Policy Analysis

A Progressive Investment Agenda for Canada: Going beyond nice words

The Government of Canada has made the notion of a “progressive and inclusive” trade and investment agenda the linchpin of its trade policy development—but the government will have to go beyond nice words to ensure that investment policy can achieve sustainable development.

By Nathalie Bernasconi-Osterwalder on August 9, 2018

The Government of Canada has made the notion of a “progressive and inclusive” trade and investment agenda the linchpin of its trade policy development.

As part of this policy process, the Ministry of Trade Diversification has indicated that it will conduct a public consultation on revising the investment component of this agenda, the model foreign investment promotion and protection agreement (FIPA). Public consultations on the new model are expected to start in August—the first formal update since 2004. Recent negotiations with the European Union (EU) in the context of the Comprehensive Economic and Trade Agreement (CETA) and with other country partners under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) might give some clues as to what an updated model would contain. But if Canada is to adopt a truly inclusive and progressive model, it will need to take a significantly different approach that aligns itself to making meaningful advances to achieving the Sustainable Development Goals (SDGs).

Moving beyond investment protection, liberalization and ISDS

Since 2004, Canada has pursued an investment protection and liberalization model similar to the one espoused by the United States and reflected in the North American Free Trade Agreement (NAFTA). This model has been used primarily for treaties negotiated with developing countries. Canada has concluded 20 bilateral investment treaties (BITs) and nine free trade agreements (FTAs) since 2004, involving a total of 25 developing country treaty partners. The model FIPA is aimed at ensuring that they grant international protection and market access rights to Canadian companies abroad. It also seeks to prohibit these governments from imposing requirements on incoming investments to encourage the use of local content, technology transfer, research and development, and other tools to promote economic development in their countries.

The consequences are significant because the Canadian model also includes an investor–state dispute settlement (ISDS) mechanism allowing foreign investors to sue a host state in international arbitration whenever they believe that the host country has not complied with the outlined obligations. Over the years, concern has grown in Canada and around the world about these arbitrations and the way in which investors have used them to challenge government measures.

Investment is crucial for achieving the SDGs—eradicating poverty, creating jobs and transitioning to cleaner and more sustainable economies.

Canadian companies have sued governments based on BITs and investment chapters in FTAs 45 times, of which 17 fell under NAFTA, 25 fell under Canadian BITs or other FTAs, and three fell under other treaties. The largest award against a developing country so far was USD 1.2 billion.

Foreign investors have also frequently sued the Government of Canada before international investment tribunals. Out of the 27 cases against Canada to date, 26 were brought under NAFTA’s investment chapter, always by U.S. investors. The cases included challenges of a wide range of government actions, including environmental measures, such as product bans due to health and environmental risks and the denial of permits for environmentally unsound projects. In the four NAFTA cases decided against Canada, tribunals have ordered the state to pay a total of USD 37 million to foreign investors. Canada has also agreed to pay USD 136 million in the two cases with disclosed settlement amounts (three other cases were settled). At least seven more cases are pending against Canada, including one case in which the tribunals have already found against Canada and will now determine the amount of compensation to be paid to the investors. These amounts do not account for the costs Canada incurred defending itself in these arbitrations.

As these investor–state cases have grown in number and prominence, so has criticism of the narrow focus and asymmetry of traditional investment treaties, especially the fact that they afford enforceable rights to companies that can be used to prevent governments from moving toward achieving the SDGs, while not imposing any obligations on them.

Responding to criticism of the predominant investment protection model and concerns about policy space: CETA and CPTPP

Responding to these criticisms as well as the increase in arbitrations involving public interest measures, the Government of Canada has made several changes to the model over the years, though without any public consultations while doing so. Far from being progressive, these changes have been minimal and have focused on damage control rather than rethinking international investment governance.

For example, newer Canadian treaties have attempted to respond to overly expansive interpretations by investment tribunals of the obligations imposed on states. The textual changes implemented by Canada appeared to be aimed at reducing the risk of investment treaties of over-restricting the state’s right to regulate, but evidence of the most recent decisions against Canada suggest that these efforts are of limited impact.

Over the years, concern has grown in Canada and around the world about these arbitrations and the way in which investors have used them to challenge government measures.

The government also began to include a corporate social responsibility (CSR) provision in some treaties. However, in contrast to the investment protection and liberalization clauses, this CSR provision is merely voluntary. While some Canadian FTAs with investment chapters have included provisions or entire chapters on the environment, labour and, more recently, gender, these are not properly integrated into the investment chapter and do little to promote responsible corporate behaviour in these areas. They are designed not to impact the implementation of the investor protections under these agreements.

While Canada’s negotiations of CETA and CPTPP continued on this path of damage control in the relevant investment protections, CETA has resulted in a new approach with respect to the structure of ISDS. In CETA, Canada for the first time agreed to move away from the traditional investor–state arbitration model to a more permanent judicial ISDS, along the lines of the EU’s investment court system. Though CETA continues to allow foreign investors (and foreign investors only) to sue the host state directly, without resorting first to national courts, it does address some of the procedural concerns relating to the lack of independence of adjudicators and lack of predictability of decision making. It also prevents investors who have established their investment through corruption and other unlawful means from bringing investor–state claims. The CPTPP, however, does not contain these elements, suggesting that Canada has bent to the direction of others in the negotiation more than it has led it.

Aligning investment negotiation objectives with Agenda 2030: Putting the SDGs at the heart of investment policy

Although CETA reflects some new elements on investment and the Trans-Pacific Partnership Agreement (TPPA) was renamed “Comprehensive” and “Progressive” reportedly on Canada’s insistence, it would be grossly exaggerated to say that these agreements take a progressive or inclusive approach to investment. Their investment chapters retain the narrow focus on investment protection and liberalization, and little can be seen on progressiveness and inclusiveness, two of the government’s favorite buzzwords to describe its new approach to international trade and investment policy.

To design a truly inclusive and progressive international investment policy, the government should begin by integrating its investment negotiation objectives with its priorities on the SDGs. The questions then are: How can Canadian investment negotiations and diplomacy actively promote and facilitate investment that advances the SDGs while discouraging unsustainable investments? How can Canada’s investment policy contribute to economic growth at home and abroad while safeguarding and protecting the environment and local communities? How can Canada’s investment treaties and chapters be redesigned to help ensure that companies act responsibly and are held accountable for non-compliance and any harm caused abroad? How can Canada set up processes that help resolve investment-related conflicts, rather than punishing tax-payers through expensive damages awards?

The upcoming consultations must go beyond tinkering with a model that hasn’t had sustainable development at its core

These questions should guide the government’s FIPA consultation process, reflecting Canada’s aims to promote a progressive and inclusive trade and investment agenda. This, however, will only happen if the government is open to rethinking its past models and approaches, including the results in CETA and CPTPP. There is a risk that the starting point will be to consult more about procedural and marginal fixes rather than imagining a new approach. For example, it would be a missed opportunity if the consultation focused on how the traditional investor-versus-state process can be made more transparent or accountable, rather than asking how a mechanism might best be designed to deal with complex conflicts arising in transnational investment projects involving multiple stakeholders, including affected local communities.

Similarly, certain elements of Canada’s investment treaty model are difficult to reconcile with sustainable development policies and should be revisited in that light. The fact that certain rules have been negotiated for years should not bar them from being questioned and analyzed in a consultation. Canada’s prohibitions on performance requirements are one example of clauses that prohibit the use of key development tools that allow developing country states to maximize their economic and social development gains from foreign direct investment. How can these be reconciled with Canada’s broader development objectives?

Finally, if the consultation is kept too narrow, it will not be possible to have a proper discussion on how to reorient the goals of investment treaties away from the narrower functions of protecting investors toward promoting and facilitating foreign direct investment that supports sustainable development in the host state as well as in Canada. Investment is crucial for achieving the SDGs—eradicating poverty, creating jobs and transitioning to cleaner and more sustainable economies. Canadian companies investing in developing countries can play an important role in the achievement of the SDGs. But current treaties, due to their narrow and one-sided focus, have not been successful at promoting investment for sustainable development. The upcoming consultations should therefore be an opportunity to work toward a positive agenda and a model of international investment governance with sustainable development at its core.

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