The realities of foreign investment: bringing in the state

So, last entry we looked at how Canada has become a pioneer in forging "nuanced" trade and investment treaties, designed to outfox countries which don't have extensive experience in trade arbitration. (We Canadians are, of course, well-versed in complicated arbitration, thanks to over ten years of NAFTA.) This approach seems to be bearing fruit with the new Canada-Peru FIPA, which seriously empowers private wealth while providing for further curtailment of public scrutiny.

Today we'll look a little deeper, at a theme that is always in the background but rarely mentioned when discussing trade and investment treaties: state power.

While advocates of deregulation and liberalization claim to oppose an activist state, the truth is that liberalized economies require heavy and frequent state intervention. Examples aren't hard to find: Argentina's financial crisis and the US savings and loans fiasco to name two.

The importance of the state holds also for foreign investors. An editorial in the Globe and Mail urges Canadian companies to seek a presence in China so they can "boost their share of China's infrastructure spending". While the business pages often scorn the "nanny state" at home, they almost never mention the fact that the white-hot economy of China owes its functioning to an authoritarian government which seldom leaves decisions to the market. Showing that the Globe editors understand this basic (but unstated) state function, they conclude with some sage and true advice: "Business could boom if governments hustled."

Similarly, the Globe's Steven Chase reported nearly two years ago that: "Ottawa also wants to sell nuclear reactors to electricity-hungry China."

But, there are limits to this sort of thing, of course. One such limit is a certain nation located immediately to the south. Chase continues:

"Beijing is hesitant to approve major investment in Canadian energy assets because of Canada's preferential trade relationship with the United States...potential petroleum investments in Canada could be harmed or forced to take a back seat to U.S. interests in the event of a supply shortage or serious conflict with Washington.
"The North American free-trade agreement gives the United States special access to the Canadian energy sector".

So the US has trapped Canada into a trade regime that hampers our capacity for independent action -- and as we have seen, Canada seems intent on passing on the lessons thus learned.

Perhaps the frankest expression of Canada's true position in international affairs was offered in the Toronto Star's business section (April 8/05). The occasion was the filing of a lawsuit by Scotiabank against the government of Argentina, alleging that the bank had not been fairly treated during the country's financial crisis. This was followed by a short lesson in Realpolitik:

"The news may also serve as a reminder to other homegrown banks that Canada may not have enough political muscle to defend businesses caught up in such situations.

"'When you get into a situation like this, there are going to be losers,' [U of T professor Albert] Berry said. 'The debtor government is going to favour the politically and economically favourable creditors (and) treat the little guys more harshly because you don't have (President George) Bush behind you.'"

by Dave Markland

Canada-Peru investment pact

by Dave Markland
Last month, the governments of Canada and Peru inked a FIPA - a Foreign Investment Protection Agreement. A FIPA is a lowly species of free trade pact, undeserving of the "FTA" status of the deals we have with Chile, Costa Rica, Israel and of course the US and Mexico in NAFTA. (You can see a Canadian government page showing all our international agreements here.)


Canada already has 20 FIPA's with other countries, but this is the first since 1999 -- before the WTO Ministerial in Seattle which ran aground on public exposure and protest. As we'll see, FIPA's are the Canadian version of Bilateral Investment Treaties (BIT's), which have become the latest weapon for the promotion of neo-liberal policies.

FIPA interpreted

Here you can find a report on BIT's done by L.E. Peterson for a German think tank. It's useful to read it and compare it with the Canada-Peru deal.

In the report's introduction, the think tank's director observes that, in lieu of progress in the WTO and similar forums, the push for BIT's "goes ahead unrestrained", though the negotiations "are rarely in the political limelight". Peterson himself doesn't mince words: "[M]any hundreds of bilateral agreements have entered into force without public notice or scrutiny. This reality casts some doubt on the oft-repeated claim that the defeat of the MAI was somehow a 'major victory' for critics of unfettered globalization."

With that, Peterson goes on to show how these new bilateral accords are attempts to succeed where global pacts have failed. He makes several interesting points, relevant to the matter at hand. Below, I note those points and add comment on how the Canada-Peru pact illustrates his concerns.

Item: "The most notable of all BIT features has been the inclusion of a provision which grants foreign investors direct legal personality under international law. Equipped with this personality, investors may bring their own claims for damages" against national governments. This goes beyond NAFTA provisions, which require national governments to go to bat on behalf of business. The Canada-Peru FIPA itself makes these provisions Article 22.

Item: "Most investment treaties no longer provide that foreign investors must exhaust their domestic legal remedies before mounting an international claim", writes Peterson. On this matter, there is no language I could find in the new FIPA which stipulates that any other avenues must be exhausted before proceeding with a request for arbitration.

Item: Peterson relates that most BIT's make use of either of two international bodies (ICSID or UNCITRAL) designed to adjudicate commercial disputes. Cases heard under UNCITRAL are typically rather hush-hush affairs. In the case of the Canadian FIPA, it stipulates that arbitration can occur under either of those bodies.

Item: Peterson specifically notes that Canada, along with the US, has pioneered the practice of "adding more nuance and introducing additional safeguards" in BIT's. The purpose of this is to gain further advantage in negotiations with weaker countries, as "many other governments have devoted far too little consideration to using similar 'specific and detailed exemptions' so as to mitigate" the effects of aggressive strategies like those ascribed to Canada.

Item: One of the purposes of BIT's, according to Peterson, is to provide aggrieved international investors with more potential avenues of litigation against foreign governments. Consequently "governments (particularly poorer ones) might choose to err on the side of caution, and refrain from exercising seemingly legitimate regulatory or policy functions, for fear that their actions might not withstand scrutiny in the 'arbitral casino'"...



**More to come on this issue in the next blog entry.