Canada has just ratified the Foreign Investment Protection Agreement (FIPA) that it signed with China more than two years ago when Prime Minister Stephen Harper met then-PRC President Hu Jintao at the APEC Summit in Vladivostok, Russia in September 2012. It will come into effect on October 1. China ratified the agreement almost immediately but it languished in Canada until now while numerous critics, including some within the government, took potshots at it. Critics accused the government of selling out Canada’s sovereign right to legislate in key areas of the environment, health and safety and of giving Chinese corporations, including those ultimately owned by the Chinese state, the right to circumvent Canadian law by appealing regulations that negatively affect their investments to a “secretive” third-party international tribunal. Even when ratification came, it was announced more with a whimper than a bang, with the press release going out on a Friday afternoon to minimize rather than enhance media coverage. This did not deter critics who were quick to denounce the FIPA. The Green Party of Canada for example, with two members in the 308 member House of Commons, immediately launched a “Stop the Sellout to China” online campaign.

Why was the government so eager to hide its light under a bushel and why was the FIPA quietly ratified now? The criticisms of the Agreement, which began in earnest after it was tabled in Parliament after the signing in 2012, focus mainly on two areas:  the potential impact on Canada of more Chinese investment and weaknesses in the Agreement with respect to greater access for Canadian investors in China. While there is always potential for Chinese companies operating in Canada to use the arbitration procedures in the Agreement to dispute new regulations, the doomsday scenarios painted by the critics are inaccurate and overblown. On the flip side, not only does the Agreement provide Canadian companies operating in China with greater protection from arbitrary or capricious actions, there is a “hidden” silver lining with respect to broader access.

The controversy over the Canada-China FIPA is in part the result of the increasing use of the “investor-state” dispute settlement provisions in many trade and investment agreements. This investor-state clause allows foreign corporations to sue sovereign governments when they take measures that damage the expected returns of those investors. The standard of proof is high, and the measures must be discriminatory, unreasonable and amount to being the equivalent to expropriation. That has, however, not stopped tobacco companies from suing a government for bringing in plain-packaging regulations for cigarettes on health grounds, (a case that has yet to be decided). However, by and large, tribunals have mostly dismissed such complaints. The US government has been on the receiving end of a number of “investor-state” complaints brought by Canadian and Mexican companies under NAFTA, but so far none have been upheld. Canada has lost or settled several cases brought by US companies, but most have been dismissed.

Canada has signed or has in-force FIPA agreements with more than 38 countries, but until the China FIPA came along no-one took much notice because in almost all cases there was very little investment by the partner country in Canada and the main focus of the agreement was to protect overseas investments by Canadian companies. In the case of China, the shoe is on the other foot, since Chinese investment in Canada now is not only larger than Canadian investment in China, but it has the potential to grow significantly. This, combined with the fact that much of the Chinese investment in Canada is from State Owned Enterprises (SOEs), has raised the spectre of undue influence over sectors of the Canadian economy by the Chinese state. Other issues affecting the bilateral relationship, such as accusations of Chinese cyber-snooping, China’s human rights record, its foreign policy etc., became part of the equation for those uneasy with China’s growing assertiveness and role in the world. This was exemplified by the controversy that surrounded the acquisition of the Canadian oil company Nexen by the Chinese National Offshore Oil Corporation (CNOOC), an SOE, in 2012. Canada ultimately approved that acquisition, but ruled out any further majority acquisitions of energy companies by SOEs – Chinese or otherwise.

Leaving aside issues such as whether China’s conduct of its domestic or foreign affairs is reason not to do business with it (a position taken by ideological opponents of China but not widely shared), the critics of the FIPA have chosen to ignore the many safeguards in the Agreement that allow governments to regulate for valid public policy purposes, including for environmental and health reasons. The requirements are that measures be reasonable in terms of achieving their public policy goals and non-discriminatory vis a vis foreign investors, but they do not prevent a government from regulating in the public interest.

Critics of the FIPA have also focused on its silence with regard to providing enhanced market access for Canadian investors to closed sectors of the Chinese economy. They argue that the Agreement is unbalanced because more sectors of the economy in Canada are open to foreign investment than is the case in China, at this stage of its development. To use a Canadian hockey analogy, the Chinese can skate on the whole rink but Canadians only get a portion of the Chinese ice.

With regard to one of the key principles of the agreement – national treatment – which ensures that Canadian investments will be treated no less favourably (in like circumstances) than domestic enterprises, and the FIPA is limited to “expansion, management, conduct, operation and sale or other disposition” of covered investments. In other words, it does not cover “establishment” or “pre-establishment”, i.e. market entry. Only after the host government has approved an investment will it be accorded national treatment. The same, of course, applies in Canada, which permits the screening of incoming Chinese investment through the Investment Canada review process – the mechanism used in the case of the acquisition of Nexen by CNOOC. Despite this limitation, the Agreement offers significant benefits for investors from both countries, particularly protection against arbitrary and discriminatory treatment for established investments and access to an impartial redress mechanism.

While the Agreement does not grant reciprocal market access for investment, something that China traditionally has been unwilling to concede, there are good reasons for Canadian investors to be optimistic that restrictions on closed sectors of the Chinese economy will be eased. Another key principle of the Agreement – most favoured nation (MFN) treatment – provides that investors of the two parties will be given treatment no less favourable than that accorded (in like circumstances) to other foreign investors with respect to the “establishment, acquisition, expansion, management, conduct, operation and sale or other disposition” of the investment. In plain language, if China grants access to a previously closed sector of its economy to the investors of another country, for example the United States, it is obligated to provide the same access to Canadian investors. And this is where the US-China Bilateral Investment Treaty (BIT) comes into play.

China and the US have been negotiating their BIT since 2008 and until recently progress was slow. Like Canada, the US has BITs with many countries. Like Canada, the US seeks to obtain market access (pre-establishment and establishment) commitments in its investment treaties, subject to negotiated sectoral exclusions. The least protectionist way to deal with sectoral exclusions is to create a “negative list” in which all sectors not specifically identified on the list are considered open to foreign investment. Until recently, Chinese unwillingness to consider establishment or market access commitments was a major stumbling block to progress on the US-China BIT. However, China’s position has recently evolved, in part for domestic reasons following the Third Plenum in 2013 in which a decision was made to continue to open and reform the Chinese economy.

In July of this year, at the conclusion of the 2014 Strategic and Economic Dialogue (S&ED) bilateral talks between Beijing and Washington, it was announced that China and the US would be starting substantive negotiations on the negative list, potentially opening the way to early conclusion of the Agreement. At last year’s S&ED talks, the two countries had agreed to BIT talks on the basis of pre-establishment national treatment using a negative list approach. So, although Canada was unable to leverage Beijing to include establishment issues in its FIPA, which was concluded before the breakthrough in the US-China BIT talks, if the US is successful in opening new sectors of the Chinese economy to US investors, Canadian investors will equally benefit from the establishment provisions thanks to the MFN clause in the Canada-China FIPA. This factor, along with the desire of Canadian officials to get the FIPA issue behind them prior to Prime Minister Harper’s expected bilateral visit to China following the APEC Summit in Beijing in November, is no doubt related to the decision to ratify the Agreement now.

It is of course uncertain whether the US-China BIT will be successfully concluded. Both countries will present a negative list of excluded sectors, with the Chinese list being considerably longer than the US exclusions. Given the respective levels of economic development, this is not surprising. The US will also be sure to retain the ability to review inward Chinese investment, with the trump card always being “national security”. Indeed, national security was invoked in the recent review of the takeover of Smithfield Foods, a US pork producer, by China’s private Shuanghui International in 2013, with arguments being made that the takeover could affect US food security or safety. These concerns were sensibly dismissed and the transaction approved, but it shows the sensitive nature of Chinese investments, even though, in contrast to Canada, more than 70% of Chinese investment in the US comes from non-SOE companies.

China, under the reforms of the Third Plenum, will continue to play a major role in the global economy even as it shifts its focus from almost double-digit export-led growth to a more balanced policy focused on domestic consumption, innovation and further opening of the economy to foreign participation. At the same time, Chinese companies will continue to internationalize and seek outward investment opportunities. Western companies want to be ready to take advantage of this shift and supply the growing middle class market in China, which already exceeds the total population of the US. At the same time, Chinese investment abroad can bring needed infusions of capital and create jobs in receiving countries. Repeated studies have shown that trade follows investment, so the clearer the rules are around investment the better it will be for Western companies in China, be they Canadian, US or otherwise, and for Chinese companies going overseas.

Hugh Stephens is Principal of TransPacific Connections (www.tpconnections.com), and Senior Fellow at the Asia Pacific Foundation of Canada, Vancouver and the Canadian Defence and Foreign Affairs Institute, Calgary. He served for 30 years in the Canadian foreign service in a number of positions in Asia and in Ottawa, as Assistant Deputy Minister in the Department of Foreign Affairs and International Trade. From 2001-2009 he was Senior Vice President (Public Policy) for Asia-Pacific for Time Warner, based in Hong Kong.