Did Canada Just Give Foreign Companies Power Over Domestic Policy?

Madelaine Drohan on why we need a public explanation of the government's decision to ratify the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States.
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November 15, 2013
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Madelaine Drohan
Canada correspondent for The Economist, Author of The 9 Habits of Highly Effective Resource Economies, and contributor to The Economist Intelligence Unit

As a working journalist, I like a juicy scandal as much as the next person and have filled my share of print columns lately with stories on the Senate and the never-ending trials of Toronto mayor Rob Ford. But one of the problems with having such stories dominate public debate is that important events that will have a long-term impact on Canadians slip by virtually unnoticed.

One such event was the government’s November 1st decision to ratify the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States.  As of December 1st, Canadian investors abroad and foreign investors in Canada who have a dispute with their host government can ask for arbitration through a World Bank body known as the International Centre for Settlement of Investment Disputes (ICSID).

This is not nearly as sexy as the latest utterances from Mr. Ford or the revelations by disgraced senator Mike Duffy on who knew what and when in the prime minister’s office. But bear with me. It’s important.

ICSID and a number of other international bodies represent what is essentially a system of private justice. When foreign companies or investors feel their rights have been infringed by a host government, they can ask for binding arbitration through one of these bodies if the body is mentioned in a bilateral investment treaty. The cases are heard behind closed doors. Sometimes even the existence of a dispute is kept secret, as are some of the decisions, depending on which body is used. The tribunals are made up of legal experts in international law, usually lawyers, but not judges. Decisions cannot be appealed to national courts. In extraordinary cases they can be annulled by the same body that issued the decision.

Canada has already had experience with this practice under the dispute settlement mechanism set up under the North American Free Trade Agreement. But that only covers Canada, the U.S. and Mexico. The convention the federal government has just ratified covers 149 other countries.

Business is quite pleased with the ratification because the ability to have a dispute arbitrated offers protection from the arbitrary actions of governments. Supporters often paint the picture of a Canadian firm fighting a corrupt or inept government in a developing country. Governments have supported the idea because being party to the convention is seen as providing extra incentive for foreign investors by making them feel more secure about their investment and therefore more willing to part with their money.

But there are problems that should be noted and debated before a government commits to the process. The problems fall into two broad categories: the constraints international arbitration places on the ability of governments to regulate in the public interest and concerns about the make-up and operation of the tribunals.

Australia felt strongly enough about the first that it announced in 2011 it would no longer include an option of investor-state arbitration in its economic deals with developing countries. It had already ruled out its inclusion in deals with higher income countries and has since insisted that it not be included in the Trans-Pacific Partnership deal being negotiated by 11 countries, including Canada and Australia. A number of developing countries, including Bolivia, Ecuador and Venezuela, have also decided to withdraw from ICSID.

The Australian government was concerned that such treaty protections would give foreign firms greater legal rights than domestic firms and that they would “constrain the ability of Australian governments to make laws on social, environmental and economic matters”. Its high-profile fight with tobacco manufacturer Philip Morris over the government’s demand that cigarettes be sold in plain packaging served to harden its resolve. Australia argued the packaging measure is a matter of public health policy. Philip Morris said it has had a negative impact on its business and used an existing bilateral investment treaty between Australia and Hong Kong to bring the dispute to arbitration, which is still ongoing.

Canada has been at the receiving end of similar disputes under NAFTA. Foreign firms have challenged laws passed for environmental or health reasons. But Canadian firms have also targeted foreign governments, including for environmental regulations that have negatively impacted their business. Methanex Corporation of Canada unsuccessfully sought damages from the state of California after it banned a gasoline additive Methanex produced on grounds that it was polluting the water supply.

As for the tribunals, critics point out that unlike judges, who take whatever cases come their way and are expected to be impartial, the legal experts on arbitration tribunals are selected specifically for each case, one by the investor, one by the host government, and a third agreed to by both. There is a strong incentive for those appointed by investors to focus on investor rights rather than the public good. And others with a stake in the outcome, such as the general public, are not at the hearing and may not even learn of the outcome. Critics argue that this set-up “fails to satisfy the basic requirement of procedural fairness”.

In the last 20 years, the number of investor-state disputes going to arbitration has soared from a handful to hundreds per year. It may well be that the benefits of international arbitration outweigh these shortcomings. At the very least supporters should be forced to make this case publicly before signing Canada up.