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Reasons to worry about the Canada-China trade deal

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Canadians feel uncomfortable about the proposed Foreign Investment Protection and Promotion Agreement with China. Tens of thousands of people who probably didn't know what a FIPA was before the end of September have sent letters to their MPs asking that it be torn up.

Many of them are worried that China-based corporations will be able to use the generous investment protections in the FIPA to challenge environmental, public health or conservation measures in Canada.

There are reasons to worry. In fact, there is a large and growing body of case law under existing bilateral investment treaties that Canada and other countries have signed proving that environmental and other non-discriminatory regulations are vulnerable to disputes from foreign investors claiming their profits were unfairly compromised by an otherwise legitimate decision.

As the Harper government seeks to increase Chinese investment in Canadian resources (tarsands, natural gas, mining) and related infrastructure projects, it's important that we understand how the FIPA will affect our ability to set limits on, or effectively regulate, this new activity.

'Fair and equitable' treatment

The FIPA and similar treaties contain guarantees of so-called minimum standards of treatment, or fair and equitable treatment, which arbitrators in investor-state disputes have interpreted much more broadly than the governments who signed the treaties intended. This has been the case in a growing number of disputes related to mining or energy projects that have faced delays or cancellations due to environmental concerns, the rights of indigenous people and local opposition.

There are also protections in the FIPA against so-called indirect expropriation, where a policy or measure that applies equally to all investors, regardless of nationality, has been found to unfairly expropriate the profits of a foreign firm. Several good examples of how these excessive corporate protections have been abused come from investor lawsuits under the FIPA-like rules in the North American Free Trade Agreement (NAFTA), but there are many international cases as well.

Canada already has paid about $170 million in fines or settlements under NAFTA investment disputes. In one of those cases, a U.S. toxic waste disposal firm was awarded about $6 million when a ban on PCB exports to the United States was found to have violated the firm's minimum standards of treatment, and to indirectly expropriate their profits. This ruling was a direct contradiction of Canada's treaty obligation to discourage trade in toxic substances so their disposal can be handled domestically.

A more recent case brought by a U.S. energy firm against Ecuador, in which the government was charged $1.8 billion plus legal fees by an arbitration panel, offers a sobering example to Canada as it contemplates ratifying this FIPA with China.

As the U.S. government watchdog Public Citizen summarizes it, in that case, Occidental breached a 1999 contract with Ecuador that granted the firm rights to explore and extract oil from a section of the Amazon but with some conditions -- among them a requirement that Occidental not portion off any of its claim to other companies. This was a part of Ecuador's energy laws designed to give the government control over who can invest in the sector.

But in 2000, Occidental ignored the contract (and the law) by auctioning off part of its Amazonian claim to an Alberta firm, AEC. A government audit in 2004 found that Occidental had not received proper government authorization for the transfer and the project was seized. The U.S. firm went quickly to arbitration under a U.S.-Ecuador investment treaty.

The panel award, released on October 5, said that Ecuador had breached the treaty's rules on minimum standards of treatment. It decided that 'fair and equitable treatment' should go beyond international law as practiced by states -- the definition Canada insists is strong enough in the FIPA with China -- and that "any penalty the State chooses to impose must bear a proportionate relationship to the violation which is being addressed and its consequences."

Arbitration panels in other cases have claimed that "idiosyncratic" decisions by governments, or decisions that went against the firm's reasonable expectations based on public or private discussions, can breach an investor's minimum standards of treatment. (Consequently, European Union negotiators are pushing for this kind of broad definition of fair and equitable treatment in the Comprehensive Economic and Trade Agreement with Canada, negotiations on which could conclude very soon.)

It's not difficult to imagine a situation in which a Chinese firm finds a similar breach of its rights based on delays, cancellations or alterations to pipeline or tarsands projects, considering the many public assurances from the Harper government about these projects moving ahead smoothly.

"Idiosyncratic" moves by provincial governments -- to seize a greater share of the profits from these projects, for example, or to better regulate for environmental protection -- could also violate the FIPA guarantees, despite Canadian assurances that these standards of treatment relate to international law only. In fact, a recent multi-billion dollar investor-case against Germany resulted in the City of Hamburg diluting its environmental rules on a coal-fired power plant, putting the health of the adjacent Elbe river at greater risk.

In the end, it will be up to an arbitration panel to decide what is and is not legitimate public policy, with expensive consequences.

Why was there no draft report?

Instead of taking this risk seriously, an environmental assessment of the China deal ignores it outright. For this and other reasons, the Council of Canadians, ForestEthics, the Canadian Environmental Law Association and other groups claimed the environmental assessment process was insufficient in their submissions to the government which were due November 11.

The final version of the government's assessment was posted surreptitiously online in mid-October. It says that "the Canada-China FIPA ensures that the Parties retain the ability to regulate in the public interest, including with respect to environmental issues," and that the FIPA "will not inhibit Canada's ability to develop and implement environmental policies."

As we've just seen, both statements are highly misleading. So is the suggestion that foreign investors in Canada "are subject to the same laws and regulations as domestic investors, which include laws aimed at protecting the environment." Time and again, even non-discriminatory measures that treat foreign and national firms equally are disputed as violations of one bilateral investment treaty or another, including NAFTA. This paradoxically results in better treatment for foreign firms than local firms under the global investment arbitration regime.

Also problematic in the environmental assessment is the strange claim that "the FIPA is not expected to generate significant economic or environmental effects in Canada." The confidence that a new investment treaty with China will have no impact whatsoever, as well as the absence of public comments in 2005 and 2008, led the government to skip a crucial part of the assessment process -- the writing of a draft report based on a deeper examination of the potential environmental impacts in the initial assessment.

Any assumption in 2005 that Chinese investment into Canada was not going to change markedly would not have held up in 2008, when it was clear that Chinese firms were expanding their investments globally, including in Canada and especially in energy and resource projects. The government, therefore, had a responsibility to carry out stage two of the environmental assessment process by producing a draft report. Instead, it moved directly from an initial to final environmental assessment without revisiting its earlier assumptions or actively seeking public input.

No effort to engage the public

Another fundamental reason to do another assessment is that there is much more public, political and First Nations concern about the FIPA now than there was at the time of the original environmental consultation in 2005, or the subsequent comment period on the initial assessment report, which was published online in 2008.

This isn't surprising since we only saw a complete FIPA text at the end of September this year. By not giving the many unheard voices adequate time to respond, the government would be violating the second objective of the environmental assessment process, which is "to respond to the environmental concerns expressed by the public."

The Framework "contains a strong commitment to communications and consultations throughout each (environmental assessment) of a trade or investment negotiation." This commitment is neglected by the government's shotgun ratification process, which left no room to discuss or debate the FIPA in the House of Commons and only a one-hour briefing for MPs during a single trade committee session.

By choosing expediency over rigorous study of the FIPA, the government ignored the broader intent of the cabinet directive on the Environmental Assessment of Policy, Plan and Program Proposals, which says that assessments of trade agreements should serve "to strengthen accountability and provide greater public confidence that federal government decisions are being made in full awareness of the potential environmental impact."

The government's failure to consider how recently the public became aware of the FIPA, with its 31 years of protection for often controversial investments in resource and energy projects, has undermined public confidence in the government and the treaty-making process itself.

That confidence could be regained through holding another, more comprehensive environmental assessment of the FIPA with a much more active public engagement, and the possibility of altering or cancelling the treaty if it is found to be not in the public interest. Ratification of the FIPA with China must be postponed until this new assessment has taken place.

A version of this article was first published by iPolitics.ca on November 14. It summarizes the Council of Canadian's submission to the federal government's consultation on the final environmental assessment of the Canada-China Foreign Investment Protection and Promotion Agreement (FIPA).

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