How the Canada-China FIPA will secretly disrupt Canadian democracy and gouge public money until 2045

Where did the Canada-China FIPA come from?

Beginning in 1994, Canada and China engaged in mutual negotiations for a Foreign Investment Protection and Promotion Agreement (FIPA), continuously for 18 years.  Then in February 2012 then Prime Minister Stephen Harper announced the conclusion of a FIPA between Canada and China, without releasing the agreement details.

Months later on September 12, 2012, the Prime Minister then met with then Chinese President Hu Jintao in Vladivostok, Russia, to co-sign the FIPA.  But it was only on the following September 27 that the FIPA text was publicly revealed, quietly tabled in the House of Commons by a Parliamentary Secretary in place of the Foreign Affairs Minister, without any associated press releases.  The FIPA became eligible for ratification by November 1, without any vote being necessary as per the executive treaty making powers of Royal Prerogative.  No House of Commons debate on the FIPA was scheduled, and Conservatives used their majority on the International Trade Committee to limit review of the FIPA to one hour only, with government witnesses only, despite repeated opposition calls for more review.

Over the month of October, Green Party leader Elizabeth May and NDP MP Paul Dewar three times requested emergency debate on the FIPA in the House of Commons, with the Speaker of the House (and Conservative Party member) Andrew Scheer turning down all such requests.  Elizabeth May and Osgoode Hall Law School international law Professor Gus Van Harten anxiously and repeatedly criticized the FIPA, with the advocacy organization Lead Now  gathering over 62,000 online signatures against the treaty by the end of the month.  Pundits such as Lawrence Martin, Michael Den Tandt, and Rick Mercer questioned the absence of debate on the FIPA.  When asked in Question Period on October 31 by the opposition leaders why Conservatives shut down public review, the Prime Minister did not answer the question.  Media coverage of the FIPA debate was so dim that news reports on the China National Offshore Oil Company purchase of Nexen oil assets would casually neglect to mention the clearly-relevant FIPA.

Stephen Harper’s cabinet then subsequently delayed ratification, keeping secret its plans of when it would ratify the agreement.  The Harper government then invested tax dollars in fighting a constitutional lawsuit by the Hupacasath First Nation, contesting the claimed right to public consultation with First Nations on the FIPA’s content.  The Nation eventually lost the case in a Federal Court ruling in September 2013, before attempting an appeal.  The following October, the Foreign Affairs Minister was present in China to inform Chinese officials that the FIPA would be ratified in “short order”.

Then on the Friday afternoon of September 14, 2014, while the Hupacasath appeal was still ongoing, the Harper government quietly ratified the FIPA.  The Hupacasath then lost their appeal in the Federal Court of Appeal in January 2015.

If one did not know better, one might think that the Prime Minister’s Office was consciously and stealthily forcing through a politically toxic legal package that it knew could not be sustained in the face of public scrutiny.  The evidence of a manipulative intent is circumstantial yet systematic.  Save for the initial announcement of a vague deal with China, every opportunity to keep Canadians in the dark on the FIPA’s existence was eagerly exploited by the Harper government.

So what were the central criticisms of the FIPA, and why would it have been kept secret?

 

Overview of Investor-State Arbitration

In June 2015 the leading FIPA critic Gus Van Harten, who has authored many peer-reviewed papers on Investor State Dispute Settlement (ISDS) treaties and authored the only peer-reviewed analysis of the Canada-China FIPA in particular, published his book, Sold Down the Yangtze, an overview of the history of investor-state arbitration, the FIPA’s exceptional flaws, and the one-sided media push for the deal.

Van Harten explains in his book that while over 2500 investor-state treaties have been signed worldwide, only 29 of them have enabled more than half of all investor-state lawsuits, and many investor-state agreements were written without the hindsight of the expansionist interpretations that arbitrators would apply.  In the late 1990s, the increasing activism of arbitrators in ensuring “fair and equitable” treatment of foreign investors led to an accelerating rise of global lawsuits, especially in treaties signed between developed and developing countries.  Canada’s North America Free Trade Agreement (NAFTA) membership has made it unique in being the most sued of all developed countries and the fourth most sued of all countries under investor-state arbitration.  The United States and China, meanwhile, have signed the most investor-state treaties of any countries, but have never in any known case been sentenced with orders to pay compensation to foreign investors.

Van Harten criticizes investor-state treaties for empowering three-person arbitrator tribunals to review democratic decisions without being subject to the same checks and balances of judges.  Arbitrators lack fixed tenure, are able to switch between roles of corporate lawyers and tribunals, and are paid by the case instead of by a fixed salary – they profit personally from ruling decisions that encourage more investor-state lawsuits overall.  According to the Organization for Economic Cooperation and Development (OECD), over 50% of arbitrators have acted as counsel for investors in other ISDS cases.

Yet arbitrators have exceptionally binding powers with enforceability beyond most other international regimes, with countries worldwide legally obliged to seize assets of any country that fails to make good on a compensation order.  They include the powers to retroactively hold sovereign states liable for damages to a business’ expected profits, even damages never anticipated to be public liability.  Foreign investors are not burdened with reciprocal liabilities under investor-state dispute, and lawsuits have been successful even where companies agreed by contract not to use investor-state arbitration.

For example, in the Yukos v. Russia case, the arbitrators exercised their power to sentence Russia with an astounding $50 billion compensation order.  With such high stakes in investor-state lawsuits, legal fees in these cases may average out at $8 million per case, or up to $1000 per hour per arbitrator.  Canadian investor-state arbitrator Yves Fortier earned $2.3 million in fees in the Yukos case.  In another case over which Fortier presided, Occidental Petroleum v. Ecuador, $2 billion was awarded for the government terminating a contract that the company had violated.  

Judges by contrast rarely sentence a sovereign government with monetary compensation, and domestic investors therefore are not as empowered as foreign investors to seek compensation.  According to Van Harten, in 45 cases where $6.5 billion (USD) total in compensation to investors was awarded, 64% was granted to companies with over $10 billion in annual revenue, and 29% was awarded to companies between $1 billion and $10 billion in annual revenue or individuals with more than $100 million in net wealth.

Also unlike judicial process, parties affected by a court decision have no guaranteed right of standing, or even the guaranteed right to know of the lawsuit’s existence, as states are the nominal actors of international law which the lawsuits are filed against.  Arbitration is not required to be open to public scrutiny unlike judicial processes.  And arbitrators have the power to review policies approved as constitutional by states’ respective judiciaries, as they did in overruling the Supreme Court on Murphy Oil’s NAFTA lawsuit against Newfoundland’s offshore oil local research and development requirements.

As shady as the overall history of investor-state arbitration is, by Van Harten’s reckoning the Canada-China FIPA’s exceptionally lopsided terms are likely to be even worse.

 

Overview of the Canada-China FIPA Criticisms

Gus Van Harten’s central criticisms of the FIPA in his book focus on how the FIPA guarantees Chinese investors, including Chinese State-Owned Enterprises (SOEs), access to Canadian markets but not equivalent Canadian investor access to Chinese markets, the 31-year exit notice to the treaty, and the exceptional discretion for arbitration secrecy.  He also makes secondary criticisms on the lack of an exemption for First Nations where performance requirements are banned, unlike the exemptions in all of Canada’s other FIPAs, and that under Article 8 foreign investors have implicit rights to import as many workers as they wish.

Investor-state treaties typically feature two core rules around Most Favoured Nation Treatment and National Treatment.  Most Favoured Nation Treatment requires the signatory country to not discriminate against foreign investors relative to foreign investors not covered under a given FIPA.  National Treatment requires that a signatory country not discriminate against foreign investors relative to its own domestic national investors.  The latter rule more so increases market access by investors to other countries to the extent that a state discriminates against foreign investors generally, as China does.

Yet Most Favoured Nation Treatment under the China FIPA’s Article 5 includes “establishment” and “acquisition” of investments, but National Treatment under Article 6 does not.  Article 8 further clarifies that “existing discriminatory measures” are exempt from arbitration.  In other words, discrimination against foreign takeovers relative to national takeovers is still permitted, with a signatory state only required not to discriminate foreign firms from one another in their takeovers.  Of course, the greatest problem for investors in China is not that China plays favourites among foreign companies, but that it favours its own companies above all others. 

Furthermore under Annex D.34 of the FIPA, only the screening of foreign investment under the Canada Investment Act is exempted from arbitration claims, yet all of China’s “Laws, Regulations and Rules relating to the regulation of foreign investment” are exempted from arbitration claims.  The Investment Act exempts foreign establishment of new companies within Canada, takeovers of assets worth less than $350 million, and expansion of previously lower-value companies to then above $350 million in value.  In other words, Canada’s open and non-discriminatory investment regime is locked in, while China is merely prohibited from adding new discriminatory laws to the highly discriminatory legal system and quasi-legal discrimination it is permitted to sustain. 

In addition to the legal inequalities between Canada and China, there is also the inequality between the two countries in terms of investment flows, with Foreign Direct Investment roughly three times greater from China to Canada than from Canada to China, an inequality likely to only grow.  Capital-importing states inherently carry more liabilities than capital-exporting states, and larger countries are more likely to be able afford investor-state legal fees.  All of Canada’s other FIPAs were signed with countries where Canada was the relative capital exporter.  Chinese state investors also have exceptional access to low-interest finance.

Not only does Van Harten argue that the treaty is lopsided in Canada’s favour, it also forces Canadians to abide by these unfair terms and any potential errors through a de facto 31-year exit notice under Article 35.  In comparison, NAFTA has a mere six-month exit notice while most of Canada’s FIPAs have a one-year exit notice.

On top of all that, Article 28 of the FIPA departs from the Harper government’s previous policy for transparency in arbitral proceedings, giving the government of a sued state unlimited discretion to conceal any or all documents to a case whenever it is “public interest”, including even the simplest acknowledgement that a case even occurred.  The only documents that cannot be concealed are a final tribunal “award” after a full lawsuit.  This provides any future government a loophole with which to hide humiliating payouts in settlements where tribunals issued no ruling, or to hide reasons for reversal or stalling of legislation that had been previously promised to the public.

 

The Defenders of the Canada-China FIPA

One by one, Gus Van Harten cites the arguments of the FIPA supporters, rebutting Canadian Council of Chief Executives CEO John Manley, Stockwell Day, National Post columnist John Ivison, CBC and National Post pundit Andrew Coyne, Senior C.D. Howe Institute fellow Lawrence Herman, private trade lawyers Milos Barutciski and Matthew Kronby, government representatives in committee and in court, trade consultant Laura Dawson, and University of Laval economics professor Stephen Gordon. 

Van Harten argues that instead of meaningfully engaging with critics, FIPA supporters engaged in the all-too successful tactic of running down the clock until the anti-FIPA movement lost steam and the 31-year lock kicked in.  None had the humility to call for a public review to test the prejudices of both sides.  FIPA supporters repeatedly accused FIPA critics of “hysteria”, “near-suicidal wailing”, and “anti-globalization activism”, without properly identifying the substantive criticisms.  They consistently ignored or downplayed the exemption of China from National Treatment status protections for Canadian investors, the 31-year treaty lock-in, the history of compensation awards, the power of the tribunals to review court decisions, and the discretion for lawsuits to be settled secretly.  They falsely claimed that the treaty only required Canada not to engage in outright discriminatory expropriation, ignoring the vague rules around “fair and equitable treatment” and “indirect expropriation”.  Coyne and Gordon cited Article 33’s exceptions for environmental, health, and conservation purposes, but arbitrators retain the discretion to decide when those exceptions are valid, not FIPA member states.

In discussions of NAFTA lawsuits, Van Harten alleges that FIPA supporters tended to cite victories of Canada against foreign claims as proof of arbitration fairness, all while citing compensation orders against Canada as proof that Canada only got what it deserved.

Van Harten does concede that FIPA critics also made inaccurate claims about the treaty, but at least they were responding to what seemed like a mere month-long window for ratification and they were not supporting a decision irreversible for 31 years.  FIPA supporters however, may not have been innocent in their misinformation.

Milos Barutciski would only one week after defending the FIPA become a lawyer for an American oil company initiating a lawsuit against Quebec’s fracking moratorium, all without having ever publicly disclosed his conflict of interest.  Laura Dawson in her interview defending the FIPA suggested that a government that hypothetically banned lawn darts for strictly safety purposes could be subject to an investor-state lawsuit.  Dawson and John Manley after publicly defending the harmlessness of investor-state arbitration would later advise the government that its anti-corruption legislation covering businesses would be vulnerable to a NAFTA investor lawsuit.  (Unmentioned in Sold Down the Yangtze and by Lawrence Herman’s pro-FIPA piece was Herman’s own cautious acknowledgements of some of the criticisms of inequalities and anti-democratic implications in investor-state rulings.)

In the Hupacasath lawsuit, Federal Court Chief Justice Paul Crampton enacted a high one-sided standard of proof, that ruling in favour of mandatory consultation with First Nations would require the probability of the Hupacasath being affected by the FIPA in particular and not just any First Nation.  Unfortunately, the judge defended his ruling that Van Harten was a “partial” witness on the false claim had the Hupacasath had acknowledged him to be partial – they did no such thing.  Yet J. Christopher Thomas, an investor-state lawyer and arbitrator who selectively rather than comprehensively cited arbitration ruling examples in his witness submission, was considered to be the supposedly impartial expert.

 

Reasons for Signing an Inequitable Treaty

Having thoroughly argued that the Canada-China FIPA is lopsided in favour of Chinese investors without any significant gain for Canadian investors, Gus Van Harten then explores the question as to why the Harper government negotiated and signed such an agreement.

In one chapter Van Harten outlays his theory that the Harper government was eager to court investment in Canada’s resource sector, and so offered whatever concessions necessary to China in order to draw investors to Canada instead of other potential developing energy markets.  In 2011 indications of a renewed effort at an investment deal with China overlapped with growing Chinese interest in the oil sands.

Aside from ensuring Chinese investment in the oil sands, Van Harten suggests that the treaty serves as a “straightjacket” deterring high-stakes regulations in the cause against climate change.  Multibillion-dollar lawsuits against Canada are conceivable.  (Tyee commentator Mitchell Anderson suggests that signing the FIPA is a deliberate effort to deter future governments from enforcing the spirit of the constitutional autonomy granted to First Nations over territorial resource disputes.)

Van Harten also explores other weaker theories for the signing of the deal, such as genuine misunderstanding on the part of the cabinet, an ideological bias in favour of investor-state treaties, pro-business political spin, or a desire to improve relations with China.

 

Analysis of the FIPA debate and what it missed

A glaring negligence in the FIPA debate on the part of FIPA supporters was a complete lack of curiosity for the question of when the treaty was to be ratified, a fact only ever publicly ascertained on the chosen day itself.  One would have thought that such an allegedly positive treaty would not have been acceptable to delay without explanation for two years, yet it seems that the overall shroud of secrecy surrounding the deal was of no concern to FIPA supporters.  Clearly for having delayed so long, lack of time was no excuse for the Harper government shutting down all public review.

FIPA supporters did not give due courtesy to Elizabeth May and Gus Van Harten for having informed the public of the mere fact of the FIPA’s existence.  Although the announcement and signing of the FIPA received some media attention, it is not clear how many Canadians beyond the political elite would ever have learned anything at all about the FIPA had May and Van Harten been silent.  FIPA supporters did not proactively inform the public but instead defensively responded to May and Van Harten.  It is difficult to tell, but some of the same individuals who defended the FIPA might otherwise not have even heard of its existence without the very critics whom they so casually dismissed.

It is unfortunate that the normally thought-provoking economist pundits Andrew Coyne and Stephen Gordon were eager to put a rubber stamp on the product of a sham parliamentary process.  Only months before defending the FIPA, Andrew Coyne had condemned Bill C-38 for diminishing the role of parliament and for changing environmental laws in the context of a “budget” bill, not seeing the FIPA as the obvious anti-democratic sequel for locking in Bill C-38’s changes.  He has also argued that Canada’s democracy is in “crisis” and accused the Conservative Party of an exceptional disdain for learning, incidentally the right conditions for a profoundly harmful treaty to be drafted at the direction of the Prime Minister’s Office.

As for Professor Gordon, he has argued that business experience is not necessarily informative on economic policy, an observation pertinent to the Canadian Council of Chief Executives and investor-state lawyers’ defense of the investor-state arbitration that may serve business interests to public detriment.   He has emphasized the role that peer-reviewed papers should play in developing public policy, while ignoring peer-reviewed analyses contrary to his FIPA judgment.

Furthermore, like the supply management monopoly that Coyne and Gordon lament, investor-state treaties empower highly-mobilized interest groups to gouge the wider public in an abstract manner in which it is difficult to counter-mobilize.  Just as established dairy producers lobby for an institution that enables their price-gouging of dairy consumers, so too do established multinational corporations and investor-state lawyers mobilize in order to protect institutions for which they can gouge public money or otherwise deter unfavourable democratic lawmaking.

Had these economics commentators been more attuned to international debates on investor-state dispute settlement treaties, they might have noticed the OECD paper and The Economist criticisms of the arbitration processes and the hundreds of economists who have warned against investor-state arbitration in the Trans-Pacific Partnership, let alone the views of many legal experts.

There is an economic fallacy in Van Harten’s writings to which FIPA supporters Professor Gordon and Professor Andrew Leach would legitimately object to however.  Van Harten warns that the FIPA could prevent governments from requiring “value-added” development in the natural resources sector, implicitly but mistakenly conflating higher-cost domestic labour with higher economic productivity.  But this is a minor error of no consequence to his broader FIPA criticisms.  The real problem may not be that Chinese state enterprises could merely sell raw bitumen cheap to Chinese markets, as we should expect from the China First Energy Strategy, but rather that proper environmental controls and royalties around such development could be deterred under fear of being sentenced for “indirect expropriation” or violating “fair and equitable treatment”.

Another implication of the FIPA missed in the debate was the consequence for human rights in China.  Being closely connected to the Chinese state, some Chinese corporate profits in the oil sands could conceivably be implicated in abuses within China itself.  For example, the China National Offshore Oil Corporation has been accused of involvement in the displacement of Tibetans from their homes, but is now fully protected under the FIPA.  Any democratic discretion for Canada to change its laws to dislodge existing state companies who violate human rights abroad is now in jeopardy.  The right to outright expropriation arguably can be taken for granted when dealing with suspicious business partners such as these.

Furthermore, given the intertwining of China’s political and business elites, the Chinese citizens and state corporations that will have the most wealth to invest abroad will be those most likely involved in the grafting of Chinese citizens.  Corrupt Communist Party officials investing in Canada will have their illegitimate wealth further protected under the FIPA, helping to ensure their power back home in China.

If the case against the FIPA has not been truly proven, the case against the FIPA being perfect is overwhelming.  It would be questionable to attach a 31-year exit notice to even the most scrutinized treaty that suffered the least criticism, given inevitable capacity for human error.  The long exit notice seems more like an implicit acknowledgement that popular legitimacy for the FIPA was never going to be.

 

Concluding Thoughts

Gus Van Harten concludes Sold Down the Yangtze with several policy recommendations for diminishing some of the rough edges of the FIPA’s effects on Canadian democracy.  He recommends legislation requiring the Government of Canada to reveal all of its documents from investor-state arbitrations against Canada, thus preventing the abusive secrecy permitted but not required under Article 28.  He further recommends a public review or a Royal Commission to assess or monitor the effects of the FIPA on Canadian democracy in the years to come.  He also recommends legislation banning or even criminalizing the signing of international treaties with exit notice lengths of more than a few years.  Van Harten has no policy formula for preventing hawkish compensation orders against Canada, but with Canadian transparency around the arbitration process activist rulings against Canada would therefore cause political blowback against investor-state treaties and affect the reputation of Chinese state companies initiating the lawsuits.

It is an indictment of Canada’s parliamentary and journalistic institutions that a 31-year-minimum binding arrangement of any kind with the world’s most powerful dictatorship was neither amended for the slightest error nor subject to mainstream two-sided scrutiny.  The Prime Minister’s Office holds immense and excessive power if it can stealthily bind Canadians into global laws of its choosing, and manipulate the legislature and media into uncritical compliance.  The passage of the FIPA is not only a wakeup call about the corporate bludgeoning of democracy in worldwide investor-state arbitration, but also a lesson in the dysfunctions of Canadian democracy here at home.  Some of those who defended the FIPA should have known better than they did, while others perhaps did know better but were not concerned with the public knowing all the facts.

The Canada-China FIPA may potentially be one of the biggest legacies that Prime Minister Stephen Harper will imprint on Canadian institutions.  Its signing and ratification were history in the making, but not likely for the better.