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.