Greater exposure

Vietnamnet | 19 February 2017

Greater exposure

The biggest lawsuit, of $3.7 billion, was filed by a US investor in the McKenziev. Vietnam case, which involved a dispute over an investment license issued for a coastal resort development in south-central Binh Thuan province.

Three of the four cases were filed in the last six years. This corresponds with the international trend of increasing usage of the investor-state dispute settlement (ISDS) mechanism by foreign investors.

Two cases were decided in favor of Vietnam, one was settled (which usually means financial compensation for the investor or a change in regulations to accommodate the investor’s demands), and one is still pending resolution (with a claim of $58 million).

While Vietnam has not yet been ordered by an arbitration tribunal to pay compensation to an investor, the Vietnamese Government has already felt the financial burden of the ISDS system. It is likely that the government has spent millions of US dollars as a result of the different arbitration tribunal cases (confirmation of the amounts is impossible due to the secrecy of cases): (i) the settlement of the Trinh Vinh v. Vietnam case (a property-related dispute) could have involved some payment to the investor; and (ii) Vietnam would have had to pay the arbitration costs and defense lawyers’ fees in different cases.

According to OECD statistics, on average States pay $4.5 million per case for arbitrator and lawyer fees to defend themselves. Vietnam has engaged international law firm Hogan Lovells in three cases, which is one of the Top 20 law firms worldwide specializing in investment arbitration. Investment lawyers in these firms charge $1,000 an hour on average.

These cases expose the danger of a growing wave of corporate lawsuits against Asian countries, which could lead to a drain on public budgets in the millions of US dollars and undermine governments’ rights to regulate in the public interest.

The secrecy surrounding investor-state arbitration means these figures could be just the tip of the iceberg. What, then, would make an investment protection chapter in the Regional Comprehensive Economic Partnership (RCEP) dangerous for Vietnam?

Vietnam already has a wide number of investment agreements in force. In fact, it has investment protection treaties that grant investors the right to sue with all RCEP countries. That means that investors from RCEP countries are already entitled to sue Vietnam at international arbitration tribunals.

So, one could ask: (i) why include an investment protection chapter in the RCEP if investors from the region are already protected?; (ii) what is the added risk of including such a chapter if investors can already sue?; and (iii) since Vietnam has never been sued by an Asian investor, why worry about granting those rights in the RCEP?

At first sight, it might look like Vietnam has nothing to lose by agreeing to an investor protection chapter. But, in fact, the RCEP will deepen the rights of investors and lock in place this system of privatized justice. Let’s look at the evidence below.

Firstly and secondly with two questions: (i) why include an investment protection chapter in the RCEP if investors from the region are already protected, and (ii) what is the added risk to include such a chapter if investors can already sue.

The reason to include an investment protection chapter in the RCEP and the added risk of doing so are related.
The RCEP is a mega-regional trade deal. Investment protection is only one element of many other issues included in this treaty.

When governments agree to grant investors rights in such treaties, they will find it much more difficult to withdraw their commitments to the rights accorded to foreign investors (if they ever wish to do so), because they would need to put an end to the whole agreement and not just the sections on investors’ rights.

Currently, all the investment protection treaties signed by Vietnam (with the exception of the AANZFTA, or the ASEAN - Australia - New Zealand Free Trade Area) are investment protection treaties alone.

They do not include all the other elements we find in free trade agreements (FTAs) and also in the RCEP, such as intellectual property rights (IPR), market access, services liberalization, and regulatory cooperation, etc. Therefore, these investment protection treaties are much easier to terminate than FTAs with investment protection chapters.

The RCEP will have the effect of locking in Vietnam - and all the other signatories - and prevent them from modifying or withdrawing investors’ rights they have granted, even if some years later they decide that granting those rights did not contribute to development in the country.

While Vietnam may consider a re-think of its investment protection framework - similar to what Indonesia, South Africa, India and other countries are doing - and terminate investment treaties that they consider have not contributed to national development, it would be practically impossible to do so with the RCEP.

Thirdly, since Vietnam has never been sued by an Asian investor, why worry about granting those rights in the RCEP?The impact of ISDS is not only about the actual lawsuits. ISDS has the effect of scaring governments away from regulations in the public interest - the so-called “regulatory chill effect” - because of the fear of having to pay millions of US dollars from public budgets.
It is almost impossible to know if the ISDS system has caused regulatory chill in Vietnam since most government officials will not disclose it.

But there are examples from around the world that show this is a reality. For instance, New Zealand decided to postpone their plans to introduce stricter rules on cigarette packaging until it knew the result of the lawsuits Philip Morris filed against Uruguay and Australia for doing likewise.

There are also cases where lawyers have made it clear that ISDS is a tool used by investors to alter government decisions on regulatory changes.

For example, a former Canadian government official, five years after NAFTA’s investor-state provisions came into force, said: “I’ve seen letters from New York and Washington D.C. law firms coming to the Canadian Government on virtually every new environmental regulation […]. Virtually all of the initiatives were targeted and most of them never saw the light of day.”

It is important to note that while Asian investors are not the most prolific users of the ISDS system, out of the 87 ISDS lawsuits initiated by Asian-based investors, 75 per cent were initiated in the last six years alone.

This shows there is a growing tendency for Asian investors to increasingly use the mechanism.
This trend leads us to believe that if governments like Vietnam lock themselves in by signing up to an investment protection chapter in the RCEP they are likely to experience an increase in multi-billion dollar claims, with their citizens being forced to foot the bill.

“Negotiations over the Economic and Technology Cooperation Program and Small and Medium Enterprise Program within the RCEP have been wrapped up, while they continue in other fields. The agreement has seen slow progress, due to differences in development levels and views among members. Sixteen official negotiation sessions and six ministerial conferences and mid-term sessions have been held. The 17th negotiation session will take place from February 21 to March 3 in Japan.

Negotiated fields include goods trade (rules of origin, customs procedures and trade facilitation, sanitary quarantine measures, trade technical barriers), trade in services (financial and telecommunication services), investment, intellectual property, competition, e-commerce, dispute settlement, and economic and technical cooperation.

The view of Vietnam when joining the agreement is to closely link with ASEAN countries to maintain the central role of the bloc and achieve benefits for all involved, boosting trade facilitation and creating favorable conditions to further develop value chains in the region.
The main content of the ASEAN Economic Community is to integrate the bloc into the global economy. The signing of FTAs with partners such as Australia, New Zealand, Japan, China, South Korea and India and the strengthening of cooperation with the US and the EU will help ASEAN successfully consolidate its central role.

For Vietnam, the RCEP will help its businesses optimize the use of inputs in production, more deeply penetrate into the markets of member countries, and increase its participation in regional value chains. The implementation of commitments to liberalize the trade of goods, services and investment will make Vietnam’s investment environment become more attractive in the region and beyond.” - Ms. Nguyen Thi Quynh Nga, Deputy Head of the Multilateral Trade Policy Department, the Ministry of Industry and Trade

VN Economic Times
Cecilia Olivet/Rese<archer at the Transnational Institute

source: Vietnamnet