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Canada - China

Initial Environmental Assessment (EA) of the Canada-China Foreign Investment Promotion and Protection Agreement

Table of Contents

1. Executive Summary

This report outlines the results of the Initial Environmental Assessment (EA) of the Canada- China Foreign Investment Promotion and Protection Agreement (FIPA) negotiations. Negotiations for a Canada-China FIPA were re-launched in September 2004. There is a reasonable expectation that these negotiations will conclude successfully in 2008.

The Canada-China FIPA is the third of such agreements to benefit from an EA. The EAs of a FIPA follow the process outlined in the 2001 Framework for the Environmental Assessment of Trade Negotiations. The process focuses on the environmental impacts in Canada and normally involves three phases – the initial, draft and final EA. The middle phase or draft EA is not undertaken if the FIPA is not expected to generate significant economic or environmental effects in Canada. Public consultations are an integral part of the EA and are undertaken throughout the process.

The Initial EA of the Canada-China FIPA negotiations identifies the likely economic effects of the FIPA and, on this basis, draws conclusions about the potential environmental impacts in Canada. The report also considers the impact of the FIPA on the ability of Canada to regulate in the interest of environmental protection. Other environmental issues are discussed as well.

Stakeholder input was taken into consideration during the Initial EA. For example, a public notice of intent was issued that invited comments on any likely and significant environmental impacts of the negotiations on Canada. In addition, the Department of Foreign Affairs and International Trade’s (DFAIT) external advisory group on EA of Trade was asked to provide feedback on the content of this report. Stakeholder input on past EA reports was also considered.

While over the long term the FIPA is anticipated to contribute to a favourable business climate conducive to growth of two way investment, such growth will depend on investor’s individual assessment of opportunity and risk.

The results of the Initial EA indicate that significant changes to investment flows into Canada are not expected as a result of these negotiations. As such, the economic effects and likely significant environmental impact in Canada are expected to be minimal. However, this report does discuss the likely environmental impacts associated with sectors in which Chinese investors have indicated interest.

The Canada-China FIPA will not have an impact on Canada’s ability to develop and implement environmental policies and regulations. Canada will safeguard its ability to maintain and expand the current framework of policies, regulations, and legislation for protection of the environment in a manner consistent with its domestic and international obligations.

The Government of Canada welcomes comments on this Initial EA Report. A Draft EA will not be carried out as the economic effects in Canada of the Canada-China FIPA are expected to be minimal. The Final EA will coincide with the conclusions of the negotiations. Please submit comments regarding this Initial EA Report to: consultations@international.gc.ca.

2. Introduction

Enhancing Canada's investment opportunities abroad is important to Canada's international competitiveness. FIPAs provide a framework for rules that help to open international markets and make them more secure for Canadian investors. As a reciprocal agreement FIPAs also contribute to attracting foreign investment into Canada. This has attendant benefits for the Canadian economy, the encouragement of increased domestic economy efficiencies and opportunities to attract new investment and technology in support of Canadian competitiveness, economic growth and prosperity.

Emerging economies and economies in transition are increasingly important destinations for Canadian investment abroad. A FIPA contributes to a predictable investment framework and engenders a stable business environment by specifying the rights and obligations of the signatories respecting treatment of foreign investment.

From the perspective of developing countries, foreign investment represents an important lever of development. Developing countries need access to capital to foster their growth prospects and they want to convey a positive message to international investors. FIPAs provide that necessary signal of stability.

In 2003, the Government approved a that serves as a template for Canada’s discussions with investment partners on bilateral investment rules. More background information on Canada’s FIPA program is also available in Annex I of this Initial EA.

The Canadian government is committed to integrating sustainable development into domestic and foreign policy, and the environmental assessment of trade and investment negotiations is one mechanism for doing so. The environmental assessments (EAs) of trade negotiations use a process that requires interdepartmental coordination along with public and stakeholder consultations, including provincial and territorial governments. The 2001 Framework for the Environmental Assessment of Trade Negotiations details this process. It was developed in response to the 1999 Cabinet Directive on Environmental Assessment of Policy, Plan and Program Proposals, which requires that all initiatives considered by Ministers or Cabinet must be assessed if implementation of the proposal may result in important environmental effects, either positive or negative. Detailed guidance for applying the Framework is contained in the Handbook for the Environmental Assessment of Trade.

3. Background on the EA Process

The Framework provides a methodology for conducting an EA of a trade or investment negotiation. It is intentionally flexible so that it can be applied to different types of negotiations (e.g., multilateral, bilateral, regional) while ensuring a systematic and consistent approach to meet two key objectives.

The first objective is to assist Canadian negotiators to integrate environmental considerations into the negotiating process by providing information on the possible environmental impacts of the proposed agreement. As such, negotiators and environmental experts are involved in the EA and work proceeds in tandem to the negotiations.

The second objective is to respond to the environmental concerns expressed by the public. The Framework contains a strong commitment to communications and consultations throughout each EA of a trade or investment negotiation.

Three phases of assessment are generally undertaken: the Initial, Draft, and Final EA. These phases correspond to progress within the negotiations. The Initial EA is a preliminary examination to identify key issues. It occurs earlier on in the negotiations. The Draft EA builds on the findings of the Initial EA and requires detailed analysis. A Draft EA is not undertaken if the negotiation is not expected to yield large economic changes. The Final EA takes place at the end of the negotiations. At the conclusion of each phase, a public report is issued with a request for feedback.

A consistent analytical methodology is applied during each phase. The Framework recognizes that economic and environmental effects can relate to changes in the level and pattern of economic activity, the type of products traded, technology changes, as well as regulatory and policy implications.

The Government of Canada has completed Initial EAs of the World Trade Organization (WTO), Free Trade Area of the Americas (FTAA), Singapore, and CA4 countries (Guatemala, Honduras, Nicaragua, El Salvador) trade negotiations, Canada-Peru FIPA as well as Canada-India FIPA. Initial EAs are underway for the Canada-Korea FTA and Canada-EU Trade and Investment Enhancement Agreement. The Draft EA for the WTO negotiations is also underway. Final EA reports have been issued for the Canada-Peru FIPA and for the addition of a government procurement chapter to the Canada-Chile Free Trade Agreement.

The Government of Canada will continue to apply the Framework to future trade and investment negotiations. Information on the EAs Canada has conducted are available on our website.

The findings of this Initial EA have been communicated to Canada’s lead negotiator, to the interdepartmental Environmental Assessment Committee for the Canada-China FIPA and to the interdepartmental EA of Trade Steering Committee. Any comments the public has on this report will inform the Final EA and be shared with the interdepartmental EA Committee. EAs of FIPAs will continue to evolve based on our experience and the feedback received from experts and the public.

4. Invitation to Submit Comments

In keeping with the Framework, an Environmental Assessment Committee (EAC) has been formed to undertake the analysis of the Canada-China FIPA. Coordinated by the Department of Foreign Affairs and International Trade Canada, the Canada-China FIPA EAC includes representatives from other federal government departments, including Environment Canada, the Canadian Environmental Assessment Agency, and Natural Resources Canada, and is formally chaired by the lead negotiator for the agreement. An important responsibility of the EAC is to gather input from provinces and territories, stakeholders representing business, academics, and non-governmental organizations, as well as the general public.

As part of its commitment to an open and transparent process, the Government has opened this Initial EA for public comment fromFebruary 20, 2008 to March 21, 2008. Feedback on the likely economic effects and the likelihood and significance of resultant environmental impacts is especially welcome, including ways in which the GoC’s current analysis could be strengthened. It is important to keep in mind that the assessment is focused on the possible positive and negative environmental impacts in Canada.

All feedback received is documented in keeping with the guidance contained in the EA Handbook, and circulated to the EAC. It will inform the Final EA of the Canada-China FIPA, as well as ongoing EA work within the Government of Canada.

Comments on this document may be sent by email, mail or fax to:

Consultations and Liaison Division (CSL)
Initial Environmental Assessment of the Canada-China Foreign Investment Protection Agreement (FIPA)
Department of Foreign Affairs and International Trade
International Trade Canada
Lester B. Pearson Building
125 Sussex Drive
Ottawa, Ontario
K1A 0G2
Fax: (613) 944-7981
Email: consultations@international.gc.ca

5. Analysis of the Canada-China FIPA

Negotiations for a Canada-China FIPA were re-launched in September 2004. There is a reasonable prospect that these negotiations will be concluded in 2008 and subsequently ratified by both Parties.

a) Identification of Likely Economic Effects

The first step in the EA process is the identification of the likely economic effects of the FIPA in Canada. To determine this we have considered existing investment flows, as well as information that provides an indication of future potential investment flows.

The two-way investment relationship between Canada and China has been growing steadily for the past fifteen years.

Canadian direct investment in China has grown steadily since 1990, but remains small in comparison to Canada’s overall investment abroad and China’s direct investment from other countries. Canada’s direct investment stock in China increased from $6 million in 1990 to $1.5 billion in 2006. China received approximately 4.6% of Canadian direct investment, and about 0.7% of total Canadian direct investment abroad.

Canadian investment in China covers a full range of key sectors including aerospace, biotechnology, education, finance, information technology, manufacturing and natural resources. However, Canadian investments in China are still mainly in the resources and financial sectors, while U.S. and Asian investments are concentrated in manufacturing industries. The majority of the 400 Canadian firms that invested in China are small and mid-sized enterprises.

China is only starting to invest abroad. Although we have seen a major increase in China’s investment in Canada over the past years, Chinese investment in Canada is still very modest.

Chinese direct investment in Canada increased from $54 million in 1991 to $1.3billion in 2006, representing 0.3% of total FDI in Canada. In 2006, the stock of Chinese direct investment in Canada increased by over 39% from 2005 level, making China the 16th largest direct investor in Canada. The increase in FDI from China in 2005 was largely due to China’s increasing investments in Canada’s energy sector, and also the acquisition of IBM’s computer division by Lenovo. Sectors of identified interest for Chinese investors in Canada include natural resources (mining and energy), information and communication technology (ICT), pharmaceuticals and manufacturing. Although there are a few large Chinese agri-food companies capable of investing abroad, it appears that Canada would not be a priority country for them. They are more interested in surrounding Asian markets before considering North America at this stage.

In recent years, China has encouraged aggressive state-owned enterprises (SOEs) investments both within China and abroad. According to Xinhua news (March 9, 2007)1, in 2006, Chinese enterprises made direct offshore investment of more that US$ 16 billion, up 32 % from the previous year. By the end of 2006, Chinese enterprises had launched more than 10,000 offshore operations, involving a total investment of US$ 73 billion.

We can expect an increased level of Chinese investment abroad, including from SOEs, in the future. We expect the FIPA to better position Canada as a recipient of such investment.

While the existence of a FIPA should be a positive factor in investors’ decisions on whether to invest in the territory of the other party, a FIPA typically does not impose new market access obligations or liberalize existing investment restrictions. Companies’ decisions to invest are largely dictated by their assessment of economic information and opportunities, whereas the existence of the FIPA is directed toward reducing political risks. Therefore, it is impossible to establish a direct causal relationship between any eventual changes in investment patterns and the outcome of these negotiations.

Recently, increased academic attention has been given to the question as to whether a FIPA, or the international equivalent bilateral investment treaty (BIT), results in an increase flow of investment between the signatories. It is important to note that these studies have focused on the impact of FIPAs or BITs on the level of investment in developing countries, and therefore such treaties are seen mainly as a tool for attracting investment into developing countries. While reciprocal commitments are made by developed countries in a FIPA, there are no academic studies to date that examine the impact of a FIPA on investment coming into a developed country. Although China’s current foreign direct investment abroad is still modest, we should expect that its FDI will increase over time, including in Canada, due to its new “Going Global Strategy”.

As a member of the OECD which established Codes on the Liberalization of Capital Movements and the Liberalization of Current Invisible Transactions more than 30 years ago, Canada has long been committed under an international obligation to remove barriers to international investment. There are high levels of international investment in many sectors of the Canadian economy, and the economic impact of these high levels of investments has been the subject of considerable academic study.

The fact that the FIPA represents, for Canada, the reiteration of an existing long standing policy suggests that its effect on inward investment will be relatively small. In addition, the fact that existing stocks of FDI in Canada are already substantial means that the economic impact of an additional investor, even a fairly large investor may be rather small by comparison with the impact of the effect of existing FDI stocks.

An increase in the level of Chinese investment stock does not necessarily indicate that there is an economic impact in Canada, as this increase could simply represent a Chinese partial or total acquisition of an already existing investment, or an increase in the book value of a Chinese owned investment. If Chinese investment is in the financial services sector, most of the Canadian assets of the Chinese financial service provider may represent a financial, rather than a controlling, stake in a wide range of assets outside the financial services sector. In such cases there is not likely to be an environmental impact as a result of the increase of Chinese investment stock. Therefore, even if a significant increase in Chinese investment is seen, this does not mean that there will be any environmental impact of this increased investment.

b) Identification and Assessment of Likely Environmental Impacts in Canada and the Context for these Impacts

The Framework calls for the identification and assessment of the environmental impacts that could stem from the anticipated economic effects of the FIPA. The likelihood and significance of such impacts would depend on the degree of increase in investment, the sectors in which the investment occurs, and the measures in place to protect the environment in relation to the investment activities.

As noted above, although growing, China’s stock of investment in Canada is modest. While over the long term the Canada-China FIPA is anticipated to contribute to a favourable business climate conducive to growth of two way investment, increases will depend on investor’s individual assessment of opportunity and risk. Significant new flows of investment from China into Canada as a result of the FIPA are not anticipated. Therefore, it is concluded that the environmental effects of the Canada-China FIPA will be minimal.

As stated previously, the sectors of identified interest for Chinese investors in Canada include natural resources (mining and energy), ICT, pharmaceuticals and manufacturing with a lesser potential for investment by agri-food companies.

Indicators of the expected economic effects of the FIPA on Chinese investments in these sectors are not available, because there are no specific investments known to be dependent on the FIPA’s conclusion or a direct known causal links between FIPAs and expansion of investment. Although significant new flows of investment into Canada as a result of the FIPA are not anticipated, and therefore overall environmental effects of the FIPA will likely be minimal, it was decided that a general assessment of the likely environmental impacts should be included in the report. This ensures that decision makers are aware of the potential environmental impacts of expanded investment from China into these sectors.

Finally, it should be noted that the Canada-China FIPA will not impact on Canada’s ability to develop and implement environmental policies and regulations. Canada will safeguard its ability to maintain and expand the current framework of policies, regulations, and legislation for the protection of the environment in these sectors in a manner consistent with its domestic and international obligations. In the model FIPA Canada protects its ability to adopt and apply measures that are designed to protect legitimate public welfare objects, without being required to pay compensation for indirect expropriation. Additionally, the model FIPA contains a provision that allows a Party to the Agreement to request consultations if it considers that the other Party relaxes its health, safety or environmental measures in order to encourage investment. The draft texts for Canada-China FIPA are subjected to legal review to ensure that the text is consistent with the spirit contained in the model FIPA and that Canada’s ability to develop and implement environmental policies and regulations is not negatively impacted.

Mining

Each stage of the mineral production process (exploration, extraction, processing, closure, and abandonment) has the potential for significant adverse environmental effects (e.g., air emissions, surface and groundwater flow and quality, soil contamination, habitat destruction and fragmentation). The temporal and spatial scale of these impacts varies significantly, from temporary and localized to long term and extensive, depending on a number of factors, such as project design, methodologies, technologies used, and mitigation measures implemented.

Canada has a regulatory framework to address environmental and others impacts from mining. The environment is a shared responsibility between the federal and provincial government. Therefore, all mining operations in Canada are regulated through federal and provincial legislations, including the requirement of an environmental assessment and other impacts prior to approval of the development of new mines and mine expansions.

During 2005, Chinese enterprises made three mining investments in Canada. Two of these investments were in Alberta’s oil sands mines and the other one in one of Vancouver’s gold mine. The oil sands sector will be discussed in more details under the energy sector.

• China National Offshore Oil Corporation (CNOOC) acquired a 17% interest in Calgary-based MEG Energy Inc. for $150 million.

• China’s Sinopec Group invested $105 million for a 40% stake in Calgary-based Synenco Energy Inc.’s Northern Light oil sands project in Alberta.

• The Zijin Mining Group invested $1.95 million in Vancouver-based Pinnacle Mines Ltd., to jointly explore and develop Pinnacle’s Silver Coin gold-silver property in the North-West of British Columbia.

In the first two cases the Chinese investment represented a minimal stake in an existing enterprise. It is not clear whether the investment was in newly issued stocks, or was acquired from existing stakeholders. However, based on available information it appears that even though the investment did not represent a majority interest, it may have provided an impetus to the project development activities of these enterprises by demonstrating the value of the work already accomplished. In the third case the investment has resulted in the creation of a joint venture. Once again the investment validated previous investments, and even more definitively than in the first two examples provided additional financing for mining activities.

Energy: Oil and Gas Sector

All oil and gas operations in Canada are regulated through a range of federal and provincial legislations, including the environmental assessment of new developments and expansions. The oil sands are located in north-eastern Alberta. According to the Alberta Energy and Utilities Board, the oil sands consist of three main deposits that cover nearly 150,000 square kilometres and represent 1.7 trillion barrels of crude bitumen, of which 19% is likely to be recovered. If reserves are located within 100 meters of the surface they can be recovered through surface mining activities commonly referred to as open pit mining. Deeper reserves require in situ recovery.

There are a number of environmental issues associated with oil sands development, with challenges related to cumulative impacts for a number of environmental parameters such as global warming/GHG emissions, water usage and water quality, aquatic and terrestrial habitat destruction and fragmentation, and land reclamation as well as growing infrastructure and socio-economic issues at the forefront of public concerns. Federal and provincial agencies participate in a number of multi-stakeholder, consensus-based regional initiatives set up to address environmental issues related to oil sands development. Recommendations arising from these initiatives are considered in directing government policy and priorities for the region.

Water usage issues center around the potential negative impact on the aquatic ecosystem, the removal of water from the watershed (surface and groundwater) and the large tailings ponds that are being created.

There are currently divergent views regarding the ultimate success of reclamation methods. The concerns related to land reclamation are that the proposed future reclaimed landscape will be significantly different than the original boreal forest, with the creation of dry, forested hills instead of wetlands, a larger percentage of lakes (the reclaimed pit lakes), and the absence of peatlands. Wetlands account for approximately 40% of the boreal forest landscape in Alberta. Almost 10% of the region’s wetlands will be permanently removed from the landscape as a result of oil sands development. While in-situ processes requires no excavation and use a smaller surface area for operation, fragmentation of the forest and water bodies from the construction of new roads in the area, seismic lines and exploration well sites represent a concern. There are a number of legislations in place, at the federal and provincial level, linked to the industrial development in the boreal, such as the Fisheries Act, the Canadian Environmental Protection Act and the Species at Risk Act. These legislations aim to protect fisheries habitat, wildlife populations and habitat and the sustainability of forests.

The production of the oil sands emits higher GHG emissions than the production of conventional crude oil and has been identified as the largest contributor to GHG emissions growth in Canada.

While significant progress has been made towards decreasing the intensity of GHG emissions produced by oil sands operators (GHG intensity of production improved by some 27% over 1990 to 2000), total emissions have increased due to higher production levels. Technology will continue to be an essential element in addressing the environmental impacts aforementioned. CANMET Energy Technology Centre (CETC) at Devon, Alberta is the federal government's primary research group for the development of hydrocarbon supply technologies and related environmental technologies, with an emphasis on oil sands and heavy oil. The Centre is working closely with industry and the province on a range of new oil sands and heavy oil technologies including technologies that will reduce the industry’s dependence on natural gas and water. Research areas include: combustion of residue bitumen, coal / coke gasification, air injection, the application of nuclear energy to provide the heat and power alternatives to natural gas, and non-water based extraction and process technologies. The use of CO2 for enhanced oil recovery could potentially reduce GHG emissions and create an economic opportunity.

Managing the environmental footprint of oil sands development will be an on-going challenge for the orderly and sustainable development of the resource.

Information and Communication Technology (ICT)

Growth in the ICT sector could result in more environmental benefits due to reduced travel, shipping and use of paper. However, any environmental challenges facing the industry as a whole can be broken down into e-waste, toxic and hazardous materials use, water and energy use.

• E-waste. One of the environmental issues associated with e-waste is the import / export of used electrical and electronic equipment (EEE) as well as the requirements to ensure that used EEE is processed or resource recovered in an environmentally sound manner. According to Environment Canada, e-waste in Canada has reached an estimated 160,000 tonnes in 2002 and is estimated to reach 206,000 tonnes by 2010. As much as 40 per cent of the heavy metals in landfills (such as lead, mercury and cadmium) come from electronic equipment discards2. Disposal of a wide range of electronic and electrical equipment and the hazardous wastes associated with them is one of the biggest issues facing the industry in terms of environmental impact. While the industry is responding to the issue, the sheer size and rapid technological change associated with the industry requires that it move quickly to create solutions. It should be noted that in 2002 the State Environmental Protection Administration for The People’s Republic of China published a series of lists of goods prohibited to be imported into China under their domestic Law of Prevention and Control of Solid Waste Pollution to the Environment. The five lists of prohibited goods include a wide variety of electrical and electronic equipment ranging from consumer items such as electric rice cookers, micro wave ovens, VCRs, TVs and telephone sets to name a few, plus commercial products encompassing automatic data processing machines, fax machines, printed circuit boards, photocopying machines and many other instruments or appliances used by institutions and/or industry. As per their UNEP Basel Convention's obligations, China has informed the Basel Secretariat of these changes, and in turn, the Secretariat informed Basel's Parties. As a result, Canada circulated and published, on its web site, a fact sheet on these changes in China to inform Canadian exporters. Canada, through activities of the Basel Convention, has been providing some financial support towards projects on environmentally sound management of e-waste in Asia, including China. This support is contributing towards the development of an e-waste inventory in China, hosting of workshop to share information and intelligence on e-waste, establishment of strategic partnerships, implementation of pilot projects on collection/segregation of e-waste and repair/refurbishment, and raising public awareness.

• Toxic and Hazardous Materials Use. Semiconductor manufacturers use a number of extremely toxic chemicals in the chip-making process. These chemicals are a serious issue for both the workers who have to deal with them and the communities where the chemical wastes end up. It is important to note that China is putting in place a regulation similar to the European Union’s Restriction on Hazardous Substances (RoHS) Directive. However, the procedures for its implementation remain unclear. As stated in the previous section, there are a series of lists currently in effect under Chinese domestic law which are prohibited from import. In addition, it should be noted that the export and import of hazardous waste or hazardous recyclable material between Canada and China, including Hong Kong, are subject to the provisions of the United Nations, Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal. Notification and prior informed written consent are required of the importing jurisdictions in order for the movement of toxic or hazardous materials destined for disposal or recycling/recovery operations as defined in the Convention or under domestic law.

• Water and Energy Use: While the industry as a whole is relatively frugal with water and energy, the manufacture of silicon chips and semiconductors requires large amounts of clean water and reliable energy, while the operation of fixed line networks (telecoms) is also energy intensive.

Retail and Distribution Services

Growth in the retail sector could result in minor environmental impacts due to the creation of new stores, wholesale facilities and retail outlets, increased movement of capital, people, and demand for infrastructure services, increased level of overall income, competition and employment, lower prices and greater variety of products for consumers. The most significant negative environmental impacts are likely to be in relation to the use of land, noise pollution as well as effects on air quality and effects of increased influents and emission on water and air quality in retail, wholesale and franchising. Other associated impacts of increased retail and distribution services relate to transportation-related impacts (e.g., air emissions) and increases in packaging waste.

According to the Asia Pacific Foundation of Canada, there are a growing number of Chinese investments in Canada outside of the energy and resource sectors, even though these investments are small in value terms compared to resource sector acquisitions. Some examples from 2005 include:

• China Telecom Corporation Ltd. (a US subsidiary of the Chinese telecom giant) opened an outlet in Toronto, Ontario as part of its international expansion strategy.

• Toronto-based TCM Inc., which exports Canadian wood frame construction technology and building materials to China, signed joint-venture agreements with Wuhu Shijie Hardware Co. Ltd. to open a subsidiary-branch outlet in Toronto; with Taizhou Baile Pumps Ltd. to open a subsidiary-branch outlet in Toronto; and with Zhejiang Huarong Exhaust Purification Co. Ltd. to open a subsidiary-branch outlet in Toronto.

• A Chinese national retail giant, Hualian Supermarket Co. Ltd., has opened a store in Richmond, British Colombia, marking the first major Chinese investment in the Canadian retail sector.

It is not clear that all of these investments will count as Chinese FDI in Canada, since some of them involve the use of subsidiaries in other countries and/or the use of capital that is technically sourced from within Canada but which may well have originated in China.

Pharmaceuticals

Since September 2001, substances new to Canada that are present in pharmaceutical products regulated under the Foods & Drugs Act (F&DA) are subject to the New Substances Notification Regulations (NSNR) (either the NSNR for Chemicals and Polymers or the NSNR for Organisms) of the Canadian Environmental Protection Act, 1999 (CEPA). The Environmental Assessment Unit at Health Canada conducts pre-manufacture and pre-import assessments of the potential environmental and human health risks associated with environmental exposure to substances in F&DA products such as human drugs, biologics, veterinary drugs, cosmetics, novel foods, food additives, natural health products and medical devices. As of 9 November 2006, 83 substances contained in therapeutic products have been notified to Health Canada in accordance with the notification triggers and data requirements stipulated by the NSNR for Chemicals and Polymers. Currently, the Environmental Impact Initiative (EII) of Health Canada is developing environmental assessment regulations more consistent with the environmental exposure and hazard profile for new substances in F&DA regulated products.

Possible routes for pharmaceuticals to enter into the environment include release from pharmaceutical manufacturing facilities, disposal of pharmaceuticals products from the supply chain (prior to distribution to the patients), disposal by patients or health care facilities of unused pharmaceuticals, or patients’ excretion of an active ingredient and metabolite(s). While environmental inputs from the manufacture of pharmaceuticals may contribute to total loading at sewage treatment plants, there is a growing consensus that reported detections of pharmaceutical ingredients in the environment originate primarily from consumer use patterns. Part of the mandate of the Environmental Impact Initiative is the development of regulatory and non-regulatory tools aimed at reducing the levels of pharmaceuticals in the environment from all possible entry routes.

The two principal scenarios associated with an increase in investment into Canada’s pharmaceutical sector (apart from the above-mentioned Chinese acquisition of existing investments) would be i) additions to Canadian pharmaceutical manufacturing capacity and ii) an increase in the consumption of pharmaceuticals to Canadians. An increase in manufacturing capacity would be limited by domestic consumption capacity and international manufacturing competitiveness for export markets; regardless, any such increase would not be expected to have an undue impact on the Canadian environment, for the reasons outlined above and due to manufacturing licensing requirements. A significant increase in consumption of pharmaceuticals by Canadians may result in a greater amounts detected in the Canadian environment; however it is unlikely that the implementation of the Canada-China FIPA would result in a drastic change in consumption patterns. Health Canada does not control the quantity of a product once approved in Canada and such a change could occur even in the absence of the FIPA.

Recognizing the modest Chinese investment in the pharmaceutical sector and the supply and demand dynamics of pharmaceutical consumption in Canada, the impact of the FIPA on the Canadian environment can be assessed as being minimal as it relates to potential future growth on FDI from China in pharmaceuticals.

Separately, as Canadian FDI moves to China - there may be relatively more but still modest to small impact of pharmaceutical manufacturing operations and consumption in China. This of course would be highly dependant on perception of risk by investors (which is currently very high) as well as Chinese public perception of usefulness of "western" medicines. Therefore any impact would be more in the mid to long term and commensurate with increased in manufacturing and consumption.

Manufacturing

Environmental impacts of Chinese Outward Direct Investment (ODI) in Canada's manufacturing sector are difficult to project given the absence of sub-sectoral ODI estimates. The manufacturing sector encompasses numerous industry sectors that could result in different environmental impact scenarios. A selection of these industries include: aerospace; apparel; automotive; basic chemicals and resins; computer and electronic products; electrical equipment, appliances and components; energy; food and consumer products; plastics; railway equipment; shipbuilding; steel; textiles; tool, die and mold making. Many of these industries would require environmental assessments under federal and provincial regimes prior to approvals for construction and operation.

There has been a total of 14 investments from China in the manufacturing sector with a corresponding asset value of $ 142 million since 1985.

A survey prepared by the Asia Pacific Foundation of Canada entitled "China Goes Global II - 2006 Survey of Chinese Companies’ Outward Direct Investment Intentions" suggests that manufacturing is the second major area of existing outward direct investment (ODI) activity accounting for 27% of the responses. Fifty seven percent of the responding companies claimed that the purpose of their ODI is to manufacture in invested foreign markets for sales in that market. China's ODI in Canada is expected to continue to increase and based on the survey results would likely correlate with a significant proportion of ODI in the manufacturing sector.

c) Policy and Regulatory Context

The Framework calls for consideration of the potential policy and regulatory effects of the FIPA. Foreign investors in Canada are bound by the same environmental protection regulations that govern the activities of domestic investors. Proposed projects resulting from inward investment would be subject to applicable environmental assessment legislation, including the Canadian Environmental Assessment Act and provincial environmental assessment regulatory regimes.

Recent revisions to the Government of Canada’s FIPA model have further expanded the provisions dealing with the governments’ right to regulate in the public interest. The new model includes a general exception that recognizes a Party’s rights to take measures necessary to protect human, animal or plant life or health, the environment and safety, or measures primarily aimed at the conservation of exhaustible natural resources, provided that these measures are not applied in an arbitrary or unjustifiable manner and are not disguised restrictions on trade or investment. In addition, the model clarifies the rules governing direct and indirect expropriation with regard to governments’ right to regulate. FIPA parties may also reserve existing laws and regulations such that they are not subject to specified obligations of the treaty, and they may reserve sensitive sectors for future regulation. Finally, the revised FIPA model strengthened a clause on "not lowering standards”. Specifically, this clause recognizes that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. In the event a Party has offered such encouragement, the other party may request consultation.

The revised FIPA model is the basis for Canada’s position in the Canada-China FIPA negotiations. We anticipate, therefore, that the final agreement will not have a negative effect on Canada’s ability to develop and implement environmental policies and regulations. Canada will safeguard its ability to maintain and expand the current framework of policies, regulations, and legislations for protection of the environment in a manner consistent with its domestic and international obligations. The draft texts for Canada-China FIPA are subject to legal review to ensure that the text is consistent with this objective.

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