Distinguished fellow, Asia Pacific
Foundation of Canada
It took the impending visit to China by Prime Minister Stephen Harper in November to finally dislodge the Canada-China Foreign Investment Protection Agreement from limbo. The Chinese ratified the agreement, signed in September 2012, almost immediately but there was a long and unexplained delay in Canada.
While the important final step in bringing the agreement into force came as more of a whimper than a bang, with the government using the classic technique of releasing the announcement on a Friday afternoon to minimize rather than enhance coverage, the agreement will now come into effect Oct. 1. Regardless of what precipitated Canada’s ratification, it is high time this deal was finally completed.
Capital abhors uncertainty and while, even with this agreement, there is no guarantee Canadian investors will not run into difficulty in China from time to time, there is now protection against discriminatory and arbitrary practice and an impartial redress mechanism. This will raise comfort levels and deter governments in China from taking capricious actions. This is a real gain for Canadian companies, both large and small, seeking to go global. Canada, like many countries, has run a substantial trade imbalance with China for many years. However, under the reforms of the Third Plenum (of the Chinese communist party) announced last year, China will be shifting from an export-led economic strategy to one more balanced and focused on domestic consumption, innovation and further opening to foreign companies. That provides a platform of opportunity for companies outside China to take advantage of a middle class market that, by most counts, already surpasses the total population of the United States. Repeated studies have shown that trade follows investment so the clearer the rules are around investment, the better it will be for Canada to be able to take advantage of China’s continued remarkable economic development by exporting Canadian goods and services to meet the growing demand of the Chinese economy.
So, if this agreement does so much for Canadian companies, why the delay in ratification? While the agreement will provide greater certainty for Canadian investors in China, by its very nature it is reciprocal, also giving greater protection to Chinese investors in Canada, including investment by the State Owned Enterprises (SOEs) that are ultimately controlled by the Chinese government. The Chinese National Offshore Oil Corporation that acquired the Canadian oil company Nexen amid much controversy in 2012 is one such SOE. According to some of the critics of the FIPA, Canada has ceded its sovereign rights to manage investment in Canada to the Chinese government. The facts simply do not bear out the doomsday scenarios.
The critics argue the international arbitration provisions of the agreement will give Chinese companies an opportunity to circumvent Canadian regulations. They argue that FIPA will allow the Chinese government, through Chinese state-owned companies, to seek compensation from Canada if their investments are negatively affected through passage of any measures — such as environmental, health or safety regulations — that would be equivalent to expropriation. In fact, the agreement specifically permits regulation for valid public policy purposes, even if the result of these regulations is to diminish the value of the investment. Critics also object to the fact the FIPA will be in effect for at least 15 years, with a further 15 years of protection for existing investments if it is not renewed. The whole basis for the agreement is to reassure investors. If the agreement could be terminated on six months’ notice, as some advocate, this would undermine the very basis for the long-term investor confidence and predictability it is designed to achieve.
Finally, there is criticism because the FIPA does not grant reciprocal market access for investors, i.e. more sectors of the Canadian economy are open to foreign investors than is the case in China, at this point in its development. This is a misunderstanding of the purpose of Foreign Investment Protection Agreements. Their function is to provide assurance of fair and non-discriminatory treatment to investors once those investors have met the legal requirements for establishment. The FIPA does not mean Chinese companies can avoid Investment Canada review any more than Canadian companies can have access to sectors of the Chinese economy that are currently restricted. As China continues to open, Canadian companies are guaranteed that access given by China to the investors of any other foreign country will also be granted to Canadians.
To be fair to the critics, there is always an element of risk, although it is manageable. One cannot exclude the possibility some Canadian measures could be challenged under the FIPA by Chinese companies. The fact is, no reward comes without some risk, but as long as regulations are not misused or clumsily handled by provincial or local governments in such a way as to give Chinese companies legitimate grounds for redress, there is no cause for alarm. On a positive note, this agreement will require governments in Canada to think carefully when they are considering policy measures that will impact the market, and take steps to ensure these steps are taken only for valid policy reasons. On the flip side, Canadian companies operating in China will have gained significantly by securing non-discriminatory treatment and due process in a regime not noted for always providing a level playing field to outsiders.
It is ironic that much of the pressure for Canada’s delay in ratifying the FIPA resulted from extraneous factors in Canada-China relations: accusations of cyber-spying, concern about doing business with a non-democratic regime, etc. Now ratification has been achieved because of another extraneous factor, Harper’s expected visit to China. Be that as it may, the deal is now done, and we can move forward to secure Canada’s interests and ensure Canadian investors have the best possible protection as they move to exploit opportunities in the Chinese market.