Chinese dairy investor pressed Canada to 'mitigate the risk' of new NAFTA

Less than three weeks after talks concluded on the revisedNorth American free trade agreement, executives from aChinese infant formula manufacturer that hadinvested$332 million to build a new plant in Kingston, Ont. asked for a sudden meeting with Canadian officials.

Zhiwen Yang, the general manager of Canada Royal Milk the Canadian subsidiary of China FeiheLimited wrote tothen-Agriculture Minister Lawrence MacAulay and the Liberal MP for Kingston and the Islands, Mark Gerretsen, describing how Canada's concessions in theCanada-United States-Mexico Agreement (CUSMA)put his business plans in jeopardy by limiting how much cow's milk formula it can exportand dismantling the dairy ingredient pricing system.

Yang asked the federal governmentto "mitigate the risks to the project." Histhree-pageletters, dated Oct. 16, 2018, werereleased to CBC News under the Access to Information Act.

A few days later, Feihe International Inc. "respectfully" askedthe president of the Canadian Food Inspection Agency and another senior government officialto meet for 90 minutes on Oct. 29 with Yang and his boss, Feihe International chairYoubin Leng,who was travelling to Canada with his directors of research and regulatory affairs.

"The purpose of the meeting is to discuss the regulatory framework in China and explore how we can work together. The expectation is not for a decision to be made, but to begin a conversation," said the email from Carey Bidtnes, Canada Royal Milk'shuman resources manager, who was part of the team that worked on bringing this investmentto Canada during her previous employmentwith the Kingston Economic Development Corporation.

Bidtnessaid that Canada Royal Milk wasworking with Health Canada and the CFIA to "resolve a challenge" with exporting its formula.

The documents reveal that the financial stakes for Feihe were higher by the fall of 2018 than they were in 2017, when CBC News reported on the potential international trade issuestriggered byFeihe's plans to export the vast majority of the infant formula it manufactures in Canada back toChinese consumers.

As construction began, the Chinese investment was pegged at $225 million. A year later, the investmentwas estimated at $332 million and projectproponents werepredictingit would bring277 direct full-time jobs to the regiononce production rampsup. A further 300 construction jobs have beencreated in the Kingston area and the plantis expected to generatethe equivalent of over 1,000 more jobs in itseventual supply chain.

Chinese companies have a deeper relationship with China's central government than private sector firms in North America do with their own national governments. Feihe is listed on the Hong Kong stock exchange, but its subsidiary, Canada Royal Milk, is incorporated in Canada.

The investment the largest foreign direct investment in Ontario agriculture in the last decade was finalized with officials from the CanadianDairy Commission during a 2016 visit to Canada by Chinese Premier Li Keqiang.

CUSMAlimitsexports, changed pricing

American officials were monitoringthis Chinese investment. President Donald Trump and the powerful U.S. farm lobbyregard Canada's supply management system as "unfair" because it blocks most American dairyfrom Canada's domestic market.

In the CUSMA, Canada agreed to several concessions that harm its dairy industry including strict limits, enforced by new export charges, on international exports of infant formula and skim milk.

CUSMA's export limit for cow's milk formula is lower than what Feihe originally planned to produce in Kingston, according to a presentation obtained threeyears ago by CBC News.

Newly released government talking points say Canadian negotiators "were in contact with a number of individuals with direct knowledge of the proposed facility's operations," including the Kingston Economic Development Corporation, "to ensure negotiators had a thorough understanding of the intended operation with a view to avoiding unintended impacts."

It's the same response CBC News got in 2018when it asked whether Canada's NAFTA renegotiationteam spoke directly to Feihe about its plans before signing off.

Another concession Canadaagreed to in the CUSMA talksdismantled part of its dairy pricing regime, endinglower ingredient pricing that kept processors competitive. Canada's prices are now based on American rates.

When Feihe agreed to invest in Ontario, Canada's lower ingredient price was part of its forecasts.

Xinhua, the Chinese news agency, reported that then-foreign affairs minister Chrystia Freeland spoke to Chinese Foreign Minister Wang Yi to brief him within days of concluding CUSMA negotiations.

But if the two ministers discussed the dairy concessions, they apparently didn't resolve the manufacturer's concernsbecause the documents show that, within days of that conversation,Feihebegan its own outreach tothe Canadian government.

Chinese asked Canada to limit competition

Earlier presentations ofCanada Royal Milk's business plans didn't mention producing and exporting skim milk powder for the adult market. But this letter to MacAulay said the company would produce skim powder for export during a "ramp up" period of testing the new facility.

Canada already has asignificant surplus of skim milk powder, left over after meeting Canada's strong demand for butter.Making baby formula at this new plant was supposed to helpuse up this surplus, not exacerbate it.

The global market for skim is crowded and ultra-competitive, with American farmers hostile to anythreats. Under the World Trade Organization's Nairobi Agreement, Canada agreed to stop exporting skim milk products as of January 2021.

"The export cap is a very serious issue for the operations of the company for 2019 and 2020," the letter from general manager Yang to then-minister MacAulay said, "and we believe it will hinder the growth of the entire industry in the future."

In its correspondence, Feihe asked for assurances that its facility had the support of all levels of government. It also requested "reasonable quota" so it could take maximum advantage of the tariff-free exports that would be allowed under theCUSMA, including a "guarantee that the full annual export quota for infant formula would be assigned to Canada Royal Milk."

Our team has already been contacted by U.S. dairy producers who are eager to sell their products to us.- Zhiwen Yang, General Manager, Canada Royal Milk

Canada is allocating its exportquota forskim milk powderbased on processors' past production. But for infant formula, export quota wasdistributedaccording toplanned production presumably to accommodatethe new plant coming online.

"Currently, details on which entities have received an allocation for the dairy export thresholds are not public," Jean-Sbastien Comeau, a spokesperson for Agriculture Minister Marie-Claude Bibeau, told CBCNews.

In a question redacted from one document released to CBC News but repeatedwithout redaction in another, Yang also asked the government if it would "take steps to limit the licensing of new infant formula manufacturing in Canada."

Whilethat appears to beanti-competitive behaviour, no other Canadian dairy processor has showninterestin making infant formulain recent years which is why Canada pursuedthe Chinese investment in the first place.

Looking for compensation

On the demise of ingredient pricing, "it's unclear how this will impact our operations in the medium to long term," Yang's letter to MacAulay said.

"Our team has already been contacted by U.S. dairy producers who are eager to sell their products to us," the letter continues.

"What has the government proposed to assist dairy processors to overcome the loss of [ingredient] pricing?"

The letter sent to MP Gerretsenrepeatedthe same demands.

Although Bibeau announced funding for dairy producers harmed by trade deals with the European Union and Pacific Rim countries in the days leading up to the 2019 federal election, the industry is still waiting for the compensation it was promised whenNAFTA was replaced.

It's unclear whether Canada Royal Milk would be eligible for compensationbut the Chinese investment has qualified for other federal and provincial support programs.

If Feihe believes its investment was harmed by Canada's concessions, it could sue for damages under the 2012 CanadaChina Foreign Investor Protection Agreement, which wasnegotiated bythe previous Conservative government.

"The sued country can opt not to make public anything until an arbitration award," Osgoode Hall law professor and investment treaty specialist Gus Van Harten said, noting this agreement is unique in this regard.

International Trade Minister Mary Ng's spokesperson Ryan Nearing said "there has been no dispute launched against Canada under the Canada-China FIPA to date, nor notification of an intention to do so."

Despite delays, manufacturernow 'confident'

In an interview with CBC, MP Gerretsen said he passed on the requests he received from the company to officials at Agriculture and Agri-Food Canada. But he said the only formal encounterhe's had with Canada Royal Milk was a tour of the construction site in his riding earlier in 2018.

"A number of the issues that were in their letter I believe have been addressed," he said.

In departmentalemail, onebureaucratcalled Yang's correspondence "an interesting letter indeed."

Before federal government officials met with the Chinese, two seniorofficials from Prime Minister Justin Trudeau's office, Brian Clow and Simon Beauchemin, joinedan "urgent briefing" with MacAulay's office an "additional twist," another bureaucrat called it.

"The Chairman is in Canada in the context of making more investment," a senior official said. The request to meet with the president of the CFIA was "in the context of the application for export," he said, "which may not be the full reality."

Comeau, Bibeau's spokesperson,tellsCBCthe Kingston facility now has its licence to export from the CFIA.

The Canadian Dairy Commission originally hoped an investor like Feihe could build a second facility, perhaps in Western Canada. But now, the government "is not in discussion with Canada Royal Milk about additional future investments," Comeau said.

Earlier plans obtained by CBC News suggested Kingston facility would be exporting by now. Bidtnes told CBC News its production lines are complete and it is pleased with the results of its test batches.

"Timelines for beginning commercial production have been stretched into the fall due to the impact of COVID-19 on some regulatory processes," she said, adding that the company remains "confident in our business plans and the support we have received from all levels of government."