Canada: Canada´s Free Trade Agreement and Bilateral Investment Treaty Activity In 2008

Canadian treaty negotiators were very busy in 2008, following the negotiation of several free trade agreements (FTAs) and bilateral investment treaties (BITs) in 2007, and in keeping with Advantage Canada: Building a Strong Economy for Canadians, an economic plan released by the Canadian government in November 2006. The plan calls for the government to "develop a new approach to international trade policy through a comprehensive Global Commerce Strategy¹ to ensure that Canadian businesses can fully participate in global market opportunities."

Today, regional and bilateral FTAs and BITs ― as well as multilateral agreements such as those of the World Trade Organization (WTO), are more relevant than ever before to companies doing business internationally. As the world's economies struggle with what may be a protracted downturn, governments will be tempted to employ protectionist trade and subsidization measures in an effort to boost employment and production at home while impeding market access of foreign goods, services and investment.

During this time, companies must be especially vigilant in monitoring governments' compliance with trade and investment treaty obligations and be aware of the remedies available to them in the event that governments impose regulatory measures inhibiting trade or discriminating against foreign investment.

New Free Trade Agreements

During 2008, much of Canada's negotiation activity has targeted Latin America. The following provides a summary of these developments, with special focus on the new trade deals with Peru and Columbia.

The Americas

With no reasonable prospects in sight for the negotiation of the Free Trade Area of the Americas (FTAA), smaller sub-regional and bilateral FTAs are becoming the norm. The result is a complex network of agreements that cover not only the traditional goals of trade integration and investment protection, but have also expanded to include other areas.

Major players have been actively negotiating such agreements, with Canada's NAFTA partner, the United States, taking the lead. In the Americas alone, the United States has approved five deals with 10 countries since 2001, most recently signing deals with Peru (April 2006), Colombia (November 2006), and Panama (June 2007). Consistent with its Global Commerce Strategy, Canada had identified the Andean Community countries (Colombia, Peru, Ecuador, Bolivia) as being among its next FTA targets. Canada announced its re-engagement in the Americas on June 7, 2007, and formally initiated trade negotiations with the Andean Community countries of Colombia and Peru.

The Canada-Peru and Canada-Columbia FTAs, signed in May and November of 2008, respectively, were the first deals Canada has endorsed in the Americas since negotiating an FTA with Costa Rica in 2001. Latin America and the Caribbean are an obvious priority for Canada. Canadian two-way merchandise trade with the region, excluding Mexico, reached over $20 billion in 2007, approximately doubling the trade volume of 10 years ago. Canadian direct investment in these countries has grown even more dramatically, from $6 billion in 1990 to some $100 billion, several times the amount of Canadian investment in Asia.

Canada is also continuing its FTA negotiations in 2008 with the Dominican Republic and the Caribbean Community (CARICOM), both of which were launched in 2007. A successful inaugural round of negotiations toward an FTA with Panama took place in October 2008 in Ottawa. Canadian government officials have stated that the FTA with Panama will include goods and services, as well as chapters on labour standards and the environment. Negotiations also continue with the Central American Four (El Salvador, Guatemala, Honduras and Nicaragua) ― these began in September 2000.

Peru and Colombia

The FTA with Peru, signed on May 29, 2008, and the FTA with Colombia, signed on November 21, 2008, are the second and third FTAs to be signed in 2008 and are Canada's fourth and fifth FTAs in the Americas (NAFTA, Chile and Costa Rica are the others). The FTAs with Peru and Colombia are comprehensive agreements comparable in scope to NAFTA, and include side agreements on labour and the environment. They can also be viewed as relatively complete agreements, with all of their chapters coming into force on the date the FTA enters into force.

These two recent FTAs can be contrasted with the Canada-Chile FTA ― Canada's first FTA with a South American country and Chile's first comprehensive FTA (the US-Chile FTA took effect in 2004) ― which reached its tenth anniversary last year. Although it is also a comprehensive agreement that covers trade in goods and services, as well as the bilateral investment relationship, some of its chapters were negotiated well after the original agreement was signed and have yet to enter into force. For example, negotiations on the financial services chapter were concluded in 2007, while negotiations on the government procurement were concluded in 2006. Nevertheless, the Canada-Chile FTA has been a success, with trade in goods between Chile and Canada growing 226 per cent over the past decade.

The Canada-Peru FTA is set to enter into force on January 1, 2009, or the date when both parties have provided notification of their ratification according to necessary domestic procedures. The Canada-Colombia FTA will enter into force 60 days from the date when the parties have provided notification of their ratification according to necessary domestic procedures.²

In terms of imports, Peru and Colombia already enjoy duty-free access to the US market under the US Andean Trade Preference Act and the US Generalized System of Preferences. The vast majority of Peruvian and Colombian goods also currently enter Canada duty-free, as Peru and Colombia have been designated developing countries and beneficiaries of Canada's General Preferential Tariff. There are, however, important exceptions ― such as apparel products from Peru and Colombia, with average tariff rates of 18 per cent, and fresh-cut flowers from Colombia, with tariff rates as high as 10.5 per cent. Approximately 50 per cent of all imports into Canada of fresh-cut flowers are from Colombia.

Many are encouraging timely implementation of these agreements, in particular the Canada-Peru FTA, in order to secure a level playing field for Canadians among major exporters to Peru. The US FTAs with Peru and Colombia were signed in 2006. While the US-Colombia FTA has stalled in the US Congress due principally to concerns surrounding Colombia's human rights record and violence against unions, the US-Peru FTA received overwhelming congressional support and approval. It was signed by President Bush in December 2007. With the US-Peru FTA coming into force prior to the Canada-Peru FTA, US wheat exports will receive duty-free treatment, a massive advantage when compared to the 17 per cent tariff that currently applies to Canadian wheat. Exports of wheat make up 75 per cent of Canada's agricultural exports to Peru, and 35 per cent of Canada's total exports to Peru. Other key Canadian merchandise exports to Peru include other cereals, pulses, paper, technical instruments and machinery. Key Canadian merchandise exports to Colombia include wheat, pulses, barley, paper products and heavy equipment. Canadian merchandise exports in 2007 totalled $330 million to Peru and $662 million to Colombia.

Pro- and anti-FTA forces will no doubt be closely following the implementation of the Canada-Colombia FTA over the next several months. Some pressure has already been exerted on members of Parliament to reject the deal by Canadian public sector unions. There has been some talk that its US counterpart, currently stalled in the US Congress, may be dealt with during the lame-duck session of Congress in the final months of 2008, or revisited again during the Obama administration. It will be interesting to see how it plays out in the United States and how human rights concerns are raised and addressed in Canada.

Highlights of Canada-Peru and Canada-Colombia FTAs

In addition to offering the obvious market access benefits that flow from the elimination of tariffs, Canada's FTAs with Peru and Colombia, both with 23 chapters, are far-reaching agreements that cover a variety of other areas. They are comparable to the NAFTA and, in certain respects, even broader in scope. For example, both contain a chapter on co-operation to facilitate trade-related capacity initiatives with the objective of strengthening the ability of Peru and Colombia to maximize the benefits of the FTAs. They also contain a chapter aimed at combating bribery and corruption, and a chapter dealing with trade conducted by electronic means. What follows is a brief discussion of some of the key areas covered by these FTAs.

Investment

Much of the recent growth in investment between Canada and Peru, estimated at $1.8 billion as of 2007, has been no doubt facilitated by the Canada-Peru BIT, otherwise referred to as a Foreign Investment Protection and Promotion Agreement (FIPA). The Canada-Peru BIT was signed on November 14, 2006 and entered into force on June 20, 2007. It was Canada's first BIT to be negotiated in eight years and the first BIT to be based on Canada's new 2004 Model FIPA. Canada does not have a BIT with Colombia. Canadian investment in Colombia is estimated at $793 million as of 2007. Canada is one of Peru's largest foreign investors and the largest foreign investor in the mining sector. The other areas of major investment are in sectors such as banking, oil and gas, electrical power and printing. Canadian investment in Colombia is concentrated in the oil and gas and mining sectors.

The investment chapter of the Canada-Peru FTA builds on and includes provisions from the Canada-Peru BIT. The BIT will be suspended from the date of entry into force of the FTA and until such time as the FTA is no longer in force. Nevertheless, the BIT remains the operative treaty for a period of 15 years after the entry into force of the FTA for breaches that occur before its entry into force. Under those circumstances, the right of an investor to submit an arbitration claim will be governed by the relevant provisions of the BIT.

The investment chapter of the Canada-Colombia FTA is similar in breadth to the Canada-Peru FTA and the 2004 Model FIPA, and contains the three core substantive obligations that protect investors against discriminatory measures, unfair treatment, and expropriation without compensation. It also provides access to binding international arbitration in the event of a dispute.

There are, however, some idiosyncrasies related to each investment chapter. For example, the Canada-Peru investment chapter permits claims to arbitration pursuant to its dispute settlement provisions for breaches of legal stability agreements. The Canada-Colombia investment chapter permits claims that a measure taken by the Colombian government in connection with what it refers to as "Juridical Stability Contracts" breaches an obligation under the investment chapter. Yet it also provides that a Canadian investor may submit an arbitration claim concerning the interpretation of, or compliance by the Colombian government with, a Juridical Stability Contract "only in accordance with Colombian law." Further, in the event of an arbitration, the seat must be in Bogotá, Colombia.

Unique among Canada FTAs to date, the investment chapters also contain a provision entitled "Corporate Social Responsibility" that allows parties to encourage corporations to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies addressing such issues as labour, the environment, human rights, community relations and anti-corruption.

Services

In terms of services, the agreements are similar to NAFTA, with chapters covering cross-border trade and services and financial services that operate to enhance market access for Canadian services providers in key sectors such as mining, energy and banking. Canadian exporters and service providers will also be able to take advantage of rules designed to increase the transparency of relevant laws, regulations, procedures and administrative rulings.

Parallel Labour and Environment Agreements

Together with the FTAs, Canada, Colombia and Peru also signed parallel agreements in the areas of labour and the environment. Under the Canada-Peru and Canada-Colombia Agreements on Labour Cooperation (LCAs), the parties have committed to ensuring that their laws respect the International Labour Organization (ILO) 1998 Declaration on Fundamental Principles and Rights at Work. Labour protections for workers include protections for occupational health and safety and minimum employment standards, such as minimum wage and hours of work.

The LCAs are touted by the parties as setting new global standards in terms of their enforcement obligations and associated penalties. Failure to respect the ILO laws or to enforce domestic labour laws may, at the determination of an independent review panel, obligate the offending country to pay up to $15 million annually into a co-operation fund to be used to ensure that the identified problems are rectified.

Under the Canada-Peru and Canada-Colombia Agreements on the Environment (Environment Agreements), the parties have committed to pursuing high levels of environmental protection, and to expanding and enhancing their environmental laws and policies. The parties are required to enforce their domestic environmental laws effectively and to refrain from relaxing those laws for the purpose of encouraging trade or investment. The Environment Agreements also reaffirm the countries' commitments under the United Nations Convention on Biological Diversity. A dispute resolution mechanism provides for consultations at the ministerial level when necessary.

The Rest of the World

European Free Trade Association

Unlike the comprehensive FTAs with Peru and Colombia, the year's earlier FTA signed between Canada and the States of the European Free Trade Association (EFTA) ― Iceland, Liechtenstein, Norway and Switzerland ― can be described as a "first-generation" agreement limited to tariff elimination. Legislation was tabled in Parliament to implement EFTA on December 1, 2008.

Jordan

Similar to EFTA, the Canada-Jordan FTA, with negotiations concluded in August of 2008, is limited to market access, although it is accompanied by side labour and environment agreements. Investment protections are provided in the Canada-Jordan BIT, which was concluded in 2007. The texts of these agreements with Jordan are not yet available as they are going through a final "legal scrub" prior to formal signature and ratification.

Other Countries

FTA negotiations continue with South Korea and Singapore. Canada has also undertaken joint studies with Japan and the European Union (EU) regarding potential FTAs.

On October 17, 2008, at the Canada-EU Summit in Québec City, it was announced that Canada and the EU have agreed to prepare formal mandates with a view to launching negotiations on an economic partnership as early as possible in 2009.

New Bilateral Investment Treaties

BITs enable investors to seek monetary damages from foreign governments that violate their treaty obligations, as do the investment chapters of Canada's FTAs, such as Chapter 11 of NAFTA. The private investor-state dispute mechanism allows foreign investors to bring damages claims before independent arbitral tribunals in the event that governments impose harmful measures that violate BIT obligations, including those that prohibit discriminatory or unfair treatment or expropriation without compensation.

India and Jordan

Although negotiations for BITs with Jordan and India concluded in 2007, the texts are unavailable as they have yet to be formally signed and ratified by the parties. Nevertheless, they are also based on the 2004 Model FIPA and are expected to be similar to the Peruvian BIT.

China and Others

In 2008, Canada concluded negotiations for a BIT with Madagascar and continued to actively negotiate BITs with China, Tanzania, Indonesia, Vietnam, Kuwait and Mongolia.

Identifying Opportunities

As the end of 2008 approaches, 2009 promises to be another active year for the negotiation of trade and investment treaties.

With the Doha Round of WTO negotiations faltering and the ensuing proliferation of bilateral treaties, the international trade and foreign investment picture has no doubt become more complex. To better understand the opportunities and pitfalls in the international marketplace, companies will now have to review and consider a growing patchwork of potentially applicable trade treaties.

Nonetheless, conducting "trade agreement due diligence" through monitoring developments, participating in negotiations, and using the available enforcement mechanisms will generate benefits well worth the effort. These include opening up new export markets for your goods and services, addressing competitive issues, and creating new means of challenging regulatory measures that are harmful to your international business operations.

* John Boscariol and Orlando Silva are partners at McCarthy Tétrault LLP and members of its International Trade and Investment Law Group.

Footnotes

1 The Global Commerce Strategy articulated by the government in Advantage Canada included a commitment to pursue regional and bilateral trade, investment and science and technology agreements, ideally together with Canada's NAFTA partners.

2 In accordance with its Policy on Tabling of Treaties in Parliament, the Canadian government will table the agreements in the House of Commons for a period of 21 sitting days. During this 21-day sitting period, members of Parliament are able to review, debate, vote on a motion or send the agreements to committee for further review. Following this period, the government will introduce legislation to implement the agreements aiming, in the case of Peru, for an entry into force date of January 1, 2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.