Is the U.S. Complicating TPP Ratification?

Alongside this week’s APEC leaders’ summit in Manila, US President Obama met counterparts and trade ministers from 11 other Asia-Pacific states that agreed in October to the expanded Trans-Pacific Partnership (TPP).

These states, covering around 40% of world GDP, can’t sign the free trade offer before February 3, once the US Congress finishes it’s 90-day review. However, Obama yet others in Manila reiterated the importance of the TPP for regional and worldwide economic integration.

There are, however, ongoing concerns in Australia and the US about the TPP’s investment chapter, including its investor-state dispute settlement (ISDS) provisions.

The ISDS provisions give foreign investors the right to use dispute settlement proceedings against a foreign government when they are unable to persuade their home country to do so. If the host state discriminates, seizes a foreign investment or makes it largely worthless without paying adequate compensation, or denies justice in local legal courts, the investor can use ISDS to create a direct claim. ISDS helps depoliticise conflicts and encourages a rules-based construction for investment, especially in creating countries.

Yet ISDS has become a lightning fishing rod for those in Australia who are unhappy about entering into free industry agreements aimed at promoting cross-border trade and investment beyond the WTO system. Polarised media coverage has escalated particularly since 2011.

Part from the criticism comes from some economists, including the Productivity Commission this year. It favoured greater financial liberalisation, but prefered unilateral moves, or at least multilateral treaties. Although accompanied by a vigorous dissent, the actual commission’s main report also adopts a laissez-faire approach to investment: firms should make their own decisions about whether to invest locally or abroad, and don’t need treaties to set standard legal standards of safety.

However, most criticism of ISDS in Australia comes from the political remaining, which is generally opposed to economic liberalisation. Treaty-based protections for investors are seen as undermining national sovereignty, altough others point out this is inherent whenever one state commits to an international arrangement.

Critics are also very concerned about “regulating chill.” They often highlight the very first (and only) arbitration brought towards Australia by Philip Morris Asia, concerning tobacco plain packaging. However a careful empirical research recently found no substantial extra regulatory chill even in a country like Canada, that has lost a few ISDS claims underneath the North American FTA in effect since 1994.

These two lines of critique came together in the Trade Policy Statement the Gillard government issued in 2011. Controversially, Australia declared it might never agree to any form of ISDS in future investment treaties. The stance complex negotiations for major bilateral FTAs along with the TPP.

In 2013, the Abbott government reverted to including ISDS on a case-by-case assessment. This helped Australia to reach arrangement on major FTAs, but the politics left continues its opposition through multiple parliamentary inquiries, especially in the Senate.

The Greens began through proposing an “Anti-ISDS Bill,” which would have legislated the 2011 Industry Policy Statement stance. The Labor members on that Senate committee disagreed, mindful of environment a dangerous precedent that might constrain a future Labor government from negotiating and signing treaties in other fields.

However, Labor parliamentarians did initially side with Greens members on inquiries into the South korea and then China FTAs, objecting in part to their ISDS provisions. Yet these are limited regarding China, and eventually Work voted with the Coalition parliamentarians to allow tariff implementation legislation and therefore ratification to bring both FTAs into force.

The big question now is what approach Labor will take to the TPP, given its inclusion of ISDS (although with side letters suggesting a carve-out between Australia and New Zealand), along with Australia’s general election planned for 2016.

Labor may well fudge its stance. After all, if elected but again only in coalition with Vegetables, a new Labor government might want to revive the Gillard government Industry Policy Statement to avoid ISDS provisions. If elected outright, Labor may instead be willing to accept them at least for that TPP. It may negotiate some further aspect letters or take the lead on the code of conduct currently envisaged for ISDS arbitrators.

Overall, the TPP’s ISDS-backed commitments are quite similar to those in Australia’s FTAs since 2003. These types of, in turn, are largely modelled upon treaties between third parties and also the US, which has never undergone a successful ISDS claim.

Labor will also have to remember that other TPP partners are usually comfortable with ISDS (as are large financial systems like Korea and China that may accede later). These include capital exporters like Japan, but also international direct investment (FDI) hosts such as New Zealand and Vietnam – after submitting ISDS to scrutiny recently.

Ironically, apart from Australia, it is mainly and so the US – typically a strong proponent of ISDS – where some recent opposition may complicate TPP ratification, especially in light of its own elections next year.

As Asia embraces the Trans-Pacific Relationship, ISDS opposition fluctuates is republished along with permission from The Conversation