TORONTO — Is Canada’s constitution and solvency less important than Europe’s?
I’m asking that question because the pending Canada-Europe trade deal (or CETA) is leading to little-known discussions in Europe — but not in Canada — about the deal’s constitutional and fiscal implications.
As planned, the deal will allow investor-state arbitrators, outside Canadian or European courts, to award vast sums of public money to a special class of private litigants: foreign owners of assets.
In light of this, the federal government and the provinces need to clarify, as the Europeans are doing, how they plan to protect federalism and public budgets from the ravages such open-ended liability could have on our economy.
While the role of investor-state arbitrators is opaque, it is more powerful and far riskier for voters and taxpayers than other international forums such as the World Trade Organization. For example, the arbitrators can award large amounts to foreign investors without giving a government the opportunity to avoid liability by altering the decision which it condemns. More worrying, the arbitrators are not judges, and even have an apparent interest to favour investors because, unlike in other forms of arbitration, only one side — the investors — can sue and, in turn, create future lucrative work for the arbitrators.
Put simply, under CETA, foreign investors will enjoy powerful rights under a lopsided process, without assuming any responsibilities that are actionable by governments.
Since the arbitrators began using their power over the public purse in the late 1990s, Canada has paid out about $160 million under NAFTA to U.S. companies. The U.S. has paid nothing to Canadian companies. Other countries under similar treaties have been ordered to pay billions and, although federal trade officials downplay the risk, the trade deal with Europe undeniably heightens the prospect of dubious yet costly awards against Canada.
For their part, the Europeans have recognized that investor-state arbitration raises important constitutional and fiscal concerns. For example, who should pay — the European Union or individual European countries — if Europe is told to compensate a foreign investor because of a member state’s implementation of a European Commission directive that required tighter environmental regulations? How can governments avoid liability when the arbitrators have interpreted similar treaties in widely varying ways and are not subject to fulsome appeal?
The European Commission, council, and parliament have engaged in extended negotiations about these issues. The commission has reportedly told European member states that it will not complete the investment negotiations with Canada until an agreement is reached within Europe about the division of legal and financial responsibility for investor-state arbitration.
It is vexing that, while commentators have flagged the same issues in Canada since NAFTA, our governments have done virtually nothing to resolve them, at least publicly. Likewise, it remains a mystery why Canada, having fared far worse than the U.S. in investor-state arbitration under NAFTA, reportedly asked to include investor-state arbitration in the Europe trade deal.
Under NAFTA, the federal government, without seeking provincial consent, accepted an investor-state arbitration process that became the first — and practically the last — such process ever agreed between developed countries with mature court systems. This was a historical departure from the usual practice of Western countries, at least when on the receiving end of capital flows from another country, to require foreign investors to accept the exclusive authority of their own legislatures and courts.
Since NAFTA, the constitutional issues have been left to simmer, made possible partly because no investment treaty concluded by Canada since NAFTA applied to substantial inward investment in Canada. Also, the amounts paid by Canada to U.S. investors under NAFTA thus far have been manageable.
These issues now loom large as the arbitrators increasingly flex their muscle and as the Harper government prepares to quadruple-down on investor-state arbitration by committing us, for decades, to three new trade or investment agreements with major economies. These include the Europe trade deal, the Canada-China investment treaty (or FIPA), and the U.S.-led Trans-Pacific Partnership.
The main worry is that the Harper government is so intent on delivering rapid-fire deals that it is shunting aside important concerns. If the Europeans can take time to work through the constitutional and fiscal implications and report publicly, why are governments in Canada not doing the same?
Governments need to anticipate and manage their fiscal position in the brave new world of foreign investor rights, especially as the Harper government is poised to make Canada the most locked-in Western country, long-term, in investor-state arbitration. Canadians at least need to know who is responsible if this rushed deal turns out badly.
Gus Van Harten is a professor at Osgoode Hall Law School. His research focuses on international investment law.