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The Debate over Free Trade Agreements

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The last article few articles analyzed the social and environmental costs facing Canadians as a result of free trade. This article presents the arguments for and against the North American Free Trade Agreements and the Foreign Investment Protection and Promotions Agreement.

Inter-Governmental Free Trade Agreements

The FTA was a free trade agreement between Canada and the US that had been signed by Prime Minister Brian Mulroney and U.S. President Ronald Reagan in 1987.

The FTA’s main goal had been to deregulate trade between Canada and the U.S. in order to facilitate the passage of goods and services more quickly and efficiently.

In 1994, Mulroney and U.S. President George Bush further expanded upon the principles espoused by the FTA and ratified the North American Free Trade Agreement (NAFTA).

NAFTA’s impact on Canada’s economic and social environment has been widely debated by numerous scholars and academics.

As covered in Article 3 Binding Clauses and the Hidden Cost of Free Trade, opponents argue that NAFTA weakens Canada’s economic sovereignty and endangers Canadian regulation and legislation.

However as analyzed below, the advocates for NAFTA argue that it increases trade, promotes economic growth, and attracts foreign investment.

 

Benefits of NAFTA

1. Increased Trade

NAFTA represents the largest trade bloc in the world facilitating trade between Canada, the U.S., and Mexico. Proponents argue that since NAFTA’s adoption, Canada’s exports and imports have increased considerably.

The net figures of Canadian imports and exports have been researched in great detail by Teaching assistant Dominik Linowski of the Warsaw School of Economics in Poland.

Linowski’s paper titled: Economic Effects of the North American Free Trade Agreement includes the following graph depicting Canada’s export growth from 1993-2003.

The graph indicates that Canada’s total exports to the U.S. has increased 87% from 1993-2003 ($113.6 billion to $213.9 billion).

 

2. Increased Economic Growth

Proponents also argue that NAFTA promotes economic growth through improving the economic output of the economy and by creating new jobs.

The graph below taken from Stats Canada reflects the unemployment rate of Canada and the U.S. from 1976 to 2006.

The graph shows that Canada’s unemployment rate has been slowly declining since 1994.

Advocates for NAFTA use this as evidence to suggest that NAFTA has had a positive impact for Canada (and the U.S.) since its implementation.

However, the official unemployment rate is widely criticized for ignoring certain key measures such as;

  • Canadians who work part-time but want full-time positions (not classified as under-employed)
  • Discouraged Canadians who have stopped looking for employment in the past 4 weeks
  • All military personnel and members of the Armed Forces

A greater discussion on Canada’s unemployment rate is found in Part 1 of the long running series Canada’s Path to Monetary Reform in an article titled: The Overview of Canada’s Financial Position.

Proponents also state that NAFTA helps attract foreign investors by enhancing Canada’s image as a stable place for investment.

 

3. Greater Foreign Investment

University of Toronto Associate Professor Walid Hejazi published a report in 2010 titled: Dispelling Canadian Myths about Foreign Direct Investment.

The report includes the following graph depicting the total amount of Canada’s foreign direct investment (FDI) from 1970-2008.

Foreign Direct Investment occurs when a company invests in a foreign country. Inward FDI refers to foreign companies that invest in a domestic country. Outward FDI refers to domestic companies that invest in foreign countries.

From the graph, one can see that Canada’s inward foreign direct investment (FDI) has increased considerably since 1994. Proponents for NAFTA state that this increase illustrates the free trade agreements positive effect on foreign direct investment in Canada.

One possible reason for this increase can be due to the provisions contained within the free trade agreement such as the Chapter 11 clause.

The clause protects investors and provides an incentive for them to invest in Canada. A more detailed account of NAFTA’s provisions is found in Part 3 of our long running series on trade.

Many of the criticisms against NAFTA are covered in Article 3: Binding Clauses and the Hidden Cost of Free Trade.

Since NAFTA, there has been criticism launched against numerous other trade deals that Canada has participated in. One of the most recent of these trade agreements is between Canada and China.

This trade agreement is referred to as the Foreign Investment Protection and Promotions Agreement (FIPA).

 

Foreign Investment Protection and Promotion Agreements (FIPA)

FIPAs are treaties that are designed to promote foreign investment. They impose binding obligations between two nations with respect to their treatment of foreign investors.

To date, Canada has entered into over 22 FIPA agreements with other countries such as Argentina, Egypt, Poland, Latvia and Venezuela in order to facilitate foreign investment in Canada.

Under the Canada – China FIPA agreement, Canada has a binding obligation to protect and promote the interests of Chinese foreign investors.

There are several obligations within the FIPA agreement that Canada must adhere to that include the following;

  • Not discriminating against Chinese investors
  • Providing a minimum standard of treatment to Chinese investors (equal rights with Canadian investors)
  • Not expropriating (taking over possession of) Chinese investments without compensation
  • Refraining from prohibited performance requirements (requiring investments to meet a certain level of performance)

Some academics and scholars consider FIPA to be an entirely different breed of free trade agreement.

Next is an analysis of the arguments for and against the FIPA trade agreement

 

Benefits of FIPA 

Historically, Canadian investors have wanted to invest in Chinese companies due to the large profit potential but have held back because of the large risks involved which exist because of large levels of corporate corruption and fradulent Chinese companies.

Advocates of FIPA state that the agreement protects Canadian investors and enables them to invest in China with some form of security.

In another benefit, advocates argue that the agreement enhances and strengthens the trade relationships between Canada and China.

There are several key advocates for the adoption of the FIPA agreement which include Canadian Prime Minister Stephen Harper and the Canadian Chamber of Commerce, and Vice Chairman of the Canada China Business Council David Fung.

Stephen Harper’s support for FIPA is shown during Parliamentary question period where he publicly stated,

For over two decades Canadian governments have been trying to get a foreign investment protection and promotions agreement with China and for one very simple reason; it’s that Canadian investors have not had the kind of protection in China that Chinese investors have in Canada. This agreement allows us to move forward, it’s why it’s been almost entirely [a] positive response from Canadian investors. They [investors] want to see this go forward and we are committed to giving them the kind of protection they need.

Here, Harper is acknowledging that the fundamental reason for instituting the FIPA agreement is to provide Canadian investors with protection in China.

In agreement with Harper is the Canadian Chamber of Commerce (CCC) – a well-known business association that has been in favour of the FIPA agreement.

The CCC supports the FIPA agreement because it presents Canadian businesses with limitless investment opportunities in China.

The CCC outlines these opportunities in one of their reports titled: Advancing our Economic Ties with China: Three priorities for Canadian businesses where they write,

There are opportunities for Canadian businesses to provide China with the goods and services it requires to sustain its own development. These include energy, raw materials, food, financial and engineering services, aerospace and transportation, and higher education… there are untapped opportunities to draw investment to Canada and to invest in China; of course, there are barriers in both countries that must be removed in order to open access to those opportunities and build a partnership of shared growth and prosperity

In other words, the CCC claims that the FIPA agreement will facilitate trade and prosperity by opening up new investment opportunities between Canada and China.

Another supporter of the FIPA agreement is Vice Chaiman of the Canada China Business Council, David Fung.

Fung argues that in order for Canada to improve its global competitiveness, the government will need FIPA to take advantage of China’s unique manufacturing capabilities.

Fung outlines his arguments in a CBC interview hosted on The Current with Anna Maria Tremonti and Gus Van Harten, where he has stated

Companies in U.S., EU, Japan, and Korea have all taken advantage of the China advantage, and it’s time that Canada should be able to expand their global supply chains and incorporate the Chinese manufacturing capability into enhancing our own global competitiveness.

Fung’s call to increase Canada’s global competitiveness may have been in response to the World Economic Forum’s Global Competitiveness Report for 2012-2013.

The report assesses the competitive environment of over 144 different economies and has found that Canada has dropped 2 rankings from 12th place in 2011 to 14th place in 2012.

In short, the above arguments have outlined 4 key benefits of the FIPA agreement; protection for Canadian investors, limitless investment opportunities for Canadian businesses, shared growth and prosperity between Canada and China, and an increase in global competitiveness for Canada.

Critics of the FIPA agreement have an entirely different view on this issue.

 

Critics of FIPA

Some of the criticism against the FIPA agreement comes from its inherent similarities with previous free trade agreements, most notably the FTA and NAFTA.

As noted in Article 3: Binding Clauses and the Hidden Cost of Free Trade, NAFTA’s Chapter 11 clause grants protection to U.S. and Mexican foreign investors and allows them to sue the Canadian government if legislation prevents them from earning profits (even potential profits).

Certain opponents argue that, like FTA and NAFTA, FIPA presents foreign investors with the power to override Canadian sovereignty.

To understand this argument, consider the following example: A Chinese investor sues the Canadian government over new legislation that hinders their investment.

If investors are successful in their case then the Canadian government may have to pay thousands or even millions of dollars in damages.

Opponents argue that the cost of these lawsuits will inevitably be “downloaded” onto the Canadian taxpayer thus reducing their standard of living.

The true effect of downloading costs and services onto municipal and provincial governments is an issue that has come up multiple times in the past.

One such instance is covered in Part 3 of the long running series How Ontario Became a Have Not Province in the article titled; The Provincial Downloading.

This decrease in the standard of living is one of the many reasons forcing individuals to look toward changing the current world trade laws and regulations. And the move to change existing trade practices is described as “Trade justice” and is addressed in future articles.

Several key critics of the FIPA agreement include NDP Opposition Leader Thomas Mulcair, The Council of Canadians, and Grand Chief Stewart Phillip.

Thomas Mulcair opposes the FIPA agreement over concern of its true implications for Canada.

Mulcair reveals his concern in a Parliamentary question period where he has stated,

On the Eve of the ratification of the China Foreign Protection and Promotions agreement, the conservatives have failed to consult parliament or consult Canadians. They’re trying to tie the hands of Canadians for 31 years with no study, no debate, and no consultation. The conservatives have brought to parliament the trade deals with Costa Rica, with Jordan, with Panama, so why not this trade deals with China? Why won’t the prime minister allow this constraining deal with China to even be debated in parliament? Will he delay the ratification until this agreement with China has been properly studied here in this house? Let me be very clear, the Conservatives won’t tie the hands of the NDP, we will revoke this agreement if it is not in the best interests of Canadians.

Here, Mulcair states that the FIPA agreement should be carefully discussed and debated through Parliamentary procedure in order to ensure that it is working for the best interests of Canadians.

The President of the Union of BC Indian Chiefs (UBCIC), Grand Chief Stewart Phillip, has also expressed similar concerns over the adoption of the FIPA agreement.

Phillip expresses his views in an open letter to PM Stephen Harper dated November 2, 2012, when he wrote,

As designed, we believe that through the ratification of this agreement, China will be granted protection and would thus greatly increase their investment in the development of the Alberta tar sands, pipelines, mining projects and possibly future offshore drilling projects, all at a great cost to our Aboriginal Title, Rights and Treaty Rights…We believe the agreement would enable Chinese investors to challenge Canadian regulations, policies and/or legislation designed to protect the environment as well as current reconciliation negotiations, accommodation measures and treaty negotiations. This agreement will adversely impact our rights and territories, and we urge you to immediately cease and desist and to indefinitely postpone the signing of the Canada –China Foreign Investment Promotion and Protection Agreement.

Here, Phillip argues that the FIPA agreement will enable Chinese investors to challenge Canadian regulations, policies and legislations that are designed to protect the environment.

Phillip argues that Chinese investors will also be able to challenge current aboriginal reconciliation negotiations, accommodation measures and treaty negotiations.

Other critics of FIPA include a large number of small Canadian businesses.

The SumOfUs.org is a civil society group and an international movement composed of small businesses, investors, workers, and consumers that work together to create a sustainable economy.

SumofUS.org has approximately 1894 business owners that are signatories in an open letter in opposition to the FIPA agreement.

The following is an excerpt of the open letter to PM Stephen Harper.

This deal is very clearly not in our interests because the FIPA deal won’t protect Canadian investors from discriminatory treatment in China. On the issue of market access, investor protection, and leveling of the playing field, the treaty favour China. FIPA’s liabilities and constraints are much greater for Canadian business. The deal also clearly impacts our ability to make decisions on our natural resources, on taxation, and on land and property rights. These will have far-reaching impacts for Canadian businesses and their competitiveness. Canadians and Canadian businesses are concerned that the legal consequences of this treaty will be irreversible by any Canadian court, legislature or other decision-maker for 31 years. FIPA has a 15-year minimum term, requires one year’s notice prior to termination, and adds another 15-year of treaty coverage for assets that are Chinese-owned at the time of termination.

Many of the business owners argue that the FIPA agreements intentions are not to benefit the majority of Canadian businesses, but rather, to benefit a few large multinational corporations.

One of the letter’s signatories, small business owner Roger Petit, has stated,

Maybe multinationals are in favor of FIPA, but I doubt that any small business owner who has looked into this deal would think it is worth the risk to Canadians. It is time the Conservative government started looking after the interests of Canadians rather than multinational corporations.

Osgoode Law Professor Gus Van Harten elaborates more on the risks mentioned by Roger Petit.

He outlines these risks in an open letter to Stephen Harper dated October 12, 2012, when he wrote,

Because the arbitrators under the Canada-China treaty operate outside of the authority of the Canadian legal system and Canadian courts, the treaty appears to contravene the judicature provisions of the Constitution concerning the role of the superior courts…This treaty will have major implications for core elements of Canadian legislative and judicial sovereignty. It will tie the hands of all levels and branches of government in Canada in relation to any Chinese-owned asset in ways that many governments in Canada, I suspect, have not considered closely. The implications will be legally irreversible by any Canadian court or other decision-maker for at least 31 years.

Harten states that the FIPA agreement follows a special type of arbitration board that is not subject to the same transparency and rule of law as the Canadian legal system.

These arbitration boards are non-reviewable and this means that Chinese investors will be able to use these arbitration boards as strategic bargaining chips against Canadian provincial law thus undermining various regulations and legislations.

Another risk associated with the FIPA agreement deals with reciprocity. Further within the letter Harten elaborates,

To elaborate, the treaty will likely be largely de facto non-reciprocal due to anticipated in-flows of Chinese investment to Canada outstripping Canadian investment in China. The deal gives Cadillac legal status to Canadian investors in China and vice versa. Yet Canada will be much more exposed to claims and corresponding constraints as a result of the de facto non-reciprocity.

Here, Harten notes that Chinese investment in Canada is far greater than Canadian investment China. He argues that because of this, China will receive more of the benefits of FIPA while Canada will bear more of the risks.

To summarize, the above arguments have outlined several drawbacks of FIPA; limiting Canada’s judicial and legislative authority, affecting environmental rights and regulations, endangering Aboriginal rights and treaties, and overlooking the interests of Canadians in favour of large multinational corporations.

 

Differences between Free Trade Agreements

Many critics of FIPA claim that it is similar to free trade agreements such as NAFTA. While they share some similarities, there are also a couple differences.

The first difference is that the FIPA agreement is not a free trade agreement, but rather, an investment trade agreement.

This means that its primary focus is related to promoting and protecting investors rather than reducing tariffs between Canada and China.

The key difference between both agreements as emphasized by Harten involves the arbitration process.

This special arbitration process allows companies to sue countries directly.

These arbitration boards operate outside of Canadian legal jurisdiction and do not necessarily follow Canadian law.

Another difference between NAFTA and FIPA is that atleast with NAFTA, it is an agreement between countries that have similar legal practices (Canada and the U.S.).

With FIPA, the trade agreement deal is between countries that have dramatically different judicial, legislative, and political differences (Canada and China). This is what has caused critics to become nervous about the trade deal.

Throughout the article many academics and scholars have been covered who have outlined the potential implications of the NAFTA and FIPA trade agreements.

The next article analyzes an alternative to the current trade regime; Fair Trade.

 

Contents:

How Free Trade Costs Canada it’s Sovereignty – Pt 1

Fundamentals of the International Trading System – Pt 2

Binding Clauses and the Hidden Cost of Free Trade – Pt 3

Canada and US Debate Over Trade Disputes on Free Trade Agreements – Pt 4

The Social Cost of Free Trade Agreements – Pt 5

Canada’s Non-renewable Resources – Pt 6

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