International Trade Committee on March 10th, 2011

[The Chair, Conservative, Lee Richardson]

I call the meeting to order.

Good morning. Welcome to the 48th meeting of this session of the Standing Committee on International Trade. We are going to continue our study of the AbitibiBowater settlement, pursuant to standing order 108(2).

This morning we are welcoming as a witness Fred McMahon, vice-president of research at the Fraser Institute, and Scott Sinclair, senior research fellow, Canadian Centre for Policy Alternatives, who has been with us before. I appreciate your coming and wading through the muck this snowy morning in Ottawa.

I think we're all ready to go. It will be the usual procedure. We'll have an opening statement from both of you and will follow that up with questions. I think we should have time for two rounds today.

I will ask you to begin and hope that you keep those opening statements to 10 minutes or less so that we can get to questions. We'll start with Mr. Sinclair, if you're prepared to go.

[Scott Sinclair, Senior Research Fellow, Canadian Centre for Policy Alternatives]

Good morning. Thank you for the opportunity to present to the committee again.

The AbitibiBowater settlement raises many serious concerns, and I will briefly address three.

First, AbitibiBowater was compensated in part for the loss of water and timber rights on public lands. These are not normally considered compensable rights under Canadian law. The provincial legislation provided for the government to compensate the company for its expropriated assets--land, buildings, equipment, etc. The company did not pursue this option, turning instead to NAFTA arbitration.

The legislation, however, appropriately denied AbitiBowater compensation for the loss of its timber and water rights, which were returned to the crown. Such natural resources are the property of the provincial crown and the public of Newfoundland and Labrador. The province retains title to the land and the right to revoke licences and permits, with or without compensation, as it sees fit.

Access to publicly owned natural resources—water, timber, minerals, oil, and gas—is not a proprietary right; it's not an ownership right. It's a contingent or a conditional right. It's based on the understanding that the resource rights holder will develop the resources productively in a manner that benefits the public. Unfortunately—and it is a tragic situation whenever a company goes bankrupt and closes its last remaining mill in a province—the company was no longer willing or able to fulfill its part of that social contract.

Provincial governments have exclusive jurisdiction regarding matters of property and civil rights within the province, including expropriation. Provinces also have exclusive jurisdiction over natural resources on provincial lands. In decisions concerning such resources, the interests of investors must be balanced against other legitimate interests, such as those of workers, local businesses, communities, and environmental protection. Under Canadian constitutional law and the division of powers, these are clearly matters to be decided by the provincial legislature.

By contrast, the AbitibiBowater settlement embraces an open-ended and excessively broad conception of property rights which, as you've heard in previous testimony, goes well beyond reasonable protections and Canadian legal norms.

My second point concerns the fact that at $130 million, this is the largest NAFTA chapter 11 award to date. The high payout will undoubtedly encourage future investor-state claims involving regulation of natural resources.

There are also serious questions about the basic fairness of the federal government's spending such a large sum to compensate the investor alone, without addressing the needs of workers' severance and pensions, local businesses, the company's creditors, and the very significant costs of remediation of the environment. This settlement reinforces the view that NAFTA chapter 11 confers rights on foreign investors without taking into account an investor's obligations or responsibilities.

Finally, while the federal government has pledged that it will not seek to recover the costs of this settlement from the Newfoundland and Labrador government, it has put provincial and territorial governments on notice that it intends to hold them responsible for future NAFTA-related damages with respect to provincial measures.

This is far from an abstract or hypothetical issue. There have been 28 NAFTA claims against Canada; six of the seven currently active claims involve an alleged breach by a provincial or territorial government of NAFTA chapter 11. These disputes concern Ontario's blocking of a scheme to dispose of Toronto's garbage in an abandoned mine; Quebec's restrictions on the use of cosmetic pesticides; Newfoundland and Labrador's requirement that offshore oil companies invest in research and development within the province; Nova Scotia's decision to block a controversial quarry, as recommended by a federal-provincial environmental assessment; and conservation measures related to Atlantic salmon and northern caribou.

We are witnessing a constitutional crisis unfolding in slow motion. The de facto imposition through the federal government's treaty-making power of NAFTA chapter 11's broadly worded investor rights constrains the ability of provincial and territorial governments to legislate and regulate even within areas of exclusive provincial jurisdiction.

In closing, the Newfoundland and Labrador government's actions in this matter were lawful, constitutional, and in my view commendable. This settlement sets a troubling precedent that undermines public ownership and control of natural resources. Unfortunately, the federal government stepped in to compensate the investor while disregarding other legitimate interests and claims. This also sets the stage for future unwarranted federal intrusions into important areas of provincial jurisdiction.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you for that.

We'll go now to Mr. Fred McMahon, vice-president for research at the Fraser Institute.

Mr. McMahon.

[Fred McMahon, Vice-President Research, Fraser Institute]

Thank you, Mr. Chairman, for the invitation to be here.

I particularly appreciate the snow show outside. I was in Mexico about a week ago in a small town, and people were asking me about the Canadian weather. I confidently assured them that the worst of the Canadian winter was over by March 1 without fail.

I'm going to make a brief comment about the presentation we've just heard and then I'm going to go off at a somewhat unusual angle.

The rule of law is crucial to maintain, including the rule of law that descends from trade treaties. If we expect fairness internationally with our investments, which are global, we must provide fairness to those who invest in Canada. When an industry is based on the use of natural resources and that is part of the conditions for which it has invested and built jobs in Canada, then to deprive that firm of natural resources is indeed a violation of property rights, given that their investment was based on that.

The Canadian government or provincial governments, if they so wish and have a compelling reason to do so, may of course expropriate property in the public interest. That's well recognized, but the right of compensation for the expropriation of property rights is also crucial. That is a good balance, with the government having the ability in the public interest to expropriate if necessary while providing the compensation that Canadian investors would expect abroad.

Now, as I mentioned, I'm going to take a bit of an unusual turn here and, if you'll excuse the word, give something of a philosophical discussion.

When I was initially contacted by the committee, I was told that the concern was about a violation of Canadian sovereignty. Any diminution of sovereignty is typically—by my friend from the Canadian Centre for Policy Alternatives, the Council of Canadians, the CBC—deemed a bad thing.

Sovereignty, of course, descends from the sovereign; sovereignty meant the power of the sovereign. Now it typically means the power of the state. In fact, the greatest advances that we have seen over the last few hundred years are a reduction of state sovereignty, and the greatest tragedies we have seen over the last few hundred years are the assertion of state sovereignty.

State sovereignty has been eroded in two directions: internally, as more and more of the power of the sovereign was transferred to the individual and the space around the individual has grown, limiting state power; sovereignty has also been diminished externally, through trade treaties, treaties of peace, and other international connections, which have produced huge benefits.

The revulsion against giving away any sort of sovereignty can be summarized by what was on the Council of Canadians' home page during its combatting of the multilateral agreement—

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Mr. Chair, I have a point of order.

I'm sorry; I misunderstood the invitation. I believe the Fraser Institute was actually invited to speak to AbitibiBowater, not to attack our organizations across the country.

Could you perhaps direct the witness to actually speak to the issue that this committee is examining?

[The Chair, Conservative, Lee Richardson]

I thought that would be highly unusual, Mr. Julian, and probably the last person to raise that issue....

Excuse the interruption, Mr. McMahon. Please continue.

[Fred McMahon]

Thank you.

Quoting somebody isn't attacking them, and the issue of sovereignty is surely at play here. It's certainly been used in the discussions. I don't see why it's not relevant to the point at hand.

The Council of Canadians wrote: Over the years, our national sovereignty has been diminished first by the Charter of Rights, then the FTA and NAFTA. But they all pale beside the coming MAI.

As you can see, the complaint is against reductions of sovereignty towards the individual and reductions of sovereignty externally. The case of AbitibiBowater is admittedly a reduction in sovereignty. It binds Canada to various international trade agreements, which are important for our well-being, given the very small size of the Canadian market and the fact that we need specialization in Canada, that we need specialization for our own industries to go out to the world market and to efficiently deliver goods here. Unless we continue to respect....

The point I'm trying to make here is that sovereignty should not be taken as an automatically good thing. In fact, through much of past history, the diminution of sovereignty has worked to the benefit of individuals and of economic growth. We are simply here following the rule of international law in compensating for the loss of property rights, and that concludes my statement.

[The Chair, Conservative, Lee Richardson]

Thank you. Both cases will stimulate some interesting debate in questioning.

We're going to begin today with our friend from Newfoundland and Labrador. It's the battle cry of the Newfoundland tea party: expropriation without compensation.

[A voice]

It's the Republic of Doyle.

[The Chair, Conservative, Lee Richardson]

Go ahead, Mr. Simms.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

Thank you, Mr. Chair. Thank you, Mr. Richardson.

Thank you to our guests who are here, and thank you for your polarized opinions.

Mr. Sinclair, I'd like to start with you.

I'm no expert, but let's just say that as an alternative, since that is in the name of your centre, I thought it to be a much better state of circumstances if what happened was that you had a three-party conversation in which the federal government was involved with the provincial government as well as Abitibi to transfer money, yes, but at the same time to come up with an agreement to remediate the lands.

That property is incredibly dirty, we'll say. I grew up there. It's a 100-year-old mill; the environmental standards were never tightened until, say, the eighties, so that's a good 75 years without any real, tangible environmental standards.

I think what troubles the people there.... You've mentioned the pension issue, which is a major one, especially for the electrical workers who were transferred. There are also creditors involved who are getting somewhere in the vicinity of 10¢ to 20¢ on the dollar, and of course there are the other issues as well concerning money owed by Abitibi, but in this particular case I thought that what is egregious to them is that $130 million was paid and we're still seeing nothing done. We still have to spend that money to do that.

I'll let you answer that, and then I have a question for Mr. McMahon.

[Scott Sinclair]

I entirely agree with that analysis. Just in terms of the basic propriety or rightness of this settlement going solely to the investor and disregarding these other legitimate claims—as you've said, just stepping back from them—is, on the face of it, an unbalanced and inappropriate use of taxpayers' money.

The question is, how did it happen?

I think it happened because of the overriding influence of the NAFTA claim, which, as federal officials said, is a legally separate matter from all these other outstanding claims. We have a broadly worded set of rights, which I think diverges—I'd like to come to this point, too—considerably from Canadian domestic norms and parliamentary tradition, in a sense overriding and distorting important policy decisions.

I agree with you. I think the major priority--and certainly I think it was the major preoccupation of the provincial government--was to assert these claims of the people in the area.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

That's right, and the assertion was that the rights you spoke about in the beginning—the natural timber rights, and as well rights to the waterways—were certainly ones that belonged to the public, and they were on loan, we'll say, or used by the company to make a profit. It just bothers me that two groups....

I mean, the province did their thing, and when the NAFTA challenge was made, it seemed as though the federal government had no interest in discussing ways to getting around this. Again, $130 million was paid--for what? We don't know.

Mr. McMahon, this is probably more a philosophical question than anything else. Let's take a look at the oil industry for just a moment, and this relates to timber rights as well. When you make an exploration in a certain area and you have found something, you get what's called a licence to explore, and it expires at a certain period of time. If you make a discovery, according to the Canada-Newfoundland Offshore Petroleum Board, you get what's called a “significant discovery licence”, and you can sit on that with exclusive rights for as long as you want.

There's a company for the Hebron Development that sat on it for over 20 years and never did anything. Instead, they wanted to invest in other areas, such as Mexico. To me, this belongs to the people--it's theirs--but really, in effect, it belongs to the oil companies.

I only bring that point up because I think the same can be applied here to timber rights, as well as to waterways. Are we strict enough in how we settle our own resources?

[Fred McMahon]

There are two separable questions here. One is the appropriateness of the agreements under which oil and gas are explored for, under which mineral rights are explored for, under which timber rights are given. That's one set of issues.

The other set of issues is that once you put that agreement into a written agreement, then you have a legally binding agreement. You may disagree with your landlord, or if you are a landlord, you may find that you really don't like a clause of your lease arrangement. That doesn't mean that you can unilaterally change it.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

I'm sorry; I don't have a lot of time. Let me interrupt there.

My landlord also has the right to kick me out when he sees fit, with due notice. Here's the situation: what if you had a law that stated that if you do not move on this particular land—whether it was concerning timber rights, or whether it concerns an oil find—and if it's particularly egregious to the public, does the government have the right to say that you don't have it anymore and that they're going to give it to somebody else to use?

[Fred McMahon]

It is a good question.

It can be done, with appropriate compensation. I come back to the point that if you destabilize—

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

Compensation for what?

[Fred McMahon]

It's compensation for whatever losses the company bears by having that. For instance, if the company leaves that oil and gas find, and they no longer have it, they've suffered a loss. If you compensate the company for the loss that they've borne, as in the Abitibi case, then yes, the government can move on that, but you don't want to destabilize the rule of law or destabilize agreements that you've made. As I say, there are two separable questions here.

[The Chair, Conservative, Lee Richardson]

Thank you.

Go ahead, Monsieur Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chair.

Mr. Sinclair, in your presentation, you said a constitutional crisis was slowly unfolding with respect to the $130 million in compensation from the federal government. You implied that the federal government was interfering in an area of provincial jurisdiction.

Could you please elaborate on how and why that crisis could get worse?

[Scott Sinclair]

Thank you for the question. The constitutional dimensions of this issue relate to the prospect that the federal government, rather than acting simply as the signatory of the NAFTA, assumes responsibility for whatever fines or awards are levied in relation to NAFTA chapter 11 when provincial or territorial measures breach this treaty. If the federal government, rather than assuming that responsibility, attempts to hold provinces liable and insists that they pay in whole or in part, that really changes the constitutional calculation, particularly when they're acting within areas of exclusive provincial jurisdiction.

That's where I see this slow-moving constitutional crisis potentially developing.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

I am asking because it would behoove us to keep a close eye on this issue. As you know, Canada is currently negotiating an agreement with the European Union. And, at the very end, it will no doubt include investment protection clauses. There is a difference between NAFTA and the agreement with the European Union, however. In the case of the European Union, the provinces are involved in the negotiations, and I would imagine they will have to sign off on the agreement. But I don't think that was the case with NAFTA.

We would do well to take into account the repercussions of the situation, as you described them, would we not? Canada, if not the provinces, should exercise caution and bear in mind what happened between the Government of Newfoundland Labrador and AbitibiBowater, should it not?

[Scott Sinclair]

I think that's an excellent question, and for the first time in the Canada-EU negotiations, the provinces are directly represented at the negotiating table, as you note.

I don't know what the exact provisions of that treaty will be with regard to provincial compliance, but I do believe that provincial and territorial governments, and the federal government itself, have a very strong interest, particularly if these types of investment protection provisions and investor-state dispute settlements are to be included in CETA, as it seems likely they will be, to ensure that these broadly worded, open-ended vague notions of, for example, expropriation and other issues related with the interpretation of these investment rights by various arbitrators and arbitration panels are clarified.

These issues have to be clarified and resolved prior to the provinces committing themselves, if they're going to do that in areas of provincial jurisdiction. I think it's a strong argument for not including these investment protection provisions and certainly for not including “investor state” in the treaty.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. McMahon, as you said yourself, your presentation was a bit on the philosophical side. As I understand it, you believe that free-trade agreements and trading systems, in general, offset the small size of our market. You also talked about a nation with full sovereignty, noting that it has its disadvantages as well. I would like you to elaborate on that a bit more.

[Fred McMahon]

What I was referring to is actually the positive aspects of giving up sovereignty, of reducing the power of the state. For instance, individual rights and freedoms are actually a reduction in sovereignty, because it keeps the state out of the sphere around the individual. Reductions of sovereignty externally tie us into trade treaties.

In the case of Canada, with our small market, that's essential for our well-being. When you look at the evidence globally, you'll find that the nations that have entered the world global trading system have actually had the greatest reductions in poverty and the greatest increases in prosperity.

My argument was that reductions in state sovereignty have a history of positive outcomes rather than negative outcomes. What I was trying to deal with was the assumption that anything like AbitibiBowater that is seen to diminish sovereignty is therefore bad because it diminishes sovereignty. What I was saying is, no, sovereignty is not an intrinsic good.