The Trans-Pacific Partnership FTA’s investment chapter: What’s next?

by: Luke Nottage and Leon Trakman
[A shorter version of this also appears today under a different title on The Conversation blog.]
Alongside this week’s APEC leaders’ summit in Manila, US President Obama met with counterparts and trade ministers from 11 other Asia-Pacific states that agreed in October to the expanded Trans-Pacific Partnership (TPP) free trade agreement. These states, covering around 40 percent of world GDP, cannot sign it before 3 February, when the US Congress finishes its 90-day review. But Obama and others in Manila reiterated the importance of the TPP for regional and indeed global economic integration.

However, public concern has been raised in Australia and the US about the TPP’s investment chapter, including its investor-state dispute settlement (ISDS) provisions. These afford a foreign investor an additional dispute resolution procedure if unable to persuade its home state to bring an inter-state arbitration claim against the host state for violating its substantive treaty commitments, such as discrimination, uncompensated expropriation or denial of justice before local courts. The ISDS option has become a common feature of investment treaties, including now within the Asian region where many states are now exporters as well as importers of capital. ISDS is seen as depoliticising disputes and encouraging a rules-based framework for investment, especially in developing countries where corruption or other governance problems remain endemic.
Relying solely on inter-state dispute resolution, as also under the WTO system applicable mainly to trade disputes, means that affected groups in one country must persuade its state to go to the expense and potential diplomatic embarrassment of pursuing the claim. Perhaps for these reasons, Australia has not joined with New Zealand as WTO claimant against Indonesia for discriminatory restrictions by Indonesia on imported beef. Perhaps Australian exporters may claw back some other advantages through inter-governmental negotiations, now that Prime Minister Turnbull is repairing Australia’s broader relationship with Indonesia, sullied before he took office. But the whole point of contemporary international economic law is to substitute such bilateral horse-trading (which tends to favour larger countries) for a rules-based system for everyone.
Despite such practical limits to inter-state dispute resolution, the inclusion of ISDS in international investment treaties has become a lightning rod for those in Australia who are unhappy about entering into FTAs aimed at promoting cross-border trade and investment beyond the WTO system. Media coverage has escalated particularly since 2011, with polarized views evident across Australia’s major newspapers.
Part of the criticism in fact comes from some economists, including the Productivity Commission in 2010 when it reported on Australia’s international trade policy. They in fact favour greater economic liberalisation, but believe it is more effectively done unilaterally, or at least through multilateral treaties. Although accompanied by a vigorous dissent, the Commission’s main report also adopts a laissez-faire approach to investment: firms should make their own decisions about whether to invest locally or abroad, and do not need treaties to set baseline legal standards of protection even in developing countries.
However, most criticism of ISDS comes from the political left in Australia, generally also opposed to economic liberalisation. Treaty-based protections for investors are seen as undermining national sovereignty. (Others, cited here, point out this is inherent whenever one state commits to an international agreement, including eg relating to human rights.) Critics are also very concerned about “regulatory chill”, namely host states no longer engaging in welfare-enhancing law-making out of fear of ISDS claims. They often highlight the Philip Morris Asia arbitration brought against Australia regarding its tobacco plain packaging litigation. (Others point out this is the only claim, still pending and under an old treaty with Hong Kong. More generally, a careful empirical study recently found no significant extra regulatory chill even in Canada, which has lost a few ISDS claims under the North American FTA in effect since 1994.)
These two lines of critique came together in the Trade Policy Statement announced in 2011 by the Gillard Government (with Labor in coalition with the Greens). Controversially, this abandoned Australia’s longstanding practice by declaring that it would never agree to any form of ISDS in future investment treaties. The stance complicated negotiations for major bilateral FTAs as well as the TPP. The Malaysia FTA was agreed in 2012, omitting ISDS, but this was largely meaningless because ISDS-backed protections were already applicable under the Australia-NZ-ASEAN FTA signed under the Rudd Government in 2009.
Following through on a pre-election commitment in 2013, the Abbott Government reverted to including ISDS on a case-by-case assessment. This helped Australia to reach agreement on major FTAs, but the political left continues its opposition through multiple parliamentary inquiries. This is especially evident in the Senate, where the Government lacks a majority needed to pass tariff implementation legislation allowing Australia to ratify FTAs agreed with overseas treaty partners.
The Greens began by proposing an “Anti-ISDS Bill”, which would have bound the Abbott and subsequent governments to the 2011 Trade Policy Statement stance. Even the Labor members of the relevant Senate Committee disagreed, mindful of setting a dangerous precedent might constrain any future Labor government from negotiating and signing treaties in other fields. However, Labor parliamentarians did initially side with Greens members on inquiries into the Korea and then China FTAs, objecting in part to their ISDS provisions. Yet those are very limited regarding China, and eventually Labor voted with the Coalition parliamentarians to allow tariff implementation legislation and therefore ratification to bring both FTAs into force.
The big question now is what approach Labor will take to the TPP, given its inclusion of ISDS (albeit with side-letters proposing a carve-out between Australia and New Zealand), and the general election scheduled for 2016. Labor may well fudge its stance. After all, if elected but again only in coalition with Greens, a new Labor government may want to revive the Gillard Government Trade Policy Statement to eschew ISDS provisions. If elected outright, Labor may instead be willing to accept them at least for the TPP, albeit perhaps negotiating some further side-letters or taking the lead to finalise a Code of Conduct already envisaged for ISDS arbitrators. Overall, the TPP’s ISDS-backed commitments are quite similar to those in Australia’s FTAs since 2003 – in turn largely modeled on treaties between third parties and the US, which has never been subject to a successful ISDS claim.
Labor will also have to bear in mind that other TPP partners are generally comfortable with ISDS, as are countries like Korea and even China, which may eventually join this FTA. Present TPP partners supportive of ISDS include major outbound investors like Japan and especially Singapore, and to a lesser extent Brunei and Malaysia. Canadian firms have invoked ISDS against other countries and the new centre-left government is likely to maintain support for ISDS. As a FDI-importer, New Zealand has seen more public debate since signing its FTA with Korea this year, but the Labour Opposition supported ratification and there remains more bipartisan support for FTAs as the best way forward for this major exporter of agricultural products. Vietnam recently went through a phase of reassessing the pros and cons of ISDS, after a few claims, but now has in place a better system for avoiding and managing investment treaty disputes. Chile, Peru and Mexico are likely to adopt the TPP with ISDS, if only to ensure that the agreement prevails, given extra outbound trade and investment opportunities, notably to the US. Ironically, apart from the Australia, it is mainly therefore the US – traditionally a strong proponent of ISDS – where some recent opposition may complicate TPP ratification, especially in light of their own elections next year.

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.