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Why Australia walked away from investor state rights in trade deals

And why Canada should too

November 14, 2012

Editor’s note: Much of the debate surrounding the Canada-China trade deal revolves around the dispute settlement clause in the deal. We contacted Professor Thomas Faunce of the Australian National University in Canberra to tell us why the Australian government decided to discontinue the practise of seeking inclusion of investor state dispute settlement provisions in trade agreements with developing countries.

CANBERRA, Australia, Nov. 14,2012/ Troy Media/ – Companies that manufacture tobacco products do little that is good for public health. Yet sometimes their intransigence in promoting that lethal substance can catalyse worthwhile social outcomes.

One such instance was the determination of such companies to oppose World Health Organisation (WHO) and science-backed legislation by the Australian federal government that mandated unappealing, plain packaging of cigarettes.

The Swiss registered JT International SA (‘Camel’ brand cigarettes) and British American Tobacco (‘Winfield’ and ‘Dunhill’ brands) unsuccessfully brought a constitutional challenge to the legislation in the Australian High Court on the basis that it was an acquisition of property that wasn’t on just terms. Before that, Philip Morris (‘Marlboro’ cigarettes) rebadged itself as a Hong Kong company to take advantage of a dispute settlement provision in an old bilateral investment treaty (BIT – the relevant equivalent being the China-Canada investment deal (or FIPA)) between Hong Kong and Australia.

This BIT allows an ad hoc gathering of three trade arbitrators to rule (without exhausting local remedies and without prospect of appeal) on whether Australia has to pay damages for passing this legislation. The arbitrators may not need to consider that the legislation was constitutional or fulfilled Australia’s international legal obligations under a WHO treaty (the Framework Convention on Tobacco Control).

International cigarette companies then lobbied the tobacco growing nations of Ukraine, Honduras and the Dominican Republic to initiate dispute settlement proceedings in the World Trade Organisation against Australia’s plain packaging legislation, claiming that it breached various provisions of the WTO Trade Related Intellectual Property (TRIPS) Agreement; the Technical Barriers to Trade (TBT) Agreement; and the General Agreement on Tariffs and Trade (GATT) 1994.

At the same time, Philip Morris International was lobbying the U.S. Trade Representative (USTR) to include investor state dispute settlement in the Trans Pacific Partnership Agreement (TPPA) which Australia has been negotiating along with the U.S. and other nations. A leaked copy of the investment chapter for the TPPA confirmed its provisions would allow foreign firms to skirt Australian domestic courts and laws to directly sue that government in the International Centre for the Settlement of Investment Disputes (ICSID). ICSID Arbitrators would, in effect, become the final arbitrators on major Australian public policy questions concerning mineral royalties, fossil fuel and renewable energy, water, telecommunications, banking, agriculture and power. Yet they would be paid by the hour (often over several years of proceedings), could act as a legal representative in one case and an arbitrator in another, and would have vested financial interests in verdicts for corporations.

The Australian government itself could not initiate suits before this tribunal. The ICSID arbitrators would not be required to take the constitutional, legislative or international human rights context (including standard legal due process procedures) into account, or maintain a public record of their decisions. The leaked TPPA text would even provide investors with a right to demand compensation for ‘indirect’ expropriation (Article 12.12) and allow foreign investors to claim government actions (such as the plain packaging laws) require technically unlimited financial compensation because of a slightly higher burden in complying with the law (Article 12.4 and 12.5).

None of this went down very well with the Australian people or their government. A central part of the social contract ratified by the Australian constitution is that our nation will be governed democratically by a rule of law, with its implicit predictability, certainty and accountability. Australian taxpayers (through their governments) have invested an enormous amount of time and resources in creating a system of governance predicated on the capacity of a non-corrupt judiciary to decide on disputes by fairly interpreting laws promulgated in advance in public. Foreign corporations operating in Australia benefit from such an equitable governance structure. Indeed, it is one of the primary reasons they invest here. Australia regularly ranks very highly in rule of law rankings of nations around the world.

Yet in the plain packaging dispute Australia confronted, for the first time, the possibility that legislation by their federal parliament and a decision upon it by the highest court in our land will in effect be overturned by an off-shore tribunal not accountable to the Australian populace and with extremely limited capacity to refer to governance arrangements directly endorsed by Australian citizens.

In 2011, the Australian Government announced that it would discontinue the practise of seeking inclusion of investor state dispute settlement provisions in trade agreements with developing countries. It stated that it would not ‘support provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses.” The Australian TPPA negotiators received explicit instructions that Australia would not accede to a TPPA investor state dispute settlement provision.

The Australian stance against investor state dispute settlement may pave the way for important public policy initiatives towards environmental sustainability in areas such as financial reform (including a global financial transactions tax) and energy security (including off grid artificial photosynthesis technologies for solar fuel and food).

Professor Thomas Faunce has a joint appointment at the ANU College of Law and College of Medicine, Biology and the Environment at the Australian National University in Canberra.

Read: Canada-China trade deal too financially risky

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