On February 8, 2012, Canada's Minister of International Trade and Minister for the Asia-Pacific Gateway, Ed Fast, and the People's Republic of China's Minister of Commerce, Chen Deming, signed a Declaration of Intent, signalling that the substantive negotiations between the countries on a bilateral investment treaty (BIT) (in Canadian government parlance, a Foreign Investment Protection and Promotion Agreement or FIPA) have come to a close. When it comes into force, the Canada-China FIPA will be the culmination of almost two decades of negotiations between the two countries and will signal a secure environment for investors from both countries.
The announcement of the conclusion of the Canada-China FIPA negotiations comes at a time of increasing bilateral foreign direct investment (FDI) flows between Canada and China. Canadian businesses make significant investments in China in the transportation, biotechnology, education, finance, information technology, manufacturing and natural resources industries. By the end of 2010, the amount of Canadian FDI in China had risen 38% from 2009 levels to a total of C$4.8‑billion. In that same year, Chinese investment in Canada rose by 9% totalling roughly C$14.1-billion. Chinese firms have expressed a strong interest in investing in Canada in sectors that include natural resources, renewable energy, information and communication technology, food processing, pharmaceuticals and natural medicine, and advanced manufacturing.
The Scope of the Agreement
The main purpose of a BIT (or FIPA) is to encourage foreign investment by providing foreign investors with greater protection against discriminatory and arbitrary practices in the host state, ensuring adequate and prompt compensation in the event of an expropriation, and enhancing the predictability of regulations affecting foreign investors and their investments. Despite these purposes and although there are currently thousands of such treaties among approximately 170 countries, the level of investment protection that a given BIT provides is a function of the respective interests and bargaining power of the parties. This will no doubt manifest itself in the specific provisions and scope of the Canada-China FIPA.
While the parties have not yet made the details of the Canada-China FIPA public, the Canadian government stated that it negotiated what it terms a high-standard agreement with comprehensive scope and coverage, and substantive obligations, pertaining to:
- the twin pillars of non-discrimination: national treatment and most-favoured-nation treatment;
- minimum standard of treatment;
- transfers of funds; and
- rules regulating the expropriation of investments.
Additionally, the Canada-China FIPA will grant investors access to "investor-state" dispute settlement arbitration. Investor-state dispute resolution regimes typically feature detailed rules on standing, procedural requirements and enforcement.
Canadian and Chinese Approaches to BITs
Canada has FIPAs with 24 countries and is currently in negotiations with 10 others. Canada's model or template FIPA provides investors with a high level of substantive protection. It incorporates key principles including fair and equitable treatment, non-discrimination, compensation for expropriation, unrestricted transfer of funds, transparency in measures affecting investment, and dispute settlement.
China is currently a party to over 100 BITs. It has historically negotiated significant limitations on the non-discrimination and dispute resolution provisions of its BITs but is taking increasing steps to align its BITs with global standards. This shift is especially apparent in recent Chinese national treatment provisions. Despite these advances, Chinese dispute resolution provisions generally remain different from those in the Canadian model FIPA.
Another important historical difference between the countries' approaches is that Canada typically requires its FIPAs to provide for national treatment and other FDI protections before the investment has been made or established (with some important and significant exceptions). China has historically been reluctant to adopt such provisions. Accordingly, Chinese investment treaties tend to only ensure FDI protections once the investment has been established.
It remains unclear how the Canada-China FIPA will address these issues.
The Next Steps for Canada and China
In the coming months, Canada and China will conduct a legal review or "scrub" of the negotiated language of the English, French and Mandarin versions. Upon completing the legal review, the FIPA will enter into force following two important steps: (1) the parties must sign the FIPA, and (2) the FIPA will have to be examined and debated pursuant to the ratification processes of Canada and China. In Canada, ratification means that the FIPA will be tabled in the House of Commons for 21 sitting-days and then come into force once an Order in Council has been approved by the Governor General.
Canadian investors will want to pay close attention to forthcoming details of the Canada-China FIPA, which will be helpful to those looking to invest in the Chinese market. Given China's increasing economic liberalization, the FIPA could be a new high watermark in Chinese international investment standards.
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