Why rush the Canada-China investment deal?

Canada setting itself up to be a sitting duck for investors and a dripping roast for the lawyers and arbitrators

October 8, 2012

TORONTO, ON, Oct. 8, 12/ Troy Media/ – The Prime Minister has said his government will stay neutral in the debate between B.C. and Alberta over the Northern Gateway pipeline. To do so, he must put the brakes on the Canada-China investment treaty.

The federal government revealed the Canada-China treaty a few weeks ago and is rushing to finalize it. The Prime Minister is proceeding without provincial consent, without an opportunity for careful study, and without a serious public debate. Yet the treaty will hamstring governments across Canada for decades in relation to Chinese-owned assets. This includes, for example, B.C. on Northern Gateway.

Because of the sheer quantity of Chinese investment in play in our resource sector, the Canada-China treaty is the most important development for Canadian sovereignty – especially legislative and judicial authority – since NAFTA. Yet, in contrast to NAFTA, the deal does not open China to Canadian exports or, with limited exceptions, to Canadian investors.

The thrust of the treaty is to give extraordinary rights to Chinese investors in Canada. The investors’ rights will be fixed for 31 years. This is lopsided, in effect, because Chinese ownership of assets in Canada will almost certainly outstrip Canadian investment in China. Chinese firms reportedly have bought $13 billion worth of the oil sands since 2010 and are pursuing a major stake in Northern Gateway.

Once the treaty takes effect, all existing and future Chinese investors in Canada will be able to enforce their new rights outside of Canadian courts in opaque extra-territorial tribunals. Only foreign investors can bring claims at the tribunals. They were set up originally to protect assets of the great powers in former colonies. They are not fair and independent in the manner of a domestic or international court.

Using the Northern Gateway case as an example, the following are arguments that a Chinese investor could make under the treaty. The examples assume that a Chinese investor owns assets, even as a minority shareholder, in the pipeline or related projects.

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B.C. Premier Christy Clark has said her province could frustrate the Northern Gateway project by withholding electricity for it. Under the treaty, a Chinese company can demand ‘treatment no less favourable than that given to Canadian firms (Article 6 of the treaty) or to investors from third countries (Article 5). Chance of success? High, I would guess.

B.C. might deny permits for the project. A Chinese investor could claim that the denial of B.C. permits was not ‘fair and equitable’ treatment (Article 4) if it could point to general approvals given by Ottawa. Notoriously, many arbitrators have expanded this right significantly by requiring governments to meet ‘legitimate expectations’ of investors, broadly construed, and to maintain a ‘stable regulatory framework’ over the entire life of a project. Democratic choice and provincial jurisdiction are not a defence. This highlights the treaty’s constitutional significance for Canada.

Chance of success for this claim? Moderate, depending on whether the arbitrators took an expansive approach to the notion of fair and equitable treatment.

What if B.C. blocked the pipeline outright after it was underway? If this required expropriation of real estate or other assets, tangible or intangible, the investor has a right to sue for compensation (Article 10) beyond that available under Canadian law. Chance of success? High for direct expropriations.

What if public opposition led to protests that hindered the pipeline? The treaty gives Chinese investors a right to ‘full protection and security’ from public opposition (Article 4). This will oblige governments in Canada to use their police authority to safeguard Chinese assets. The chance of a successful claim is low, but governments in Canada will certainly have to weigh Canadian democratic values against their duty to protect Chinese investors.

To win against Canada, an investor would have to succeed with just one of these arguments. Foreign investors have won on these arguments in other cases. The Chinese investors would likely be assisted by the club of lawyers in Canada and elsewhere who specialize in suing countries (and who may double as arbitrators) in these disputes.

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The system is rich for the lawyers and arbitrators, and the stakes are high for taxpayers. To date, the largest award against a country was close to $2 billion. Various multi-billion dollar cases are pending, including one by Chinese investors against Belgium.

The danger for Canada is that, on balance, we are the capital-importer under the treaty. This is the first deal Canada has signed, since NAFTA, where this is the case. Thus, under the Canada-China treaty, we will be the sitting duck for investors and a dripping roast for the lawyers and arbitrators.

The treaty has major implications for federal-provincial relations and governments across the country. It is a recipe for more conflict, not less, since governments in B.C. and other provinces will not capitulate easily on their basic responsibilities of representative government. The conflicts will culminate in extra-territorial Chinese lawsuits before investor-friendly tribunals. Will Ottawa foot the bill if, after a provincial decision, Canada is ordered to pay billions to a Chinese investor?

And, could someone please ask the Prime Minister to reconsider the decision to rush this through?

Gus Van Harten is a professor at Osgoode Hall Law School. He has a PhD on international investment law from the London School of Economics.

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