Canada's FIPA treaty with China and what it means

It has no legal effect on the Nexen deal, but it says we're open for business.


(Photo: Adrian Wyld/Canadian Press)

It may seem auspicious, coming as it does while the federal government ponders approval of China National Offshore Oil Co.’s $15-billion purchase of Calgary-based Nexen, but the new investment agreement with China that is soon to be ratified in Parliament was actually 18 years in the making.

Negotiations for the agreement Prime Minister Stephen Harper and Chinese President Hu Jintao signed Sept. 9 in Vladivostok, Russia, at the 2012 APEC leaders’ summit began in 1994. The Conservative government tabled the Foreign Investment Promotion and Protection Agreement (FIPA) in the House of Commons Sept. 26. As such treaties don’t require debate in Parliament to be ratified, it is slated to be adopted 21 days after it has been tabled.

The treaty’s impact on bilateral trade will be subtle. “If anyone’s looking for immediate impact, it’s not meant for that,” says Daniel Schwanen, associate vice-president of trade and international policy with the C. D. Howe Institute. “It’s a framework. It gives Canadian businesses that are already there—or investments, minority stakes and so on—comfort that they’re not going to be treated worse than investors from any other country.”

On its surface, the agreement will have no impact on the biggest deals currently under way between China and Canada. Nothing in it overrides the provisions of the Investment Canada Act, and so it will have no legal bearing on CNOOC’s takeover of Nexen. It will have major symbolic importance when it comes to the approval of such deals, however. It sends a message that both countries are open for business.

“It has a symbolic significance in that you could say from a political perspective, it indicates that Canada welcomes Chinese investment,” says Lawrence Herman, trade law expert at Cassels Brock & Blackwell LLP. “It would be difficult to say, ‘We’ve concluded this agreement but we don’t like the CNOOC deal.’”

In the same vein, it won’t have a legal bearing on current efforts by Canadian companies—such as Manulife and Scotiabank—to have their investments in China approved. Scotiabank’s purchase of a 19.9% stake in the Bank of Guangzhou, which is run by the Chinese government, for about $719 million, has been held up for a year. (Neither Canadian firm was prepared to comment for this article.) Although the new trade agreement won’t explicitly ease the way for Canadian firms wishing to make new investments in China, however, Herman believes it will have an effect.

“If the Chinese turn down Scotiabank for protective reasons, I believe they would have betrayed the spirit of the FIPA,” he says. “I would be concerned if, having concluded a FIPA, they did not treat Scotiabank in a spirit that was consistent with it. If they said, ‘Thanks very much, but we’re not going to accept what would otherwise be a perfectly legal investment,’ I would be concerned. Canada should be concerned. The federal government would come under criticism from certain corners if Scotiabank was turned down.”

When Schwanen compares this Foreign Investment Promotion and Protection Agreement with other bilateral agreements we’ve signed (the last international trade pact Canada signed was with Latvia), however, he notes that it contains more concessions.

“It’s not as strong as agreements we have with other countries,” says Schwanen. The treaty includes a Most Favoured Nation provision, which guarantees that Canadian firms will be treated the same as firms from any other nation with which China may have a better trade agreement. What it lacks is something known in international trade as a Right of Establishment, where China would agree to treat new investments from companies in Canada the same as it would treat investments from domestic firms. Such an agreement would have eased new deals, such as Scotiabank’s.

“The Chinese have a lot of rules and regulations, and were not prepared to treat the foreign investor differently,” says Herman. “Admittedly, that is a serious shortcoming of this agreement.”

The treaty should serve to make investors feel at ease by providing a framework for dispute resolution and neutral arbitration.

John Manley, who was Jean Chrétien’s industry minister when the talks got started, objects to any idea that the document’s raison d’être is cosmetic—simply a welcome mat for trade.

“It’s more than just a feel-good kind of agreement,” says Manley, now president of the Canadian Council of Chief Executives, which has lobbied for a greater Canadian corporate presence in Asia. “It is a legal agreement, and there is a process to enforce it.…Time will tell how effective the dispute resolution process is. It’s too soon to say whether that’s going to be very big, or whether it’s going to be more modest.”