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A Canada–U.K. deal that protects Big Oil? We should be cheesed off.

A post-CETA free trade deal with the United Kingdom should facilitate decarbonization and a just transition, not get in the way.

June 3, 2021

7-minute read

Boris Johnson insists Canadians should be eating more Wensleydale. Actually, that’s putting it a bit mildly.

What's really needed now is more affordable, high-quality British cheese in Canada,” exclaimed the United Kingdom’s prime minister in a late-May interview with the CBC’s Rosemary Barton, “and I hope that we can do a deal to allow that.”

Ominously, Johnson then produced an enlarged photo of his new national flagship, the Stinking Bishop, a Royal Navy vessel on a mission to promote British interests around the world. The implication was clear: resist Britain’s demands and face a hot rain of Shropshire Blue from the Bishop’s 100+ heavy cannons.

I’m playing with you here. The recently announced trade flagship does not yet carry the name of a Gloucester semi-soft (I may submit the idea if the U.K. holds a naming contest for the vessel and it’s open to residents of the colonies). Johnson did not show Barton a picture of the vessel on her Sunday news show, and as far as we know it won’t be armed. But the promised new deal with Canada is quite real. And it will cover much more than the cultured and aged excretions of bovine mammary glands.

A likely chapter on investment protection, depending how it’s played, may even have gunboat-diplomacy-like effects, by shielding entrenched fossil fuel interests from demands for democratic control and a just transition.

Earlier this year, Canada ratified a Trade Continuity Agreement (TCA) with the U.K. that more or less upholds the bargain reached between Canada and the European Union in the 2017 Comprehensive Economic and Trade Agreement (CETA).

Having quit the EU in 2020, the U.K. forfeited membership in Europe-wide trade deals like CETA. The bilateral TCA is meant “to provide stability and predictability for businesses and workers in both countries,” according to the Canadian government.

Somewhat paradoxically (if stability is your goal), Canada and the U.K. committed in that deal to begin negotiating a totally different agreement by April 2022. This presents an interesting challenge for critics of neoliberal trade regimes.

On the one hand, we should not mourn the end of CETA’s applicability to Canada–U.K. trade. Canada made unnecessary sacrifices and missteps in that deal in return for very modest market access improvements in a limited number of export sectors. The result was a “last century” deal that reinforces inequity and corporate bias in the global rules-based order, one that may well depress wages in the long run and that has so far perpetuated Canada’s pre-CETA trade deficit with the EU, according to a 2019 CCPA report.

As part of this sad CETA bargain, municipal governments in Canada are now prohibited from applying local preferences or economic development conditions to most public purchasing, a progressive policy option still available to cities in most other countries.

As part of this sad CETA bargain, municipal governments in Canada are now prohibited from applying local preferences or economic development conditions to most public purchasing.

A new certificate of supplementary protection regime in Canada, mandated by CETA’s intellectual property chapter, has already extended lengthy monopoly protection for dozens of brand-name medications by up to two years, with many more in the patent pipeline. This one-sided Canadian concession will soon be reflected in increased costs for private and public drug plans that would otherwise have been able to purchase cheaper generics sooner.

Importantly, CETA includes a strong investment protection chapter and “investment court system,” an institutionally novel form of investor–state dispute settlement (ISDS) built to save the transatlantic deal from popular opposition in Europe. This ISDS “court” is not yet operational, as all EU member states must first ratify CETA and only half have done so.

A key question for Canada and the U.K. is therefore whether to include a CETA-style investment chapter in their bespoke free trade pact or something closer to traditional ISDS.

If our governments truly care about transitioning away from fossil fuels and zeroing greenhouse gas emissions, they will ditch both options.

The ISDS regime was developed after the Second World War to shield Western private investment, mainly but not exclusively in resources, from interference or nationalization by governments in newly independent former colonies. In 1958, the German financier Hermann Abs worked with Royal Dutch Shell to produce a draft treaty, or “Magna Carta for the protection of foreign interests,” in Abs’ words, whose provisions “pervade the more than 3,000 investment treaties that are in force today,” writes Nicolás M. Perrone in his new book, Investment Treaties and the Legal Imagination (Oxford University Press).

These treaties, like CETA or the old NAFTA, allow foreign firms and investors to bypass local courts and sue countries, sometimes for billions or even tens of billions of dollars, when they feel a government decision has unfairly hurt their investments or their ability to profit from them. The disputed measure needn’t be discriminatory, expropriative or patently abusive to violate the generous investment guarantees in a standard treaty.

Government-led clean energy transitions, controls on utility rates to keep water or electricity affordable to the public, and decisions not to grant mining permits to unpopular and/or environmentally damaging extractive projects have all been successfully challenged in ISDS proceedings.

To date, Canada has lost or settled 10 ISDS claims filed under NAFTA and paid out more than $263 million in damages to private claimants while soaking up more than $113 million in unrecoverable legal costs (up to March 2020).

Nearly two-thirds (64%) of all ISDS claims against Canada have targeted environmental or resource management decisions by federal or provincial governments.

In one notorious case, U.S. aggregates firm Bilcon won compensation from Canada for a rigorous environmental assessment that put a stop to a proposed quarry in an environmentally sensitive coastal region of Nova Scotia. The lone dissenting arbitrator in that case called the decision a “significant intrusion into domestic jurisdiction” that “will create a chill on the operation of environmental review panels.”

Nearly two-thirds (64%) of all ISDS claims against Canada have targeted environmental or resource management decisions by federal or provincial governments.

Even emergency responses to unexpected crises like the 2007–09 global financial crisis or the current COVID-19 pandemic are not off-limits to opportunistic investors seeking compensation for alleged violations of their considerable investment treaty rights. Chrystia Freeland, then foreign affairs minister, said at the conclusion of the CUSMA negotiations in 2018 that removing ISDS from the new NAFTA “strengthened our government’s right to regulate in the public interest, to protect public health and the environment.” Canada’s pitiful record backs her up on this point.

As CCPA trade researcher Scott Sinclair said in his April 2021 report, The Rise and Demise of NAFTA Chapter 11, getting rid of ISDS in CUSMA was a remarkable victory for social movements who have campaigned for years against international investment arbitration. So it was disturbing to watch a Global Affairs Canada official claim before the House of Commons trade committee in February that “Canada maintains the flexibility to negotiate variable outcomes with respect to our various partners on ISDS, and we would determine whether or not we would be seeking ISDS on a case-by-case basis.”

Extricating Canada from the policy-chilling effect of NAFTA’s investment chapter only to jump into a similar legal arrangement with the U.K. makes little sense in light of Freeland’s negative comments about ISDS. It looks downright foolhardy when we consider the frequent use of investment treaties by British firms, and the extractive sector in particular, to challenge government regulation of oil, gas and mining projects.

Of 1,104 known treaty-based ISDS cases globally up to December 31, 2020, 90 (just over 8%) involved U.K.-based investors. This is about half the number of known cases brought by U.S. investors internationally (194, or almost 18%), which include several dozen claims against Canada under NAFTA, as mentioned above. And it is about a third more cases than Canadian investors have lodged abroad (58, or just over 5% of all known ISDS claims globally).[1] U.K. firms averaged a few cases a year until about 2010, when annual caseloads intensified, peaking at 10 in 2015.

Of the 40 U.K.-based ISDS cases launched since 2015, 17 (about 42%) involve the extractive sector. In 2017, British firm Rockhopper used the ISDS process in the Energy Charter Treaty to demand US$350 million in compensation for Italy’s 2016 ban on new oil and gas operations near the country’s coast. The case is pending.

Expanding ISDS to cover litigious British firms can only frustrate efforts in Canada to fight climate change by hobbling government plans to phase out fossil fuels, implement stricter sustainability criteria on mining operations, or transition to cleaner forms of power generation.

Canada is already facing one investor–state dispute from a coal mining firm incorporated in Delaware, which claims Alberta’s phaseout of coal-fired electricity violates its NAFTA rights to minimum standards of treatment. Multiple similar ISDS cases demanding billions in compensation have been filed in Europe against clean energy transitions.

Just as ISDS between Canada and the U.K. would threaten legitimate public responses to climate change here, so too would Canadian firms be able to challenge just transition measures in the U.K.

The Mining Association of Canada has called for “the continued inclusion of robust ISDS mechanisms” in Canadian trade and investment agreements. Canadian oil, gas and mining companies listed on the London Stock Exchange through subsidiaries may even be able to sue Canada under a poorly worded investment treaty, a legal sleight known as “treaty shopping.”

Based on Canada’s high-profile push to attract more foreign investment in our domestic extractives sector, this disciplinary feature of ISDS might be part of the appeal for Global Affairs Canada and the federal government.

Neither the CETA “investment court” nor the investment chapter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (which the U.K. is seeking to join) provide much cover for government measures aimed at decarbonization, strengthening environmental assessments of new extractives projects, or achieving our Paris Agreement commitments.

Canada’s current roster of Foreign Investment Protection Agreements (FIPAs) also permit ISDS claims against expropriation and minimum standards of treatment even where a disputed government measure was taken as part of Canada’s treaty responsibilities to Indigenous peoples.

The International Energy Agency now claims that any new investment in fossil fuels is dangerously out of step with a safe climate, reversing decades of advocacy for the sector. Pursuing a trade and investment treaty with the U.K. or any other country that facilitates and protects investment in oil, gas and other unsustainable extractive projects is, frankly, much more preposterous than Johnson’s musings about British heirloom cheddars.

Canada should follow its own lead in the CUSMA negotiations by joining the growing number of countries withdrawing from the anti-democratic, environmentally backward investment arbitration regime. If ISDS were a cheese, it would be far past its best-before date. Time to throw it away.

[1] Case number totals from the UNCTAD Investment Dispute Settlement Navigator, with additional calculations from the author.

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