Investor-State Dispute Settlement Back for Australia’s Free Trade Agreements

Australia’s Coalition Government, dominated by the Liberal Party and led by Prime Minister Tony Abbott, recently completed a rocky first 100 days in power. Diplomatic rows with China and Indonesia are only part of the story. The Government stands accused, for example, of sending ‘conflicting messages’ to the business sector. At the Business Council of Australia’s 30th anniversary dinner on 4 December, Abbott reiterated his election-night declaration that Australia was ‘once more open for business’. Yet five days earlier, his Treasurer had taken the rare step of blocking a major foreign direct investment (FDI) – a $3.4 billion bid by US firm ADM for GrainCorp.

One main reason given by Joe Hockey was possible reduced competition in grain handling, even though the bid had been cleared by Australia’s competition regulator. A second and more unusual reason given was ‘community concern’ over FDI. Commentators pointed to growing concerns within the National Party (the junior Coalition partner) over foreign investment in rural land and agribusiness. But one senior politician later criticised the Government’s decision as having been made ‘on the hop’, impeding investment needed for Australian agriculture and the potential to expand markets abroad.
This situation does not augur well for pulling Australia out of its ‘dog days’ following the mining boom, as urged recently in a new book by Ross Garnaut. Indeed, this leading economist could ‘see no economic benefit from the current review process’ for FDI anyway (at p147), in the context of ‘barriers to international trade’ generally.
The Abbott Government has also been in the news over its strict stance regarding ongoing support for the car-assembly industry, with Holden (GM’s local subsidiary) deciding to follow Ford in phasing out local production – leaving only Toyota, for now. Successive Australian governments had provided the local car industry with $19 billion in handouts and tariff protection over the last decade. This brave new world should reduce one stumbling block to successful conclusion of an FTA being negotiated with Japan since 2007: Australia’s five percent tariff remaining on imported vehicles.
Some may consider the inclusion of investor-state dispute settlement (ISDS) provisions in the Australia-Korea FTA, concluded on 5 December after many years of negotiations, as providing indirect support to foreign investors – both inbound and outbound. Yet this enforcement mechanism, allowing foreign investors to bring international arbitration claims directly against host states for violating substantive rights agreed in treaties (for example, against expropriation without adequate compensation), is aimed at effectively maintaining minimum international standards of protection. ISDS is particularly important when the counterparty is a developing country, with problems invoking protections through local courts, but it is still quite often agreed to in treaties among developed countries in order to encourage FDI. National laws in Australia are not necessarily perfect, as evidenced by recent critiques of compulsory acquisition powers presently available to the government in New South Wales and Victoria.
Australia’s new Trade Minister, Andrew Robb, reportedly indicated he was prepared to be more flexible on including ISDS in the FTA with Korea, if the latter conceded on other matters important to Australia’s interests. Unfortunately we will never know what the final trade-off amounted to, but at least the deal is now done, apparently including carve-outs regarding FDI measures ‘in important areas such as public welfare, health and the environment’. This deal will also exert lateral pressure to bring the Australia-Japan FTA negotiations to a successful conclusion. In regard to ongoing Trans-Pacific Partnership negotiations including Japan, the US and nine other developed and developing countries, Robb has also indicated that: ‘If there is a substantial market access offering, and if we can also succeed in getting exclusions and protections to safeguard certain public policy measures, then we will be prepared to put [ISDS] on the table, but it is not on the table yet’.
The reason that Australia can now drive a harder bargain in its FTA negotiations, ironically, is the decision announced in the 2011 ‘Gillard Government’s Trade Policy Statement’ not to agree at all on ISDS in future treaties. The Coalition Government is not bound by the Labour Government’s stance, and indeed has removed the Trade Policy Statement from official websites – although it is reinstated for posterity here. But the Coalition Government can still hold out for a good overall deal by referring to concerns over ISDS raised by the 2010 report on trade policy from Australia’s Productivity Commission. That report queried whether offering ISDS in fact led to significantly more inbound FDI or benefits for outbound investors, and highlighted some potential risks for host states agreeing to ISDS (more liability claims and potential ‘regulatory chill’).
These concerns are worth raising and exploring, although the evidence and theory sketched by the Productivity Commission was arguably insufficient to justify rejecting Australia’s longstanding treaty practice of including ISDS at least in treaties with developing countries. By contrast, those more familiar with international investment law generally tend to favour more targeted reforms, through careful treaty drafting. An interdisciplinary research project, just funded by the Australian Research Council for 2014-16, will undertake detailed empirical and theoretical inquiries into the Commission’s concerns and other questions raised by ISDS. The findings should help calibrate ongoing FTA negotiating strategies for Australia, but also its counterparties in present and future negotiations, as well as for other countries assessing the pros and cons of ISDS.
Indeed, the emerging findings should also impact on the Labor Party’s stance regarding ISDS. So far, Penny Wong (Senate Opposition Leader) has reportedly expressed concerns about the inclusion of ‘any’ such mechanism in the Australia-Korea FTA. The Labor Party’s dominance of Australia’s upper House of Parliament, at least until July 2014, may also impede implementation of that FTA. In addition, a recent Australia Institute survey on the TPP found that 75% of Australian respondents were opposed to the (putative!) US ‘demand’ that ‘foreign companies be allowed to sue the Australian government if laws or regulations are passed that reduce the future profitability of foreign companies operating in Australia’. It is also worth remembering that the then Opposition in Korea also delayed implementation of the Korea – US FTA, partly due to concerns about ISDS. The issue therefore remains a live one not only for Australia, but also other countries in the Asia-Pacific region.

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.