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

Less than three weeks after talks concluded on the revised North American free trade agreement, executives from a Chinese infant formula manufacturer that had invested $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 Feihe Limited — wrote to then-Agriculture Minister Lawrence MacAulay and the Liberal MP for Kingston and the Islands, Mark Gerretsen, describing how Canada's concessions in the Canada-United States-Mexico Agreement (CUSMA) put his business plans in jeopardy by limiting how much cow's milk formula it can export and dismantling the dairy ingredient pricing system.

Yang asked the federal government to "mitigate the risks to the project." His three-page letters, dated Oct. 16, 2018, were released to CBC News under the Access to Information Act.

A few days later, Feihe International Inc. "respectfully" asked the president of the Canadian Food Inspection Agency and another senior government official to meet for 90 minutes on Oct. 29 with Yang and his boss, Feihe International chair Youbin 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's human resources manager, who was part of the team that worked on bringing this investment to Canada during her previous employment with the Kingston Economic Development Corporation. 

Bidtnes said that Canada Royal Milk was working 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 issues triggered by Feihe's plans to export the vast majority of the infant formula it manufactures in Canada back to Chinese consumers.

As construction began, the Chinese investment was pegged at $225 million. A year later, the investment was estimated at $332 million and project proponents were predicting it would bring 277 direct full-time jobs to the region once production ramps up. A further 300 construction jobs have been created in the Kingston area and the plant is expected to generate the equivalent of over 1,000 more jobs in its eventual 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 Canadian Dairy Commission during a 2016 visit to Canada by Chinese Premier Li Keqiang.

CUSMA limits exports, changed pricing

American officials were monitoring this Chinese investment. President Donald Trump — and the powerful U.S. farm lobby — regard Canada's supply management system as "unfair" because it blocks most American dairy from 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 three years 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 2018 when it asked whether Canada's NAFTA renegotiation team spoke directly to Feihe about its plans before signing off.

Another concession Canada agreed to in the CUSMA talks dismantled part of its dairy pricing regime, ending lower 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 concerns because the documents show that, within days of that conversation, Feihe began its own outreach to the Canadian government.

Chinese asked Canada to limit competition

Earlier presentations of Canada 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 a significant 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 help use up this surplus, not exacerbate it.

The global market for skim is crowded and ultra-competitive, with American farmers hostile to any threats. 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 the CUSMA, 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 export quota for skim milk powder based on processors' past production. But for infant formula, export quota was distributed according to planned production — presumably to accommodate the new plant coming online.

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

In a question redacted from one document released to CBC News but repeated without redaction in another, Yang also asked the government if it would "take steps to limit the licensing of new infant formula manufacturing in Canada."

While that appears to be anti-competitive behaviour, no other Canadian dairy processor has shown interest in making infant formula in recent years — which is why Canada pursued the 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 Gerretsen repeated the 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 when NAFTA was replaced.

It's unclear whether Canada Royal Milk would be eligible for compensation but 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 Canada–China Foreign Investor Protection Agreement, which was negotiated by the 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, manufacturer now '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 encounter he'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 departmental email, one bureaucrat called Yang's correspondence "an interesting letter indeed."

Before federal government officials met with the Chinese, two senior officials from Prime Minister Justin Trudeau's office, Brian Clow and Simon Beauchemin, joined an "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, tells CBC the 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."