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China free trade: is there a devil in the detail?

Source: Abc.net.au

November 16, 2014

By Kyla Tienhaara

Investor-state dispute settlements could hurt our efforts to combat climate change, which is why we should hope the Australia-China free trade deal doesn’t allow for them, writes Kyla Tienhaara.

Last week a historic agreement was announced between the US and China that aims to cut greenhouse gas emissions in the world’s two largest emitters.

Whether or not this proves to be the “game-changer” it has been lauded to be, it is a step in the right direction after so many years of deadlock in the international climate change negotiations.

Today, the memorandum of understanding on another major agreement, this time between Australia and China, will be signed.

Unfortunately, this agreement won’t help and could actually hinder efforts to mitigate climate change. The text of the Australia-China Free Trade Agreement (FTA) has not yet been made public, but it is expected that it will include a controversial provision allowing for “investor-state dispute settlement” or ISDS.

If it does, this will be another step in the wrong direction by the Abbott Government.

In simple terms, ISDS allows foreign investors, especially large multinational corporations, to sue governments in an international forum over changes in regulation that negatively impact their investments. By the end of 2013, investors had launched at least 568 cases against 98 countries around the world.

Investor complaints have covered the gamut of regulatory measures: from taxes to land-zoning decisions to bans on dangerous chemicals. Measures taken by governments to protect the environment have proven to be particularly susceptible. As countries around the world begin to take more serious action on climate change, ISDS is likely to become a key battleground between progressive governments and corporations that are resistant to change.

Thankfully, ISDS panels cannot tell sovereign states how or what to regulate. But they can award investors compensation for their losses and even for “lost future profits”. The stakes are incredibly high.

Many ISDS claims now exceed $US1 billion and although the compensation actually awarded is generally much lower than what is sought, the impact on the public purse can be substantial. This year the $US1.77 billion award against Ecuador (brought by Occidental Petroleum) – previously the largest known ISDS award in history – was vastly outstripped with a mind-boggling $US50 billion award against Russia in its high-profile dispute with the oil company Yukos.

The huge sums of money involved make it all the more surprising that ISDS is so poorly designed. Originally set-up to deal with disputes between firms, international arbitration is ad-hoc, and panels of three members chosen by the parties to the dispute are set up on a one-off basis. Because they are chosen by the parties to the dispute and paid by the hour, arbitrators lack the independence of court judges. Additionally, individuals may act as an arbitrator in one case and as a legal representative for a claimant in another, which creates serious issues of conflict of interest. Arbitrators are also generally experts in the field of commercial arbitration and may have little knowledge of domestic environmental and health legislation.

There is also no system of precedent or any process for appeals, which makes the outcomes of ISDS cases difficult to predict, creating uncertainty for regulators. ISDS is also very expensive; governments can spend millions of dollars defending themselves in arbitration and may not recoup these costs even if they eventually win.

It is for all of these reasons that the Australian Labor Party decided to cease agreeing to ISDS mechanisms when it was in government and now continues to oppose its inclusion in the China agreement and in other FTAs. It is also for these reasons that earlier this year Greens Senator Peter Whish-Wilson introduced a Bill to the Senate proposing to ban any future Australian government from agreeing to ISDS.

There is also movement in this direction outside of Australia. Germany – a country currently facing a €4.7 billion challenge to its decision to phase-out nuclear power – is currently opposing the inclusion of ISDS in a trade agreement between the EU and the US. Indonesia, India, South Africa, Bolivia, Ecuador, and Venezuela have also taken steps to try to limit their exposure to ISDS.

The Abbott Government is not unaware of the risks of signing up to ISDS. Indeed, significant resources are currently being expended by the Government to defend legislation on the plain packaging of cigarettes, which is being challenged in arbitration by tobacco giant Philip Morris. Nevertheless, the Government appears to be determined to “get the deals done” (and quickly) regardless of the cost.

For the Korea-Australia Free Trade Agreement, signed earlier this year, it was clear that the Government wouldn’t have been able to get a deal without ISDS, so they capitulated. Although ISDS was left out of the Japan-Australia Economic Partnership Agreement, a clause was included that stipulates that if Australia agrees to ISDS in another bilateral or multilateral agreement then a review should be conducted with a view to adopting a similar mechanism.

What this means is that if Australia agrees to ISDS with China it is also, essentially, agreeing to ISDS with Japan.

As a result, the Abbott Government’s case-by-case approach to ISDS is beginning to look a lot like ISDS in every case. And if the Government says yes to ISDS with Korea and China, it can hardly say no to the US in the ongoing negotiations for the Trans Pacific Partnership Agreement, which is of particular concern given the highly litigious nature of American multinationals.

We should all applaud the progress made last week on tackling the single most important issue that we currently face as a species. But it would be a mistake to ignore the implications that other ongoing negotiations have for climate change and other critical public policy issues.

Dr Kyla Tienhaara is a research fellow at the Regulatory Institutions Network, ANU College of Asia and the Pacific. She recently presented on ISDS at the Senate Defence, Foreign Affairs and Trade Legislation Committee. View her full profile here.

 

 

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