Thank you, Madam Chair.
I too would like to thank the members of the committee for their invitation to appear this afternoon to discuss ISDS. I'm honoured to share this forum with others I have had the pleasure of encountering in the course of my career, namely Mr. Fortier, Mr. de Mestral and Mr. Leblond.
My perspective is that of an academic who has had an interest in ISDS for some 20 years. I would like to step back and put a number of ISDS issues into perspective. I'd like to begin by saying that I'm generally in agreement with Mr. Fortier.
It's important to remember that foreign investment existed before, that it still exists today and that it will continue to exist whether or not there is an ISDS mechanism. The ISDS is one of several considerations to be weighed in making investment decisions. If ISDS is were to disappear, foreign investment would not disappear. Foreign investment will always continue, just as foreign investment disputes will continue, whether or not ISDS exists. The disappearance of ISDS would not cause such disputes to disappear. Basically, ISDS is a tool or instrument for the settlement of the kinds of disputes that have always existed and that will in any event continue to exist.
Another factor that needs to be given consideration is the relative size of the amounts at issue—the amount of the claims being made under ISDS, the actual amount of damages eventually awarded, and the value of foreign investment stocks in a particular state. When these figures are put in perspective, it can be seen that apart from a number of fairly well-known exceptions, damages awarded amount to only a tiny fraction of the capital invested in states, which they need to grow their economies.
I'd also like to discuss Canada's changing stance towards ISDS, and particularly its overall position on foreign investment.
Until the 1990s, Canada was essentially a net importer of foreign capital. Since then, Canada has been a net exporter of foreign capital. Canada belatedly joined the shift towards investment agreements and ISDS. It took until the late 1980s for it to sign its first such agreements. However, it caught up quickly, in practice, because although ISDS had been included in treaties in the early 1960s, it really only gathered momentum in the 1990s. Canada was therefore one of the pioneers in the use of ISDS. I am referring here to the use of ISDS against Canada, because there were numerous claims from American investors.
I was looking at the numbers again yesterday. Of the countries most frequently sued under ISDS, Canada is ranked seventh. A total of 30 claims were made against Canada, 29 of which were from American investors. They did not always win, and we can return to this later. Canadian investors also ranked fifth in terms of most frequent users of ISDS globally. This must not be forgotten in reviewing Canada's stance towards ISDS. Thus far, 55 claims have been made by Canadian investors abroad.
I'd like to comment briefly on the origins of the ISDS mechanism.
As I was saying earlier, foreign investment disputes will continue to exist, whether or not there is an ISDS mechanism. All states around the world are bound by the international custom that provides minimal standards for dealing with foreign individuals and goods. In the absence of an investment agreement that spells out the protections included and an ISDS mechanism providing arbitration for investors that have been harmed and the state that harmed them, the system of international law works as follows: the foreign investor's state of nationality or state of origin must make an international claim against the state that wronged the foreign investor. This is what is called diplomatic protection. It's a system that has been around for a long time.
The downside of the system is that a dispute between a private investor and foreign state turns into a dispute between two sovereign states. Historically, this has contributed to deteriorating international relations. There have also been all kinds of diplomatic protection abuses, mainly before, but also in, the 20th century.
States therefore sought to avoid this politicization of investment dispute settlements. Hence the emergence of the idea of establishing direct joint international remedies between the wronged investor and the state in which the investor invested, rather than involving the investor's state of nationality. Several bodies were established, like joint arbitration commissions and joint tribunals, until investment agreements began to include provisions for the ISDS system.
When all is said and done, I cannot stress too strongly that beyond its technical advantages, ISDS primarily provides a political advantage by helping to depoliticize the settlement of investment disputes. It means that a state is not required to get involved in problems being experienced by its investors abroad. It prevents the souring of relations between investors' state of residence and the foreign states in which they invest.
For example, many Canadian investors brought claims against Venezuela for all kinds of reasons. All of these were dealt with by the ISDS process and Canada, as a state, did not have to trigger an avalanche of international claims against Venezuela. Each of these disputes remained limited matters between the company that was wronged and the state in question, in this instance, Venezuela.
Another example is the high-profile Keystone XL pipeline. For the time being, it's still possible to bring a claim under former NAFTA Chapter 11. However, if a situation like this one were to occur in a framework where there was no longer an ISDS mechanism, once the internal remedies had been exhausted, on the assumption that there are such remedies in the United States, Canada would be subject to political pressure and would have to decide whether or not to bring a claim against the United States, whether diplomatically or in court. A company's problem would accordingly become Canada's problem. It's important to keep this aspect in mind.
Problems with ISDS were brought up frequently and I will therefore not address these here. We can return to them in the discussion, if required.
I'd now like to mention a number of options and recommendations for Canada.
First of all, it would be a good idea for Canada to develop a foreign legal policy that is more in tune with ISDS. Canada has in fact embraced just about all of the scenarios being talked about in connection with ISDS. The first suggestion was to completely abandon ISDS in the Canada-United States-Mexico Agreement. Then, there was an in-depth reform of the system put forward by the European Union, which proposed establishing an investment tribunal and an appeal court. And finally, in its bilateral agreements and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Canada maintained the status quo, merely making some ad hoc improvements to the existing system.
It is therefore difficult at this time to ascertain the underlying mindset for all these decisions. It seems to me that Canada should have a more considered and systematic approach. What should this approach be? In my view, it's imperative to begin by identifying the needs of Canadian investors abroad. It's impossible to come up with an approach without being aware of the needs of Canadian businesses investing abroad. It's also essential to establish whether Ottawa wants the responsibility of settling disputes on behalf of all Canadian companies abroad if the decision is made to abandon ISDS. It's important to keep this in mind.
Should our approach be matched to our trading partner's level of development? That's more or less what we appear to be doing, without actually saying so. If that's what we want, it seems to me that our decision should be based on analysis, rather than simply on what the negotiating partner wants. A well-thought-out and consistent policy seems to be lacking in this area.
I believe that some fundamentals need to be dealt with.
One of the problems stemming from Canada's rather kaleidoscopic approach is that there are still some loose ends that need to be tied up. For example, even though Canada is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, it still has some bilateral agreements, including an ISDS mechanism, with some states that are also its CPTTP partners. This peculiar approach means having sets of coexisting treaties with different obligations. It allows investors to choose the most recent treaty, or the oldest, depending on what they want.
Other states, like Australia, systematically abrogate previous treaties when they sign a multilateral treaty that includes the same parties. It's surprising that Canada hasn't done the same.
Canada did so, however, with the European Union. Hence, if the CETA chapter on investment comes fully into force, then it is expected that the six or seven bilateral treaties that Canada still has with European states will be abrogated.
It's unusual to take two different approaches in this area. Once again, I find Canada's approach inconsistent.
Another problem we have is that Canada still has some old bilateral treaties that are still in effect. They were negotiated at a time when the scope of protections, applicable rules of procedure and process transparency were less carefully defined. These older treaties are still out there and could come back to haunt Canada. It is indeed possible that investors might try to invoke the better protection provided in a treaty with other states, under the most favoured nation clause. We therefore run a real risk of seeing efforts to improve the system through more modern treaties thwarted by the invocation of older treaties.
Many states around the world have begun to modernize older treaties. Canada should begin the task of doing so as well.
To conclude, the end of ISDS does not mean the end of regulating disputes with foreign investors. These disputes will continue to exist, but they will simply have to be dealt with otherwise. In the end, whether or not they are settled mainly by domestic courts, there will be pressure on Canada, and it will have to decide whether it is willing to handle claims made by Canadian companies abroad. This needs to be taken into account if the abandonment of ISDS is being considered.
Canada is not the only country to consider discarding ISDS. China was mentioned a short while ago. China appears to have sidelined ISDS in the recent chapter on investment In the regional comprehensive economic partnership signed by 10 member states of the Association of Southeast Asian Nations. One agreement with the European Union also appears to have dropped ISDS. Some states are therefore moving in this direction. It must not be forgotten, however, that disputes will continue. Removing ISDS may simply lead to a renewed politicization of dispute settlement.
We also need to pay attention to the possibility that foreign investors, through careful business planning, might invest in Canada via subsidiaries located in those states with which Canada has investment agreements. Moreover, it might be relatively effortless for investors to circumvent the abandonment of ISDS. Once again, this provides an illustration of the problem caused by Canada's somewhat inconsistent approach, which does not address the matter systematically. In some circumstances, careful business planning could allow private investors to benefit from ISDS in treaties with other states. I repeat that this may not be possible in all instances, because certain conditions need to be complied with, but it is a possibility.
I'll leave it at that for now. Thank you for your attention.