Why no investor–state arbitration in the Australia–Japan FTA?

Author: Luke Nottage, University of Sydney

Australia and Japan finally concluded a bilateral free trade agreement on 7 April 2014.

Some Australian media outlets had prior inklings that negotiations had achieved significant breakthroughs, especially for agricultural market access into Japan, but a frequent assumption was that Australia must have ‘given up’ something major in return. Concerns were expressed that this included measures favouring Japanese investors into Australia, especially protections from investor–state dispute settlement (ISDS, especially arbitration) provisions. These provide an extra avenue for foreign investors to enforce the substantive treaty rights limiting a host state’s capacity to illegally interfere with foreign investments (like through expropriation). They add to the (more politicised) inter-state arbitration procedure invariably included in investment treaties, as well as any rights under domestic law available through the host state’s court system — particularly problematic in developing countries.

ISDS provisions had been added to the South Korea–Australia FTA concluded in December 2013 by the Abbott government, which also declared that it was reverting to a case-by-case approach to ISDS. This contrasted with the position taken by the 2011 Gillard Government Trade Policy Statement, which had reversed Australia’s longstanding treaty practice by declaring that it would not agree to any forms of ISDS in future treaties — even with developing countries. The 2012 Malaysia–Australia FTA omitted ISDS, although that was meaningless in practice as ISDS remains available to enforce similar substantive rights under the 2009 ASEAN–Australia–NZ FTA. Curiously, however, the new Australia–Japan FTA ultimately omitted ISDS provisions as well. Why is this, and what are the broader implications?

We will never really know the reason, as treaty negotiations are kept confidential, but presumably Japan (the net capital exporter, especially for FDI) did not push very hard for ISDS — even though such protections are included in almost all its other investment treaties, including recently with Switzerland. The government would have consulted with key Japanese business groups, including the Nippon Keidanren which since 2000 has been pushing for ISDS, but large-scale Japanese investment into Australia (dating back to the 1960s) has not encountered major adverse treatment by Australian government authorities.

More generally, Japanese investors are still risk averse and prefer to take a long-term view if disputes arise, so they have not yet directly availed themselves of ISDS provisions provided in any Japanese treaty — even with developing countries. Japanese investors tend still to negotiate amicable settlements directly with the host state or through the informal good offices of their own government — although perhaps now more often ‘in the shadow of the law’, including international investment law, as evidenced by a Japanese aluminium joint venture’s recent claim settled with Indonesia (albeit based on an arbitration clause in their contract, not a treaty).

In the FTA negotiations with Australia, the Japanese government may also have not wanted to press too hard to secure ISDS protections because this would probably have involved conceding even more access to Japan’s politically sensitive sectors, such as agricultural markets. Prime Minister Abe will already face fire domestically from rural voters, especially as the commitments made in this bilateral FTA will form a new benchmark for negotiating the expanded Trans-Pacific Partnership Agreement (TPP), involving other major agricultural products exporters including New Zealand and the USA. [Prime Minister Abe would also have been conscious of some popular concern about ISDS generally, epitomised by a TV Asahi program last year – although mainly from Opposition party members and supporters, and not as strong as in South Korea (in the context of its FTA with the US and a pending ICSID claim indirectly from a US investor).]

Australian government negotiators were presumably happy enough with existing concessions, deciding that any extras offered from Japan in exchange for ISDS protections were not worth it.

By not agreeing to ISDS, the Abbott government also could signal that it expected better trade-offs to be offered in Australia’s other ongoing negotiations for bilateral FTAs negotiations (especially with China) and regional FTAs (the TPP, and Regional Comprehensive Economic Partnership [RCEP] or ‘ASEAN+6’ FTA). In addition, it could deflect some domestic political pressure from those cautious about foreign investment generally (linked to the government’s rejection recently of a major US agri-business investment proposal) as well as ISDS (evident from the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, brought before the Australian upper house by a minority Greens Party senator from Tasmania — and therefore unlikely to be enacted).

Conversely, omitting ISDS holds little downside for Australia’s investors into Japan, as they have limited existing and likely flows of FDI into Japan (which anyway has a high-quality court system and domestic law protections for all investors).

Nonetheless, omitting ISDS from the Australia–Japan FTA may have significant long-term consequences. What happens if Australia also ends up omitting ISDS with developed country negotiating partners in regional agreements such as the TPP, having done so already in its bilateral FTAs — as with the USA (2004), New Zealand (2011), Malaysia (2012) and now Japan? If this occurs also with Singapore, Chile and Canada, which also have robust domestic law systems, then the other five TPP negotiating partners may also seek exclusion of ISDS — arguing that what is ‘good for the goose is good for the gander’.

An ‘anti-ISDS’ mood might spread throughout other parts of Asia too, affecting also the RCEP negotiations, despite the gradual acceptance of treaty-based arbitration within the region — epitomised by the 2009 ASEAN Comprehensive Investment Agreement. After all, last year India announced a ‘review’ of ISDS in their treaties, and last month Indonesia declared that it wished to terminate its bilateral investment treaties — although without mentioning its regional treaties or FTAs. Such postures are related to domestic politics, including general elections soon in both countries. But it should also not be forgotten that India, Vietnam, Thailand and Laos are still not among the 150 states that have ratified the 1965 International Centre for Settlement of Investment Disputes Convention, which provides further support for ISDS procedures.

Including or not including ISDS may not have held much significance for the Australia–Japan FTA itself, but its omission could have wider repercussions for the broader treaty-based arbitration 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 version of this article was also published here on the ‘Japanese Law and the Asia-Pacific’ blog.

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Ken Ward
9 April 2014 2:12 pm

Indonesians are going to the polls today. If the author has any evidence that Indonesia’s new ISDS policy has had anything to do with today’s legislative elections, this writer for one would be grateful to learn of it. ISDS is probably not the first thing on Indonesian voters’ minds.

Luke Nottage
11 April 2014 10:09 am
Reply to  Ken Ward

Good point, thanks. There appears to have been significant public discussion about ISDS in Indonesia since it lost in February its objection to ICSID tribunal jurisdiction against Australian/UK investors (Planet/Churchill) regarding their huge coal mining investment in Kalimantan. Combine that with the resurgences of broader “resource nationalism” that Hal Hill and others have highlighted before Indonesian elections generally, and I think it’s a fair inference that there is some connection to the subsequent declaration by the Indonesian government that it would be not renewing or terminating its BITs. However, whether this new stance will significantly attract extra votes, or will survive long after the election, are further interesting questions.

Ken Ward
13 April 2014 6:49 pm
Reply to  Luke Nottage

Thank you for your reply to my comment. My point is really that the current ISDS policy in Indonesia, though adopted by the outgoing Yudhoyono government,is not really associated with any particular political party. And the 9 April election was contested by parties, not by the government.

Resource nationalism is in any case becoming the consensus position in Indonesian politics. I would answer the question in your final sentence by saying that the Yudhoyono government’s ISDS policy will very likely be retained by the next government, which will take office in October.

Luke Nottage
15 April 2014 5:21 pm
Reply to  Ken Ward

Thanks again, Ken. I’m no expert in Indonesian politics/elections but I can imagine that the outgoing President might be thinking of attracting votes to his party or political allies by declaring the new policy towards BITs / ISDS before the party elections, with more votes for parties also important to be able to nominate candidates for the July presidential elections.

However any link is certainly much more indirect than in a Westminster democracy like Australia, where ISDS has become an issue that varies depending on the government/PM (eg Gillard Government announced in April 2011 it wouldn’t allow any more ISDS, deposed by Rudd Govt before the 7 Sept 2013 election without any mention of ISDS policy; but the new Abbott Govt has reinstated a policy of case-by-case assessment, hence including ISDS in the Korea FTA but not the Japan FTA.)

If Indonesia’s stance on ISDS is retained by the new govt (and new President), then things will get very interesting in ongoing FTA negos – maybe the policy shift extends to those for bilateral FTAs, but it will be difficult for ASEAN(+) FTAs like RCEP given ISDS included in intra-ASEAN treaties and almost all ASEAN+ treaties.