Australia’s rejection of Investor-State Dispute Settlement: Four potential contributing factors

In April of this year, as a part of a broader rethink of Australia’s approach to international trade negotiations, the Gillard Government vowed that it will no longer include provisions on investor-state dispute settlement (ISDS) in bilateral and regional trade agreements.[1] The new policy is justified by reference to the principles of ‘no greater rights’ for foreign investors and the government’s ‘right to regulate’ to protect the public interest. These principles have long been advocated by non-governmental organizations (NGOs) but have generally only been paid lip service by governments.

For many observers, both within and outside the country, this policy development came as a surprise. Earlier in the decade, Australia had famously rejected ISDS with the United States in the Australia-US Free Trade Agreement (AUSFTA). However, since then successive governments have negotiated and concluded trade agreements that include ISDS. Furthermore, Australia has very little in common with the states that have been leading the charge against ISDS (mainly left-leaning Latin American countries). Perhaps most puzzling is that this bold policy has emerged in a country that has never been involved in an investor-state dispute.

In this article we speculate that four factors might provide some insight on how and why this policy shift came about.

1. Trade relations with the United States: from AUSFTA to the TPPA

In 2003, a conservative Liberal-National coalition government led by John Howard commenced trade negotiations with the United States. The AUSFTA, which came into force in 2005, did not include a standard provision on ISDS. The official line taken by both governments was that ISDS was unnecessary because each country has a “robust” legal system for resolving disputes.[2] However, this justification glosses over the substantial concerns that were raised about ISDS by both NGOs and elected officials in Australia over the course of the negotiations.

The AUSFTA “prompted the biggest critical public debate ever held in Australia about a trade agreement” and ISDS was “a major target of community campaigning”.[3] Negotiators have acknowledged that this debate had an impact on the position taken by the government.[4] Furthermore, it strongly influenced the decision of the Australian Labor Party (ALP) to adopt a policy which was critical of some aspects of the AUSFTA, including ISDS. The Greens and the Democrats also opposed certain elements of the agreement. Because these parties held a majority of Senate seats, they had the option of blocking the implementing legislation for the AUSFTA.  It seems likely that the Howard Government removed ISDS from the agreement in the hope that this would assist passage for the implementing legislation through the Senate. Despite intense internal debate over the agreement within the ALP, the implementing legislation was eventually approved, albeit with some amendments.[5]

Five years later, with the ALP in power (at that time led by Prime Minister Kevin Rudd), the government again sat down at the negotiating table with the US. This time the talks concerned a regional trade agreement known as the Trans Pacific Partnership Agreement (TPPA). The TPPA builds on the Trans-Pacific Strategic Economic Partnership Agreement between Brunei, Chile, New Zealand and Singapore, adding to the mix Australia, Malaysia, Peru, Vietnam, and the US (other countries are also contemplating joining). The TPPA has been described as a building block for a free trade area covering the entire Asia-Pacific region.[6]

At the start of the negotiations in March 2010, Trade Minister Simon Crean suggested that Australia was taking a comprehensive approach to the trade deal and that “everything was on the table”.[7] Academics and NGOs expressed alarm that the government was re-opening all of the issues that they (and the ALP) had fought against during the AUSFTA negotiations. The government quickly backtracked on the issue of ISDS, with Mr. Crean noting that he had “serious reservations about the inclusion of investor-state dispute settlement provisions” in the TPPA.[8]

As is the case in many developed countries, very little notice was taken when the Australian government signed agreements containing ISDS provisions with developing countries (e.g. the Australia-Chile FTA), despite consistent campaigning on this issue by some NGOs. Most of the public and government concern with ISDS is focused on the threat to Australian public policy. This threat is obviously most potent when the US—the single largest source of FDI in Australia—is involved. However, whether the negotiation of the TPPA provided the impetuous for the trade policy review remains a matter of speculation.

2. An economic approach: the role of the Productivity Commission

The Australian Productivity Commission is an arms-length advisory body set up in 1998 to conduct independent research on a range of economic, social and environmental issues. On 27 November 2009, the government requested that the Productivity Commission undertake a study into the impact of bilateral and regional trade agreements on Australia’s economic performance.

Over the course of its year-long study, the Commission consulted the business sector, government agencies and other interested parties and invited submissions from the public. Several NGOs, trade unions and academics made submissions that were highly critical of ISDS.[9] A submission by academics Jonathan Bonnitcha and Dr Emma Aisbett that dismantled the traditional economic arguments used to justify State participation in ISDS (e.g. the claim that it will result in greater inflows of FDI) appears to have made a particularly strong impression on the Commissioners.[10]

The Commission’s final report was released in December 2010.[11] One of the Commission’s recommendations was that the government should “seek to avoid” the inclusion of ISDS provisions in its trade agreements.[12] Three key conclusions led to formulation of this recommendation.[13] First, the Commission found no evidence of the existence of a market failure relating to sovereign risk. Although it was acknowledged that the domestic court systems in some countries might not be as robust as Australia’s, the Commission reasoned that in most instances the desire on the part of governments to retain a good reputation with foreign investors was sufficient to quell any impulse to expropriate.[14] The Commission also argued that there is no evidence that regulation (in Australia or abroad) is systematically biased against foreign investors—in fact the reverse may be true.[15] Despite having found no evidence of a market failure, the Commission went on to assess whether, if such a market failure did exist, there were other options for addressing it. Their second key conclusion was that insurance and investor-state contracts were more appropriate mechanisms for dealing with political risk than ISDS.[16] Finally, the Commission assessed the issues of regulatory chill and the cost of arbitration to governments. Their third key conclusion was that “Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions”.[17]

The Gillard Government was not obligated to adopt the Commission’s recommendations. However, one could speculate that the new Trade Minister—Dr Craig Emerson, a trained economist not supportive of the idea that the role of government is to create additional legal rights to protect investors—was likely to be persuaded by the Commission’s economic reasoning on ISDS.

3. No champion for ISDS: the absence of a strong business lobby

ISDS is generally supported by two main groups: investment lawyers/arbitrators and businesses (particularly multinational corporations). During the Productivity Commission study neither group rallied to defend ISDS. The absence of a strong business lobby on this issue seems particularly significant.

Australian businesses have apparently never utilized the ISDS provisions in Australian treaties, which may explain their lack of interest.[18] In this respect, it may be relevant that large (and politically influential) Australian mining corporations are accustomed to guarding themselves against political risk through investor-state contracts, which often include provisions on ISDS, when they operate abroad.

What is perplexing is that foreign businesses with interests in Australia did not get involved in the debate, when clearly some have a very strong interest in accessing ISDS (see next section). Perhaps they reasoned that interfering in Australia’s policy process would be counterproductive. However, it is also conceivable that some foreign business groups were simply unaware of the Productivity Commission’s study or the impact that it would have on government policy. Since the announcement of the new policy, the US Council for International Business has been in contact with the Australian Chamber of Commerce and Industry in an attempt to bolster domestic support for ISDS (with the particular aim of ensuring Australian support for its inclusion in the TPPA).[19]

4. A viable threat: Big Tobacco’s assault on plain packaging legislation

During the period that the Productivity Commission was studying the risks and purported benefits of ISDS, Australia was developing legislation that would require tobacco products to be packaged in plain paper (with graphic health warnings, but no branding). This legislation, based on a World Health Organisation recommendation, is set to pass through both houses of government in the next few months.

Large multinational tobacco companies operating in Australia have (unsuccessfully) used several tactics to pressure the government to drop the legislation. One of the key strategies has been to threaten the government with a legal dispute. Although most of the discussion has surrounded the viability of either a constitutional case in the courts of Australia, or an intellectual property dispute in the WTO, the government was not ignorant of the possibility of an investor-state dispute. In fact, the policy statement on ISDS explicitly noted that the government “has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products”.

Less than three months after the release of the policy statement, the ISDS threat has become far more palpable—on 27 June, Philip Morris (one of the world’s largest tobacco companies) notified the government of its intention to launch a dispute under the Australia-Hong Kong Investment Promotion and Protection Agreement (1993). The ostensibly American company is engaged in a similar dispute with Uruguay, although in that case it claims to be a Swiss investor.

The government has vowed to stand its ground on the issue and is confident that Philip Morris doesn’t have a case.[20] Nevertheless, some commentators, including the Australian Medical Association, have already begun to call for the Hong Kong treaty to be terminated. This would be fairly straightforward as the treaty has reached the end of its first term (15 years) of enforcement, although such a move would have no impact on this particular case.

Conclusions

Australia’s new policy on ISDS has been described by some as ‘naïve’, ‘backwards’, ‘overkill’, and by others as ‘reasonable’, ‘progressive’ and ‘worth emulating’. However, most of these reactions have occurred outside the country. A few local law firms have decried the government’s decision and a few NGOs have praised it—but (in Australian terms) there hasn’t been a great deal of ‘argy-bargy’ on the topic domestically.

However, we will conclude with two key points of caution. First, it may be difficult for Australia to maintain its position against ISDS in the TPPA negotiations, particularly given the pressure that is likely to come from the US. Then again, it is also possible that Australia’s stand against the ISDS will encourage countries like New Zealand and Vietnam, which have in the past claimed exemptions from ISDS provisions (in the ASEAN-New-Zealand Australia Free Trade Agreement), to take a similar position. Second, it should be noted that the ALP has a minority government and is reliant on the support of some independents and Greens. On the one hand, the need to retain this support is likely to strengthen the position against ISDS. On the other hand, the Liberal-National Coalition has come out ahead of the ALP in recent opinion polls and could win an election if one were called in the near future. The shadow trade minister, Julie Bishop, has made it clear that the Coalition believes that ISDS is important both to protect Australian business interests and to attract FDI to Australia.[21]

Although the future of the new policy on ISDS is, therefore, subject to these political uncertainties, one can hope that the greater legacy of this episode in Australian politics will be that it inspires governments in other parts of the world to examine their own investment policies more critically.

Authors:

Kyla Tienhaara is a Research Fellow at the Regulatory Institutions Network, Australian National University, and the author of The Expropriation of Environmental Governance: Protecting Foreign Investors at the Expense of Public Policy (Cambridge University Press, 2009).

Patricia Ranald is a Research Associate at the University of Sydney and Convenor of the Australian Fair Trade and Investment Network (AFTINET). She has written a number of articles on the AUSFTA and recently contributed a chapter on this topic to the book No Ordinary Deal: Unmasking the Trans-Pacific Partnership Agreement (Allen and Unwin, 2010).