FTAs and Investor-State Dispute Settlement Clauses - Expectations for the Trans-Pacific Partnership



To stimulate cross-border trade and economic growth, free-trade agreements (FTAs) are state-negotiated tools that can be pressed upon trading partners, enticing them to reduce protectionism. Utilising a unified and cooperative approach, trade liberalisation can achieve mutual gains, albeit for some economies more than others.

After seven years of negotiation, the Trans-Pacific Partnership (TPP) – an agreement between 12 APEC member economies (5 from the Americas - Canada, Chile, Mexico, Peru and the USA and 7 from Australasia - Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore, and Vietnam) – has been finalised. Its content has been released to the public here, thanks to New Zealand. The agreement seeks to reduce trade barriers between member economies. Economic modeling has indicated varied estimated projections of GDP growth as a result of the deal for the economies involved. In 2012, the gains were valued at $26.6 trillion although, more recently, researchers have projected estimates down to nearly $300 billion in a decade or $285 billion by 2025, amongst others.

To protect investors and drive foreign direct investment through this opportunity, the TPP includes investor-state dispute settlement (ISDS) clauses. Investment is defined broadly under the TPP to include every asset, whether tangible or intangible, that an investor controls either “directly or indirectly, that has the characteristics of an investment”.

ISDS clauses provide foreign investors the right to sue states if the government adversely affects existing corporate investment through regulatory policy change. These clauses also safeguard investors from discrimination that they may receive in a foreign court, protecting them against bias and “insufficient legal remedies”.

To diminish taxpayer apprehension about these clauses, national foreign affair agencies have released summary documents which explain the “suite of mechanisms” included in the TPP to safeguard the state’s ability to regulate policy to protect the public and common good. It contains specific mention of the areas of health and the environment. But questions still remain if these safeguards will be strong enough to protect states from loophole-seeking corporations wanting compensation, or regulatory static, as states strengthen regulations in their established markets.

The aptitude of these safeguard provisions as witnessed in past agreements have had mixed results. The US-Central America Free Trade Agreement (CAFTA) and Peru-US Free Trade Agreement (PTPA) contained clauses with environmental safeguards. Even so, American firm Renco, a lead mining company, was still able to sue the Peruvian government when Peru introduced stricter standards to companies, requiring them to reduce their lead pollution during their production.

ISDS cases have not just taken place in emerging nations with weak legal institutions, but also in economies with robust systems. Argentina has faced 98 ISDS claims and, as a result of the North American Free Trade Agreement (NAFTA), Canada has faced 22 and the USA 15. It is likely that the strength of TPP ISDS provision safeguards to states will not be known until tested in the market - a highly expensive trial.

Although they are very expensive to prosecute against, safeguards have been successful in the past. These will hopefully deter future cases. Last month, Australia won an investor-state arbitration case between the state and tobacco company Phillip Morrison Asia (although with a $50 million taxpayer price tag for the proceedings). This case followed after Australia brought in plain packaging regulation to strengthen its tobacco control measures. Proceedings were initiated under an ISDS clause of a 1993 Hong Kong-Australia Bilateral Investment Treaty (BIT). The case has finally been dismissed as Australian prosecutors were able to prove that Philip Morris acquired “shares in Philip Morris Australia in early 2011 ‘in the full knowledge’ of the government’s decision in 2010 to introduce plain packaging.”

Public calls for government policy responses will continue to morph with changing public apprehensions, which may menace market environments for investors. Political change is now occurring at a rapid rate. One can see this astonishing pace - driven by a mix of political will and public pressure - in the rapid achievements of Uruguay. This South American country has been able to shift its high levels of imported oil (27% of energy needs in 2000) to produce 95% of its electricity needs from clean energy sources. With strong political leadership and policy stability, governments are able to change policy rapidly. Thus, there will be new areas of importance to public welfare that are not included in ISDS provision clauses in the current negotiated arrangement.

With these matters in mind, it is trusted that the current TPP has struck an appropriate balance between the government’s ability to legislate in the public interest, and investor protections to adequately promote investment and to increase international trade. It is hoped that the protections and safeguards put in place in the TPP will be able to disenfranchise companies from suing the state if acting unethically, solely their own economic interests. Time will tell.

Cassandra Oaten is the International Trade and Economy Fellow for Young Australians in International Affairs.

This article can be republished with attribution under a Creative Commons Licence. Please email publications@youngausint.org.au with any questions or for more information.

Image: Leaders of TPP member states

Image Credit: Gobierno de Chile (Wikimedia: Creative Commons).

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