Canada-China Investment Protection Agreement - A significant stepping stone to deeper economic co-operation

Mondaq, 21 December 2005

Canada-China Investment Protection Agreement - A Significant Stepping Stone to Deeper Economic Co-Operation

Article by Cliff Sosnow - Blake, Cassels & Graydon LLP

The pieces of the Canada-China economic puzzle are starting to come together and the picture that emerges reveals a slowly developing but inevitably closer economic relationship between these two economies.

The People’s Republic of China (excluding the Hong Kong Special Administrative Region) is Canada’s fourth largest export market. In 2004, Canada’s total merchandising exports of goods to China amounted to C$6.6 billion, an increase of 39% over 2003. Total merchandising imports from China increased to C$24.1 billion in 2004, up 30% over 2003. Canada ranks as amongst China’s top 10 trading partners and amongst its top 10 export markets.

But, given the evident importance of the Canadian and Chinese markets to each of these countries, the level of direct investment by each country in the others’ market, while slowly increasing, is nevertheless modest. The stock of Canadian direct investment in China for 2004 was C$647 million. And estimates of the stock of Chinese direct investment into Canada in 2004 is about one third of that. It is not as if Chinese investors are not interested in the Canadian market or that Canadian companies do not identify China as a desirable destination for the investment dollars. Aside from Canada’s natural resources and energy sectors, Chinese investors have expressed interest in Canada sectors diverse as information and communication technology, biotechnology, agri-food, pharmaceuticals and manufacturing. Canadian investment interest in China includes aerospace, biotechnology, education, finance, manufacturing and natural resources. Logic suggests that direct investment in each others’ market should be higher than it is.

Bilateral Investment Treaty Negotiations

To open up the investment gates and encourage direct investment in each others markets, Canada and China resumed stalled negotiations in Beijing in September, 2004 to develop a Canada-China bilateral investment treaty (also called a foreign investment protection and promotion agreement by Canadian officials). This is a signal achievement whose importance cannot be over-stated or over-valued.

Bilateral investment treaties are agreements aimed at protecting and promoting foreign investment. They accomplish this by setting out the respective rights and obligations of the countries that sign the agreement. Typically, bilateral investment treaties seek to ensure that foreign investors will not be treated worse than similarly situated domestic investors or other foreign investors; that they will not have their investment expropriated without prompt and adequate compensation; and, in most circumstances, that investors will be free to invest capital and repatriate their investment and returns. In effect, bilateral investment treaties tell the investment community that its investment is welcomed and can operate in a safe, secure and predictable legal environment.

Consultation Is Lacking

But, in law, process is as important as product and there are serious question marks about the process. Negotiators met in Ottawa in June 2005 and the message coming out of the negotiations is that both Canada and China are striving for a high quality agreement. But the contents of the agreement remain a mystery to those that the agreement is intended to most directly assist: the investor. Will the agreement give investors access to international arbitration? Will international arbitration, if provided, be first subject to an expedited domestic review procedure as is the case in the investment treaty recently signed between the Netherlands and China? Recognizing the right of Canada and China to regulate in the public interest, what will be the grounds for legitimate expropriation of investments and how will compensation be assessed? What industries and sectors will be "carved-out" of the investment treaty and what government activity will both countries want to exclude from the operation of the treaty? Without greater investor involvement, answers to the questions may have to wait for the completion of the negotiations.

The Canadian Standing Committee on Foreign Affairs and International Trade does not think this is an acceptable process. In a recent report on trade and investment relations between Canada and China, it recommended that in its negotiations with China (and other key emerging markets) Canada consult with business as it pieces together the elements of an agreement intended to stimulate direct investment in China.

The negotiation of a bilateral investment treaty between Canada and China, the second-largest destination of foreign direct investment, is a major development on the road to deeper economic ties between these two countries. It is critical for companies with an interest in both the Canadian and the Chinese market to feed into the negotiating process to ensure that the rules that are negotiated strengthen the investment ties between Canada and China.

source: Mondaq