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Canadian Foreign Investment Policy and the International Politico-Legal Process

Published online by Cambridge University Press:  09 March 2016

D. J. Albrecht
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Canadian Yearbook of International Law/Annuaire canadien de droit international , Volume 21 , 1984 , pp. 149 - 175
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Copyright © The Canadian Council on International Law / Conseil Canadien de Droit International, representing the Board of Editors, Canadian Yearbook of International Law / Comité de Rédaction, Annuaire Canadien de Droit International 1984

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References

1 Foreign Investment Review Act, S.C., 1973–74, c.46, am. 1976-77, c. 52.

2 For example, the United States, supported by Western Europe and Japan, formally submitted a complaint to a GATT Panel of Experts pursuant to Article 23 procedures. The complaint concerned Article 3 (national treatment) with respect to Canadian sourcing undertakings extracted by the FIRA process, and Article 17 with respect to export undertakings. The Panel recently decided that the sourcing requirements violated Article 3 (see the Globe and Mail, Wednesday, July 13, 1983, at 1). It is expected that the GATT Council will give its formal approval, thus leading to the possibility of retaliatory actions should Canadian policy not be changed.

3 “Portents Troubling on U.S. Trade Policy,” in Canada’s National Journal of Business Investment and Public Affairs, January 8, 1983.

4 Wilson, , Foreign Investment in U.S. Industry 5 (1980) (U.S. Congress; Congressional Research Service — Major Issues System)Google Scholar. This is the reaction of a state with an economy over 10 times the size of Canada, yet with a level of foreign investment equal to or less than that of Canada: see infra note 9.

5 Budget Paper on Economic Development in the 1980’s (excerpts published in the Globe and Mail, November 13, 1981, at A12).

6 National Energy Program, Energy, Mines and Resources, Canada (1980) and UPDATE (1982). The details involved are beyond the scope of this article. For more information, see the Canadian Energy Program Reporter, CCH Canada Limited (Don Mills, Ontario, 1982).

7 Steiner, Henry and Vagts, Detlev F., Transnational Legal Problems 45 (2nd ed., Mineólo, New York, 1976)Google Scholar. In 1980, the figure was 82% (New York Times, January 28, 1983, at D13, speech of Canadian Ambassador Allan Gotlieb).

8 Task force on the Structure of Canadian Industry, Foreign Ownership and the Structure of Canadian Industry 1 (Watkins Report) (Ottawa, 1968).

9 Note, “FDI in the U.S.,” (1976–77) 26 Am. U.L. Rev. 109, 121. In the publication, Survey of Current Business, Bureau of Economic Analysis (August 1981), it appears that the U.S. has barely edged out Canada for top place overall, but Canadian threshold requirements are 50% foreign ownership whereas the U.S. uses a 10% ownership level.

10 OECD, Penetration of Multinational Enterprises (in the Manufacturing Industry in Member Countries) (Paris, 1977).

11 For example, the lack of research and development resulting from the branch plant nature of the economy. Canada has a lower research and development level than that of any other major industrialized nation: see OECD, Trends in Industrial Research and Development, 1967–1975 (Paris, 1979), using table 1.2 on p. 102, which compares total intramural expenditures to the domestic product of industries. Another problem is the use of foreign suppliers (hence the FIRA sourcing requirement).

12 Levitt, Kari, Silent Surrender: The Multinational Corporation in Canada (Toronto, 1970)Google Scholar. For additional views see Gordon, , A Choice for Canada (Toronto, 1966)Google Scholar; Safarian, A. E., Foreign Ownership of Canadian Industry (Toronto, 1966)Google Scholar, a study of the performance of Canadian subsidiaries. See Johnson, Harry G., The Canadian Quandary (Toronto, 1963)Google Scholar, for a contrary look at nationalist aspirations. See also Livtak, and Maule, , “The Multinational Firm and Conflicting National Interests,” (1969) 3 J. World Trade L. 309 Google Scholar, concerning the responsiveness of foreign-owned subsidiaries to Canadian government policy.

13 For example, the efforts of the OECD members, France and Japan; see American Bar Association, Guide to Foreign Investment 260–77 (New York, 1979). For an excellent study of the French system of administrative discretion as to whether to authorize foreign investment, see Torem, and Craig, , “Foreign Investment in France,” (1971) 70 Mich. L. Rev. 283.CrossRefGoogle Scholar

14 Such as evidenced by the proposed UN “Code of Conduct for Transnational Corporations” or the OECD Guidelines for MNE’s (infra note 65 and following).

15 The Foreign Investment Review Agency, “Foreign Investment Review,” Spring 1980, at 13 and Winter 1977–78, at 20.

16 Final Report of the Royal Commission on Canada’s Economic Prospects, Ch. 18 (Ottawa, 1958).

17 Supra note 8. It was never given official recognition and status, although it was commissioned by the government.

18 Foreign Direct Investment in Canada (Ottawa, 1972).

19 Canada extensively uses the international legal process. For example, expansion of fishing zones; protection of the Arctic and marine environments; the east coast boundary dispute (George’s Bank); complaints of extraterritorial application of national laws of some states. In the words of Prime MinisterTrudeau, , “Canada strongly supports the rule of law in international affairs,” H.C. Deb. (Canada) 1970, April 8, at 5623–24.Google Scholar

20 Chayes, Abram, The Cuban Missile Crisis 44 (New York, 1974).Google Scholar

21 There would appear to be some 17 such treaties still in force (from correspondence with the Economic Law and Treaty Division, Department of External Affairs, Canada). The principal one of interest is the treaty with Spain, negotiated between 1922 and 1927. Canada also entered into a FCN treaty with France in 1936 that may be of interest. They have both been enacted into legislation (S.C. 1928, c. 49 and S.C. 1932–33, c. 30 respectively) and accordingly are part of the domestic law of Canada should they be of benefit to any person. It seems to be accepted that Canada inherited the rights and obligations of the British FCN treaties: see 15 Canadian Yearbook of International Law 339–40 (1976). The peculiar circumstances in which Canada and the other Dominions evolved into independent states over a relatively long time period might explain this: see Kennedy, W. P. M., The Constitution of Canada: An Introduction to Its Development and Law (2nd ed., 1938, reprint, New York, 1973).Google Scholar

22 Britain and Canada never recognized it as being in force after the War of 1812 (see British and Foreign State Papers, Vol. 7, at 94, in Treaties and Agreements Affecting Canada in Force between His Majesty and the United States of Canada, 1814–1925, at vii (Department of External Affairs, Ottawa, 1927). The U.S. courts have taken the same view of Article 3 of the Treaty (see Karnuth v. U.S., 279 U.S. 231 (1929); U.S. v. Garrow, 88 F. 2d 318 (1937); Aikins v. U.S., 551 F. 2d 1222 (1927), but not of some other articles (for example Article 9) affecting vested rights. In any event, the doctrine of desuetude would seem to have application.

23 See Weston, , “Constructive Takings under International Law: A Modest Foray into the Problem of Creeping Expropriations,” (1975–76) 16 Va. J. Int’l L. 103, 113Google Scholar; Christie, , “What Constitutes a Taking of Property under International Law,” (1962) 38 Brit. Y.B. Int’l L. 307 Google Scholar; Vagts, , “Coercion and Foreign Investment Rearrangement,” (1978) 72 Am. J. Int’l L. 17.CrossRefGoogle Scholar

24 Ibid. For example, see The Norwegian Claims (Norway v. United States), I UNRIAA 307 (1922), Scott, The Hague Court Reports (and ser.) 39, cited in Christie, supra; cf. Sohn, and Baxter, , “Draft Convention on State Responsibility for Injuries to the Economic Interests of Aliens,” (1961) 55 Am. J. Int’l L. 545 CrossRefGoogle Scholar. See the opinions of Judges Fitzmaurice and Gros in the Barcelona Traction case, [1970] I.C.J. Rep. 4, at well as those of the majority (at p. 51) who did not reach the merits of the case.

25 “No person shall have any right to … compensation, damages or indemnity … for any acquired, vested or future interest … replaced or otherwise affected by this Act”: sec. 61(2), Bill C-48, 1st session, 32nd Parliament, 29 Eliz. II, 1980.

26 A comprehensive review of the evidence in the area is provided by Dolzer, , “New Foundations of Expropriation Law,” (1981) 75 Am. J. Int’l L. 553, 553–72CrossRefGoogle Scholar. Dawson, and Weston, , “Prompt, Adequate and Effective: A Universal Standard of Compensation,” (1961–62) 30 Fordham L. Rev. 727 Google Scholar, and Lapres, , “Principles of Compensation for Nationalized Property,” (1977) 26 Int’l and Comp. L,Q. 97 CrossRefGoogle Scholar, are examples of the myriad of law review articles in the area; cf. Arechaga, , “State Responsibility for Nationalization of Foreign Owned Property,” (1979) 11 N.Y.U. J. Int’l L. and Pol. 179 Google Scholar, for a Third World view accepting the basic principle. Perhaps it can be said that a “non-universal” customary international law rule requiring the payment of appropriate compensation has developed (see Jessup, , “Non-Universal International Law,” (1973) 12 Col. J. Trans. L. 418)Google Scholar. This position would certainly seem to be supported by Canadian practice (see Castel, J. G., International Law 1153 (3rd ed., Toronto, 1976)Google Scholar and by the practice of other Western industrialized nations (ibid., 1123–25). For a recent illustration, consider the potash industry takeover by the Saskatchewan provincial government in the mid-1970’s (analyzed in Richards, John and Pratt, Lawrence, Prairie Capitalism: Power and Influence in the New West (Toronto, 1979)) where appropriate compensation was negotiated.Google Scholar

27 Canada Oil & Gas Act, S.C. 1980-81-82, c. 81, s. 29, provides for compensation of past exploration costs, based on a complex formula, to be paid out of the Crown’s share of future production.

28 Schwarzenberger, Georg, A Manual of International Law 123 (6th ed., Milton near Abington, Oxon, 1976)Google Scholar. There is no explicit constitutional protection of property rights in Canada.

29 Ibid., 3, 7, 123. Mann, F. A., “State Contracts and State Responsibility,” (1960) 54 Am. J. Int’l L. 572, 587CrossRefGoogle Scholar, maintains this is the position in international law even if a state has undertaken not to terminate or change the contract.

30 Saudi Arabia v. Arabian American Oil Company (Aramco Arbitration Tribunal, August 23, 1958, 27 Int’l L. Rep. 117. More recently, see Texaco Overseas Petroleum Co./California Asiatic Oil Co. v. Government of Libyan Arab Republic, Geneva, January 19, 1977, (1978) 17 Int’l Leg. Mat. 1; also Award in the Arbitration between Kuwait and the American Independent Oil Co., March 24, 1982, (1982) 21 Int’l Leg. Mat. 976.

31 Ibid.

32 Despite Professor Jenning’s arguments for such a rule in “State Contracts in International Law,” (1961) 37 Brit. Y.B. Int’l L. 156, it would seem that the question is really whether one should be created (Mann, supra note 29, at 588). In this connection, consider the continuing existence of the “Calvo clause” doctrine; cf. Mann supra note 29, at 577–80, and Brownlie, Ian, Principles of Public International Law 549 (3rd ed., New York, 1979).Google Scholar

33 Butterworths, Canada’s Tax Treaties, vol. 1, at 203 (reproducing excerpts from the 1969 Government White Paper on Tax Reform). The Model Conventions are: the Draft Double Taxation Convention on Income and Capital (OECD, Paris, 1963) ; and the Model Double Taxation Convention on Income and Capital (OECD, Paris, 1977). Text and official commentary are provided in the Butterworths service.

34 It is the subject of a Recommendation rather than a Decision which is binding (Art. 5 of the OECD Convention).

35 Recommendation of the Council, Concerning the Avoidance of Double Taxation, April il, 1977 (see supra note 33, Canada’s Tax Treaties, at 1501).

36 Canada’s Tax Treaties, supra note 33, at 315.

37 For a detailed review, see Robertson, and Bissett, , “Non-Discrimination (Article 24),” (1979) IFA Canada Seminar 304–11.Google Scholar

38 The explanation given by the commentary to Art. 24(4) is that the article also provides for a situation where an enterprise of a contracting state is not a national of that state (which is possible given that the definition of national in para. 2 refers to the place of organization of the company rather than its residence); it states that “strictly speaking … [para. 4 is] designed to end … discrimination based not on nationality, but on the actual situs of an enterprise.” Perhaps it is simply to ensure that the treatment of a permanent establishment is equivalent to that accorded to resident corporations, that is, those organized under the laws of the state concerned. Support for this is found in the Art. 24(4) commentary. For example, s. 25 states “the purpose is to end all discrimination in the treatment of permanent establishments as compared with resident enterprises belonging to the same sector of activities” as regards taxes on business profits. Ss. 25, 26, and 29 specifically refer to providing treatment equal to that of resident enterprises. S. 22 states that ‘Hess favourably levied” allows for different modes of taxation as long as the result overall is not more burdensome “than that on resident enterprises.” Such discrimination can be a real issue; for example, the branch profits tax levied by some states (including Canada) in the absence of contrary treaty provisions.

39 Supra note 37, at 304.

40 The commentary does not become part of the resulting treaty based on the Model, yet it is “of special importance in the development of international fiscal law” (Report of the Committee on Fiscal Affairs, adopted in the Recommendation, supra note 35) even if it is not officially part of the “preparatory work,” which is an aid in the interpretations of treaties (Vienna Convention on the Law of Treaties, Art. 32, UN Doc. A Conf. 39/27). As it is a clarification by those who drafted the article, it is of assistance in the settlement of disputes (Model Convention and commentary thereto, supra note 33).

41 O’Brien, , “The Nondiscrimination Article in Tax Treaties,” (1979) 10 L. and Pol. Int’l Bus. 545, 612.Google Scholar

42 See supra note 38.

43 Paper by Jr.Patrick, R. J. in “The Canada-U.S. Income Tax Treaty III,” (1980) 32 Canadian Tax Foundation, Rep. of Proc. 648, 735.Google Scholar

44 The United States Executive branch has ruled that Canada does not discriminate against U.S. citizens wishing to invest in Canadian energy companies, thus allowing Canadian access to mineral land leases on U.S. federal lands (New York Times, February 11, 1982, at A24).

45 Excerpt from the Statement of Staff of Joint Committee on Taxation, Hearings on Various Tax Treaties, Senate Foreign Relations Committee, September 24, 1981.

46 Supra note 2.

47 The following discussion relies on The OECD History: Aims Structure (OECD, Paris, 1963), which also contains the text of the Convention establishing the Organization.

48 Camps, Miriam, First World Relationships: The Role of the OECD 47 (Atlantic Institute for International Affairs, Paris, 1975).Google Scholar

49 Infra note 65 and text thereto.

50 OECD, 1978 (reprint of the 1973 edition). First adopted December 12, 1961.

51 Australian Foreign Affairs Record 672, 573 (1976).

52 Aubrey, Henry G., Atlantic Economic Cooperation: The Case of the OECD 6 and 145–47 (New York, 1967)Google Scholar; he concludes the “prodding effect” of the OECD forum is something to reckon with.

53 Gordon, “The OECD,” (February 1956), International Organization, quoted in Aubrey, ibid., 28.

54 The recognition of this, coupled with the need for co-operation, together form integral parts of the OECD aims and purposes; these are referred to specifically in the preamble to the OECD Convention (supra note 47 at 43).

55 Supra note 48, at 25 and 28.

56 The recent constitutional crisis in Canada was caused by the federal government’s threat to repatriate unilaterally the Constitution (from Britain), which was only settled by a subsequent agreement with the provinces (except Quebec).

57 Supra note 33.

58 OECD (Paris, 1967). It did not come into force and was not made the subject of a Decision of the OECD.

59 Infra note 65 and following text.

60 Supra note 50.

61 OECD, International Investment and Multinational Enterprises: Review of the 1976 Declaration and Decisions 45 (Paris, 1979).

62 Supra note 4 and text thereto.

63 Supra note 50, Annex B, 39.

64 See Torem, and Craig, , “Foreign Investment in France,” (1971–72) 70 Mich. L. Rev. 285 CrossRefGoogle Scholar, even though there is not a formal statutory mechanism.

65 Adopted by the governments of OECD member states on June 21, 1976. Reference to a complete text is provided in supra note 61.

66 Supra note 61. See Appendices I, II, and III for the Decisions as revised in 1979.

67 From the preamble to the Declaration, supra note 61.

68 Supra note 61, at 55–57.

69 Ibid., 45–52.

70 The National Energy Program, supra note 6, devoted a chapter (“The Problems”) to this issue; cf. Mangone, Gerard (ed.), Energy Policies of the World, Vol. 2 (New York, 1971)Google Scholar. These sources provide the basis for the examples following in the text.

71 Theo. Vogelaar, W., “The OECD Guidelines,” in Horn, Norbert (ed.), Legal Problems of Codes of Conduct for Multinational Enterprises 127, 135 (Deventer: The Netherlands, 1980).Google Scholar

72 The Report of the Committee on International Investment and Multinational Enterprises (CIME Report endorsed by the Council), supra note 61.

73 Baade, Hans W., “Legal Effects of Codes of Conduct,” in Horn, , supra note 71, at 3, 10–18.Google Scholar

74 Ibid., 10.

75 Brownlie, Ian, “Legal Effects of Codes of Conduct Commentary,” in Horn, , supra note 71, at 38.Google Scholar

76 Supra note 71, at 133.

77 Supra note 66, and text thereto.

78 Supra note 48, at 20.

79 The executives involved in the Badger case might question just how voluntary the guidelines are: see text infra at note 85.

80 Supra note 71, at 135.

81 Para. 7 of the introductory considerations and understandings to the Guidelines for MNE’s as set out in the Annex of the Declaration. The Declaration itself states that they are an integral part of the Guidelines.

82 Ibid., in the “Having Regard” clause.

83 Supra, note 71, at 134.

84 Ibid.

85 Prof. Dr.Blanpain, R., The Badger Case and the OECD Guidelines for Multinational Enterprises (Deventer: The Netherlands, 1977).CrossRefGoogle Scholar

84 Ibid., 115.

87 Supra note 53.

88 Supra note 75, at 42.

89 Supra note 71, at 134.

90 As discussed in the text supra at note 70.

91 Statement made by the Secretary of State for External Affairs at the OECD ministerial meetings adopting and affirming the Declaration. The full text of this statement is available from the Department of External Affairs, Canada. The relevant passage is set out in the text infra.

92 Supra note 73, at 14.