Failure not an option; Harper may need to compromise to get European trade deal

OTTAWA - It's an open question whether Canada needs a free trade deal with Europe, but it is more certain that the Harper government does.

With a cloud suddenly appearing over the Stephen Harper's "historic achievement" because of German concerns over a clause that allow firms to sue governments, free trade advocates are advising the prime minister to compromise if he has to, but get the deal done.

The German objection — signalled in a news leak on Saturday that it would not sign the agreement with the current language on investor state dispute settlement (ISDS) — has since been modified by a government official saying Germany would examine "meticulously" the deal once it has been finalized.

In a response to a media question, the European Union's trade official in Canada, Karsten Mecklenburg, said "negotiators have almost finished their work" and only then would EU member states be asked to approve the document.

Germany's ambassador to Canada, Werner Wnendt, says investor protections are not a deal-breaker for his country, but they deserve close scrutiny.

"That (ISDS) is the concern of people in Germany and it's something that needs to be taken seriously by the government," he told CBC.

He also said Canada and European nations have functioning court systems, so "the question is do we need a separate conflict resolution mechanism."

Officials in Trade Minister Ed Fast's office did not respond to requests for an interview with the minister Monday and continued to insist "excellent progress is being made."

A spokesman for the Canadian Chamber of Commerce also downplayed the news report.

"We have been assured by our German partners that they will not block the deal. They have had to manage their internal political issue, in the context of TTIP (talks with the U.S.)," said Emilie Potvin, vice-president of public affairs with the business group.

But trade experts who have followed the talks closely say Germany was almost certainly sending a message that Ottawa had better heed, or risk losing the agreement.

That would be bad for Canada's economy, they say, even though Statistics Canada figures show exports to the EU have rebounded smartly from last autumn. But given the importance Harper has put on the pact, failure would be politically damaging entering into an election cycle.

"Harper's competitive advantage is that he is a superior manager of the economy, that he can do trade deals big and small. But if he can't close on what he calls the biggest, most comprehensive free trade deal in history, it's going to hurt a lot," said Ian Lee, an economics professor at Carleton University.

Trade lawyer Lawrence Herman said Canada should go back to the drawing board on investment protection if it has to, and even be prepared to drop ISDS altogether to get the deal done.

"Its value may be overstated," he said. "None of the 200 pending arbitrations under the International Centre for the Settlement of Investment Disputes involve Canadian companies suing European governments."

A more palatable approach would be to re-work the ISDS to offer foreign investors less scope to sue over government policy choices, particularly on initiatives to protect the environment, experts suggest.

Lee says Germany is not so worried about Canadian firms launching a flood of lawsuits against European countries, but what more naturally litigious and deep-pocketed American firms would do if given the chance.

While the weekend developments come as a shock, Europe has never been as keen on the need for ISDS as Ottawa, say analysts.

As a 2012 German document points out, "Canada is a demander in the field of investment protection."

European member states did give negotiators a mandate to negotiate ISDS — something that was not done with the U.S. talks. Since then, however, Germany has been hit with a multi-billion lawsuit from energy companies — including a Swedish firm — over its decision to shut down nuclear reactors by 2022. That's exactly the kind of scenario that could play out under the ISDS chapter.

In January, the European Commission launched a public consultation process on ISDS using the proposed chapter in the Canada deal as an example.

"This shouldn't be a surprise because the Germans and other European countries have been raising concerns about ISDS for some," said Don Davies, the NDP's trade critic.

From his point of view, Davies said jettisoning the chapter from the agreement would improve the agreement, although it would give a black eye to the Harper government, which has been denouncing left wing groups like the Council of Canadians for fear mongering on ISDS.

Davies notes that currently ISDS gives more leeway to foreign firms than domestic. The former can take a case to an international panel whose decisions are final; whereas domestic firms have redress only in the country's courts, whose rulings can be appealed.

One thing the latest development does show, said Davies and Liberal critic Chrystia Freeland, is that Harper was premature in announcing an agreement in principle last October.

"I'm glad they announced it," said Freeland, who believes a free trade agreement with Europe would benefit Canada. "I just wish that they had had a deal."