Arbitration rights back for the South Korea-Australia FTA

Author: Luke Nottage, University of Sydney

Australia’s Coalition government, dominated by the Liberal Party and led by Prime Minister Tony Abbott, recently completed a rocky first 100 days in power. While the government stands accused of sending ‘conflicting messages’ to the business sector — including for blocking a major foreign direct investment (FDI) proposal, the A$3.4 billion bid by US firm Archer Daniels Midland for GrainCorp — completion of the Australia-South Korea FTA may be a positive step for attracting foreign investment.

Some may consider the inclusion of investor-state dispute settlement (ISDS) provisions in the new FTA, concluded on 5 December after many years of negotiations, as providing an indirect ‘subsidy’ to foreign investors — both inbound and outbound. Yet this enforcement mechanism, allowing foreign investors to bring international arbitration claims directly against host states for violating substantive rights agreed to in treaties (for example, against expropriation without adequate compensation), is merely aimed at effectively maintaining minimum international standards of investor protection.

ISDS is particularly important when the counterparty is a developing country, and there are problems invoking protections through local courts, but it is still quite often agreed to in treaties among developed countries — partly to encourage FDI. National laws in Australia are also not necessarily perfect, as evidenced by recent critiques of compulsory acquisition powers presently available to the state governments in New South Wales and Victoria.

Australia’s new trade minister, Andrew Robb, reportedly indicated he was prepared to be more flexible on including ISDS in the FTA with South Korea, if the latter conceded on other matters important to Australia’s interests. Unfortunately we will never know what the final trade-off amounted to, but at least the deal is now done, apparently including carve-outs regarding FDI measures ‘in important areas such as public welfare, health and the environment’.

This deal will also exert lateral pressure to bring the protracted Australia-Japan FTA negotiations to a successful conclusion.

In regard to ongoing Trans-Pacific Partnership (TPP) negotiations (including Japan, the United States and nine other developed and developing countries) Robb has also indicated that ‘If there is a substantial market access offering, and if we can also succeed in getting exclusions and protections to safeguard certain public policy measures, then we will be prepared to put [ISDS] on the table, but it is not on the table yet’.

A reason that Australia can now drive a harder bargain in its FTA negotiations, ironically, is the decision announced in the Gillard government’s 2011 Trade Policy Statement to omit ISDS in all future treaties.

The Coalition government is not bound by the Labor government’s stance, and indeed has removed the Trade Policy Statement from official websites. But the Coalition government can still hold out for a good overall deal by referring to concerns over ISDS raised by the 2010 report on trade policy from Australia’s Productivity Commission. That report queried whether offering ISDS in fact led to significantly more inbound FDI or benefits for outbound investors, and highlighted some potential risks for host states agreeing to ISDS (more liability claims and potential ‘regulatory chill’).

These concerns are worth raising and exploring, although the evidence and theory sketched by the Productivity Commission was arguably insufficient to justify rejecting Australia’s longstanding treaty practice of including ISDS at least in treaties with developing countries. By contrast, those more familiar with international investment law generally tend to favour more targeted reforms, through careful treaty drafting.

The Labor Party’s dominance of Australia’s upper House of Parliament, at least until July 2014, may also impede implementation of the Australia-South Korea FTA (as ratified treaties must also be turned into domestic law by the legislature). So far, Penny Wong (Senate Opposition Leader) has reportedly expressed concerns about the inclusion of ‘any’ such mechanism in that FTA.

In addition, a recent Australia Institute survey on the TPP found that 75 per cent of respondents were opposed to the (putative) US ‘demand’ that ‘foreign companies be allowed to sue the Australian government if laws or regulations are passed that reduce the future profitability of foreign companies operating in Australia’. It is also worth remembering that the then opposition in South Korea also delayed implementation of the Korea–US FTA, partly due to concerns about ISDS.

The issue therefore remains a live one not only for Australia but also other countries in the Asia Pacific region: what is the right balance of dispute settlement rights that private investors should be afforded against host states in the region’s future trading system?

Luke Nottage is Professor and Associate Dean at Sydney Law School and founding co-director of the Australian Network for Japanese Law (ANJeL).

A longer version of this article was also published here on the ‘Japanese Law and the Asia-Pacific’ blog.