GREG WOOD. The TPP is dead – so scotch ISDS

Jan 29, 2017

With the Trans Pacific Partnership’s (TPP) demise, Australia should take the chance to reconsider its approach to international trade negotiations. Certainly we should never again sign an agreement with wide ranging Investor State Dispute Settlement provisions (ISDS) which are definitely not in the interests of our society, democracy or economy.  

Malcolm Turnbull needs to accept that the Trans Pacific Partnership (TPP) is as dead as Monty Python’s parrot, instead of acting as though part of that skit. A stock take of our approach to trade negotiations is mandated. Of late they have been negotiated in imprudent haste, over-reached in their scope, lacked adequate democratic input into the negotiating process, and motivated by domestic politics.

The TPP provisions allowed foreign investors to sue governments that introduce legislation harming the investor’s interests. There were some caveats, which for Australia in the TPP included carve outs for “legitimate” health and environmental legislation. Whether these would have achieved their intended objective is unclear and, with the treaty’s demise, will remain so.

Clearly Australia’s negotiators had doubts as to how successful they’d been. That shows in the TPP’s preamble where they felt a need to state the axiomatic. It‘s a jumble of thought bubbles that smack of hasty drafting; in contrast to the main text which has been worked over every which way by lawyers. Because it’s a preamble, it’s legally non-operative. But apropos of nothing it magnanimously recorded that the signatories retain their right to ”… set legislative and regulatory priorities… protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals”. They accept “…their inherent right to adopt, maintain or modify health care systems”. You only see a need to state such things if there are grounds for concern that the opposite could apply: with the ISDS it can.

Australians were understandably agitated when Philip Morris used an obscure investment protection agreement between Australia and Hong Kong to challenge the Australian Government’s cigarette plain packaging legislation. The tribunal hearing the case didn’t address the substantive issue. Rather, it decided the tobacco company had reconfigured its ownership arrangements just to have a means of challenging the measure. The tribunal decided Philip Morris “engaged in an abuse of process” and ruled against it. The tribunal did not consider the real question; whether the Australian action had caused Philip Morris a loss of intellectual property and, if so, whether it should be compensated. With the decision in our favour Australians then stopped worrying about the ISDS concept, but the case had already lasted 5 years, costing the Commonwealth Government $50 million in legal bills. Had compensation been mistakenly awarded, it could have been massive.

As is the way with ISDS arbitration, the decision rested with three trade lawyers, not independent judges; nothing precluded their involvement on one side or the other in similar cases, or their working simultaneously on behalf of other clients. The Australian High Court had already considered, and decided against, Philip Morris: the company wanted consideration from a yet higher court.

Notionally, ISDS doesn’t preclude a government from considering new laws or new issues but it can attach a hefty bill to them, resulting in ‘regulatory chill’. National agendas and political and economic philosophies necessarily change, and can do so quickly. In the TPP context, the Australian government made much of its success in excluding environment and health care from the ISDS’s ambit. Environment is a relatively recent arrival as a top tier political issue: it’s just 15 years ago the Kyoto Protocol on climate change became operative. New issues of national importance will always be emerging and can’t readily be predicted.

ISDS proponents often seem attracted to regulatory chill as a way of dampening social change. If anything, ISDS will act with more potency to discourage micro economic reform than the ‘public welfare’ agenda. Australia has a constant appetite for deregulation but the possibilities become less attractive if ISDS generates costs and litigation.

Perhaps I am drawing a long bow, but currently the Productivity Commission is wrestling with a ground breaking report on the way this country approaches its data resources, primarily those in the hands of government but, just possibly, those in private sector hands: social media or financial institutions for example. Potentially, the implications could be far reaching. It’s early days, but the thinking is to make data more available both as a commercial and a societal resource: additional rights of access, record transfer, and correction would be attached. That will be contentious, possibly disruptive: as with any formative approach it will need flexing and adjustment as the policy evolves. Certainly, if a TPP style ISDS were in place it would make the whole notion a perilous one, especially given some of the parties and interests involved. And that’s just today’s example.

ISDS favours foreign investors over domestic investors. An Australian owned firm in Australia, competing with an overseas company based in Australia, can’t bring it into play. The Treaties Committee of Federal Parliament, which predictably ticked the government’s take on the TPP, noted approvingly that more Australian firms had initiated ISDS cases against foreign governments than foreign firms had initiated against Australia. They grasped at that as validating the concept.

Companies should make investment decisions abroad on the basis of their judgement of the commercial and sovereign risks that apply. (In certain cases you can even purchase foreign investment insurance). Having ISDS in place may indeed reduce those risks for the Australian firm investing abroad but that comes at a cost to Australia’s citizenry and taxpayers, through regulatory chill, possible damages, and litigation costs. Weighing the issue as the Treaties Committee did is tantamount to asking Australians to subsidise Australian firms investing abroad. Besides which, compared to most investment destinations, Australia has a comparative advantage with its sound laws and domestic legal system. If anything, ISDS erodes that comparative advantage.

Prior to the finalisation of the TPP the then Chief Justice of the High Court, Robert French, and the former Chief Executive of the Australian Industry Group, Heather Ridout, both spoke against ISDS. Ridout was quoted as saying: “mark my words, we will regret it if we sign away our rights.” She’s correct. The demise of the TPP gives us a chance to reconsider and resolve never to have such a disadvantageous provision in another trade agreement.

Greg Wood was formerly Deputy Secretary of Prime Minister and Cabinet. He headed the Americas and Europe and the North Asia Divisions in DFAT. He has had a long involvement in international trade policy and trade negotiations.

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