The Flip Side of Protectionism

I have argued before that specific, bi-lateral treaties or agreements can help prevent foreign investment problems that often arise when politically important countries (read: China) invest in another country.  For most countries, the investment rules that govern investments from, say, Chile, may not work for, say, China.  Unfortunately, however, different treatment for different countries (which present different risks) often means that protectionist policies towards a certain country may result.  China has complained that Canada was singling it out for tougher scrutiny, for example (which is probably true, and not necessarily the wrong thing to do–again, China is not Chile).  Walking that line between a realistic appraisal of risks–which, yes, sometimes results in more scrutiny–and protectionism is difficult. 

Sometimes, however, a country might swing too far in the other direction, as some have argued is occurring with Canada’s reboot of its investment relationship with China:

The Foreign Investment Promotion and Investment Agreement (FIPPA), signed in Russia, is a bilateral investment treaty that abrogates international and constitutional law, and essentially hijacks municipal, provincial, territorial, and federal laws that threaten the profitability of Chinese State Owned Enterprises (S.O.E).

A treaty as momentous in its import should merit open discussion, but instead, it has been cloaked in secrecy, which is consistent with the treaty itself. According to the treaty, if a Canadian law threatens the profits of a Chinese S.O.E, a secret tribunal, consisting of three arbitrators, and operating outside the jurisdiction of Canadian law, will adjudicate and award penalties, should it deem that profits have been compromised.

And here are some specific criticisms of the treaty from Gus Van Harten, Associate Professor at Toronto’s Osgoode Hall Law School (I am not familiar with the treaty, and undoubtedly others do not see it Van Harten’s way, but he makes some powerful points):

Instead of promoting growth, the treaty may undermine growth by removing value-added benefits from Canada’s resource sector.

The treaty’s main role is to protect Chinese-owned assets from Canadian legislatures, governments, and courts, and vice versa (i.e corporate empowerment), though it is largely non-reciprocal since China’s interests/capital will be (and currently are) far greater than Canada’s current or anticipated investments in China.

Regulatory differences between the two countries will create an uneven playing field as well. Canadian investors will have fewer protections from discriminatory treatment in China, since China’s existing legal frameworks are opaque relative to Canada’s (remaining) legal frameworks.

There is also a huge disparity of capital flows, with most capital flowing in to Canada from China, so treaty protections are mostly one-sided.

An Independent Commission has not studied the treaty, so Canadians are unaware of projected costs and benefits.