The short answer is all trade reduces sovereignty to some extent. The TPPA is no exception, but its effect is probably small. 

Allow that we had to give away something, such as increased copyright extensions, for better access for our exports; the real issue for us in the TPPA is that it reduces ‘sovereignty’. To report my conclusion at the beginning: all trade and all trade deals reduce sovereignty to some extent. This has been going on in New Zealand since its first European economic engagement. The Investor State Dispute System (ISDS) is another step. As far as I can judge, the ISDS provisions in the TPPA do not represent a great loss of sovereignty – but then the TPPA benefits from increased market access are not huge either.

I use the term ‘sovereignty’ here to mean the ability to act independently of others – ‘the full right and power of a governing body to govern itself without any interference from outside sources or bodies’. The governing body may be the state but it could also be the individual or a host of institutions in between. Once the body comes to an agreement with another party it loses some of its sovereignty. Since trade involves such agreements, every trading action involves some loss of sovereignty – it may be small, it may temporary, but it is a loss.

Modern trade increasingly requires a formal framework between the participants. To take a simple illustration: transaction costs between traders are reduced by common standards for weights and measures and the like. New Zealand is a signatory to various international agreements It did not have to adopt them but it would be troublesome for our exporters and importers if they had to keep converting local measures into international ones.

Because it is a small country New Zealand has been very keen that there be an international framework based on a rule of law so that, typically, there are enforcement provisions in each agreement to make them work. On occasions they have definitely worked in our favour. For instance, we have had favourable WTO rulings in regard to apple access to Australia and lamb access to the US – in each case a larger power was pushing us around but they had to give up some sovereignty and do what the WTO tribunal decided. When we are on the wrong end of a decision, we will also have to agree to something we do not want to do too.

The ISDS extends the framework to foreign direct investment. For economics, investment is a kind of trade characterised by it taking place over a longer period than a conventional export or import. Its effect is to bind the destination of the foreign investment to treat the investor in certain ways. Illustrative is that the first ISDS appears to have been between Germany and Iran in 1979 with the purpose of preventing expropriation of German investments without compensation. Today’s provisions are much more complicated although they exclude some areas which the foreign investors may not take action over – the environment, health care, the Treaty of Waitangi. for instance.

No investor will absolutely trust the state legal processes since the law may be changed, the courts stacked. Thus investors seek a dispute resolution procedure outside the state even though New Zealand probably has a better reputation than most states.

My ideal, would be a world court for investor state dispute resolutions, something like that proposed by the EU. But the US Congress will not countenance such a court system, and its fallback is an arbitration system between the state and investor.

It is not be the first time we have agreed to an ISDS process in a free trade deal; it wont be the last. (Instructively, some who oppose the ISDS provisions in the TPPA are willing to take human rights issues to the international tribunals – even though that represents a potential loss of sovereignty too.)

What I think is going on here, is that economic globalisation is undermining the ability of states to govern themselves exclusively. Economic transactions now cross their borders. We have to create supranational institutions to govern them. Such institutions undermine national sovereignty.

As I have indicated, the US is also nervous about this loss of its sovereignty. It is possible that the ISDS provisions will affect whether the US Congress votes to adopt the TPPA or not. In particular there must be some anxiety that foreign investors in the US have privileges that US domestic investors do not have.

The US as hegemon has an alternatives to the ISDS to solve investment disputes. It imposed sanctions when Cuba privatised some US businesses with offers of negligible compensation. New Zealand would never be able to do that as effectively. As a small economy we need an international rule of law to enable us to pursue our international objectives and to protect us from bullying (although, alas, it still happens to a lesser extent).

Of course we could easily avoid the need for an ISDS by repatriating all foreign investment. Ridiculous? Yes. But it illustrates that ISDS is not an autonomous change but a response to another change, the rise of foreign direct investment. (To be clear, I am not against all FDI, but I have argued that our failure to save adequately means we have too much of it.)

Is an ISDS necessary? In principle we do not need one, but we would face the challenge of being less attractive to foreign investors compared to those that were a part of the ISDS (say Australia); so we would attract less FDI and it would be more expensive.

It is argued by some proponents of the ISDS in the TPP, that they already exist in other FTAs and that New Zealand has never had to a claim under one. I say, ‘thus far’. And it is also a matter of concern that the few cases involving other jurisdictions mean there is not a lot of case law.

So the ISDS in the TPPA reduces our sovereignty, or rather it reinforces the reduced sovereignty that foreign direct investment is already causing. In my judgement the reduction is not great compared to all the many international concessions New Zealand has already made. But the benefits from improved market access (offset by the copyright extension) are not huge either even though they are there.

Comments (17)

by Andrew Geddis on February 16, 2016
Andrew Geddis

A few comments/corrections:

Today’s provisions are much more complicated although they exclude some areas which the foreign investors may not take action over – the environment, health care, the Treaty of Waitangi. for instance.

Not true. Under the TPP an investor may seek arbitration if their investment is "expropriated" by domestic regulatory action. The text (at Annex 9-B then says) "Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances." What does that last bit then mean? We don't yet know ... it will be for future arbitration panels to tell us.

Illustrative is that the first ISDS appears to have been between Germany and Iran in 1979 with the purpose of preventing expropriation of German investments without compensation.

You're out by 20 years - the first ISDS in a Bilateral Trade Agreement was between [West] Germany and Pakistan in 1959. But what has changed since then is that ISDS no longer are just between established democracies with good rule of law protections and more ... arbitrary states. Now they are an attempt to impose policy constraints on nations that have well functioning domestic democratic political and legal systems. In other words, they function much as a written constitution does ... to constrain possible political futures, enforced by a small group of unelected interpreters of the text. It may be worth noting that NZ has resolutely refused to adopt such processes into our domestic law - but apparently we're OK with doing so through the back-door of international agreements.

What I think is going on here, is that economic globalisation is undermining the ability of states to govern themselves exclusively. Economic transactions now cross their borders. We have to create supranational institutions to govern them.

Yes. The "needs" of transnational capital are shaping (in the sense of constraining) the domestic political realm. So, why can't we do the same thing for our citizen's economic, social and cultural rights by creating a legally binding means of enforcing these by way of three human rights lawyers judging whether our Governments are meeting their obligations under the ICESCR?

by Murray Grimwood on February 16, 2016
Murray Grimwood

The simple problem with a 'world court' is the same problem with compliance. The cost is the same, whether the applicant/plaintiff is a big or small operation. Clearly, big operations can simply out-bleed the small, pick over the carcass.

A case of the rich getting ever-richer and the poor getting the ever-clearer picture.

But on a finite planet with an overshot population and a peaking energy supply, there was always going to be a scrap over what's left. This one has a formal framework.......

by Ian MacKay on February 16, 2016
Ian MacKay

So the ISDS in the TPPA reduces our sovereignty, or rather it reinforces the reduced sovereignty that foreign direct investment is already causing.

In governing our country, will there be a reluctance to avoid passing some legislation for fear that we will be trounced by some big company?

by MikeKirk on February 16, 2016
MikeKirk

Default assumption: globalisation is a good thing and will continue. James Rickards (Currency Wars) shows that globalisation is not likely to continue once the dollar's dominance is overtaken by events. Also, defining the argument in terms of national sovereignty obscures the democratic issue - if an electorate wants something done by government and elects one to do that thing, and it clashes with the TPPA, then the TPPA holds sway. In common with EU requirements on member States, this is anti-democratic.

by Andrew Geddis on February 16, 2016
Andrew Geddis

@MikeKirk,

Also, defining the argument in terms of national sovereignty obscures the democratic issue - if an electorate wants something done by government and elects one to do that thing, and it clashes with the TPPA, then the TPPA holds sway. In common with EU requirements on member States, this is anti-democratic.

Not quite. The EU set-up requires that member states give priority to EU laws, so that if there is a clash between that and domestic law, the EU prevails. Under the TPP, New Zealand is still able to pass legislation that breaches an undertaking (say, by prohibiting overseas investors from buying NZ farm land). However, if we do so, we become (potentially) liable to compensate for any forgone future profits that overseas investors "lose". So ... unlike the EU, we get to keep our own laws. We just have to pay for the privilege.

by Fentex on February 16, 2016
Fentex

There's a big gap between the concept of ISDS in general and the specifics of any particular agreement.

And the specifics of the TPP are new to New Zealand.

Our widely accepted and successful treaty with China has provisions for resolving disputes, it refers them to the International Centre for the
Settlement of Investment Disputes (“ICSID”) under the Convention
on the Settlement of Disputes between States and Nationals of
Other States
, done at Washington on March 18, 1965.

But the TPP has it's entirely own idea of how to go about it, starting off thus...

1. If a dispute regarding any matter arises under this Agreement and under another international trade agreement to which the disputing Parties are party, 28-3 including the WTO Agreement, the complaining Party may select the forum in which to settle the dispute.

2. Once a complaining Party has requested the establishment of, or referred a matter to, a panel or other tribunal under an agreement referred to in paragraph 1, the forum selected shall be used to the exclusion of other fora.

Right off the bat loading the dice in the complainants (most likely a corporate) favour.

Just because the concept of Treaties including mechanisms for their own enforcement and the idea countries ought treat traders fairly is easy to grasp does not mean any provision written in a treaty that touches on it is proper and restricted to those purposes.

Personally I think the adoption of U.S.A IP standards as so blithely accepted by Brian at the start of his opinion does more harm to NZ than everyone seems to think and is a reason to reject the TPP on it's own  as NZ needs to expand it's non-primary produce economy much more urgently than incrementally expanding our mature dairy and meat industries and hampering our ingenuity by submitting to IP regulations favouring wealth over invention is a folly.

by Wayne Mapp on February 16, 2016
Wayne Mapp

Andrew,

In respect of your second post. I think it would be very difficult for an individual investor to take an ICSID action if for instance they could not buy residential land in breach of New Zealand's TPP obligations. It would be extremely difficult for them to quantify the actual loss. 

In any event would any particular potential overseas purchaser actually take an ICSID proceeding when their individual loss for the loss of the opportunity to buy a residence say in Auckland would be quite small, relative to cost of an ICSID proceeding. 

Rather New Zealand would be in breach of its obligations in respect of the other eleven state parties. These state parties may (either collectively or individually) seek redress for the New Zealand breach. Such a redress might be a selective tariff on New Zealands exports, or suspension of one or more TPP provisions as they relate to New Zealand.

by Andrew Geddis on February 16, 2016
Andrew Geddis

@Wayne,

If an existing investor in, say, the dairy or forestry industry had long-term expansion plans in place that were thwarted by a ban on further overseas investments then they certainly could! But agreed as regards residential investments it's highly unlikely someone will think it worthwhile to bring an ISDS claim just because they can't buy an Auckland villa to live in (even if this counted as an "investment", and even factoring in Auckland property prices!)

by Wayne Mapp on February 16, 2016
Wayne Mapp

Hi Andrew,

As you know the rural sales issues are already governed by the OIA, and Labour seems happy with the OIA as it currently stands. So the overseas investor will be properly subject to the existing OIA rules. The investor would only have an action under the ISDS provisions if the OIA was applied in an obviously discriminatory manner, beyond their proper and legitimate purpose.

Hence the reason why I used the residential sales example, which seems to be the actual point of concern for Labour.

by Andrew R on February 16, 2016
Andrew R

Hi Brian

I disagree with your suggestion that 

Because it is a small country New Zealand has been very keen that there be an international framework based on a rule of law so that, typically, there are enforcement provisions in each agreement to make them work.... The ISDS extends the framework to foreign direct investment.

The ISDS is at odds with the usual tenets of rule of law -- it is only available to some - not all - investors, decisions are not based on precedent, there is no independent judiciary, there is no appeal right.  

That ISDS is not a justice system in the usual sense of the word is a major point against it.

It is a threat to sovereignty because it is an instrument by which coroporations can, and do, challenge democratic decisions and seek to intimidate governments to make, or not make, particular decisions.  This is confirmed by the trend of increased actions under ISDS - like provisions in so-called free trade agreements.

 The initimidation factor of threatening to take court action is real.  Two example where it has worked in New Zealand is when Labour was considering imposing local music quotas.  A more recent example is how the National government has delayed the introduction of plain packaging of tobacco because of the ISDS-like court action against Australia.  

That case illustrates a further intimidatory factor in taking an action under ISDS, even one with little merit -- the cost of defending the decision, both in $ and in time.  It is a not uncommon business tactic to use the courts for such purposes.

That is why I suggest that the glib assurances by the government, and its supporters, that there are strict limits in the TPP on what can be taken to ISDS are, at best, misleading and incomplete statements. 

Couple that with wording in the TPP that is uncertain (Andrew Geddis gives examples above) and you have to conclude that the ISDS provisions are unjust and an attack on democratic sovereignty.

by Andrew Geddis on February 17, 2016
Andrew Geddis

@Wayne,

Sure, the Overseas Investment Act presently applies to certain sales of farmland. And it will continue to do so after the TPP kicks in (albeit that the threshold for its application will rise from $100 million to $200 million). My point, however, is that should a future Government decide (and Parliament agree) that this protection is no longer adequate and wish to place an outright ban on overseas purchases of land (including farmland), then that would trigger potential ISDS claims. 

(Not sure exactly what Labour's current policy is (and not spruiking for it in any case), but here's what it was saying back in 2014.)

by Rich on February 17, 2016
Rich

The EU set-up requires that member states give priority to EU laws, so that if there is a clash between that and domestic law, the EU prevails

I'd just point out that the EU is very different from the TPP.

Firstly, there is no dominant state like the US - Germany may be the largest country in the EU, but it's population (and hence, broadly, votes) isn't larger than the next two states. Secondly, the EU's laws are made through a more or less democratic process - both the directly elected parliament and the Council (of ministers) have to approve - EU directives can also be repealed by the same process. (The big deficiency remains that there isn't a clearly elected "government" - although the Commission President is now elected by parliament, there isn't really a process by which the various parties contend to govern the EU).


by Tim Watkin on February 17, 2016
Tim Watkin

Andrew, you're right about that first ISDS being in 1959 between Germany and Pakistan.

http://www.economist.com/news/finance-and-economics/21623756-governments...

While I recognise that "except in rare circumstances" will be open to interpretation, isn't there an element of law where you respect the intent of the law. And if the countries went to the effort of creating a carve out, the intent was clearly to, well, carve out those issues form ISDS. Wouldn't that hold sway?

On the foreign buyers issue, as I understand it Labour would have to send letters of intent to all the parties that they intended to flout that bit of the TPP. Given that several countries already have that carve out, I've been told it wouldn't likely cause too much consternation. So Mike, I don't think you can simply say 'the TPPA holds sway'. Countries will certainly change policies over time. 

 

 

by Ian MacKay on February 17, 2016
Ian MacKay

An American program last week said that the wording in TPPA says that the Agreement would be flexible and would "evolve over time." Be changed?

And somewhere it says that each country would have different ways of doing things but would expect to "harmonise systems." Wonder if NZ's Pharmac or Education or Health Delivery will be harmonised with say USA systems?

by Oliver Hailes on February 18, 2016
Oliver Hailes

Commentators have framed the debate as the abstract oppositions of "sovereignty/democracy" versus "free trade," which has proven horrendously unhelpful. Once we confront the fact that concrete economic gains attributable to trade are to be minimal and that there is a well-rehearsed history of anti-regulatory ISDS proceedings, we can present the conflict as "strong property rights for transnational capital" versus "unencumbered domestic regulatory intervention". This nuanced opposition is a lot less balanced, especially cast against the backdrop of climate change, income inequality, real estate prices, and almost every other politically salient issue in New Zealand.

by Andrew Geddis on February 18, 2016
Andrew Geddis

@Tim,

And if the countries went to the effort of creating a carve out, the intent was clearly to, well, carve out those issues form ISDS. Wouldn't that hold sway?

Well, we might hope so. But there will be legions of extremely well paid lawyers looking to exploit any loophole/nuance in the system for their client's advantage. And how that then works out in the future is, if anyone is really honest about it, a known unknown. 

A parallel example. In 1990, Geoffrey Palmer stood up in the House and gravely told it that the Bill of Rights Act he was proposing would lead to no new judicial remedies ... that courts would not be able to do anything under it that they could not currently do. Since then we have seen the development of stays of proceedings, exclusion of evidence, damages for breaching the BoRA and most recently declarations of inconsistency. Demonstrating that whatever the people who create legal texts think they are doing, the future practice may be quite different.

by Brian Easton on February 20, 2016
Brian Easton

Thankyou for corrections Andrew Geddis.  Mea culpa. Incidentally, I very much enjoyed, and was informed, by the subsequent interchange that Andrew led.

 

Ian MacKay asks ‘In governing our country, will there be a reluctance to avoid passing some legislation for fear that we will be trounced by some big company?’ I think the short answer is that there is always a reluctance to introduce legislation which threatens some big interest. I doubt that the ISDS will change this much.

 

Mike Kirk says ‘Default assumption: globalisation is a good thing and will continue’. My default assumption is ‘globalisation will continue and we have to make the best of it.’

 

Fentex says that I ‘blithely accepted the adoption of US IP standards’ I did not. I reluctantly accepted what is in the TPPA as an offset to the gains from better market access; as the article makes clear I am actually rather bitter about the extension of copyright.

My understanding is that the TPPA has only partially adopted US standards and, for instance, it is has much less onerous IP standards than the US-Korea deal.


I am not sure, Andrew R, that the ‘ISDS is at odds with the usual tenets of rule of law’ so much as that it is a rather imperfect extension.

 

Ian MacKay wrote ‘An American program last week said that the wording in TPPA says that the Agreement would be flexible and would "evolve over time." Be changed?’ My understanding too, but it would have to be by consensus. Talking to those who are better informed than I am, I am left with the impression that there is more flexibility in the application of some of the provisions of the TPPA than outsiders might think. However, as Andrew G reminds us, a quasi-judicial process may generate outcomes which insiders had not expected.

Incidentally, the sort of change which might occur is that assuming the TTIP (between the US and the EU) have an ISDS, it might be sensible for the TPPA to change its provisions to be in line with them. The EU is insisting on a more judicial approach, which I would be more comfortable with.

 

Oliver Hailes says ‘concrete economic gains attributable to trade are to be minimal’. It would be more correct to say they are not large but the improvements in market access are real enough and significant to the benefiting industries. . As I said though, the concessions we are making – most importantly in IP and ISDS – are not large either.

 

A point not made here, but in some private conversations, is that my concern is not with legal sovereignty but de facto sovereignty. It will be recalled that many colonies were given their independence, by which was meant legal sovereignty, but they suffered severe limitations as to what they could actually do. That is where theory of ‘neocolonialism’ comes in.

 

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