In the second article of our two-part series on the effects of a Trans-Pacific Partnership Agreement on social justice in New Zealand, EJP today explores the impact of the proposed Investor-to-State Dispute Resolution provisions in the draft TPPA. James Peacock asks whether these provisions, which will effectively give companies in TPPA-party states the ability to sue the New Zealand government for harming their interests, will negatively impact on our Government's ability to introduce measures aimed at protecting New Zealanders from harm.

Read yesterday's first article here.

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On October 11 2014, The Economist published an article about a mechanism known as the “Investor State Dispute Settlement” (ISDS) clause, which allows firms to “sue states for profit” through provisions in international trade agreements.[1]

Following this article, WikiLeaks published a leaked copy of the “Investment” chapter of the Trans Pacific Partnership Agreement on March 25 2015, which gave an indication of what the public are to expect from the final document when it is signed.[2] On the surface, foreign firms will be able to sue our government through the TPPA for actions that negatively affect their investments.

This raises one immediate concern: How can the government act exclusively in public interest with the fear of corporate litigation looming over its head?

What is ‘Investor State Dispute Settlement’? 

The ISDS is an instrument of international law that was first introduced in a bilateral trade agreement between Pakistan and Germany in 1959.[3] It grants investors the right to take foreign governments to an international tribunal if the foreign state has caused damage to the firm’s investment; that is to say, damaged their profits.

Generally speaking, the scope of the ISDS provisions in these agreements vary, with some states including specific provisions to protect their ability to pass laws relating to public health and environmental issues. An example of this is in the New Zealand-Korea FTA.[4] So far 37% of cases made through ISDS have ruled in favour of the state — with another 36% being settled or discontinued before the tribunal reaches a ruling. In effect this means only 27% of ISDS cases have ruled in favour of the investor.[5] Of these 27% of cases the average payout is around $10 million with average court costs of $8 million.

These high costs put less wealthy countries in a vulnerable position in which large corporations, some of which have resources exceeding those of smaller and less wealthy states, are able to dissuade states from defending their policies due to the cost of legal action. This has recently occurred with the tobacco company Philip Morris International threatening Togo and other small countries with legal action if they pass laws restricting the availability or promotion of tobacco products.[6]

One reason that the costs are so high is that arbitration law is a niche field, with only a very limited pool of lawyers from which countries may choose their counsel. Arguably, this also raises the question of whose benefit the lawyers are acting for. Many lawyers act concurrently as both arbitrators and advocates in different matters, and some even assist in the creation ISDS of provisions in Free Trade agreements. Suggestively, ISDS procedures are often characterized by a pyramid of conflicts of interests, raising, at least, the suggestion of bias. Furthermore, due to these arbitration procedures being conducted in secret, there is little potential for public accountability.[7]

Suggestively, ISDS procedures are often characterized by a pyramid of conflicts of interests, raising, at least, the suggestion of bias. Furthermore, due to these arbitration procedures being conducted in secret, there is little potential for public accountability.

Philip Morris is also currently pursuing a case against Australia in which, after losing in the Australian High Court, the company alleges that the Tobacco Plain Packaging Act 2011 violates Australia’s obligations under a 1993 trade agreement with Hong Kong.[8] The basis of their argument is that the enforcement of plain packaging is an effective “seizure” of their Marlboro brand — and as a result they should be compensated by the Australian Government.

Following the ongoing and expensive Philip Morris litigation, the Australian Productivity Commission has concluded that ISDS provisions do not provide any substantial economic benefits to Australia. Furthermore, the initial leaked TPPA “Investment” chapter shows Australia is now refusing to accept ISDS provisions in future trade agreements, so as to avoid incurring such potential liability again (subject to certain conditions). 

Would a TPPA with ISDS provisions Benefit New Zealand? 

Despite Australia’s pushback against further ISDS obligations, the TPPA is still currently in negotiation with New Zealand. So far, the government has shown no hesitance in regards to the ISDS provisions. This is emphasized by Professor Jane Kelsey of the University of Auckland who wrote in the New Zealand Herald, following the March leak:[9]

“It [has not] protected the New Zealand Government's right to regulate from being attacked by foreign investors and from rogue interpretations by investment arbitration tribunals, as promised.”

Another concern of Prof Jane Kelsey is the fact that Parliament does not need to ratify the treaty for it to come into effect.  She writes that:[10]

“Parliament’s role in treaty making is largely symbolic. It has no power to decide whether or not the TPPA should be signed or ratified and no ability to change its terms TPPA or require it to be renegotiated.”

In practical terms this means that the decisions of the current executive will have the ability to bind the current and future Parliament’s ability to freely legislate without fear of corporate litigation — thereby undermining democracy and putting a large amount of legislative power in the hands of foreign corporations. This has already been seen in New Zealand with Parliament hesitant to pass cigarette plain packaging laws until the Australian cases are resolved.[11] Whilst, of course, New Zealand may assert its ability to resile from its obligations under international law, doing so would adversely impact on New Zealand’s international standing and credibility as a participant in international agreements.

This raises the question of what laws Parliament will be allowed to pass in the future unless they want to deal with an expensive court case in an international tribunal. The National government is currently preparing to ban “zero hour contracts” in New Zealand to protect many of our more vulnerable workers.[12]

These zero hour contracts have been seen by many as quite exploitative of minimum wage workers. As a result of public pressure however, it appears that this is set to change for the benefit of the people of New Zealand (as argued by those who are for the change).

This illustrates one of the most concerning aspects of  ISDS provisions, whether it be regulations to tackle climate change that lead to a decrease in the profit of oil companies or health policy designed to tackle obesity which may hurt the bottom line of companies like Coca Cola or McDonald’s. There are a myriad of potential public policy areas that the government might want to regulate in the future in the best interest of the public that will ultimately damage some firm’s bottom lines. This could then trigger an ISDS procedure, exposing governments to huge financial risk.

There are a myriad of potential public policy areas that the government might want to regulate in the future in the best interest of the public that will ultimately damage some firm’s bottom lines. This could then trigger an ISDS procedure, exposing governments to huge financial risk.

Furthermore, limiting the government’s ability to create public health policies to tackle issues such as obesity will have a much greater impact on the most vulnerable members of our society. Obesity is an issue that occurs overwhelmingly in lower socioeconomic groups in New Zealand, with children in the “most deprived” areas three times more likely to be obese.[13] As a result, not only do ISDS provisions hinder Parliament’s ability to protect the health of the New Zealand public in general, but they specifically hinder Parliaments ability to protect those who need it most.

Thankfully, ISDS provisions included in many agreements in the past have protected governments from litigation over cases where “increasing minimum wage” and similar laws have damaged a firm's profits. But this has not stopped the progression of the case of Veolia Propreté v Arab Republic of Egypt where Veolia is suing Egypt for raising the minimum wage.[14] Their argument is that they deserve compensation because they “would not have invested in Egypt” if they had known about the minimum wage increase in advance.

The reason this case has been able to get so far is because protections in Egypt’s trade agreements were too ambiguous. Jane Kelsey believes that the “exceptional language in the TPPA” poses the same problem — also noting that Veolia is an established company in New Zealand and that they run Auckland’s urban passenger train system.[15]

New Zealand negotiators, on the information available, appear willing to accept such ISDS as part of a TPPA. However, Australia, made wary by the Philip Morris litigation, are militating against the inclusion of ISDS provisions in future free trade agreements.

The East West Centre forecasts a $2 billion (0.9%) boost to our GDP by 2025 should the TPPA be signed.[16] But it is worth questioning whether gaining that $2 billion GDP increase would be worth the risk of the Government being made to pay out should New Zealand be sued for introducing regulations to promote public policy objectives at the expense of market participants.

But it is worth questioning whether gaining that $2 billion GDP increase would be worth the risk of the Government being made to pay out should New Zealand be sued for introducing regulations to promote public policy objectives at the expense of market participants.

That is a decision for the Government to make. Before they do so, it must be hoped that they will look across the Tasman and see whether the benefits to New Zealand citizens, particularly our most vulnerable citizens, are worth that risk.

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[1] “The arbitration game” The Economist (online ed, 11 October 2014)

[2] “Secret Trans-Pacific Partnership Agreement (TPP) - Investment Chapter” (25 March 2015) WikiLeaks <wikileaks.org>.

[3] Treaty for the Promotion and Protection of Investments, Pakistan-Germany 6575 UNTS 24 (signed 25 November 1959, entered into force 28 April 1962).

[4] Ministry of Foreign Affairs and Trade New Zealand – Korea, FTA Guide (March 2015) <korea.fta.govt.nz>.

[5] “Investor-to-State Dispute Settlement (ISDS), Some Facts and Figures” (12 March 2015) European Commission <trade.ec.europa.eu > at 1.

[6] John Oliver “Tobacco” (15 February 2015) Last Week Tonight <youtube.com/lastweektonight>.

[7] George Monbiot “This Transatlantic Trade Deal is a Full-Frontal Assault on Democracy” The Guardian (online ed, England, 4 November 2013).

[8] Philip Morris Asia Limited (Hong Kong) v The Commonwealth of Australia PCA (14 April 2014); “High Court rejects plain packaging challenge” (15 August 2012) ABC News <www.abc.net.au>; Tobacco Plain Packaging Act 2011 (Cth); Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments [1993] ATS 30 (signed 15 September 1993, entered into force 15 October 1993).

[9] Professor Jane Kelsey “Leaked TPPA Text has all the Dangers Govt Promised to Negotiate Away” The New Zealand Herald (online ed, 27 March 2015).

[10] Professor Jane Kelsey “One more time, PM: Parliament does not get to Ratify TPPA” (press release, 31 March 2014).

[11] Catherine Saez and William New “WTO to Consider Five Australian Plain Packaging Disputes under One Panel” (26 April 2014) Intellectual Property Watch <www.ip-watch.org>.

[12] Nicholas Jones “Government to move on zero-hour contracts” The New Zealand Herald (online ed, 14 April 2015).

[13] Ministry of Health “New Zealand Health Survey” (2012/2013) <www.health.govt.nz>.

[14] Veolia Propreté v Arab Republic of Egypt ICSIC ARB/12/15 (25 June 2012).

[15] Interview with Professor Jane Kelsey, (the author, Auckland, 13 May 2015)

[16] “At a Glance: What is the TPPA?” (7 October 2014) 3 News <www.3news.co.nz>.

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