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CETA Will Create a Two-Tiered System for Investment Canada Act Reviews

The text of the Canada and European Union (EU) Comprehensive Economic and Trade Agreement (CETA) is due to be released soon, but it remains to be seen if the Canadian government will clarify which countries, in addition to those in the EU, will benefit from the higher $1.5-billion threshold for review under the Investment Canada Act (ICA).

On October 29, 2013, the Canadian government released the Technical Summary of Final Negotiated Outcomes of CETA, in which it indicated that the ICA threshold would be raised to $1.5 billion for EU investors and that investors from Canada’s other free trade agreement (FTA) partners would also benefit as a result of the most-favoured nation (MFN) commitments in those FTAs. Investors from other countries would continue to be subject to the lower threshold (which itself is expected to be increased to $1 billion by 2016 as per previously announced proposed amendments).

Currently, Canada has FTAs in force with 13 countries, of which only six are entitled to MFN treatment for the higher ICA threshold (the United States, Mexico, Chile, Colombia, Panama and Peru). Canada has two other FTAs with Honduras and South Korea that are finalized but not yet in force. Once they are in force, those countries would also be entitled to MFN treatment.

Following the announcement of CETA on October 18, 2013, Prime Minister Harper indicated that “it should be understood [the ICA threshold change for the EU] raises that threshold not only for Europe, but for all countries with which we have trade agreements.” He went on to say, “Obviously, the 42 countries in the world with which we have free trade agreements are good partners that give us few or no concerns.” In referring to 42 countries, the Prime Minister was also including those countries that have Foreign Investment Promotion and Protection Agreements (FIPAs) with Canada. However, these FIPAs do not entitle any of the signatory countries to MFN treatment for the higher ICA threshold.

In light of Prime Minister Harper’s statement, the Canadian government could voluntarily extend the higher ICA threshold for the benefit of other countries beyond those six countries entitled to MFN treatment under their FTAs. Some options open to the Canadian government include voluntarily extending the higher ICA threshold for the benefit of:

  • the seven countries that are signatories to FTAs with Canada and that are not otherwise entitled to MFN treatment (Costa Rica, Iceland, Israel, Jordan, Liechtenstein, Norway and Switzerland);
  • the numerous countries that are signatories to FIPAs with Canada. However, if the Canadian government were to extend the higher threshold to these countries, Russia (which has a FIPA with Canada) would be entitled to the higher ICA threshold but Australia (which does not have an FTA or a FIPA with Canada), for example, would not. Similarly, China (whose FIPA with Canada is due to come into force on October 1, 2014) would be entitled to the higher ICA threshold but Japan (which does not have an FTA or a FIPA with Canada), for example, would not;
  • the Organisation for Economic Co-operation and Development member countries (Australia, Japan, New Zealand, Switzerland and Turkey); or
  • all World Trade Organization member countries (in which case there would be no two-tiered system for ICA review).

Given the current geopolitical environment and the ongoing Trans-Pacific Partnership and other free trade agreement negotiations, at this time we do not expect the Canadian government will voluntarily extend the higher ICA threshold beyond the seven countries that are not entitled to MFN treatment under their FTAs with Canada.

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