, the annex of the treaty contains a passage that is supposed to shield governments from investor claims regarding non-discriminatory actions to regulate the environmental and protect public health and safety, says Gantz. Still, this may not be enough:

"In the case of this treaty critics believe, probably accurately, that the agreement will encourage Chinese investment in natural resource development in Canada, activities which typically raise environmental concerns as with such projects as the XL pipeline and the Alberta oil sands development."

Canada’s Green Party has called the treaty "the sellout to China" while citizen rights group Council of Canadians has branded it as "one of the most fundamentally anti-democratic, anti-worker, anti-environment and anti-Indigenous rights deals since NAFTA."

Canadian Prime Minister Stephen Harper speaks at a joint press conference with German Chancellor Angela Merkel on Parliament Hill in Ottawa, Canada, Thursday, Aug. 16, 2012. (AP Photo/The Canadian Press,Patrick Doyle) Premier Harper will decide when to ratify the treaty

All eyes are now on Prime Minister Harper. Perhaps he is waiting for the resolution of a remaining legal injunction against FIPA by the Hupacasath First Nation which claims the government did not consult Native Canadians before signing the treaty. A decision is expected in June.

Regardless of the outcome, Armand de Mestral who favors the deal, cautions against what he describes as simply calling wolf over fears of Chinese interests in Canada: "I think Canada retains sufficient regulatory control under the terms of this treaty to protect its national interests. People said much worse about NAFTA and Canada is still a sovereign country."

keywords : CanadaChina source : DW

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