This article was originally published in Blakes Bulletin on International Trade, July 2005
Article by: Jesse Tracey and Cliff Sosnow, ©2005, Blake, Cassels & Graydon LLP
Bill C-59 allows the government to review foreign investments if it is thought that they might compromise Canada’s national security. The amendment contains no definition of national security nor does it set out criteria to be considered when determining if an investment is a threat. Foreign investors are given little protection from arbitrary and capricious decisions under the NAFTA and the WTO.
Overview On June 20, 2005, the Minister of Industry announced amendments to Canada’s foreign investment legislation, the Investment Canada Act (ICA). The proposed amendments contained in Bill C-59 (An Act to Amend the Investment Canada Act) would allow foreign investments to be modified or disallowed because of concerns they may compromise Canada’s national security. The ICA currently allows for review of foreign investment but this review is limited and the factors to be considered are set out in the legislation. These factors are also reflected in the North American Free Trade Agreement (NAFTA) in the Investment Chapter under Annex I and certain provisions of the World Trade Organization (WTO) General Agreement in Services (GATS) and the Trade Investment Measures (TRIMs) Agreement. This transparency allows for certainty and predictability in decision making and affords a level of protection to investors. In our view, the proposed amendments to the legislation remove this certainty and protection. The amendments do not define national security nor do they set out the criteria to be used when considering it.
TheInvestment Canada Act Amendments
Recognizing that increased capital and technology would benefit Canada, the ICA was originally established to encourage investment in Canada that contributed to economic growth and employment opportunities, ensuring a net benefit to all Canadians. In its present form, the ICA differentiates between investments in cultural businesses and other investments. Investments in cultural businesses are reviewable by the Minister of Canadian Heritage regardless of their asset value. Other investments are reviewable by the Minister of Industry but only when the asset exceeds an established threshold, $250 million in direct acquisitions for (WTO) members. A lower threshold applies for certain sensitive sectors such as uranium production, certain financial services and transportation services or where both the buyer and the seller are not from countries or entities that are members of the WTO.
When the Minister is making a decision as to whether the investment will be of net benefit to Canada, certain listed economic factors, known as the net benefit test, must be considered. These factors are reflected in Annex I to Chapter 11 of the NAFTA, the Schedule of Canadian Commitments appended to the GATS, and the TRIMs Agreement. They include the effect of investment on domestic competition; on Canada’s ability to compete in world markets; and on the compatibility of the investment with national and provincial economic and industrial policies. The listed criteria, along with the financial threshold, minimize hindrance to investments flowing into Canada. Foreign investors are afforded protection from arbitrary and capricious decisions and can appeal decisions using the NAFTA or the WTO through the proxy of their government.
The new provisions could take away this protection as it would allow the Minister to conduct foreign investment reviews for security purposes when the Governor in Council (i.e., Cabinet) deems the review necessary, independent of existing reviews and without the former limits of sectoral or asset value thresholds. Under Bill C-59, the Minister can alter or deny investment if he or she has "reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security." The new powers provided by the amendment do not come with any limit, definition or criteria to be considered.
Comparable U.S. Provisions
While the government claims that the proposed amendments bring the Act in line with other G8 countries, there are a few important differences with, for example, the equivalent American legislation which provides far more protection to potential investors from arbitrarily being denied the opportunity to invest. The United States federal government reviews foreign direct investment for national security concerns under Section 721 of Title VII of the Defence Production Act of 1950, known as the Exon-Florio Amendment.
Under the legislation, the President has the authority to suspend or prohibit any foreign acquisition, merger or take-over of a U.S. corporation that is determined to threaten the national security of the United States but only if he finds there is credible evidence that the foreign entity exercising control might take action that threatens national security and the law does not provide adequate authority to protect the national security.
The U.S. legislation states that credible evidence is required, while no such requirement is included in the Canadian legislation. The U.S. legislation also goes further to list the factors that the President or his designee may consider in determining the effects of a foreign acquisition on national security, including the potential effects of the transaction on the sales of military goods, equipment, or technology to a country that supports terrorism.
NAFTA and WTO Provide Limited Protection
In the current international trade environment, the lack of certainty in Bill C-59 may have negative consequences for foreign investment in Canada. Under Article XIV bis of the GATS, Article XXI of the GATT (General Agreement on Tariffs and Trade) and Article 2102 of the NAFTA, there are expansive exceptions for national security measures. These international agreements historically allow countries to limit trade and investment when they perceive their national security is threatened. A country is left to make this determination and, "in practice", no recourse is left for investors or countries denied access to markets. Given the current global environment, this is unlikely to change in the future. Investors will get little protection from either of these agreements if they feel they have been unfairly denied access to markets as a result of national security concerns under the amended ICA.
Listing Criteria is a Better Way
The Canadian legislation, as tabled, lacks any explicit direction in considering what constitutes a threat to Canadian security. By following the lead of our neighbors to the south and providing a definition of national security, along with the criteria to be considered when making a decision, the Canadian Government can provide protection to foreign investors and also protect Canadians from harm.
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