The Investment Chapter and Investor-State Dispute Settlement in the TPPA

Fauwaz Abdul Aziz, Third World Network

26 June 2013

The TPPA is an agreement that its proponents such as the US hope

- To be the most comprehensive and ambitious regional FTA to eliminate trade barriers and increase opportunities for trade, investment;

- a broader platform for trade liberalisation;- to establish new rules on emerging trade

issues.

New demands, higher standards

- intellectual property- labour standards- competition policy- investment rules- environment - state-owned enterprises

ASEAN’s RCEP

1. Built on ASEAN’s experience, integrating all ASEAN+1 FTAs

2. More accommodative of the development differences of ASEAN

3. Flexibility and adjusting mechanisms4. More attention to physical, institutional

and people-to-people connectivity 5. Narrowing development gaps

• 1. Market Access for Goods

• 2. Textiles and apparel • 3. Customs• 4. Trade facilitation• 5. Sanitary and

Phytosanitary (quarantine)

• 6. Technical Barriers to Trade (labelling and standards)

• 7. Trade Remedies• 8. Subsidies• 9. Government

Procurement• 10. Investment• 11. Cross Border Services• 12. Financial Services• 13. Telecommunications• 14. E-commerce

• 15. Temporary movement of natural persons

• 16. Intellectual Property• 17. Labour• 18. Environment• 19. Development• 20. Trade Capacity

Building• 21. Competition• 22. State owned

enterprises• 23. Supply chains• 24. Transparency• 25. Regulatory Coherence• 26. Initial Provisions• 27. Dispute Settlement• 28. Exceptions• 29. Final Provisions

• 1. Greater prominence of ‘behind the border’/trade facilitation measures

• Introduce domestic reforms• To address the “noodle

bowl” effect of overlapping and inconsistent smaller FTAs

• Support and stimulation of the emerging international production network

Benefits?

“The TPPA has the potential both to harmonize and to fragment. It reflects both a convergence of economies seeking to form a broader alliance, and a divergence from the multilateral trading system. The TPP has the potential to create a new paradigm for trade agreements, to form the basis for a Free Trade Area of the Asia-Pacific (FTAAP), and to provide an alternative power center within Asia-Pacific Economic Cooperation (APEC) in ways that are distinct from the models that have been jockeying for favor the past several years. Nevertheless, if the TPP is not negotiated properly, these results are unlikely to materialize.”

- Meredith Kolsky Lewis

Benefits?

- UNDP: There is no convincing evidence that an FTA with developed countries increases FDI- Brazil does not have a long list of FTA partners

from among developed countries, but still receives large amounts of FDI due to its large population.

- World Bank- UN Conference on Trade and Development:

FDI connected to country’s - market size- per capita income- market growth- natural resources- low cost unskilled labour- skilled labour- physical infrastructure (ports, roads, power,

telecommunications, etc)- low input costs

FTA = FDI?

TPPA: A ‘trade’ agreement that would

1. Protect, promote foreign investors and investments in Malaysian health and land use policies, government procurement decisions, regulatory permits, intellectual property, regulation of financial instruments (e.g. derivatives), contracts to operate utilities, environment, democratic policy-making, etc;

2. Limit how Malaysia can regulate foreign investors; 3. Require government to provide foreign investors greater

rights than domestic firms

• The Investment Chapter, if on the basis of the NAFTA’s Chapter 11 and other problematic provisions, should be kept out of TPPA.

Some common elements of investment

agreements

• (Article 12.11): a right to challenge capital controls and other macro-prudential financial regulations that promote financial stability13.

• Definition of “investment” that goes far beyond “real property” as defined under domestic law would expose wide swaths of common domestic policy to attack.

• Overreaching definition of “investor” and lack of robust “denial of benefits” provisions allow firms from non-tppa countries to exploit the privileges for foreign investors and enforcement regime

Some common elements of investment

agreements

• “Denial of benefits” terms are not particularly robust, since even having a staff person or two and a minor paper trail in the claimed home country can pass the “substantial business activities” threshold.

• Procedural rights not available to domestic investors to sue governments outside of national court systems, unconstrained by the rights and obligations of countries’ constitutions, laws and domestic court procedures

Investor-State Dispute Settlement• Promotes globally a two-track legal system: foreign

firms can skirt domestic courts and laws, directly sue governments in external tribunals

• Demand compensation for domestic financial, health, environmental, land use laws and other laws they claim undermine their new privileges

• International arbitration tribunals empowered to order payment of unlimited government Treasury funds to foreign investors

International arbitration tribunals:

Section B: Would not meet standards of • Transparency• Consistency• Due process common to domestic legal systems• fair, independent or balanced venues for

resolving disputes• Private sector lawyers rotate as “judges” and

advocates for the investors suing the governments

• No general exception to safeguard environmental, health, labor and consumer protection policies

• The foreign tribunals would be staffed by private sector lawyers who rotate between acting as “judges” and representing corporations suing governments, posing major conflicts of interest

• Foreign tribunals empowered to order governments to pay unlimited cash compensation out of national treasuries.

• Article 12.6 on minimum standard of treatment: Investors can demand compensation if new policies that apply to domestic and foreign firms alike undermine foreign investors’ “expectations” of how they should be treated, claim damages for government actions (such as new environmental laws) that reduce investors’ expected future profits (Article 12.12 on indirect expropriation) or go against the expected level of regulatory scrutiny that an investor might have had when dealing with a previous government.

• Right to claim compensation for indirect expropriation allows foreign investors to demand government payments for regulatory costs all firms operating in a country must meet.

• Indirect expropriation provision in investment agreements has been interpreted to require compensation based on the impact of the government measure on the value of an investment, regardless of whether there has actually been some appropriation of an asset by a government.

• The provision (article 12.6) used in most successful investor compensation demands would be extended. The most successful (and controversial) basis for investors’ challenges of government policies in past agreements is alleged violations of the guaranteed minimum standard of treatment for investors or the closely linked “fair and equitable treatment” (FET).

• Domestic policies that apply equally to domestic and foreign firms can violate investors’ TPPA rights.

First investment treaties signed in 1959, second in 1965

• Different context: fears of nationalization, expropriation - international investment rules sought to provide foreign investors protection, compensation if land/plant

• Domestic court system did not provide for compensation.

• By 1999, only 69 cases (less than 2 cases a year) filed at the International Centre for the Settlement of Investment Disputes

• Now, ICSID’s cumulative case load is over 385 – 460% increase since 1999; over US$719 million paid out under U.S. FTAs and BITs; 70 % are from challenges to natural resource, environmental policies

UN Conference on Trade and Development (UNCTAD) 2012

• 62 new ISDS cases initiated• 68% involved developing, transition countries as

respondents; • 63% brought on by developed country

investors;• 70% rulings against the State;• US$1.77 billion awarded to Occidental vs

Ecuador

ISDS arbitrations initiated most frequently by claimants from

• The US (123 cases, or 24% of all known disputes)• The Netherlands (50 cases)• The UK (30)• Germany (27)

INFAMOUS ISDS CASES • Vattenfall vs Germany• Ethyl v Canada• SD Myers v Canada• Renco v Peru• Metalclad v Mexico

Recent government review /revision • South Africa has decided not to sign any new BITS;

will attempt to exit from or re-negotiate existing ones, and will formulate a new model BIT;

• Australia no longer agreeing to USDS provisions; • India is reviewing its BITS; • Latin American countries (including Ecuador,

Venezuela, Bolivia) quitting ICSID, formed a coalition to tackle ISDS challenges

With so many problems arising and so many cases being taken against countries, the review and reform of investment treaties should be accelerated at both national and international levels.

Thank you.