With trade a key issue for the federal government, it’s worthwhile to review a few major developments relating to Canadian bilateral investment treaties in 2014. The Canadian government has been active in negotiating treaties with China, South Korea, and the European Union. Once in force, the Canadian government expects them to result in increased competition at the consumer level and easier access to large foreign markets previously protected by fees and tariffs.
Canada and China reached a major milestone on Oct. 1 when the Canada and China foreign investment promotion and protection agreement came into force. The agreement marks an important shift in trade policy between China and Canada by determining clear rules for investors in each country.
The following are key aspects of the agreement:
1. An initial 15-year term and a further 15-year application period following its termination date: Agreements signed within the initial 15-year term will be subject to the agreement with China for an additional 15 years, meaning an effective termination date of 2043 for an investment made by 2029.
2. No national treatment at the establishment and acquisition stage: Most Canadian bilateral investment treaties guarantee parties an equal playing field at the establishment and acquisition stage of an investment. The deal with China differs from standard bilateral investment treaties as it only affords national treatment protection once the parties have signed a binding agreement.
3. Private dispute resolution by default: Dispute resolution is by default private unless the state in which the dispute arises agrees and allows for public arbitration.
4. Exempted industries including cultural industries and education: The agreement doesn’t apply to a number of industries that parallel those prohibited to foreign investors under the Chinese catalogue of prohibited foreign investment industries. They include education, the military, and certain aspects of the health-care industry.
For all of its critics, the agreement offers Canadians unprecedented access to the Chinese market. Given Canada’s large trade deficit with China of $32 billion in 2014, the Canadian government hopes the agreement will help stimulate exports to that country.
The Canada-South Korea free-trade agreement came into force on Jan. 1. As a direct result, the Canadian government forecasts an increase in Canadian exports to South Korea by almost a third.
The key provisions include:
1. South Korean tariff elimination: The deal reduces or eliminates the following tariffs: the elimination of 90 per cent of non-agricultural tariff lines immediately with the remainder within the next 12 years; the elimination of 70 per cent of fish and seafood tariff lines within the first five years and 100 per cent within 12 years; the elimination of 85 per cent of tariffs on forestry and valued-added wood products within five years and 100 per cent within 10 years; a progressive elimination of 86 per cent of agricultural tariff lines. Certain exceptions from agricultural tariff line reductions include most dairy products, poultry and its derivatives, ginseng, rice and its byproducts, refined sugar, and most tobacco products.
2. Canadian tariff elimination: The deal reduces or eliminates the following tariffs: the immediate elimination of 81.5 per cent of all non-agricultural tariffs and duties and a progressive tariff elimination on the remaining tariff lines within 11 years; the elimination of 100 per cent of tariff lines on fish and seafood within three years; the immediate elimination of duties on all wood and forestry tariff lines; the immediate elimination of half of agricultural tariff lines and a further 36 per cent of duties on agricultural tariff lines over five years. Exclusions include over-quota, supply-managed products such as dairy, poultry, and eggs.
3. Elimination of duties for South Korean automobiles: The deal eliminates the duties applied to South Korean automobiles.
All told, the deal will provide Canadian consumers greater access to Korean products while boosting export opportunities to the peninsula. Both it and the agreement with China illustrate the growing focus by the Canadian government on Asian trade partners as they continue to offer Canadian businesses tremendous growth opportunities.
Another important development in 2014 was the release of the draft Canada and European Union comprehensive economic and trade agreement on Sept. 26. The target implementation date is 2016. Broader in scope than the North American free-trade agreement, the Canadian government qualified the European deal as Canada’s “most ambitious trade initiative.” It includes provisions on labour and mobility, government procurement, and intellectual property. The Canadian government predicts it will result in bilateral trade increasing by 20 per cent and an annual boost of $12 billion to Canada’s economy.
Key terms of the deal include:
1. Tariff elimination or reduction: The draft text proposes the elimination of 98 per cent of all tariff lines, including 100 per cent of non-agricultural tariff lines and close to 94 per cent of agricultural tariff lines, with the vast majority coming into effect immediately on the implementation of the agreement.
2. Made in Canada requirements: The agreement provides clear rules of origin for determining made in Canada goods that are eligible for preferential tariff treatment.
3. Streamlining regulatory requirements: The agreement proposes a series of measures to streamline regulatory requirements through mutual recognition of technical regulations in each respective market and by accepting test results on products from each respective certification body.
4. Trade remedies and investor disputes: The agreement reflects World Trade Organization rules on unfair pricing and government subsidies requiring a country to undertake a fair and transparent investigation to determine whether unfair trade is taking place before imposing a trade remedy. It includes a contentious dispute resolution mechanism between investors and a state. The investor-to-state dispute settlement would involve an independent arbitration panel hearing facts and opining on the merits of an investor’s claim. The contention is the mechanism would affect the sovereignty of a state to legislate on specific internal matters, such as labour and environmental laws.
5. Government procurement: One big gain for Canadian businesses is access to opportunities in the large European Union government high-value procurement market with minimum threshold limits revised biannually and subject to certain exceptions including culture, aboriginal affairs, defence, and local development efforts.
6. Intellectual property: The agreement echoes the recent Copyright Modernization Act, which supports advances in technology and international standards and aligns Canada with the World Intellectual Property Organization Internet treaties.
7. Sustainable development, labour, and environment: The agreement also emphasizes the promotion of economic, social, and environmental objectives. It ensures that national laws and policies protect fundamental principles and rights at work, including the right to freedom of association and collective bargaining, the abolition of child labour, the elimination of forced or compulsory labour, and protection against discrimination.
So what can we look for in 2015? With the Chinese and South Korean agreements now in force, we may see in 2015 the first disputes arising from them. We may also see an influx of Chinese and Korean products in Canada, resulting in better prices for Canadian consumers.
As for the draft agreement with the European Unions, legal review and translation into European languages will take up most of 2015. In order to meet the target implementation date of 2016, the European Union council, the European parliament, the 28 member states of the European Union, and the federal and provincial governments in Canada will need to ratify the agreement before the end of 2015. Further negotiations may also result in changes to the draft investor-state dispute resolution provisions.
All told, the Canadian government continued to reduce trade barriers in 2014 by offering Canadian businesses better access to foreign markets while liberalizing industries in Canada previously protected by duties and tariffs.
Patrick Gervais is a business lawyer at Blaney McMurtry LLP called to the Ontario and New York bars. His practice focuses on a range of commercial matters including mergers and acquisitions, public and private financings, and a range of commercial agreements. Patrick also advises companies on compliance requirements and regulatory matters. He’s available at [email protected].
