Bilateral Trade with China

What FIPA Means for Canada

Bilateral trade, simply explained, is the exchange of goods between two countries under an established framework aimed at minimizing trade deficits faced by countries in our globalized market economy. These agreements are treaties, established to facilitate trade and maintain and support these commercial relationships.

Bilateral agreements institute a relationship of mutual preference and often reduce or eliminate tariffs, export quotas, export restraints and any barriers to trade. They essentially establish agreed upon rules under which the newly recognized and ratified international partnership can and will do business toward a mutually beneficial end goal.

Since 2006, Stephen Harper and his Conservative Government have signed nine trade deals, 24 Foreign Investment Promotion and Protection Agreements (FIPA), and have launched 60 negotiations with other countries. This strategy is intended to diversify trade by expanding governmental focus from large, powerful countries to smaller ones as well. The Government has an understanding of the many impediments which arise when establishing deals of this capacity, and must seize any potential opportunities.

As an example of stalled bilateral efforts, Australia has been working on bilateral trade with China for the past eight years. Given the manner in which bilateral trade deals are established, it is important to understand the dimensions and implications of such an agreement on both participating countries in both the short and long term and this consideration can often lead to years, even decades, of negotiations.

On September 9, 2012, at the APEC Summit in Russia, Canada and China officially signed the FIPA investment treaty. On September 26, 2012 the Canada-China FIPA was tabled in Parliament. As treaty ratification is a Royal prerogative, FIPA can become law through a cabinet order in council after it has sat in Parliament for no less than 21 days after being tabled. Many people, especially Canadians, are skeptical about such an agreement and the process by which it is ratified, with little information being available to the public before it enters Parliament.

The major misconception that needs to be dispelled is that a FIPA is not a free trade agreement. Bilateral agreements are legally binding rights and obligations to protect business interests at home and abroad. Although China has showed much interest in a free trade agreement with Canada, Ottawa is not yet prepared to take that step. Former Prime Minister Brian Mulroney, on his involvement with China as a business partner, says that he does not foresee Canada ratifying a free trade agreement with China for at least a decade, citing concerns that although China has progressed rapidly and has become a major global player, the country has yet to modernize to a full market economy which may lead to difficulties when negotiating free trade. In order for China to be considered as a free trade partner, Mulroney feels that more efforts need to be made in the areas of acknowledging the rule of law and respecting intellectual property rights.

China has enjoyed much success and progress since opening its borders 30 years ago, and this progress in such a short time lends support for increasing trade linkages with this booming economy – so long as the relationship is reciprocal in nature. Currently, 70 other countries besides Canada have similar trade agreements with China.

FIPAs do not open up new sectors for investment. They are concerned with post-investment approval aimed at establishing equality in business practices for both parties, as well as a dispute settlement process in the event of discriminatory treatment (it is interesting to note that only three claims have arisen under China’s investment treaties). There is some concern surrounding the transparency of the dispute settlement process but all hearings and evidence will be available to the public. FIPAs are less restrictive than free trade agreements such as NAFTA, although in this case the FIPA is stricter than NAFTA in terms of health, safety, environmental and conservation measures.

A joint study released on August 15, 2012 explained the benefits that could come of deeper trade links between Canada and China. The study suggested that a trade deal would benefit both nations in seven key sectors of the economy:

1. Agriculture
2. Clean technology
3. Machinery
4. Natural resources
5. Services
6. Textiles
7. Aerospace technology

In the case of Canada and China, a conventional free trade agreement would not sufficiently treat the problems facing Canadian business in China. China, as a developing country, receives preferential tariff conditions. Tariffs are more likely to impact a country like Canada and tend to become problematic in key sectors of the economy, such as agriculture. China is seeking higher end sources of protein such as beef, pork and seafood, which Canada can supply. China is also seeking access to clean technology and natural resources, which Canada can provide. These needs, paired with China’s differing attitudes towards investment and competition policy, have many wondering what the benefits will be for Canada. Although bilateral trade over the past decade with China has substantially increased from $11 billion in 2001 to $65.6 billion in 2011, nearly $80 billion of trade accounted for the goods and services imported from China, compared to the $17 billion of trade which China imported from Canada. Given the increasing demand for goods from many key Canadian industries, this agreement could in fact level out these numbers over the years to come.

Canada has roughly 30 investment treaties, outlining how business is done with many global players, yet it has protected its freedom to review and approve new investments and takeovers (including state owned takeovers) under the Investment Canada Act. Canada still reserves the power to reject deals or place conditions on deals such as the potential $15.1 billion acquisition of Calgary’s Nexen by China National Offshore Oil Corporation (CNOOC). The 45 day government review of the Nexen takeover has been extended by 30 days to December 10, 2012; given the size and state owned nature of CNOOC the government wants to ensure this deal will be best for Canada. The Canadian Government could also use this newly signed agreement and the extension of the review for leverage for Chinese approval of Canadian takeovers in China such as the Bank of Nova Scotia’s pending purchase of the Bank of Guangzhou, encouraging a more reciprocal relationship between both parties.

It is still too early to fully grasp the scope and implications of the Canada-China FIPA, but there are several things to watch as this relationship progresses. One of the major benefits for Canada will be the increased Chinese investment which will significantly drive the Canadian economy. Typically, FIPAs are established with countries that do not already own assets in Canada, whereas there is already substantial Chinese investment in Canada. Another significant implication of such an agreement is the potential impact on the provinces, as their provincial bargaining power would be diminished since the arbitration process operates outside of the Canadian legal and court system.

Any failure to uphold FIPA could leave Canadian taxpayers financially responsible for any infractions. Given the small number of claims set forth by China in the past, this does not seem like a very substantial threat. FIPA is the result of two countries, with two very different legal systems, entering an agreement to establish common laws that each would be responsible for upholding as the trade relationship between the two continues to grow, guiding this growth to be mutually beneficial.

As more information begins to surface regarding the details of this agreement, proponents and detractors of bilateral trade continue to amass. Government opposition parties advocate for further research, study and debate on the issue while the government insists that this is an agreement that respects reciprocity, that it is good for Canada and that it will continue to assure protection of Canadian business interests and business equity in China and abroad.

Agreements like FIPA guarantee the interests of global investors and ensure a welcoming environment in which to do business with a guarantee of equity. If the goal of the Canadian government is to diversify trade, they have made great bounds with agreements like FIPA which entrench these global partnerships and promote mutual benefit.