Joseph Caron
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September 10, 2012

Canada and China broaden the playing field

Yesterday’s signature of the Canada-China Foreign Investment Protection Agreement, witnessed by Prime Minister Harper and Chinese President Hu Jintao on the margins of the Vladivostok APEC meeting, can legitimately claim to mark another milestone in our relations with China. It follows the release, last month, of the Canada-China Economic Complementarities Study, drafted by both governments, which may lay the ground-work for the negotiation of an FTA. These and other steps can broaden the playing field if Canadian business can indeed take advantage of the changes being put in place, and if the Government of China can deliver. Two big, but not insurmountable, conditions.

First the FIPA. Over twenty years in the making, having absorbed  substantial policy changes in both countries, we now have an investment protection agreement with China. While the final text has not yet been released – it will be submitted to Parliament shortly – it will in all likelihood resemble the 21 Canadian FIPAs now in force, especially the most recent versions that incorporate the changes to Canada’s foreign investment policies over the last decade.

To take this year’s Canada/Slovak agreement as an example, Canada/China will most certainly include provisions enshrining MFN status to Canadian investments, promise compensation for direct and indirect expropriation, confirm Most Favored Nation treatment for repatriation and transfer of earnings and, according to the DFAIT website, incorporate minimum standards of treatment, transparency and expropriation. The sticking point, according to earlier reports, has been the dispute settlement provisions, Canada and China differing on issues of pre-conditions and transparency.

Canadian companies will have to wait to see the details, and the effectiveness of the agreement’s provisions. There will be much interest, especially, in the arbitration mechanism.

China signed its first bilateral investment agreement with Sweden in 1992, and has over 120 in place, one assumes of varying quality and reach. Having endorsed investor-state arbitration over a decade ago, China has incorporated its principles in its model FIPA and in various regional and bilateral agreements. The International Center for the Settlement of Disputes, established under the auspices of the World Bank, registered one claim last year against China, subsequently suspended. Progress of a sort.

Whether we see similar progress coming out of the Economic Complementarities Study will have to await the fullness of time, although an optimist could project that FTA negotiations will begin in 2013.

The Canada-China Economic Complementarities Study is meant to move the goal posts. It is the result of a renewal of commitment, in both Beijing and Ottawa, to move beyond the current trade frameworks established in the early days following recognition in 1970s and China’s post-2001 WTO accession commitments. (This initiative also returns the political relationship back to where it was in 2006.)

The Study explores the potential for further economic integration, based on current trade and investment patters;  identifies areas where the potential for substantial expansion is greatest; and lists the barriers to achieving that potential. Given that these are governments talking, the focus is on policy instruments that impede exports and imports, rather than market factors such as the terms of trade.

Seven areas are covered: agriculture and agri-food; clean technology and environmental goods and services; machinery and equipment; natural resources and derived products; services; textiles and related products; and transportation infrastructure and aerospace.

At a minimum, the study is a useful, statistics-filled snap shot of Canadian and Chinese performance in each of these sectors. And it may be needless to add that the congruence of China’s continuing economic growth and attendant needs, and the structure of the Canadian economy and its performance, make of us ideal partners indeed.

If we can get the policies right.

This is where the next step – a free trade agreement or one of its variations – could come in. While the differences between the Canadian and Chinese economies are many, the study points out that the real impediments to further integration always come down to the same set of national policies, albeit in various proportions: tariffs; sanitary, phytosanitary and product standards; regulations; administrative capacity restraints; intellectual property protection; lack of policy clarity.

In theory, all of these can be addressed. In practice, each sector has its established winners who like things the way they are, and these interests can hold sway in capitalist Canada as much as in ‘socialist with Chinese characteristics’ China. And even the best agreements can be vitiated by lack of political or institutional support.

Still, there is a lot to build upon. China already has in place nine bilateral and multilateral FTAs of various kinds, involving 31 countries, and it is negotiating another five. Canada has racked up 11, in force or concluded, and several others in negotiation, including potential block-buster EU (or so it was thought at the time).

Other elements in the Canada/China economic architecture are also moving forward. China recently added Canadian securities among the assets that Qualified Foreign Institutional Investors can include in their portfolios. And one way or another, the Canadian Government’s decision on CNOOC/Nexen will point the way towards future investment relations between both countries: some members of the Cabinet are reported to be demanding reciprocal access for Canadian companies into China. One can speculate that, during their one-on-one chat in Vladivostock, PM Harper and President Hu spent more time on that question than on the FIPA.

Relevance to Canadian business: a long-term watching brief, but an important one, especially if the post-Hu Party and Government decide that further market opening is essential for restructuring the Chinese economy. On verra.

Joseph Caron