The EU approach in trade deals is likely to protect the right of states to make public policy

How can foreign investors in New Zealand be sure that we will treat them fairly? If they are not sure perhaps they will not invest here, even though their investment may be valuable to us. (I do not believe all foreign investment is worthwhile, but much is.)

Hence the need for investor-state dispute resolution procedures, whereby an investor (say a firm) with a grievance can get a fair hearing. Why not in the state’s court? In many countries the government can manipulate its courts and the law to give itself a favourable outcome. That may not be true in New Zealand, but how is an investor to know? Additionally, there need to be rules about what are legitimate grievances.

So Free Trade Agreements (FTAs) between countries are increasingly containing provisions which set out how disputes between states and foreign investors can be dealt with (usually using independent international tribunals) and what may be disputed.

It can be tricky to get the investor provisions right. At the moment about 60 such dispute procedures are initiated each year. Some will be legitimate to a fair minded person; suppose a state expropriated a company without any compensation. However, what about  requiring compensation for the loss of tobacco sales from a public policy designed to improve the nation’s health? International tobacco companies are litigating over an Australian law which imposes plain packs for cigarettes.

Many people are nervous about some approaches to an Investor State Dispute Settlement (ISDS) regime especially the version put forward by the US which seem to be very favourable to business. The nervous, including some Americans, fear this would require any policy changes which were against business interests to be compensated, preventing a country from taking action in the interests of the public at large. (It will be recalled that the ACT party proposed legislation which would have had a similar effect; even its National partner in government blanched.)

The Commission of the European Union, which negotiates trade deals on behalf of its 28 member states, has consulted them as to what should be the EU policy. It proposes that measures ‘to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations’. It also requires any proceedings and findings to be made public. (Most of today’s are secret.) The approach is likely to be incorporated into the FTA the EU is currently negotiating with Canada.

The EU has released its negotiating mandate for the proposed FTA with the US (TTIP – the Transatlantic Trade and Investment Partnership). However the Commission is still reviewing its ISDS-related proposals following public consultation. Presumably the approach in the Canadian negotiations will be there but already the mandate makes clear that the TTIP Agreement should ‘respect the policies of the EU and its member states for the promotion and protection of cultural diversity’. (Audiovisual services are already off the negotiating table.) Our FTA with China has such an exclusion, as well as for policy changes for health promotion purposes and for protection of the environment.

The US, if it is driven by its companies rather than by its people, may be determined to pursue a much harsher deal. Probably that would be enough to sink the TTIP.

The EU approach is likely to set a standard for SIDS provisions in FTAs among rich and middling rich countries, even when the EU is not involved. Some countries (including New Zealand?) may insist that the EU provisions are the benchmark in the TPP (Trans Pacific Partnership) FTA.

Do I hear you snort that any investor state resolution provisions are unnecessary and that they only compromise the sovereignty of New Zealand and other nations? Something like them is inescapable where there is foreign direct investment. It is international trade and investment which compromises sovereignty. Well-designed dispute resolution reduces the compromise especially if it protects a state’s legitimate right to make public policy.

 

This article was made possible by support from the EU Delegation in Wellington and the Goethe Institute on behalf of the Embassy of Germany in Wellington. An earlier version was published in the Dominion Post on Thursday 9 October. It has been revised in the light of recent EU announcements.

Comments (5)

by David Crosswell on October 20, 2014
David Crosswell

It's quite easy to gain valid representation in another national context, as well as to ensure that valid contribution is made to that environment instead of just a convenient raid. Two words: joint venture. The national legislation is there for the viewing before entering into the environment. After that, it's a straight business decision like any other; is the overhead viable or isn't it?

Free Trade Agreements are rarely free. In any scenario, as Neitzsche assures us, where the balance of power is not equal, justice is the first victim. How wide is the social demographic spectrum represented in the current TPPA scenario, as a stand-out example? I was on an advisory panel in regard to Australia's FTA with the U.S. during the Bush era, and again with the New Zealand/Chinese trade Agreement. Bush was prepared to concede *anything* (including Australian beef into the U.S. market), in the final signing, except IP. That was the first example of U.S. law being imposed into the Australian national environment, and they went ahead with it, regardless of what many of us said. An extremely dangerous legal precedent. They regret it now.

The U.S. has made a classic business mistake: they have permitted accountants to make decisions on their business, and when Wall Street pointed out an obvious economic saving in a cheap, out-sourced, labour market, they leapt, before counting the cost. Now the U.S., after having given it away to China and India wholesale, is running round like a chook with its head cut off trying to install U.S. IP law into as many other national contexts as possible through Free Trade Agreements. Horse bolted: stable door.

Do try not to be silly, New Zealand.

John Key can pay for his own damned greens fees.

by Rae on October 20, 2014
Rae

I would like to see it defined what "investment" where foreigners are concerned. Landlording, landbanking of residential/farm land and farml purchasing should be absolutely excluded and David Crosswell is on to it, jv's.

We don't need fta's with onerous conditions, we are a tiny country, and supplying what we produce to Asia should be enough, our innovative abilities, I believe, will bring the world knocking at our doors.

I note with horror today that our supermarkets will soon see Aussie produced irradiated fruit and veg, including APPLES (oh no irony in that), and it won't be long before my prediction of all the good growing land (houses covering the Bombays) will be converted to housing and dairying and we won't even be able to grow our own food.

 

by Fentex on October 20, 2014
Fentex

Do I hear you snort that any investor state resolution provisions are unnecessary and that they only compromise the sovereignty of New Zealand and other nations? Something like them is inescapable where there is foreign direct investment.

This appears to be a claim that there has been no foreign investment in our past, for we have not had Investor-State Dispute Resolution Procedures (ISRP) to date and if neccessary for foreign investement it follows we cannot have seen any foreign investment.

This is, from observation, obviously not true.

It may be that to do something new we may have a need for ISRPs but I wonder what is this new thing that requires new regulation? Is it simply an ambition for increased inter-state investment for the hoped betterment of all or is it, as an observer of the surreptitious ambitons of the TPP might suspect a desire to impose and embed an ideology of free market capitalism liberated from accountability to wider society in countries not yet invested in corporate funding of their governments?

The Commission of the European Union, which negotiates trade deals on behalf of its 28 member states, has consulted them as to what should be the EU policy. It proposes that measures ‘to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations’. It also requires any proceedings and findings to be made public. 

 How much confidence can an observer of the TPP negotiations have that, as an example to draw evidence and conclusions from, that those with an ambition for ISRPs have ambitions that accept open, public debate and evidence as neccessary for their objectives to understood, accepted and supported?

by Alistair Connor on October 22, 2014
Alistair Connor

Although I agree with the point about not ceding national sovereignty to multinationals (as the TPP and its American sponsors would wish), this doesn't go far enough at all.

I have a philosophical problem with the basic notion of foreign (or more particularly, multinational) companies being accorded the same rights as local firms in trade dealings, unless and until they are subject to the same obligations. The fact is that multinationals are generally structured so as to limit tax liabilities, which gives them an unfair advantage over any nationally based company. Let's have a level playing field; otherwise "free trade" = exporting jobs.

Even without the egregious immunity to national laws which is being sought through the TPP, I'm opposed to extending any additional privileges to companies wishing to trade with NZ until an enforceable international tax regime is in place.

by Brian Easton on October 23, 2014
Brian Easton

David Crosswell recalls the AUSFTA between Australia and the US. Howard was so keen to have a deal that he accepted a non-deal (or worse). At least some of us learned that we should not get over-committed to the TPPA. The danger is that in the rush at the end (if there is one) our politicians will accept a poor quality deal pretending it is not.

 

Oops, Fentex, I cut out the historical references for space reasons. I am writing a history of New Zealand; I can assure you that every one of my contributions to Pundit is informed by a historical context. In the past almost all our IS disputes have been settled domestically (when not from international political pressure), but we have used outside arbitrators occasionally I think. Anyone know for sure? To repeat the theme of the column, it is up to our negotiators to ensure there is a satisfactory ISDS in the TPPA. If there is not, we should refuse to sign up. The EU offers a template as to what we might think should be satisfactory and negotiable.

 

Not uncomfortable with Alistair Connor, except we should not overlook that our large domestic firms also get up to some of the activities he deplores. One particular foreign investment I particularly dislike is that which depends on us not having a capital gains tax.

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