International Trade Committee on Dec. 5th, 2013

[The Chair, Conservative, Rob Merrifield]

Thank you.

Before we get to the questions, we'll hear from Mr. Mann. The floor is yours.

[Dr. Howard Mann, Senior International Law Advisor, International Institute for Sustainable Development]

Thank you, Mr. Chairman and members of the committee, for the invitation to speak today. CETA is a major trade and investment initiative, quite obviously, and will have major implications for all governments in Canada as well as the Canadian public.

I want to speak today only to the investment chapter. Not because the others aren't important, but simply because my expertise is on the investment issues and the investment chapter and not on the other issues. Unfortunately, official texts have not been released by the Canadian government and the EU Commission, just the summaries. However, as I indicated in my letter accepting the invitation to speak, I will do the best I can based on the summaries, but also on leaked text that has been circulating from time to time since last winter.

Of course, Mr. Chairman, it would be much better if we could all have a fully informed and transparent debate based on the full draft text, rather than relying on leaks and self-selected summaries by each government—and the summaries are in fact different, based on the interests of each government. The details matter, and they are largely absent from the summaries. We look forward to having a fully informed debate when the actual text is available. In the meantime, I should inform you, Mr. Chairman and members, that one such leaked text began circulating last week in Europe and fell into my inbox on Monday. It concerns the investment negotiations that took place in the middle of November and the text following that. I will speak to that text as well. I will make written submissions next week, Mr. Chairman, that will address six technical issues that support the conclusion I'm going to reach. I'll give that conclusion now because I'm sure I will run out of time at the end.

The conclusion is, very simply, in my opinion, the investment chapter, if it continues on what appears to be its present course, will provide foreign investors into Canada with the most investor-friendly set of corporate rights ever drafted by the Canadian government in an international treaty. The consequence of this increase in investor rights, coupled with a very robust investor-to-state dispute settlement mechanism under the treaty, will be a growing substantive scope for more investors—the European investors—to challenge more government measures based on higher levels of corporate rights, including future human health and environmental measures, at both the federal and provincial levels.

I say foreign investors here because this isn't just limited to European investors. All investors who are beneficiaries of an investment treaty will be able to take advantage of this package of rights because of the most favoured nation provision that's included in all the other treaties. It ratchets up the rights for everybody at the same time.

In terms of the technical points, my first one relates to the most favoured nation provision, which in this draft agreement is fully open and backward looking. I'll explain what I mean. Under investment law a most favoured nation provision allows an investor into Canada to have the same level of rights as the highest level of rights any investor in Canada has, including domestic or foreign. That's what most favoured nation means.

The current draft text is fully open so that the provisions of prior investment treaties concluded by Canada can be adopted by foreign investors under this treaty in the event of any disputes, if they're more favourable. The present draft CETA text provides carefully worded language on many provisions. In most cases, this is designed to limit the potential scope of interpretation of the rights of investors and thus to help protect government regulatory space, the right to regulate.

However, the MFN provision allows investors to reach back in time to those treaties that weren't drafted with the same level of care and the same purpose of balancing the right to regulate with investor rights.

It's worth noting, Mr. Chairman, that this ability to reach back into the older text was precluded by the language in the 2004 Canadian model FIPPA that allowed the MFN provision to apply only on a forward-looking basis, not backwards in time, precisely to prevent the undoing of the more modern language—the more up-to-date language—in the model FIPPA, in the substantive obligations of the government. The present draft text quite precisely reverses the 2004 model FIPPA in this very important way.

The second point, and on the substance, this is an area where the careful drafting doesn't reduce investor rights. It increases them and potentially quite dramatically.

The fair and equitable treatment provision, in my view, will become the most open ever concluded. The experience with the over 600 investor-state arbitrations under investment treaties to date globally shows that the fair and equitable treatment provision is the most frequently and the most successfully used by investors under the investor-to-state process. So it is a really important provision. It counts—it counts a lot.

The current text comes in what I will, for present purposes, call three boxes.

The first box has a defined list of factors that would constitute a breach of the fair and equitable treatment by a state, by the government. That's fine. The list generally reflects the issues most analysts would associate with the concept of FET under international law. The list is what most would have looked to, and it is defined and limited. That's good drafting in my view.

The second box is actually a couple of paragraphs later and addresses a very specific concept called the legitimate expectations of the investor. It too has been widely referred to in previous cases and analysis, and it is specifically defined and limited here. Again, it's careful drafting.

It's the third box, Mr. Chairman and members, that is of concern. The third box is defined to exist in addition to the first two. The language is very careful, “in addition to”. This third box refers to what customary law says constitutes a breach of FET, other than what is in the first two boxes. But it does not set any scope for this. It does not set any thresholds relating to the degree of government misconduct, whether it be significant, serious, or egregious, and international law has those three and other tests for the threshold of conduct, but it doesn't set out which one should apply here. It doesn't set out the test to apply in terms of how to determine whether what proposition, what alleged misconduct, is actually part of customary international law or not.

The problem is all of these things have been addressed in the existing cases and all of them have come to very different and, in many cases, opposite and irreconcilable conclusions. So there's a wide variety of very open and very closed interpretations, and this treaty does nothing to set any parameters or define any of those tests. It does so in a context where we have two boxes that would otherwise have been seen largely as the limits of what FET means, and here we have, in addition to that, this other box that is left completely undefined. That's where the serious potential mischief lies, Mr. Chairman.

The treaty essentially invites foreign investors to identify what they think should be in that new third box, that empty box, and for tribunals to decide what should be in it without any guidance from the drafters. It's open season for the lawyers in that case.

The third technical point relates to the possible inclusion of an umbrella clause, which is still on the table. I only note it; I won't get into it because of the time factors. It's a smaller technical issue.

I do want to quickly note the issue of exceptions to national treatment, which are a normal part of every agreement. This is nothing new or nothing exceptional—25% of the text of NAFTA is exceptions to national treatment in MFN—except that in this case, as it relates to the provinces, for any exceptions to apply, they have to specifically identify nonconforming provincial measures to include in a schedule. Previous agreements have grandfathered all non-existing, nonconforming measures. The change means that the provinces have to list all of their measures that they want to be excluded from full coverage of the agreement, as of when the agreement starts. That puts a heavy burden on the provinces to go through all their laws, to verify exactly which are nonconforming to the text, and schedule them.

The problem is if they make a mistake, they can't reverse it afterwards. It's finished. Once the schedule is accepted, that's it, the listing is closed. It's a very heavy burden on the provinces because of that particular change.

The fifth issue, just to note it for the record, concerns the use of a general exceptions clause like that found in article XX of GATT. I note it, but I won't speak to it here unless there are questions on it.

The final point, Mr. Chair, is the right to regulate clause, which is held up both here and in Europe as an example of the balancing that's included in the text. In this case, the right to regulate clause is intended to be in the preamble to the whole of the agreement, as I understand it, and it is not in the leaked text, but the technical summary produced by the Canadian government tells us that the agreed language is that it will indeed reaffirm the parties' right to regulate, but in a manner consistent with this agreement.

That language actually comes from article 1114(1) of NAFTA. That's where it was originally used, and it means, as a matter of law, that the agreement prevails over the right to regulate of governments, and all exercises of the right to regulate at both the federal and provincial levels must conform to the agreement. So contrary to what is often implied by referring to a right to regulate provision, it in fact prioritizes conformity with the treaty obligations over the right to regulate. This is absolutely beyond a legal doubt, as seen in the history of NAFTA itself.

Very briefly, here are my conclusions, Mr. Chairman, given all this. As a matter of law based on the summaries and the existing text, the current drafting of CETA will give foreign investors into Canada more international law rights than ever before; will do so quite knowingly and deliberately; and this will inevitably lead to increases in the number of arbitrations against Canada, for both federal and provincial measures, and resulting pressures not to regulate in key areas such as the environment, human health, anti-tobacco practices, and so on.

Thank you, Mr. Chairman.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Davies, the floor is yours.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thanks, Mr. Chairman.

Thanks to all the witnesses for coming, and welcome to the trade committee.

Mr. Mann, I want to direct my questions to you, if I may. One of the main concerns of Canadians, if I may put it just very generally, is that they want to know if CETA would allow foreign corporations to sue Canadian governments for passing legislation—and I'll put a couple of specifics to you—that protects our environment. For instance, let's say that Quebec decides it wants to put a moratorium on fracking in the province. I know there is already a lawsuit against it. Would CETA permit that?

[Dr. Howard Mann]

Yes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Would it allow foreign corporations to sue Canadian governments for passing legislation, say, directed at consumer protection? Say we wanted to pass tobacco packaging laws like Australia did. Would CETA permit them to sue us if we tried to do that?

[Dr. Howard Mann]

Yes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Would it permit European corporations to sue Canadian governments if we decided to create a public program like national pharmacare?

[Dr. Howard Mann]

I'm not sure what would be in that program, so I don't want to speculate just on that kind of open language.

[Don Davies, NDP, Vancouver Kingsway, BC]

Okay. Just generally, after reviewing the chapters you've seen on investments so far, are you concerned that CETA has gone too far in giving corporations the right to challenge democratically decided decisions by our governments?

[Dr. Howard Mann]

Yes, I am. Let me be specific here, and a little more precise, if I may. Simply because the agreement would allow European investors and other investors using this text because of MFN provisions to initiate an arbitration doesn't mean they will win, so we want to be a little bit careful there.

My concern is that this agreement, because it allows cherry-picking, through the MFN provision looking backwards, of all of the best drafted provisions from an investor perspective, wipes out all of the lessons learned and the more modern drafting that's taken place because of that; also because of the drafting of the FET provision, which takes those two areas that we would have seen as the scope of FET and then says, “in addition there is this undefined box, and you, the investors and tribunals, go out and try to fill it”. That's what the real concern is for me.

[Don Davies, NDP, Vancouver Kingsway, BC]

You're right that we don't know if anybody is going to win or not, but I've heard the concern raised that if governments are making decisions and they fear they are going to be sued, there can be a chill factor on governments' ability. Second, even if you don't win the case in the end, if you're faced with multiple multi-billion dollar lawsuits, that costs a lot of money to the public purse in defending those cases.

So those are the two concerns that are raised. Win, lose, or draw, it's going to cost taxpayers millions and millions and maybe more to defend those suits. Is that not a legitimate concern?

[Dr. Howard Mann]

There are two issues there.

The first one is the chill effect. In my view that is very much present. It's on the record in New Zealand now in terms of the anti-tobacco issues. They wanted to pass the exact same legislation Australia did, and the health minister in New Zealand said straight out, on the record, that they weren't going to do it until they saw the results of the cases against Australia and Uruguay brought by Philip Morris. We see that chill effect.

I saw it in Canada both when I was a lawyer in the government and after I left the government. It's there. It exists, even in Canada. Because of the uncertainties, it becomes very difficult to say with precision what kind of measure will or won't, and in what circumstances it will or won't be a breach of an agreement. That uncertainty is the problem. We can manage it if it is clear, but again, it's the MFN provision that allows the reaching back. That unknown third box on FET takes away the certainty, the clarity, and the predictability, and that's the issue.

In terms of the cost, this draft of CETA is actually intended to include a provision requiring investors to pay the government's costs when they lose an arbitration, so that will assist on the second issue.

[Don Davies, NDP, Vancouver Kingsway, BC]

One wonders why we have an investor-state provision in this agreement at all. We know that it came from chapter 11 in NAFTA, in which we had concerns about the Mexican judicial system. We're dealing with Europe here, modern democracies with the rule of law. My understanding is that Canada put the ISDS provision on the table. The Europeans didn't want it. The Europeans have never signed an agreement that has investor-state provisions in it.

Why are we providing investors with access to an investor-state panel instead of making them use the domestic courts, as every other investor has to do? What is the rationale for that?

[Dr. Howard Mann]

I can't speak for the government here and I wouldn't attempt to. In theory, the idea is that access to investor-state dispute settlement and the provisions thereof attract higher levels of investment. That's the theory.

The empirical facts indicate that it doesn't do that. There is no relationship between investment treaties or the investor-state dispute settlement process and attracting new high levels of investment. Unfortunately, for my colleagues here, the investment chapter isn't going to do anything to help them receive the kinds of investments they're talking about. That's the empirical evidence.

My understanding is that it was the Canadian government that pushed for the inclusion in this. The original EU-Canada sustainability impact assessment report, funded through the European Commission, actually recommended not including the investor-state dispute settlement system, and it was the Canadian government that continued to push for it.

My own view is that it doesn't attract new levels of investment—that's the empirical fact. Our courts are perfectly capable of handling the disputes here. European governments have concluded agreements that include investor-state dispute-settlement mechanisms with countries around the world. I think there are about 1,500 European-based bilateral treaties with other governments, but they were not originally supportive. I don't see the value of this; I see the risks. I know for sure the only groups that will certainly benefit from this are the lawyers who do the arbitration and sit on the tribunals as arbitrators.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We will now move to Mr. Cannan for seven minutes.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you, Mr. Chair.

Thanks to our witnesses.

Obviously, Mr. Darch, you caught my attention when you mentioned Kelowna. I had the privilege of spending nine years as a city councillor and it will be eight years next month that I have been the member of Parliament for Kelowna—Lake Country.

You mentioned working with municipalities across Canada. I was president of our area association, in local government, and I spent two years with the Union of British Columbia Municipalities. You talked about supporting local government, and Mr. Fast also spent nine years in Abbotsford as a city councillor so he understands the importance of working with our local governments.

Have you been working with the Federation of Canadian Municipalities, and has this new non-profit organization had any liaison with them as well?

[Mike Darch]

On the mission we were just on, there was a representative from the Federation of Canadian Municipalities along with us, but I would also like to make the distinction that we represent the economic development departments and most of the economic development departments are at arm's-length and are not for profit. Being at arm's-length doesn't mean we don't work closely with the municipalities, and it certainly doesn't mean we don't work closely with the mayors. But our relationship with the Federation of Canadian Municipalities is more one of being sister organizations involved in the same activity related to cities.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

So you'd be working with Kelowna Chamber of Commerce, etc.?

[Bruce Lazenby, Board Member, President and Chief Executive Officer, Invest Ottawa, Consider Canada City Alliance]

The Consider Canada initiative was intended to focus solely on foreign direct investment. We did not want to step on the toes of others already in some other areas. As Mike said, it's a sister organization but with a unique focus.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

What type of businesses...? I'd be interested in any that are specific for Kelowna, as well as any across Canada. What were some of the specific organizations...and interests expressed in your last visit?

[Mike Darch]

I'll address Kelowna and then the broader one. Unfortunately Vancouver couldn't attend so I was representing Vancouver. That's how I knew about Kelowna.

In Amsterdam, I was approached by a couple who are professionals, who have just received their permanent resident status in Canada. It's their intention to move to the Kelowna area to either purchase or invest in a retirement home. Their specific area of interest is psycho-geriatric diseases so they were looking at retirement or nursing homes related to that. That's a specific investment they were interested in.

We deal more with specifics than generalities. If you want to look at some of the industries that were talking to us, certainly there were a lot of engineering and construction companies that are specifically interested in the activity taking place in the oil fields, the LNG facilities going into B.C., mining, etc. There were also a large number of companies in research and development. The Canadian research and development tax credit system is far better than the European system. They were looking to move activity here.

Certainly Bruce can attest to the advantages here since Ericsson has recently announced major expansions to its facility here in Kanata, as well as its facility in Montreal.

So companies that were coming and looking were actually across a fairly broad cross-section. A number were interested in both Halifax and Vancouver because of the relatively low amount of activity in the navy-type activity in Europe. They were looking at our ship rebuild programs taking place on both coasts.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you.

I have an article just last month from The Vancouver Sun talking about how the trade deal with the European Union will be good for B.C. business and a variety of sectors. The EU is already the second-largest foreign investor in Canada. It says the province represents excellent opportunities in all sectors ranging from transportation, logistics, tourism, and energy to forestry, mining, and seafood.

With the concept and the interest that's been expressed, and with this new, as alluded to, stability, there's predictability and rules-based trading. Do you think that's going to help stimulate more foreign investment in Canada, considering the comments Mr. Mann previously made?

[Mike Darch]

As Mr. Mann said, a lot of the details of the agreement haven't been discussed. Certainly I have not read a lot of the details and can't comment on them.

From the point of view of being a stable economy with a considerable amount of activity going on at the moment and which is welcoming to immigration, etc., I think that right at the present time, Canada has a significant amount to offer.

Bruce can attest to it from the Ottawa point of view. I can speak for all 11 members. Canada is historically a great place to invest. Certainly one comment that was made by some large investors in Amsterdam is that we're just too modest. I think we are now getting a set of tools that lets us maybe shake off a little of our modesty and be much more aggressive in looking at attracting that foreign investment.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

I appreciate that we're humble Canadians, but we're also proud Canadians. We have a lot to offer.

From your last trip is it fair to say that greater EU foreign direct investment into British Columbia and Canada will stimulate economic growth and job creation here at home?