The TPP is Back: Submission to Australian Parliamentary Inquiries

[Update of 22 August 2018: the JSCOT Report No 181 recommending CPTPP ratification is now available. It refers to this Submission, my oral evidence given at hearings in Sydney (transcribed here), and further statistical information jointly with PhD student Ana Ubilava (incorporated also into an article for the Sept 2018 issue of the Intl Arb L Rev).]
The Trans-Pacific Partnership was signed in February 2016 by Australia, Japan, the US and 9 other Asia-Pacific countries, but the new Trump Administration withdrew signature in January 2017, so the remaining 11 re-signed a variant (TPP11 or CPTPP) in March 2018. Inquiries into ratification are now being conducted by the the Australian Parliament’s Joint Standing Committee on Treaties (JSCOT, where the Government always had a majority of members, so will almost certainly recommend ratification) and the Foreign Affairs, Defence and Trade Committee in the Senate (where the Government lacks a majority overall). The Inquiry reports do not bind the Government anyway, so the big question remains: will the opposition Labour Party subsequently vote with the Government to enact tariff reductions consistently with this treaty, to allow the Government then to ratify the treaty so it can come into force?
A particular stumbling block will remain the TPP11’s investor-state dispute settlement (ISDS) provisions, given as an option additional to inter-state arbitration for investors directly to enforce substantive commitments offered by host states to protect foreign investment, given that the Labour Party’s policy remains opposed to including ISDS in treaties. Despite that policy position, going back to the the Gillard Government Trade Policy Statement in 2011 (in force until Labour lost power in 2013), the Labour Opposition nonetheless voted pragmatically with the Government to allow FTAs containing ISDS to come into force with Korea and China.
Below is my Submission to both Parliamentary Committees, focusing on the investment chapter and supporting ratification of the TPP11. It is based in part on my latest paper with A/Prof Amokura Kawharu focusing on recent ISDS cases and investment treaties (re)negotiated by Australia, and New Zealand where a new Labour Government has also renounced ISDS for future treaties, but pragmatically agreed to rather minimal changes to ISDS and the investment chapter overall in TPP11. The footnoted original versions of the Submission, available by the Committee websites, refer to some of my other recent writings concluding a 4-year ARC cross-institutional research project on international investment dispute management. One is a 21-chapter book on ‘International Investment Treaties and Arbitration Across Asia‘, launched by former Chief Justice Robert French on Thursday 13 April as part of a SCIL-supported symposium on international commercial dispute resolution, including Australian perspectives.

Re: Submission focusing on the Investment Chapter, for the Inquiry into the Comprehensive and Progressive Transpacific Partnership (CPTPP)*
My earlier Submissions in 2016 supported ratification of the TPP, after carefully assessing the Investment Chapter. I now support ratification of the CPTPP, which makes minimal changes to the Investment Chapter. Those are summarised in a recent update with A/Prof Amokura Kawharu on Australian and New Zealand investment treaty practice. Specifically:

The CPTPP will commit New Zealand [Australia and the remaining 9] signatories … to ISDS provisions, but their application to investment agreements and investment authorisations will be suspended. In New Zealand’s [and Australia’s] case however, authorisations were already excluded from ISDS by virtue of Annex 9-H of the original TPP text.
[In addition, Australia had only ever agreed to apply ISDS procedures in government contracts with foreign investors in its 2015 FTAs with Korea. In future contracts concluded between foreign investors and CPTPP host states, they remain free anyway to negotiate an arbitration clause that includes provisions similar to those provided in the CPTPP (such as enhanced transparency, compared to usual international commercial arbitration).]
A further change is that the minimum standard of treatment [or: fair and equitable treatment] protection has been suspended with respect to investments in the financial services sector. Again, in New Zealand’s [and Australia’s] case, this change may prove less significant than it first appears. Most foreign investment in the New Zealand financial services sector is by Australian investors. They are already entitled to the minimum standard of treatment under the Investment Protocol to the Closer Economic Relations Trade Agreement between New Zealand and Australia, albeit underpinned only by inter-state arbitration.
… New Zealand also exchanged bilateral side letters excluding ISDS with Australia (consistent with their past practice) and Peru, as well as (more symbolically [due to AANZFTA 2009 maintaining ISDS ]) with Brunei, Malaysia and Vietnam, and issued a Joint Declaration on ISDS reforms with Canada and Chile. Despite these efforts, it seems that New Zealand has proven agreeable to quite limited actual changes to the TPP provisions on ISDS. Those were not renegotiated, for example, to add an appellate review mechanism. This is even though future agreement on such a mechanism is envisaged in TPP Article 9.23(11), and despite some form of appellate review being increasingly advocated by those unhappy about inconsistencies in rulings from traditionally-structured one-tier ISDS tribunals.

However, I would encourage Australia to take leadership (preferably with New Zealand) in:
(a) commencing formal negotiations with the other signatories about superimposing an appellate review mechanism after ratification; and
(b) developing guidance or a code of ethics specifically for ISDS arbitrators (as required by TPP Article 9.22.6 before the treaty comes into force) that includes an express prohibition on “double-hatting” (arbitrators serving as counsel in other ISDS cases).
These initiatives would go a long way towards assuaging public concerns about ISDS, which may in turn be undermining support for commercial arbitration and ADR generally. Such initiatives might also prompt Australia (and New Zealand) to go the next step and propose an EU-style permanent investment court procedure (as in the EU-Vietnam and EU-Canada FTAs), in both countries’ future treaties such as the (ASEAN+6) Regional Comprehensive Economic Partnership. Nonetheless, neither of these matters should be a deal-breaker, preventing the CPTPP from coming into force.
Overall, contrary to the main arguments of Australia’s Productivity Commission that led to the Gillard Government eschewing ISDS in treaties over 2011-13, there is good evidence that:
– even qualified procedural rights for investors to bring direct action against host states for expropriation or other violation of substantive treaty commitments, in addition to the option of inter-state arbitration, has led historically to increased FDI on a world-wide basis;
– Australian investors now make good use of ISDS protections to recoup losses incurred by alleged treaty violations, notably by developing states;
– the risk of successful claims against Australia and hence supposed “regulatory chill” should be minimal – as shown by the outcome of the Philip Morris claim (and the merits decision in its claim against Uruguay over tobacco regulation) even under old treaties without TPP-like elaborations, as well as the ambit claims recently by some US investors.
Encouraging investors to make and maintain investments in reliance on investment treaty protections is also better than leaving them to “manage” them eg though bribery. After all, corruption in public office has been a problem not only in developing countries in Asia but even recently in New South Wales.
Lastly, this Committee should further encourage the Government to engage in wider and structured public consultation with a view to developing (at least partially bipartisan) model investment treaty provisions for Australia. This would extend beyond the outreach roundtables on international trade and investment law helpfully organised by DFAT in recent years.
Yours sincerely
Luke R Nottage

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.