ABC | Background Briefing | 14 Septmeber 2014
ISDS: The devil in the trade deal
A common provision allowing foreign investors to sue host governments has become a ticking time bomb inside trade agreements like the soon to be signed Trans Pacific Partnership. Some countries are now refusing to agree to the provision and are questioning its legal legitimacy. Jess Hill investigates.
The Trans Pacific Partnership, or TPP, is one of the biggest trade deals in history. If it’s signed, it will cover almost 40 per cent of the global economy and 12 countries that border the Pacific Ocean, including Australia and the United States.
US Secretary of State John Kerry was in Honolulu last month to preach the ethos of what he calls a ‘21st century agreement’. ‘In the 21st century, a nation’s interests and the wellbeing of its people are advanced not just by troops or diplomats, but they’re advanced by entrepreneurs, by chief executives of companies, by the businesses that are good corporate citizens,’ he said.
However, critics of the TPP, like the Nobel Prize-winning economist Joseph Stiglitz, say it’s being driven by the interests of corporations, and will do little for the wellbeing of citizens. The fact that negotiations are being carried out in secret has only served to enflame such criticism. The little we know about the TPP has come from negotiation leaks; we won’t even know what’s in the final agreement until it’s already been signed.
There’s one standard provision most expect to end up in the final text; it’s called investor state dispute settlement, or ISDS. It enables foreign investors from TPP states to sue the governments who sign up to it if those governments act in a way that harms their interests.
What could harm a company’s interests? It could be something straightforward, like a government nationalising a factory. Increasingly, however, cases are being launched against government regulations and policies.
‘What has happened, in my view, is an expansion of the field well beyond the contemplation of those who originally designed it,’ says Toby Landau, a leading arbitration lawyer who works with ISDS.
‘The kinds of cases are expanding in terms of scope. They are covering all forms of governmental activity wherever that activity might have an adverse impact on a foreign investment, for example cigarette packaging, regulation of carbon emissions, nuclear policy and taxation.’
Because ISDS is in thousands of treaties, ISDS claims have been launched against governments all over the world. Take Germany, for example. In 2011, the German government settled an ISDS case with Swedish energy company Vattenfall, which launched a 1.4 billion euro claim against the government for strict restrictions that were imposed on a coal-fired power plant it was planning to build on the banks of the River Elbe. To settle the case, the German government had to agree to withdraw the restrictions. Now Germany is facing another ISDS claim from the same energy company, this time against the decision to wind back nuclear power after the Fukushima nuclear disaster.
There have been more than 550 ISDS claims made against governments, the vast majority of them made in the past decade. Possibly the most famous of these is the ISDS claim brought by tobacco company Philip Morris against the Australian government’s plain packaging legislation.
Philip Morris is suing Australia under an ISDS provision in a Hong Kong-Australia investment agreement. It’s just one of 28 agreements Australia has signed that include an ISDS provision. Deals with countries like China, India, Peru, Chile and Singapore contain the provision.
However, when the Howard government signed a free trade agreement with the United States in 2004, both parties agreed to leave ISDS out of it. Now, as trade negotiators draw closer to signing the Trans Pacific Partnership, Australia could be about to sign up for ISDS with the United States for the first time.
That worries critics like ANU Law Professor Thomas Faunce because America is not just Australia’s largest source of foreign investment, it’s also the nation whose corporations are the most frequent users of ISDS.
‘If we create investor state disputes settlement with established democracies and developed countries with very powerful corporations, that’s a new thing. That’s what we’re concerned about,’ he says.
For his part, the head of trade and international policy at the Australian Chamber of Commerce and Industry, Bryan Clark, can’t understand what all the fuss is about.
‘The Australian Government has had ISDS provisions, or very similar ones, in free trade agreements and bilateral investment treaties since the 1950s,’ he says. ‘They have been in place for a very long time, and they haven’t created any risk to the Australian economy. I fundamentally don’t see why that circumstance would change now.’
Faunce insists this is different, however, and people only need to look to Canada to see what an ISDS agreement with the United States could mean for Australia. ‘If you think that all this discussion of ISDS is scare-mongering, just have a look at what’s happened to Canada under the North American Free Trade Agreement (NAFTA) with the United States. It’s all there ready and waiting to happen to us.’
When NAFTA was signed in the ‘90s, the United States and Canada wanted to include an ISDS provision in the agreement to protect their investors in Mexico, where they considered the justice system suspect. What they didn’t anticipate was that the ISDS provision would be used against them.
There have been dozens of ISDS claims launched under NAFTA, many of them against the United States and Canada. The United States has never lost a case, but Canada has been sued nearly 20 times and has lost or settled seven times, paying American corporations at least $US158 million in compensation.
One of the earliest cases, launched in the late 1990s, was about a fuel additive called MMT, which the Canadian government decided to ban after it concluded that it could be a threat to human health and the environment. After being sued by Ethyl, the American corporation that manufactured MMT, the Canadian government settled the case for $US13 million. To settle, it had to agree to overturn the ban and, to add insult to injury, publish a statement declaring MMT to be safe.
There are eight cases pending against Canada, with damages claims totaling almost $6 billion. One of those cases has particular resonance for Australia. It’s a claim made by an American resources company against the moratorium on oil and gas exploration in Quebec.
When the moratorium was announced in 2011, the Lone Pine Resources Company had a permit to extract gas from beneath the St Lawrence River. When its permit was revoked, it said the Quebec government was breaching the ISDS provision in NAFTA, and it is now suing the Canadian government for around $US230 million.
These kinds of cases led the former Labor government to ban the inclusion of ISDS in future trade agreements. The ban was backed up by findings from the Productivity Commission, which said there was no proof that ISDS has any significant impact on the flow of foreign investment into a country, and it was a considerable financial and policy risk, despite the claims of ISDS advocates.
The Coalition’s policy on ISDS is to consider it on a case-by-case basis. Federal Trade Minister Andrew Robb refused Background Briefing’s request for an interview.
The Australian Chamber of Commerce and Industry says it supports the Coalition’s position, and says ISDS is a protection for Australian firms investing in foreign markets, especially in countries where the legal system is ambiguous or suspect.
‘We would always defend the rights of companies to take action where they thought that a government has done something that is reducing their enjoyment of their investment and ability to generate profit,’ says Bryan Clark, ACCI’s head of trade and international policy. ‘Australian firms, as they move out into the world and some frontier markets, I think they are benefitting from having those provisions in the agreements.’
The Department of Foreign Affairs and Trade says three Australian companies have launched ISDS claims against foreign governments. Background Briefing has discovered two of the three companies, Tethyan Copper and Planet Mining, are both wholly owned by foreign-owned companies, who are using the ISDS provision in treaties that Australia has signed with the governments of Pakistan and India.
One of the world’s leading arbitration lawyers in the ISDS field, George Kahale, says he doesn’t see any benefit for governments in signing up to ISDS. In fact, he thinks the system is so fundamentally flawed it should be abolished.
‘This particular system doesn’t have sufficient checks and balances to ensure correct legal decisions, and that is a danger when you’re talking about very, very substantial amounts of money,’ he says.
Arbitration lawyer Toby Landau acknowledges that there are serious issues that need resolving in the ISDS, but believes it’s still a valuable asset for foreign investors and governments.
‘What we’ve seen develop is an incredibly effective form of international recourse for foreign investors. This is a major bonus both for investors and for host countries; whereas in the past there was never any effective form of recourse, now there is.’