What is an Investor-State Agreement?
While investor-state agreements are sometimes associated – or even confused – with free trade agreements, they are not the same. A trade agreement opens up areas, or sectors, of national economies to allow other countries access. An investor-state agreement is different. For example, the Canada-China Investment Treaty does not open any new sectors to trade. China still refuses foreign investment in its energy sector – while at the same time it makes major purchases of Canadian energy companies.
An investor-state agreement gives a foreign company (an “investor”) the right to seek damages from a country (a “state”) in private arbitrations. These are not court actions, although the word “sue” is often used. These are claims for damages arbitrated by a panel of three arbitration lawyers – usually in a posh hotel room somewhere. The first investor-state agreement in the world was Chapter 11 of NAFTA. In the late 1990s, an attempt was made through the Organisation for Economic Co-operation and Development (OECD) to extend Chapter 11 principles to all industrialized countries. The OECD proposal was called the Multilateral Agreement on Investment (the MAI). In what is viewed as the first global citizens’ campaign using the internet effectively, the MAI was defeated. The pro-MAI community then turned to advancing bi-lateral investment treaties. The Canada-China Investment Treaty is one such effort.
Why should Canadians care about investor-state treaties?
One of the issues that was frequently raised in the last round of town hall meetings I held with constituents in January 2013 was the threat of the Canada-China Investment Treaty. As I write this, the treaty has still not been ratified. While this is very good news, the treaty could be ratified at any time by a decision of the Prime Minister and his Cabinet. If ratified, the treaty would be binding on Canada and on future Canadian governments for a minimum of 31 years.
Meanwhile, there have been a number of interesting developments in countries around the world related to this type of treaty, often called a Foreign Investment Protection and Promotion Agreement (FIPPA or FIPA). Australia recently undertook a cost-benefit study of investment treaties, which showed that these treaties create far greater costs than benefits. Since this study, Australia has taken a new and strong position: they have decided not to enter into any new FIPAs. Similarly, India also recently decided that it would not only reject any new investor-state treaties, it would also attempt to re-negotiate any existing treaties that contained investor state clauses. India’s new stance may come as a surprise to the PM as it was just last fall that Stephen Harper returned from India claiming a Canada-India Investor-State agreement was just around the corner. Meanwhile, South Africa is also reconsidering its investor-state agreements, and a recent international report which makes clear the social and monetary costs of these agreements is likely to influence other nations to also reconsider entering into investor-state agreements.
Are these cases taken to court?
No. They go to an arbitration. Three international lawyers hear the case, usually in a hotel room. There are no appeals. There is no access to a Canadian court before being thrust into arbitration.
While “international arbitration” may sound fair and neutral, the reality is different. A recent report, “Profiting from Injustice: How law firms, arbitrators and financiers are fuelling an investment arbitration boom,” (Corporate Europe Observatory, Transnational Institute, Brussels, Amsterdam, November 2012), provides some disturbing details of the world of global arbitration.
The report concluded that:
“Rather than acting as fair and neutral intermediaries, it has become clear that the arbitration industry has a vested interest in perpetuating an investment regime that prioritises the rights of investors at the expense of democratically elected national governments...”
Here are some of the report’s key findings:
- There is a huge increase in the number of such cases -- from 38 cases in 1996, to 450 in 2011;
- The cost to a country of fighting an investor challenge is on average $8 million (US$), and rise to over $30 million (US$) in some cases;
- Elite arbitration lawyers charge as much as $1,000/hour;
- Poor countries have to spend scarce resources on lawyers to battle global multi-nationals. For example, the Philippines spent $58 million defending a claim by German airport operator Fraport. That amount of money could have paid the salaries of 12,500 school teachers for the year;
- A small group of elite international lawyers handle a large proportion of the cases. 15 lawyers alone decided 55% of all known investor-state disputes; and
- They are often associated with firms that advise governments to enter into such treaties.
After I read this report, I raised the issue on the floor of the House, suggesting international investment treaties put us in the hands of “global ambulance chasers.” I think most MPs simply do not understand what we are granting the People’s Republic of China in this investment treaty. But the decision to ratify will not be made by Parliament. The Prime Minister and his Cabinet can decide through an Order in Council.
“When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all [...] Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.” - Juan Fernandez-Armesto, arbitrator from Spain
Why is the Canada-China Investment Treaty worse than NAFTA Chapter 11?
- NAFTA can be exited with six months written notice; the investment treaty with China is in force for 15 years, then Canada or China could give a one year written notice to exit, but all existing investments would be grandfathered for a further 15 years (31 year “lock-in”);
- Even though it is egregious that US (or theoretically Mexican) corporations can bring multi-million dollar claims against Canada for laws passed with no intent to discriminate in trade terms, the “investors” from China are not individual corporations. State Owned Enterprises (SEOs) of the People’s Republic of China are all branches of the government, with boards and CEOs appointed by the politburo of the Communist Party of China;
- Under the Canada-China FIPA all claims begin with six months of diplomatic efforts to resolve the dispute. Under such a provision, the larger economic party, China, would be able to link all its investments in Canada into a serious threat for economic retaliation. This is not something a US-based firm would be capable of doing under NAFTA, and, in any event, a diplomatic process is not part of NAFTA.
Is an Investor-State Agreement necessary to pursue trade?
No. Even though Australia does not have an investor-state treaty with China, they lead the globe in Chinese investment.
In 2012, investment from China to Australia stood at $51 billion (US), eclipsing the United States ($50.7 billion) and far surpassing Canada ($36.7 billion).
Source: KPMG - Demystifying Chinese Investment, August 2012
In the House of Commons - Hearings on the Canada-China Investment Treaty
April 22, 2013
Elizabeth May: Mr. Speaker, I would like to wish all members of this House a happy Earth Day. Today is the 43rd anniversary of that celebration, but please excuse me if I do not feel like celebrating. The only motion before us today that has any environmental content is the NDP motion from its last opposition day to block ratification of the Canada–China Investment Treaty.
We should all be voting to block ratification, but I can predict as of now that the motion will be defeated, and that is going to be a terrible shame because it will mean that this House has not had a single proper day of hearings, not one day of expert witnesses coming here to tell us what we need to know about this extraordinary treaty that will give the People's Republic of China and its Communist Party government the right to sue us and lock us in for 31 years.
NAFTA locks us in for six months. The new treaty that was tabled after the Chinese treaty locks us in for 16 years. However, there was not one day of hearings on this. I urge members, before it is too late, to let us find a way to have hearings.
(Video available online at www.elizabethmaymp.ca/video)