On October 1, 2014, the long-delayed and controversial Foreign Investment Promotion and Protection Agreement (FIPA) between China and Canada came into force. The new FIPA signals a deepening of the growing trade relationship between the nations, offering investors in both a more transparent and more predictable investment environment – and greater certainty that should encourage confidence for reciprocal and strategic international investment.
And this FIPA isn't just for big business; it represents a strong opportunity for all businesses in the targeted industries – energy, agriculture, mineral products, seafood, and shipping – so all companies in these industries should take a hard look at whether and how this new FIPA opens opportunities in China for them.
FIPAs FACILITATE INTERNATIONAL INVESTMENT
International investment is a critical strategy for companies that compete – or want to compete – globally, but there are risks to foreign investment. Concerns like political instability, weak legal institutions and limited dispute resolution remedies are often significant barriers. Foreign Investment Promotion and Investment Agreements (FIPAs) help companies in the member nations overcome these barriers – and facilitate international investment.
Role of FIPAs. FIPAs are bilateral investment treaties that provide a framework of legally binding obligations and rights around foreign investment. At the core of Canada's FIPA model is protection of investors from discriminatory conduct, arbitrary treatment and expropriation by a host country. The host country for investment should publish the laws, regulations and procedures applicable to foreign investment or make it otherwise readily available to investors to promote transparent dealings between investors and a host country.
Trending. 28 FIPAs are currently in force between Canada and other nations – and this trend of using FIPAs as a tool to facilitate bilateral international investment will likely continue.
THE NEW CHINA-CANADA FIPA
China's rapid growth and expanding economy has created an opportunity for direct foreign investment. China is Canada's second-largest trading partner, second only to the US: at the end of 2013, Canadian direct investment in China reached $4.9B and China's investment in Canada reached $16.6B. Originally signed in 2012, the new Canada-China FIPA is a culmination of nearly two decades of negotiation. The Canadian government says its purpose is to "ensure greater protection to foreign investors against discriminatory and wholly arbitrary practices, to provide adequate and prompt compensation in the event of an expropriation and to enhance predictability of the policy framework affecting foreign investors and their investments". The FIPA will be in force for 15 years, after which either nation can choose to terminate it. The termination will be effective one year after a notice of termination, but the FIPA's rules will continue to apply to pre-termination investments for 15 years after termination.
5 Key Obligations. The China-Canada FIPA consists of 35 articles and a number of reservations and exceptions, and includes some core rights, obligations and protections akin to those in Chapter 11 of the North American Free Trade Agreement. Here are five of the key obligations under the new China-Canada FIPA:
- Non-discriminatory treatment. The FIPA includes provisions to ensure that investors from both countries are treated at least as well as any other foreign country's investors ("Most Favoured Nation Treatment"), or as well as domestic investors ("National Treatment"). However, if new investment from China in Canada exceeds certain monetary thresholds, the FIPA does not restrict Canada's freedom to review and approve acquisitions of Canadian businesses under the Investment Canada Act, and China has an analogous power.
- Fair and equitable treatment. The FIPA obligates both countries to treat investors in accordance with international law. It also includes minimum standards addressing a broad range of interests, and includes expectations related to transparency, performance requirements, transfers and expropriation, all with the intent of guiding investors.
- Expropriation. Under the FIPA, expropriation (whether direct or indirect) must: be for a public purpose; be non-discriminatory; comply with domestic due procedures of law; and include compensation.
- Dispute resolution. The FIPA allows investors and the foreign state to arbitrate commercial disputes between them through international arbitration rather than a foreign state's domestic court system. Arbitrations will follow the International Centre for Settlement of Investment Disputes or the United Nations Commission on International Trade Law. A key distinction between the China-Canada FIPA and other Canadian bilateral treaties is that the arbitration process is private unless the host government determines there is a public interest in making the dispute resolution public.
- Damages. The new FIPA grants investors the ability to bring a damage claim (a claim for monetary compensation) against the foreign state that has failed to comply with the terms of the FIPA.
3 TIPS TO MAKE THE MOST OF THE NEW FIPA
This FIPA isn't just for "big business" – in fact, "big businesses" might already be in the Chinese market, and are often well positioned to assess and absorb the risks associated with international investment. Instead, small and medium sized businesses with globalization potential and aspirations will likely benefit the most from the protections the new China-Canada FIPA affords.
There are strong educational and governmental bonds between Canada and China – but the industrial bonds are still developing. This FIPA specifically targets local industrial businesses that may have considered entering China, but were otherwise hesitant, particularly the energy, agriculture, mineral products, seafood, and shipping industries This FIPA represents a strong area for opportunity for the targeted industries – so companies in these industries should be taking a hard look at how it can open opportunities in China.
This FIPA is only a legal roadmap; the next step for businesses to develop a concrete business roadmap. Here are three tips to get you started:
- Be strategic. First time investors and businesses should consider trading in cities that are traditional trading partners. For example, Zhuhai is a port city in China that shares similarities with Halifax, Nova Scotia, Canada.
- Don't reinvent the wheel. Being strategic might include reaching out to other leaders in your industry to identify opportunities to share knowledge and to coordinate and combine efforts.
- Work with leaders and partners. Identify and reach out to people or organizations with knowledge in the area that can help with strategy development, strategic alliances and building international bridges. For example, the Hong Kong-Canada Business Association (which has an Atlantic Canada Section) and the Halifax Port Authority are both identified knowledge leaders in this area.
McInnes Cooper prepared this article for information; it is not legal advice. Consult McInnes Cooper before acting on it. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2014. All rights reserved.