This is the first in a series of articles interest.co.nz has commissioned reviewing the key chapters and issues for New Zealand in the Trans-Pacific Partnership Agreement.
By Ryan Greenaway-McGrevy*
One of the more contentious parts of the TPPA is the creation of the Investor-State Dispute Settlement (ISDS) mechanism between member countries.
It is due to the ISDS provision that many Kiwis feel that we will be ceding sovereignty to foreign corporations if the TPPA is ratified. ISDS provisions create a specific legal mechanism for foreign investors to seek international arbitration if they believe that the host state has breached their obligations as stipulated under the agreement.
In plainer language, this means that foreign corporations will be able to sue the government in an international court. Many critics of the TPPA are framing the ISDS provision as open season on our domestic policies.
Chapter 9 (investment) of the TPPA covers issues related to ISDS. Part A stipulates obligations for investors and host countries in terms of investment scope and limits, while Part B outlines the arbitration mechanism for disputes. Article 9.8 gives us some insight into what these obligations entail. It states:
No Party shall expropriate or nationalise a covered investment either directly or indirectly through measures equivalent to expropriation or nationalisation.
Direct expropriation and nationalisation are easy enough to comprehend. ISDS mechanisms have been around since the late 1950s, and were originally intended to give foreign investors some level of reassurance that their investments in politically unstable regions would not be taken from them. At the very least they could pursue compensation should the host country change its attitude to foreign investment.
So what exactly constitutes indirect expropriation? All government policy creates winners and losers, and often those losers include private enterprise. If any loss of profit is the standard for determining expropriation, it is difficult to imagine what kinds of government policy would not be considered to be expropriation. Indeed, some of the more infamous investor-state law suits suggest that ISDS is carte-blanche for all government policy to be dragged through the court room, such as Philip Morris suing the Australian government over plain packaging of cigarettes. For the sake of argument, suppose that a future government wanted to implement a soda tax. Would the government be facing a potential law suit from Coca Cola et al.?
We gain a better understanding of what indirect expropriation means in Annex 9-B of the TPPA text. Paragraph 3(a) stipulates that loss of profit does not in itself constitute indirect expropriation:
The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:
(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred.
Paragraph 3(b) provides further clarification on the extent to which the ISDS clause could limit government powers:
Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.
On paper there remains plenty of scope for the government to continue to legislate in the public interest, provided the regulation is not used to play favourites with domestic business. Other articles in the text reinforce this sentiment (such as 9.16).
We have however seen lip service paid to social and environmental welfare concerns in previous ISDS agreements, such as the North American Free Trade Agreement (NAFTA). Article 1114 in the Investment chapter of NAFTA states that:
Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.
NAFTA has enabled some of the more egregious environmental law suits, such as Ethyl Corp. successfully suing Canada for banning a toxic fuel additive. But in comparison to NAFTA, the language used in the TPPA does a better job of enshrining the government mandate to legislate in the public interest. I remain cautiously optimistic.
But what happens if we are sued? Section B of chapter 9 outlines the dispute settlement process for ISDS.
Investors can bring a case against a member government if they believe there has been a breach of obligation as defined in the agreement. The investor must first seek resolution through negotiation before going to arbitration (Article 9.18). If negotiation fails the complainant must select an arbitration forum, and then an arbitration panel will be convened following the process outlined in Article 9.22.
The panel consists of three members. The complainant (investor) and respondent (state) each appoint one member. The remaining member and chair of the panel must be agreed upon by the two parties, or is otherwise appointed by the tribunal. At this point the respondent can object to the merits of the case and request that the panel endorse the legitimacy of the complaint before invoking the full arbitration process (Article 9.23 paragraph 4).
One of the biggest concerns with the arbitration tribunals is a perceived lack of transparency. Indeed, there are varying degrees of transparency amongst some of the potential tribunals listed in Article 9.19. For example, the recent Philip Morris case against Australia was held under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, which require that both parties agree to waive confidentiality before information can be released. In contrast, The World Bank’s International Centre for Settlement of Investment Disputes (ICSID) is not usually confidential.
However, perhaps in response to public concerns, the TPPA includes specific provisions relating to transparency in Article 9.24. The Article states that hearings must be open to the public unless the content of the hearing contains “protected information”. Just what exactly constitutes protected information will no doubt remain a subject of debate, and this caveat leaves both parties some scope for keeping arbitration under wraps. There is however another caveat in paragraph 5 of the Article, which states that the TPPA cannot require the government to keep arbitral proceedings confidential if doing so would contravene our domestic laws:
Nothing in this Section requires a respondent to withhold from the public information required to be disclosed by its laws. The respondent should endeavour to apply those laws in a manner sensitive to protecting from disclosure information that has been designated as protected information.
Our government may very well be the ultimate vanguard of transparency.
Interestingly, there is also a provision in Article 9.23 that allows third parties who are considered to have a “significant interest in the arbitral proceedings” to make submissions to the tribunal. The interpretation of “significant interest” is obviously important, but this may provide opportunity for public interest groups to make their case directly to the arbitration panel.
I ran into one of the TPP protests rolling through lower Queen Street one Saturday afternoon. Judging from the various signs and banners it was apparent that many people associate the agreement with American hegemony. And I do not recall such vocal opposition to the original TPP between New Zealand, Chile, Singapore and Brunei. It is only when the US got involved as part of President Barack Obama’s “pivot to Asia” that we really began to pay attention.
To some extent this opposition is warranted. Work by Henry Farrell at George Washington University highlights how divergent the US negotiating position was in the early rounds of negotiation.
However, when it comes to ISDS, we opened the door to law suits from American multinationals a while ago. Let me explain by re-visiting the Philip Morris case. Philip Morris is ultimately owned by the plain-and-innocent-sounding Altria Group, which is headquartered in Tobacco Country - Henrico County, Virginia. Australia does not have an ISDS agreement with the US, and in fact, due to the unpopularity of ISDS with the Australian people, an ISDS provision was explicitly omitted from the Australian-US Free Trade Agreement. So how could US-based Philip Morris sue Australia for its plain packaging laws?
Australia does have free trade and bilateral investment treaties with nations other than the US, and many of these contain ISDS provisions. Australia has an ISDS agreement with Hong Kong, and as it turns out, Philip Morris has a subsidiary in Hong Kong. It was the ISDS agreement with Hong Kong that gave Philip Morris the back door to suing the Australian government. This is an example of what Todd Tucker at the University of Cambridge’s Centre for Development Studies refers to as Creeping Multilateralism.
Four of our free trade agreements already contain an ISDS provision: the FTAs with China, South Korea, ASEAN/Australia, and Malaysia. As the Philip Morris case has demonstrated, multinational corporations with affiliates domiciled in these countries already have a foot in the door.
In the end the arbitrator declined to hear the Philip Morris case. Philip Morris shifted investments after the plain packaging policy was announced to ensure that Philip Morris Asia held a stake in Philip Morris Australia. This was deemed to be an abuse of right and the case was dismissed. An arbitrator calling out Philip Morris for foul play is certainly a far cry from ISDS tilting the playing field to favour foreign business interests.
Every international agreement requires participants to give up some degree of sovereignty. Indeed, that is usually the point of the agreement. Prudence requires that we recognise this cost. But prudence also requires that we weigh these costs against the benefits. Economists and policy-makers often argue that ISDS fosters an environment that attracts foreign investment, which means more jobs and more income. But I would point out that New Zealand has not had much trouble attracting foreign investment: We have a strong, transparent and independent judiciary, and a business-friendly economy. ISDS-or-no-ISDS, we have attracted investment from all corners of the globe.
Cast in this light, the ISDS clause in the TPPA is a solution to a problem we do not have. In order to recognise the benefits of ISDS we must instead invert our viewpoint. It is not so much that foreign multinationals will now feel a little bit more confident about investing in New Zealand: It is that our home-grown businesses will now feel a little bit more confident about investing overseas.
*Ryan Greenaway-McGrevy is a senior lecturer at the University of Auckland in economics. Prior to that he was a research economist in the Office of the Chief Statistician at the Bureau of Economic Analysis (BEA) in Washington DC.
*Amber Carran-Fletcher contributed to this article.
The series so far: