Canada: Blakes Bulletin on International Trade - China Focus - December 2005

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

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.

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.

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.

The People’s Republic of China (PRC) is often the target of complaints by Canadian manufacturing companies that the PRC is "dumping" goods into Canada which is causing "material injury" to Canadian manufacturers. The year 2005 was no exception. This article will discuss the dumping and subsidy cases involving the PRC that were concluded in 2005.

Pursuant to international trade rules, where exporters to Canada are found to be "dumping" their product and the dumping results in "material injury" to Canadian manufacturers of identical or similar goods, Canada is authorized to impose an "anti-dumping" duty equal to the margin of dumping. These duties remain in place for five years and can be renewed for additional periods of five years.

In 2005, exporters from the PRC were the subject of two "inquiries" by the Canadian International Trade Tribunal (CITT) and one "expiry review". The two inquiries in question involved Certain Steel and Stainless Steel Fasteners and Certain Laminate Flooring. Both inquiries were the result of a formal complaint filed by the respective Canadian manufacturers in 2004. In both cases, anti-dumping duties were imposed on goods sold by PRC exporters on the basis there was evidence of dumping and that the dumping caused material injury (subject to some exceptions).

In Certain Steel and Stainless Steel Fasteners, PRC (and Chinese Taipei) exporters were found to be "dumping" the goods at margins ranging from 3.46% to 115.45%. These duties were imposed for five years on carbon steel screws from the PRC; all other types of subject fasteners were not imposed with such duties, either because the CITT found "no injury" or because the volume of the goods was negligible.

In Certain Laminate Flooring, the PRC and six other countries were targeted as dumping their goods into Canada. However, at the time of the CBSA’s final determination of dumping, the investigation was terminated in the case of 5 countries, leaving only the PRC and France. PRC exporters were found to be dumping their goods at margins ranging from 0% to 17%. These duties were imposed for five years because the CITT found that the dumping by PRC exporters had caused material injury to Canadian manufacturers of identical or similar goods. On November 14, 2005, the Canada Border Services Agency (CBSA) initiated a "reinvestigation" of normal values and this represents an opportunity for PRC exporters to obtain lower normal values or demonstrate that they are not dumping.

For the first time in Canada, the PRC was alleged to be unfairly subsidizing its exporters. This occurred in Certain Steel and Stainless Steel Fasteners. The CBSA finally determined that the PRC subsidized its exporters of subject goods to the extent of 1.25 RMB/kg. In 2005, there was a second allegation of unfair subsidization by PRC, this time in Laminate Flooring. In this case, the CBSA finally determined that the PRC subsidized its exporters of subject goods in the range 0 – 3.54 RMB/square metre.

The case involving Certain Laminate Flooring is also notable because it was during that case that the CBSA ceased applying the "zeroing" methodology it has historically applied in making dumping calculations. When "zeroing" was applied, the CBSA would ignore (by setting to zero) any instances where there was no dumping, which tends to raise the resulting "margin of dumping". PRC exporters (indeed, all exporters) should be pleased about the CBSA’s decision since future calculations will tend to result in lower overall margins of dumping per exporter.

Another notable event which occurred in 2005 involved the expiry review by the CITT of the finding on Women’s Boots. Women’s boots have been subject to anti-dumping duties in Canada since 1990. The anti-dumping duty imposed on exports by PRC exporters was 29% until January 31, 2005, at which time the CBSA raised it to 72.1% following the conclusion of a reinvestigation. As a result, many importers of women’s boots made in the PRC participated in the CITT’s expiry review proceeding, and were able to persuade the CITT to rescind the finding rather than renew it for another five years. Since the CITT’s Order to rescind on April 29, 2005, PRC exporters can sell their women’s boots to customers in Canada free of any anti-dumping duties.

Canada must delicately balance the protection of domestic manufacturers with its desire to foster a robust trading relationship with the planet’s emerging trade superpower.

2005 saw a sharp increase in safeguard complaints by Canadian industry. In the 10 years since the creation of the World Trade Organization (WTO) Canada had conducted only one safeguard inquiry – the 2001 inquiry concerning steel imports. In 2005, however, the Canadian International Trade Tribunal (CITT) made recommendations in two cases and is considering an additional three complaints. Chinese imports are the primary target, but it is not just Chinese manufacturers and their Canadian importers whose lives are made difficult by the surge in complaints. Canada must delicately balance the protection of domestic manufacturers with its desire to foster a robust trading relationship with the planet’s emerging trade superpower.

A safeguard is an extraordinary measure intended to provide a limited escape clause from international trade obligations when unanticipated import surges overwhelm and seriously injure a domestic market. The principal advantage of a safeguard over a dumping investigation is that one need not demonstrate that imports are "unfairly" priced. Instead, it is sufficient that there has been an import surge causing, or threatening to cause, serious injury to domestic producers.

Historically, a major drawback of safeguards was that duties had to be applied identically to imports from all countries. As a condition of its entry to the WTO, China gave other WTO Members the right to apply an additional two safeguard-like remedies to Chinese imports: market disruption and trade diversion inquiries.

Market disruption is a safeguard remedy applied only to Chinese imports. The remedy also employs a lower threshold: imports must simply be a significant cause of material injury, rather than a principal cause of serious injury.

A trade diversion inquiry determines whether any action affecting the import of Chinese goods into the market of another country causes, or threatens to cause, a significant diversion of trade into the Canadian market.

While Canada has yet to conduct a trade diversion inquiry, 2005 was an active year for both safeguard and market disruption complaints.

The CITT released its recommendations in the Bicycles Global Safeguard Inquiry and the Barbeques Market Disruption Inquiry in September and October of 2005, respectively. The domestic industry was successful in both cases. In Bicycles, the CITT recommended three years of substantial duties. Although global safeguards are intended to apply to all imports, the CITT decision excludes Canada’s free-trade partners and some developing countries (but not China). In Barbeques, the CITT recommended imposing a 15% import surtax. The domestic industry’s success in these cases will likely spur similar complaints. Indeed, two more complaints – a global safeguard complaint concerning tobacco and a market disruption complaint involving residential furniture - were filed with the CITT within weeks of the Barbeques decision. These were in addition to a market disruption complaint concerning Chinese apparel filed in July.

The increase in complaints is not surprising. The CITT has now recommended imposing duties in all three safeguard-like inquiries concluded since the WTO’s inception. Recommendations do not, however, necessarily result in the imposition of large import duties. Canada must decide whether and how to implement those recommendations and there are political considerations that weigh against simply rubber-stamping the CITT’s decision. Indeed, the Canadian government waited several months to act on the steel safeguard recommendations and ultimately decided against imposing duties.

The imposition of duties in market disruption cases is even more politically unpalatable for the Canadian government. While there is a strong political motivation to protect Canadian manufacturing, Canada is also eager to cultivate its trading relationship with China.

CITT’s willingness to recommend duties in safeguard and market disruption inquiries will encourage more complaints by Canadian industry and create challenges for Chinese manufacturers and Canadian importers. Canada’s competing interests in implementing those recommendations, however, provide importers a final opportunity to press the Canadian government for a decision that truly reflects the interests of all Canadians, including consumers.

The Government of Ontario recently concluded a successful trade mission to Beijing, Shanghai, Suzhou, Nanjing and Honk Kong, China. The 12-day trade mission included representatives from not only the Provincial Government of Ontario, but also from approximately 100 organizations from the private sector, universities and colleges, municipalities, agricultural organizations and medical research institutions.

The Trade Mission by the Government of Ontario and accompanying representatives comes on the heels of a similar mission conducted by the Government of Quebec earlier this fall from September 21 to 29, 2005. In January of 2005, the federal Government of Canada embarked on its own trade mission to China, identifying the following "priority sectors" for future development: Aerospace; Agri-food; Biotechnology; Education; Financial Services; Information and Communication Technologies; Natural Resources; and Tourism and Transportation.

The Ontario Trade Mission focused on themes such as education, innovation and investment, and resulted in the signing of more than 30 memoranda of understanding (MOUs) and agreements between delegation members and Chinese partners on a host of projects designed to further strengthen the economic foundation of both jurisdictions. Other highlights of Ontario’s Trade Mission included: the renewal of Ontario’s 20-year-old friendship and co-operation agreement with Jiangsu Province, including the formation of a new Business Council; meetings between Premier Dalton McGuinty with top Chinese government officials; and a successful series of roundtables and seminars matching Ontario organizations with over 600 potential partners.

The Government of Ontario’s Trade Mission reflects the growth in trade and investment experienced between China and Ontario. For example, international trade between Ontario and China has been growing steadily for the past number of years, particularly Ontario’s imports of Chinese goods. Ontario’s exports to China increased from just under $1 million in 2000 to $1.3 million in 2004. Ontario’s imports from China grew from approximately $5.5 million in 2000 to nearly $12.5 million in 2004. Outside of the United States, China is the largest country of origin of imports into Ontario and is the second largest destination for Ontario goods.

The fact that each of the Federal Government, and the Provincial Ontario and Quebec Governments sent their own trade missions to China this past year also demonstrates the opportunities for increased trade and investment the business community in Canada sees emerging.

Notwithstanding such optimism, however, there have also been a number of potential roadblocks in recent years to international trade and investment between Canada and China. For instance, over the past few years, there has been an increasing number of trade remedy actions (e.g., antidumping suits, safeguard investigations, etc.) brought by Canadian domestic producers against imports from China. For example, Canadian producers have recently sought to impose duties on imports from China of goods as varied as: outdoor barbeques; steel fuel tanks; certain fasteners (e.g., nuts, bolts, etc.); laminate flooring; and wood venetian blinds.

In addition, earlier this year, several federal politicians in Canada openly questioned the Canadian economy’s growing appetite for investment from China going so far as to seek amendments to the Investment Canada Act, in large part to counter a wave of foreign investment from China.

Ontario’s Premier Dalton McGuinty, however, made it clear to both Canadian delegates and Chinese representatives that Ontario is "open for business," remarking that "Ontario is open to China and Ontario is aggressively pursuing greater two-way trade and investment."

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