This is the third and final post in the series China-Canada Investment "Straitjacket:" Exclusive Interview with Gus Van Harten. You can access Part 1 here and Part 2 here.

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This post is second in a series on the Canada-China Investment "Straitjacket:" Exclusive Interview with Gus Van Harten. You can read Part 1 here and Part 3 here.

Right now Canadians stare down the barrel of a 31-year long legal trade agreement with the Chinese government that did not become public knowledge until September 26, 2012.

The trade treaty, known as the Foreign Investment Protection Agreement or FIPA, has garnered notable opposition in the past three weeks, with NDP trade critic Don Davies calling for public hearings, Green Party MP Elizabeth May calling for an emergency Parliamentary debate, and campaign organizations Leadnow.ca and SumofUs.org gathering over 39,300 opposition signatures (and counting) to deliver in person to Ottawa.

Yesterday, the Canadian Press reported the Harper government's refusal to host public hearings. Elizabeth May's October 1 request was also denied on the grounds that FIPA does not meet the test of emergency.

The trade agreement, or treaty, as it is called, is slated for ratification at the end of this month. The Commons trade committee will be briefed on the document in a one hour hearing.

With a trade deal that threatens Canadian sovereignty looming on the horizon and a government committed to expediting its approval, DeSmog caught up with trade investment lawyer and Osgoode professor Gus Van Harten to talk through some of the details.

In this segment Van Harten discusses why the Canadian government would pursue a deal of this sort, outlining the implications of the agreement for environmental legislation in Canada and development in the tar sands, especially in light of the spring's Omnibus budget bill C-38.

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Van Harten also considers the implications of the trade agreement for undecided energy projects like the Northern Gateway Pipeline and, significantly, if first nations and environmental groups were to blockade projects of this sort – who's rights the government would be obliged to protect. 

Below is Part 2 of our interview:

Carol Linnitt: As you have described it, it doesn't seem to make much sense for Canada to sign this agreement.

Gus Van Harten: I can tell you – trying to think about why the government would sign the China-Canada deal – it’s very unfavourable to Canada because of the way in which, as I was saying earlier, we have an open economy and China’s is closed, so the deal really, in fact appears likely to benefit Chinese investors far more than Canadian investors in China, because there will just be more Chinese investment here, because we’ve allowed more in. But I was trying to think why the government might do it, well I thought of different reasons, one might be that they sort of want to score the political bragging rights, of, ‘we signed the deal’, which is, you know, very short sighted, but sometimes governments are kind of shallow like that.

Another explanation would be that they want to open up the economy to this investment, and so that shareholders in Canadian companies in the oil patch can sell their shares at a premium to the Chinese, and get that benefit.

But another more troubling explanation which would require greater sophistication by the government but is not – certainly shouldn’t be ruled out – is that they foresee changes in attitudes about the oil patch, in the United States, in Canada, and that this may lead to new regulations on the oil patch, in that, climate can’t just be wished away forever, and that governments might take steps to regulate the oil patch in ways that investors wouldn’t like.

If you bring in a lot of Chinese investments, and you sign the Canada investment deal, you kind of get the Chinese investors to do your dirty work for you, for years after the current government is gone, because the Chinese investors can beat up on new governments that actually do take steps to change the balance between the investor rights in the oil patch and the general interest in addressing climate change or other issues like pollution and so on.

CL: Wow.

GVH: So that’s probably the most troubling aspect, is that this is designed to be a straitjacket, and it will have effect on Chinese investments that have been let in for the next 31 years after the deal’s been signed. Because the deal has a 15 year term, you have to give another year’s notice to terminate the deal and then after it’s terminated it still applies for another 15 years for investments that are in the country at the time of termination.

CL: So you’re saying that this deal has an active shelf life of 15 years, but stays in effect for 31 years?

GVH: Yes, the treaty does, meaning the treaty will be available to protect Chinese investors, including not just the Nexen investors, if they’re allowed to buy Nexen, but any other Chinese investors who come into the oil patch. I don’t think the government wants to see the whole oil patch Chinese owned, but I think it’s quite likely we’ll see significant portions of it Chinese owned, and once significant portions are Chinese owned, the you’ve also given lawyers who work for the Chinese investors this powerful tool to beat up on governments anywhere in Canada, you really frustrate the ability of Canadians to elect governments that are going to get more serious about the environmental consequences of the oil patch. That will be for 31 years from the date of this deal coming into effect, which is right now forecast to be about a two weeks away.

CL: And what’s the significance of that for, say, something like the northern gateway pipeline project that’s still in decision process?

GVH: Well, I mean, first of all, if that pipeline is owned, if foreign investors are spending money in relation to the proposed pipeline, then they right there could conceivably use the China-Canada deal to object to decisions taken by Canada, for example the British Columbian government, in objection to the pipeline. So the BC government may say ‘we don’t like the deal for the pipeline, we won’t supply electricity to it,’ well if they did that and the pipeline had Chinese money in it, the Chinese investors could say ‘you are discriminating against us, you don’t treat other investors in pipelines the same way in BC, so why are you discriminating with this pipeline, you’re not allowed to do it, and any money we lose as a result, you have to compensate us. You, Canada.’

And that’s not just the money that they put into the pipelines, they that’s their lost profits, that’s the money that otherwise reasonably would have earned, had this pipeline gone forward.

CL: I’m thinking about how tenuous the situation has already become in terms of environmental regulations after the Omnibus budget bill was passed and we saw a severe weakening of our environmental reviews and assessments and regulations. In effect the Harper government has instituted this new legal framework in which our pre-existing environmental laws have been weakened, gutted and now we are introducing this new 'straitjacket' to maintain those laws because of the possible difficulty of ever reinstituting them in stronger ways.

GVH: Yes, exactly, and let me spell it out very precisely. In many cases the arbitrators have allowed the investors to argue under the treaties that their treatment by the government was unfair and inequitable, if the government did not provide a stable regulatory framework. So if the regulatory framework is in a particular state, let’s say its currently denuded state because of the changes in the spring budget to environmental legislation, investors from China now say ‘well, we’re going to invest now because we don’t think any of our projects will be subject to environmental assessments and fisheries act regulations’, and so on. A new government comes in when the projects are underway, and says, ‘well actually we’re putting the laws back in place’. The Chinese investor can then say 'ah, but you can’t because we made our investments based on an expectation that there was a stable regulatory framework and that the previous government promised us that that regulatory framework would be stable’.

And so you can’t change the laws so easily. I’m not saying that the arbitrators necessarily would, but many have, interpreted the treaties broadly enough to allow the Chinese investors to receiver full market compensation in those circumstances from the new government due to a change in the regulatory framework. And, in a way, some of the things that the Harper government has done, I understand second hand – but have not confirmed this myself – that one of the ministers, I think Joe Oliver, had said at press conferences that they were changing the environmental laws because that’s what the investors wanted. If he did in fact say something along these lines, the he could have done nothing more to feed the arguments to the  investors’ lawyers down the road, if a new government decided to put the laws back in place. Because Chinese investors would be able to point specifically to his statements, which would be statements on behalf of Canada, that Canada was prepared to remove its environmental laws in order to bring in Chinese investment because that’s what investors wanted. It almost becomes part of the deal. A new government can reverse that decision, but they will have to pay for it.

CL: Well, that is astounding to hear.

GVH: Yeah, it’s kind of disheartening to those who care about, let’s say, protecting the environment for future generations. But on the other hand, the system has invoked very strong reactions by some countries, and increasingly governments that don’t put investor rights ahead of the rights and interests of everyone else are taking steps to unplug the system as best they can. But the decision to allow the China-Canada investment deal to come into effect will have the greatest impact on Canada’s ability to take sovereign decision with respect to its resource sector since any treaty we have signed since NAFTA. And it is comparable to NAFTA in terms of the effect that it will have. Yet it does not allow any access by Canadian exporters to the Chinese market, unlike NAFTA for the U.S. market. For this reason, it seems to be just a very lopsided deal for Canada.

CL: And this is why the conversation that you see coming, even from conservatives, expressing concerns about the fact that China is not a benevolent nation, that this is why that statement is so significant. They’re not talking about whether these are nice guys or not. This is a much more meaningful and significant thing to say about a county like China when you’re preparing to engage in this kind of deal.

GVH: Well let me give you another example. Under the treaties investors are entitled to something called ‘full protection and security’. Now what that has been interpreted by arbitrators in some cases to mean, among other things, that the government has to protect the investors’ property, assets, from public opposition and public protest. So let’s imagine that there are blockades of the pipeline as it’s being built through British Columbia, let’s say by native groups and by environmentalists. The Chinese will have an expectation, backed by the treaty, that the Canadian government through its police, through the courts, will take strong steps to protect the Chinese investors’ business plans from public opposition.

Now, sometimes public protests in opposition to foreign investments in other countries, I’m thinking in particular of a couple of cases in Latin America, one involving oil drilling in the Amazon by Texaco and then Chevron, and the other involving the disputes over a privatised water system in a city in Bolivia, some of those protests have actually led to violence, people have died, and that becomes part of the context for the arbitrators deciding whether the governments’ protection of the investor were sufficient. So it’s a concern, and I think it’s fair to say the Chinese investors may have a different view of how to handle that kind of situation from what we’re used to in Canada.

CL: And suddenly the onus is placed on the federal government to uphold this agreement, and their loyalty will in some sense be split between preserving this agreement that they have with the company and also protecting the rights of the citizens.

GVH: Yes, exact. So the question that the government will now have to face is, how is it going to balance its obligations to respect Canadian democratic protests, including when it’s actually effective in frustrating a pipeline, to balance that against its new obligations to provide full protection and security, backed by a very powerful international arbitration process, which tends often to favour the investors in its legal approach, and to provide that full protection and security under the treaty to Chinese investors. That’s the question the government will now have presented for itself.

[END OF INTERVIEW PART 2]

Gus Van Harten has written extensively on foreign investment deals. His research is freely available on the Social Science Research Network and International Investment Arbitration and Public Policy website.

Stay tuned for Part 3 of my interviews with Gus Van Harten.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.

This post is the first of a series on the Canada-China Investment "Straitjacket:" Exclusive Interview with Gus Van Harten. You can access Part 2 here and Part 3 here.

I recently picked up a copy of Francis Fukuyama's 2011 book, The Origins of Political Order. Sitting on the bedside table at the house I was staying at, the book made for some 'light' bedtime reading. I heaved the enormous tome onto my lap and, opening it to a random page, read this alarming passage: 

There is no rule of law in China today: the Chinese Communist Party does not accept the authority of any other institution in China as superior to it or able to overturn its decisions. Although the People's Republic of China has a constitution, the party makes the constitution rather than the reverse. If the current Chinese government wanted to nationalize all existing foreign investments, or renationalize the holdings of private individuals and return the country to Maoism, there is no legal framework preventing it from doing so.  (Pg 248)

My concerns with China's treatment of foreign investments arose in light of China's recent bid for Nexen, a Canadian company with large holdings in the Alberta tar sands. Since Canada is having trouble with the management of the tar sands now, what would it look like if we had Chinese state-owned enterprises like the Chinese National Offshore Oil Company (CNOOC) in the mix?

It turns out the problem is of magnitudes greater than I had originally conceived, and concerns not only Canada's management of its resources, but its sovereignty, its democracy, and the protection of the rights and values of its citizens.

Perhaps most strikingly, Canada is embracing this threat, showing telltale signs the real culprit in this dangerous deal isn't China at all.

In order to untangle the web of an international trade deal as complex as the China-Canada Investment Treaty, which establishes the terms of the Nexen deal – the biggest overseas takeover by a Chinese company –  I spoke with Professor Gus Van Harten of Osgoode Law School, an expert on foreign investment deals of this sort.

Below is Part 1 of our interview:

Carol Linnitt: Thanks for taking my call, and for making time for me to ask you some questions. I really appreciate that.

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Gus Van Harten: No problem at all.

CL: I guess I’ll just jump right in. The first question I have regards Canada’s sovereignty over its resources when it engages in these kinds of transactions with state-owned enterprises. Could you talk about Canada’s ability to maintain its sovereignty over the tar sands with this potential Chinese acquisition of Nexen under the Canada-China investment deal?

GVH: Okay, so when we talk about sovereignty, the way a country exercises sovereignty over its territory is by being able to pass laws and enact regulations that apply to companies and anyone else operating in its territory. And if there are any disputes about the laws or the regulations, then those get decided in the courts of the country.

What’s really different about the China-Canada investment deal – although it tracks especially NAFTA in Canada's case, although NAFTA obviously relates to American investors – is that it allows disputes about how laws and regulations or even court decisions have been made, to be decided outside of the Canadian courts. So they’re decided by international arbitrators at the option of the investor…and the China-Canada investment deal and many of these other investment treaties … give the power, and quite immense power, to the investor to challenge any decision that Canada would make, whether by the Canadian Parliament, or a provincial legislature, by the Supreme Court of Canada or a lower court, or by Cabinet or some low-level government official. Anything can be challenged by skipping Canadian courts and going straight to these international arbitrators.

And the international arbitration process, for a number of reasons, is really, I would say, without wishing to make personal allegations about any of the arbitrators, objectively slanted in favour of the investors. That’s not unique to the China-Canada deal. But what is unique is that this is the first time since NAFTA that Canada is entering into a deal that allows for these kinds of lawsuits with a country that is likely to have investors that own a lot of assets in Canada. Okay? You get my drift?

CL: Yes.

GVH: So Canada has other investment deals with countries like Romania, but there are not a lot of Romanian investors in Canada. There are more Canadian investors in Romania. But in this case it seems very likely that there will be a lot more Chinese investment in Canada than Canadian investment in China, and that’s because the China-Canada investment deal has another element, which is that it does not require each country to open up its economy to investment from the other country. Now, Canada is already very open to foreign investment, including Chinese investment, whereas China is relatively closed.

So for that reason, going forward, we are likely to see major purchases of assets in the resource sector, especially the oil sands obviously, by Chinese companies, but I don’t think we’re likely to see anything like the same amount of investment by Canadian companies in China, because the Chinese government won’t allow it, it puts more restrictions on foreign investments. You have to do a joint venture, for example.

They just won’t allow their major companies to be bought up by foreigners in the way that Canada has in the last 10, 15 years. And Canada is increasingly open to having that done, because the Harper government has raised the threshold for the review of foreign takeovers of Canadian companies under the investment Canada Act from about 330 million now, it’s going to go up in about 5 years to 1 billion dollars, meaning the Chinese can buy any Canadian company worth less than a billion dollars without any government review, under the usual process, under the Investment Canada Act. So the Nexen takeover is subject to review because it’s worth more than a billion but there could be a lot of purchases by Chinese investors we won’t even hear about.

The point is, we’re open to foreign investment, and it’s only once the investment is allowed in that the rights of the foreign investors kick in under the deal. So it’s much more likely that Chinese investors will benefit from being able to sue any Canadian exercise of sovereignty than vice-versa.

CL: What kind of potential litigation do you see happening? What are the types of regulatory frameworks or legal frameworks that you could foresee being a problem, say in the development of the tar sands?

GVH: I’ve tracked all the known investment treaty lawsuits brought by companies, and most of these lawsuits are brought by American and Western European companies against developing countries. But there’s been a lot of lawsuits against Canada under NAFTA, and Canada’s been sued more than any other developed country. A Chinese company just launched its first lawsuit against Belgium for two or three billion dollars, which is a very large amount, involving the kind of winding-down or takeover of a Belgian bank, in which the Chinese invested before the last financial crisis. So it’s quite reasonable to expect Chinese investors will be in a position to sue Canada in the way that other companies have sued other countries under these treaties.

Now in tracking those cases to date, there are about 300 that have led to a known decision, not all of which you can really evaluate, so it’s maybe between 150 and 200 that can be evaluated on this point; that is, what kind of disputes do they relate to? There are four main areas:

1) One of the major areas is resource disputes. Resource disputes lead to a lot of investor lawsuits in cases to date.

2) Another area is environmental and health regulations, and I would say most of the lawsuits against Canada under NAFTA, there have been about 30, relate to one of those two areas, a significant majority. So we have a reasonable basis to expect that Chinese investors, where we make decisions in the resource sector and/or related to health and environmental regulations, that they will generate lawsuits under investment treaties.

3) The other two areas incidentally are privatisation, disputes arising from privatisation of major infrastructures, such as water systems or gas transmission lines, led to a lot of disputes. So if we’re talking about a privately owned pipeline, subject to regulation in Canada, then that is also an area that’s ripe for investor-state disputes that could be resolved by these arbitrators.

4) The fourth area is tax disputes and financial sector disputes, and those often link in to the resource sector too, because a government will, for example raise royalty rates on the basis that there has been a windfall profit. This has happened in the oil and gas sectors. Many countries have put new taxes on what they consider to be windfall profits by companies in the relevant sector, and those have generated disputes.

So I really can’t imagine any area of government decision making in Canada other than the resource sector specifically, with the huge money that’s going to be wrapped up in the oil sands, and on piping the oil out of the oil sands, that would be more likely to lead to disputes involving Canada.

When we open up other areas of the resource sector, like in the north, in northern Ontario, the Ring of Fire, those will also be ripe for disputes if there’s a significant foreign investment, which there almost certainly will be.

The biggest loss for Canada under NAFTA was a lawsuit brought by companies owned partly by Exxon against Canada, because of Canada and Newfoundland & Labrador’s process for putting research and development spending requirements on companies operating in the Hibernia, Terra Nova oil projects were objected to by the foreign Exxon-owned companies. The tribunal based that decision on a reading of Canada’s exceptions, Canada actually had exempted Hibernia and Terra nova from the NAFTA provisions, but the tribunal apparently adopted a, very unfriendly for us, interpretation of those exceptions, making them very narrow, and we lost on that basis. This is significant because we’re relying on the same types of exceptions in the Canada-China deal.

CL: So that means that not only can China, say for example, challenge the current regulatory framework, but they can also retroactively challenge pre-existing Canadian decisions about Canadian resources?

GVH: Yes, they can challenge existing decisions, and they can challenge existing legal frameworks, although there are grandfathering provisions with respect for some of the standards in the treaty. But it gets quite complicated as to which existing laws are exempted and which are not, and this goes back to the point about the case I just mentioned. It’s that the arbitrators may not consider Canada’s exceptions for its existing laws, including provincial laws, they may not consider them sufficient to avoid liability in the way that the Canadian government is telling us that they are. And incidentally I should add also, the case in which this was decided is called Mobil Oil and Murphy Oil versus Canada. The award in that case was issued in May of this year, and, despite Canada’s government stated policy to make all documents public, it is still sitting on that award and has not made it public. So we cannot see the basis on which the arbitrators in effect defeated our exceptions under NAFTA, reportedly, and we cannot evaluate the risks associated with using potentially the same exceptions under the Canada-China deal as well as other trade deals the government is negotiating.

CL: So there’s no way at this current stage that we could make an informed decision about whether the China Nexen deal would potentially be a good thing for Canada?

GVH: Well I’m not sure about that, but anyone outside the government is unable to evaluate whether or not the exceptions that the government is relying on to exempt certain existing laws are really reliable, or whether this decision actually frustrates our legal approach, or both.

[The exceptions Van Harten is referring to are stated clearly in this explanatory memorandum.]

This isn’t a central point, I should add, this is something of a more peripheral point to what we were speaking about earlier. The bigger point is that we’re essentially delegating a judicial component of Canadian sovereignty to international arbitrators. And the arbitrators, I should stress, are not subject to review in any court, whether a Canadian court, or an international court. And the arbitrators themselves aren’t judges. In this case the arbitrators are often corporate lawyers whose main career is to work for large companies and other foreign investors, or they’re moonlighting academics, or sometimes they’re members of corporate boards.

Put it this way, the process is not independent in the way that most Canadians would think of a judicial process. 

The other point that’s quite important is that it is very reasonable to expect that in relation to Canada’s resource sector, because of the amount of money at stake and the possibility that governments will try to take steps to ensure that Canadians and the Canadian economy benefit from the exploitation of our finite resource. This is something that all governments have an obligation to do, some do better than others. 

If a new government came in or if the circumstances change, say the price of oil in the international market goes up to $200 a barrel, we could quite likely see a government say, “Well, we’re going to raise the royalty rates”, or they’re going to say, “We’ve got enough, we don‘t need to attract as much foreign investment anymore, so we’re going to start demanding a bit more of a share from these projects.”

That is just a minefield under the Canada-China investment deal for lawsuits by China against Canada, and these would potentially be multi-billion dollar lawsuits. The largest lawsuit I’ve heard of is a lawsuit against Pakistan that involves claims in excess of 100 billion dollars, which is sort of hard to get your head around.

CL: Yes.

GVH: It's a massively important decision-making power that the arbitrators have.

CL: And when this sort of international arbitration occurs, is it usually for the purpose of an award, or can it also be for the purpose of re-establishing a legal framework in favour of the investors? Say the investor has a problem with the way that the local government wants to build a pipeline, or manage a certain resource, or deal with privatisation of resources. Can the decision of this international arbitrator actually end up instituting certain laws or changes in the legal framework?

GVH: Generally the arbitrators do not do that; they just award money. They require compensation of the foreign investor out of the public purse of the government. Now that in itself reflects a change in the government's decision, because the government will have taken a decision to pass a law, it will have said ‘we’re not going to compensate everyone in the world who is disadvantaged by this law.’ That’s not how parliaments work.

When Parliaments pass a general law, they don’t compensate all the businesses that now have lost profits they would otherwise have earned over the next ten or twenty years had the law not been passed. But the arbitrators do award that kind of compensation in some cases. They order, in effect, the state to pay compensation for legislation when parliament otherwise would not have, or when the Canadian courts would have ordered parliament not to have done it. So in that way they change decisions but the change is related to the monetary implications for taxpayers.

CL: Right.

GVH: Now the monetary implications in themselves can be huge and can actually exceed in their impact a non-monetary order. It’s actually easier sometimes for a government just to change a decision or tweak it than to have to pay a massive award for all the lost profits of the investors. The threat of a lawsuit, especially if it involves a lot of money, can be used in the early stages of a dispute to get a government to change decisions, or to deter it from making certain decisions. It’s not clear the extent to which this happens because it’s extremely difficult to research, because we never really hear about these cases, because they never lead to an award, they get settled even sometimes before the investor has brought a claim. You see what I mean?

CL: Yes, absolutely.

GVH: Threaten Canada with a lawsuit, and parliament changes its decision while it’s still in the committee stage. We could find out about that. Or for, for example, the federal government may lean on a provincial government to change its decision. We might never know. 

CL: So in effect, when these massive state-owned enterprises are purchasing large stakes in a resource, they’ve got big muscles to flex, basically, they have a lot of power to exercise in the way laws are managed and shaped.

GVH: These treaties are like a dream for the lawyers who work for big companies. It’s just a wonderful additional tool to use to threaten and intimidate and beat up on governments.

And I believe that lawyers in Canada, Canadian lawyers in law firms, may be quite keen on the China-Canada investment deal as they see work for themselves, representing Chinese investors and helping them understand how they can sue, or threaten to sue, governments in Canada. And in fact, it’s regularly the case that you have this section of the Canadian legal community that promotes actively the ability of foreign investors to sue or threaten to sue the Canadian government.

CL: My goodness, the more you talk about this, the more it sounds like absolute madness.

GVH: Yeah, I’ve hardly even gotten started.

[END OF INTERVIEW PART 1]

Gus Van Harten has written extensively on foreign investment deals. His research is freely available on the Social Science Research Network and the International Investment Arbitration and Public Policy website.

The Harper government has recently decided to extend the review period for the CNOOC purchase of Nexen for an additional 30 days until mid-November. The China-Canada Agreement, however, is slated to pass into legislation on October 31, 2012 without open parliamentary debate. 

Campaing organizations Leadnow.ca and SumofUs.org have launched an effort to stop this deal before it's even begun.

Stay tuned for Part 2 of this series based on my interviews with Gus Van Harten.

Images from "PM Visits China" Photo Gallery.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.