It is not often that China-watchers look for policy clues in Ottawa. However, a new bilateral investment treaty between Canada and China offers the latest glimpse into China’s thinking on international law protections for FDI. The pact between China and Canada, which was unveiled in late September, will be studied especially closely in Brussels and in Washington, where efforts remain afoot to conclude similar investment treaties with China.

Observers have been especially keen to see if China would agree to open new markets to Canadian investors. However, it appears that Canada has tried, and failed, to get China to agree to treat Canadian investors on the same footing as Chinese investors for purposes of establishing or acquiring new investments in China. Instead, the new pact merely promises that Canadians will enjoy a level playing field with other non-Chinese players when jostling for access to the Chinese market.

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The Canada-China pact also fails to rein in the use of subsidies or other forms of state-support – a perennial sore point for private companies competing with state-backed Chinese firms. While the agreement falls short with respect to liberalising investment flows, it does put in place a strong legal framework to protect investments of one country that have been approved for operation in the other’s territory. At this 'post-establishment' phase, foreign-owned investments will enjoy protections that include:

  • guarantees that nationalisation will not take place without full compensation;
  • assurances that foreign investors will not suffer discriminatory treatment at the hands of local authorities; and
  • promises that investors will be assured basic standards of due process and fairness.

Canada also persuaded China to accept certain exceptions and safeguards which are designed to ensure that protections for foreign investments do not over-reach and impinge upon legitimate public welfare regulation, including new environmental and safety regulations. This will be of particular interest to Washington and Brussels, as policymakers grapple with how best to protect the expectations of foreign investors while leaving room for governments to introduce new policies designed to promote broader public welfare.

The protections of the China-Canada pact are underwritten by a binding dispute settlement mechanism that allows investors to sue before an international arbitration tribunal if the host country has breached its treaty obligations. While this arbitration mechanism may be viewed by Canadian investors as a welcome alternative to opaque and unreliable Chinese courts, the reciprocity of this mechanism means that Chinese investors in Canada can now detour around a Canadian court system that was not lacking in due process. Given that the China-Canada pact opens the door for the use of international arbitration to resolve FDI disputes, it is a pity that the two sides could not agree on an arbitration process that is open to the wider public and the media.

While Ottawa has long pushed for international arbitrations to be open to public scrutiny, the China-Canada treaty only provides that the final rulings of these adjudicative tribunals will be published. Otherwise, the parties to a given dispute can veto efforts to open up the hearings themselves – not to mention the voluminous written legal records from such cases. Unfortunately, because key aspects of the dispute settlement process can be shielded from public view, it will be harder for observers – including those in Brussels and Washington – to judge the full legal and policy ramifications of this latest Chinese investment treaty.

Luke Eric Peterson is the publisher of Investment Arbitration Reporter (http://www.iareporter.com), an online news and analysis service monitoring foreign investment law disputes.