“What do Australia and others expect from Japan in regional FTA negotiations?” (eg ISDS)

I was recently interviewed on this topic by NHK World Radio’s principal program director, Yutaka Konishi. His main questions and some of my points in response are outlined below. Some of our interview was broadcast on “Radio News in English” on 9 May 2013, at http://www3.nhk.or.jp/nhkworld/english/radio/program/), the transcript of the full interview is here (download PDF file), and my own notes are reproduced below.
Later I was also interviewed in Sydney by TV Asahi specifically about investor-state arbitration (and other ISDS) provisions in the expanded Trans-Pacific Partnership (TPP) negotiations, which Japan has now officially joined. The 14-minute special feature from their “Hodo Station” evening news on 24 May is also available on YouTube, and a video-clip of my edited comments (from 7m30s to 8m5s) can also be downloaded here (11MB .mov file). In the longer interview in Sydney, I reiterated that there is ample scope for this new FTA to include innovative ISDS provisions that appropriately balance the interests of host states (in regulating for the public interest) and private investors (seeking minimum and internationally-accepted legal standards before committing long-term investments). Em Prof Mitsuo Matsushita (former WTO Appellate Body judge) and especially Mr Shigeaki Koga (a former METI official) also emphasised this point in their comments for the Hodo Station special feature. As the TV Asahi website overview pointed out, this topic is now attracting considerable interest in Japan:

[Konishi] Economic cooperation in the wider Pacific region has accelerated, with Japan’s participation in the Trans-Pacific Partnership talks becoming certain, and a meeting of Regional Comprehensive Economic Partnership (RCEP) starting on Thursday 9 May in Brunei. Oceanian nations such as Australia and New Zealand are key in such talks. These nations promote trade and are rich in natural resources and farm products, and they have played a leading economic cooperation role in the wider Pacific.
How will Australia and New Zealand tackle the series of free trade talks?
1. Although I come originally from NZ, I have been living in Sydney since 2001 so I will focus mainly on Australia. But both countries have very close economic and diplomatic links, largely sharing similar perspectives on international trade policy.
2. In reality, Australia seems quite ambivalent about these talks. In its April 2011 “Trade Policy Statement”, the Government reiterated that multilateral (WTO) liberalization, and then even unilateral liberalization, remained a priority compared to liberalization via bilateral or even regional FTAs.
3. Yet the Government in fact continued negotiating the FTAs it was already discussing, including those with China (since 2005), Japan and the GCC (2007), Korea and Pacer-Plus (with Pacific Islands, 2009) and the TPP (2010). The Australian Government also has started negotiating new FTAs, both bilateral (with India, since 2011, and Indonesia since 2012) as well as regional (RCEP or “ASEAN+6”). It seems to accept that there is little hope any more for further multilateral liberalization through the WTO (except perhaps for a new separate and plurilateral agreement on services). But this does mean that Australian officials responsible for FTAs remain stretched among numerous negotiations, which may exacerbate delays.
4. The Australian Government is also being urged to use FTAs to develop deeper as well as broader economic cooperation, including measures addressing “behind the border” issues. Most commentators, especially economists, see this as simply promoting greater liberalization – eg by encouraging treaty partners to reduce levels of regulation even if those are proportionate to risks and don’t discriminate against foreign traders or investors.
5. But a few commentators, like myself, envisage the possibility of using FTAs to develop mechanisms to increase levels of regulation in appropriate cases. For example, I have suggested that Australia’s new FTAs should require regulators in each country to notify their counterparts about serious consumer product related accidents, and to consider joint safety standard-setting. This is known as “positive harmonisation” within the EU, and operates very effectively in securing minimum levels of consumer protection. Closer to home, there is increasingly close cooperation between Australia and NZ, including “mutual recognition” combined with possibilities for joint standard-setting, although this is achieved by parallel legislation rather than binding treaties as in Europe.
6. In my view, after the Global Financial Crisis of 2008 caused by lax regulation of financial markets, unless “free trade agreements” are “re-branded” to also include better regulatory safeguards in areas like consumer protection, there is a significant risk that civil society groups will at least slow down and possibly prevent conclusion of new agreements, or at least “WTO+” aspects such as expanded protections and liberalization concerning foreign investment or services. Some groups and individuals have been quite vocal in Australia and NZ particularly in opposition to the TPP.
What do these Oceanian nations expect from the cooperation?
1. Australia, like NZ, hopes primarily for better market access for exports of their agricultural products. This includes Korea, via RCEP or the bilateral FTA under negotiation. This also includes Japan and the US, via TPP. Australian sugar exporters remain very disappointed that sugar was excluded from the AUSFTA of 2004, due to American protectionism.
2. Conversely, both countries expect strong pressure from the USA to extend IP rights protection via the TPP. This is a concern because this also does not involve a classic “trade law” problem of discrimination, but rather an economic calculation as to how much protection is needed to encourage IP rights holders to invest in R&D, generating economic growth – and such a calculation is highly country-specific. Economists in Australia and NZ are increasingly concerned that it is not in their countries’ interest to extend IP rights protection beyond what already exists in domestic law, especially since Australia has already extended its copyright term after the AUSFTA.
3. Australia also expects US pressure in TPP negotiations regarding an important aspect of our public health system, the Pharmaceuticals Benefits Scheme. But that has already been made more transparent, hence more accessible to foreign drugs manufacturers.
4. Another potential stumbling block in TPP negotiations, but also in RCEP, is investor-state arbitration provisions – a mechanism that is increasingly widely accepted to enforce protections and liberalization regarding foreign investment. Australia’s TPS of 2011 abandoned 20+ years of treaty practice by declaring that it will not include ISArb protections in its future treaties, even with developing countries with less effective domestic law systems for protecting property rights. The other TPP and RCEP partners, including Japan, almost always include such protections nowadays.
5. The Australian Government’s new policy stance seems to be an unfortunate over-reaction to an arbitration claim brought by the tobacco company Philip Morris, under a 1993 bilateral investment treaty with HK, concerning Australia’s new legislation for “plain packaging” of cigarettes. (That legislation has also generated an unsuccessful constitutional challenge of “expropriation” in the High Court of Australia, by other tobacco companies including the Japanese gov’t-linked Japan Tobacco group.) Australian industry groups have belatedly realized that they are disadvantaged in outbound investments if future treaties don’t include ISArb provisions, so they are calling for a reversal of the policy shift so ISArb can be included in future treaties with developing countries. The Australian Government has rejected these calls but the Opposition is open to them, and is likely to win the general election in September.
What do Oceanian nations expect for Japan?
1. All Oceanian nations expect Japan to show leadership by liberalizing agricultural market access – this would also provide encouragement to countries like Korea, which also protect their markets for political rather than economic reasons. The terrible ‘3-11’ disasters in 2011 offer an additional opportunity to rethink the role of agriculture and rural communities in 21st century Japan.
2. At the same time, Australia and NZ would generally be pleased to see further investment from Japan into their agricultural sector, building on an initial wave of investment into the beef export industry and more recently into other food and beverages manufacturing. The high Australian dollar is exacerbating difficulties faced by farmers and others in Australia, which has traditionally relied partly anyway on foreign capital to develop efficient economies of scale.
3. Australia and NZ would also welcome Japan resisting any US pressure for excessive IP rights protection, even though of course Japan is also a net technology exporter, as well as resistance from US pressure to undermine public health systems – to the extent they work effectively (which is not always the case, either in Australia or Japan).
4. Many commentators and groups within Australia would also welcome Japan pressing for ISArb provisions in future treaties, like the bilateral FTA and especially the TPP and RCEP. We think that Australia’s policy change in 2011 was misguided and could begin to unravel the entire treaty-based international investment law system that has finally become quite well-established – even thought it remains an imperfect “work-in-progress”.
5. Overall, most people in Australia hope that the bilateral FTA negotiations will be concluded soon this year – a successful conclusion would help smooth negotiations especially in the TPP and then RCEP, which shouldn’t delay progress on key bilateral FTAs. Both Japan and Australia surely have scope to compromise on issues that are difficult politically within each country: market access barriers for agricultural products in Japan (eg still-high beef tariffs) and on auto imports into Australia (5% tariff on autos from Japan, protecting local manufacturing and generating $500m revenue for the Gillard Government facing electoral defeat in September).

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.