Thank you, Mr. Chair.
I'm the managing director of the Macdonald-Laurier Institute, which is a public policy think tank based in Halifax.
As I understand it, the committee is charged with studying a matter of great national importance that falls into two parts: first, $130 million paid by the federal government to AbitibiBowater as a settlement of its claim under NAFTA's investor provisions, and second, the impact of this settlement on future democratic decisions taken in the public interest by Canadian governments at all levels. Those are two separate issues, and I'm going to speak to both of them.
Like Mr. Van Harten, I intend to make four points with respect to these issues today.
Point one: the chapter 11 provisions of NAFTA provide no bar whatsoever to Canadian governments acting in the public interest through law and regulation, but they properly require that the government pay the legitimate costs associated with their decisions, including compensating parties whose property is confiscated or nationalized.
Let me expand on that point. The successful actions against Canadian governments under NAFTA's chapter 11, including AbitibiBowater's, have not been decided on the basis that Canada did not have the power to act in the public interest. That has not been the basis of these decisions. Indeed, there is no such provision under NAFTA, and no government would have signed it if there had been. What NAFTA does require is that where the legitimate interests of foreign investors have been damaged by policy decisions of those governments, those investors should receive appropriate compensation.
In the case of AbitibiBowater, for example, the chapter 11 challenge did not seek to roll back the decision of the Government of Newfoundland and Labrador to nationalize those assets. Instead, the challenge sought compensation for the damage the decision did to the legitimate interests of the company and its investors.
The claim that no compensation should be forthcoming in such circumstances is not, in my view, a defence of the sovereignty of governments in Canada. It is a defence of the unprincipled position that governments should be able to ignore the rights of parties damaged by government action, that individual rights should be hostage to the whims of government, and that the rule of law is an annoyance to be dispensed with when it inconveniences policy-makers.
Point two: paying compensation for expropriation is a matter of basic fairness and is a fundamental principle in Canadian law, not just NAFTA. Such a need for compensation is quite deeply entrenched in Canadian law and practice, quite separate from the constitutional question that Mr. Van Harten quite properly raised, which is that constitutionally there is no bar to this happening. That doesn't mean that governments have to not provide compensation.... On the contrary, the ability of governments in Canada to seize my home or your farm for matters of high national interest is undisputed. No one challenges that.
What is equally undisputed is that individuals should not be forced to bear the cost of important public policy, but that the cost of policy should be borne by governments and the taxpayers they represent. That is good policy when we consider that Canada has benefited enormously from the inflow of foreign investment over the course of its existence, since such investment brings with it not only employment but expertise and productivity improvement.
But it is in the nature of such investments that they have to be made up front, with often billions of dollars paid in the first year to, say, build an oil sands cracking plant, whereas the payback period is normally measured in years, if not decades. This long payback period after the initial investment subjects investors to various kinds of risks.
One of the principal risks is the risk that governments will change the law or break promises they have made in order to attract the investment in the first place. This political risk, I am glad to say, is relatively low in Canada, precisely because of our long-established tradition of the rule of law, the independence of the courts, and our deep commitment to fairness. As a result, we've been a very popular destination for foreign investors, but actions such as those of the Government of Newfoundland and Labrador endanger that hard-won reputation.
I think it's important to underline that the investor protection provisions are in no way an obstacle to democracy, because democracy here does not refer only to the ability of majorities to make decisions. We in Canada believe in a particular kind of democracy, where even the will of the majority is bound by rules and laws.
We believe, in other words, that even majorities may be wrong, and there are certain things majorities ought not to be allowed to do, such as oppress minorities. This means that constitutionalism and the rule of law are an integral part of democracy in Canada and that the investor protection provisions in particular and rules against uncompensated confiscation of property in general are firmly within the Canadian democratic tradition.
Point three: as a country with huge investment in other jurisdictions, we benefit enormously from such investor protections in other countries, and failure to apply such protections domestically would damage our credibility and harm Canadian investors. Let me expand on that point a bit.
In Canada, we don't actually have that much of a problem with uncompensated seizures of property. It's not chiefly a domestic issue because such seizures are, thankfully, quite rare. The larger problem is that Canada, in addition to being a major recipient of foreign investment, is also a major source of foreign investment for other countries. In fact, Canada has usually been a net exporter of capital since the late 1990s. In my brief, I include some data that will allow you to establish the truth of that proposition.
This means that a great many Canadian companies have invested millions of dollars in far-flung places like Peru, Ecuador, Mongolia, Vietnam, and Jordan, in industries as diverse as telecommunications, mining, and transportation. The profits earned by these companies help to pay for jobs and economic activity here, they generate tax revenue in Canada, and they help to pay for pensions and other retirement savings. In addition to benefiting Canada, these investments benefit the host country for similar reasons.
But the fact of the matter is that many countries that do not have the benefit of Canada's deep tradition of the rule of law and fair treatment under independent court often indulged in the kind of uncompensated seizure of foreign assets that the AbitibiBowater decision dealt with, because foreign investors could not be certain that their capital would be safe. The levels of investment required to lift many of these countries out of poverty were not available, and the political risk was simply too high. As a result of decades-long efforts by Canada and other western countries, we have increasingly brought such countries to understand the necessity of providing a stable and safe climate for foreign investment, achieved largely through bilateral treaties, but also through multilateral negotiations. The result has been a significant increase in the flow of capital to such countries and measurable improvements in their levels of growth and employment. Again, I include a chart which documents this.
A key factor, however, in helping such countries to see the worth of negotiating such investor protection has been the credibility of western partner nations, such as Canada, in arguing that they are not seeking to apply a double standard, but are asking third-world countries to apply the same standards that we have applied to ourselves.
Even if the net consequences of Newfoundland's decision in the AbitibiBowater asset seizure had been positive, I think the damage done to our credibility and the safety of Canadian foreign investments would far outweigh the benefit. As I hope I have made clear, I believe the consequences of Newfoundland's decision were negative, not positive.
The final point is that the AbitibiBowater case points out a damaging inconsistency in Canada's constitutional legal framework, whereby Canada has the treaty-making power and is therefore responsible for ensuring that we meet our treaty obligations, but provinces are not bound to respect the NAFTA provisions. A mechanism can and should be found to oblige provinces to take responsibility for their decisions and to prevent them from passing the costs of provincial decisions on to the federal taxpayer.
One of the questions that must seem mysterious to many outsiders is why Ottawa and the federal taxpayer had to pick up the cost of a decision that went against the Government of Newfoundland and Labrador for an issue falling under provincial jurisdiction. I'm scarcely saying anything this committee does not know when I observe that this anomaly arises because only the Government of Canada has the power to make treaties with foreign countries.
As the sole Canadian signatory of NAFTA, Ottawa is the respondent in NAFTA actions such as chapter 11 cases and, therefore, is responsible for ensuring that we meet our treaty obligations. The fact remains, however, that provinces can and do have the power to take actions that are contrary to NAFTA's provisions. At present, there is no mechanism for holding them responsible for these actions when they result in Canada's having to pay damage to other NAFTA partners. This asymmetry exits despite the fact that a large majority of provinces were supportive of the original free trade agreement, and later NAFTA, and indeed have recently sought the extension of NAFTA's benefits to state, provincial, and local government procurement in the face of the Buy American provisions of many of the stimulus programs in the recent recession.
If there is any kind of democratic deficit in the AbitibiBowater decision, it is that the Government of Newfoundland and Labrador was able to force the federal government and federal taxpayers to pick up the tab for its bad behaviour. Surely one of the principles of democracy is that voters should have to face the true costs of such decisions so that they can make a balanced assessment of the pros and cons. The current arrangements reward such bad behaviour and force innocent federal taxpayers, who have no hand in choosing provincial governments in other provinces, nonetheless to pay the tab. This is a classic perverse incentive.
I would therefore urge this committee to recommend that some kind of formal mechanism be established, by federal legislation if necessary, to ensure that the potential for such destructive gaming of the system by provinces be eliminated. Ideally, this should be done by negotiation, but the principle at stake is serious enough that Ottawa should consider giving itself the legal power to claw back from federal transfers amounts equal to the costs of the legal defence of such actions by provinces and the amount of any eventual awards. I realize that this is a complex area, but I cannot believe that a reasonable accommodation cannot be found.
Finally, I observe that precisely because provinces escape the obligations that NAFTA imposes, the European Union was keen to have the provinces represented at the bargaining table for the ongoing Canada-EU free trade negotiations. If the provinces are going to insist on sitting at the table and helping to negotiate such agreements, they should accept up front to be bound by all the obligations that result. To do otherwise is to confer on them power without responsibility, which, in my view, is another combination that has been found to be poisonous to the success of democratic institutions.
Thank you very much.
