Australia: Arbitration rights back for the South Korea-Australia FTA

Australia’s Coalition government, dominated by the Liberal Party and led by Prime Minister Tony Abbott, recently completed a rocky initial 100 days in power. While the government stands accused of sending ‘conflicting messages’ to the business sector

— inclunding for blocking a major foreign direct investment (FDI) proposition, 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-national dispute settlement (ISDS) provisions in the new FTA, concluded on 5 December next a lot of years of negotiations, as providing an indirect ‘subsidy’ to foreign investors — both inbound and outbound.

From presently on this enforcement mechanism, allowing foreign investors to bring international arbitration claims due against host states for violating substantive rights agreed to in treaties (for example, against expropriation without adequate compensation), is merely aimed at entirely maintaining minimum international standards of investor protection.

ISDS is particularly significant at the same time as the counterparty is a developing country, and there are problems invoking protections through local courts, but it is still completely often agreed to in treaties part developed nations — half to encourage FDI. National laws in Australia are as well not necessarily perfect, as evidenced by recent critiques of compulsory acquisition powers instantly available to the national governments in New South Wales and Victoria.

Australia’s new trade minister, Andrew Robb, reportedly indicated he was prepared to be additional flexible on inclunding ISDS in the FTA with South Korea, if the latter conceded on other matters significant to Australia’s interests. Unfortunately we will at no time know what the final trade-off amounted to, but at least the transaction is presently done, apparently inclunding carve-outs regarding FDI measures ‘in significant areas such as public welfare, health and the environment’.

This transaction will as well exert lateral pressure to bring the protracted Australia-Japan FTA negotiations to a successful conclusion.

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

A reason that Australia can presently 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 next 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 in general transaction by referring to concerns over ISDS raised by the 2010 statement on trade policy from Australia’s Productivity Commission. That statement queried whether offering ISDS in fact led to significantly additional inbound FDI or benefits for outbound investors, and highlighted some potential risks for host states agreeing to ISDS (additional 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 inclunding ISDS at least in treaties with developing nations. By contrast, those additional familiar with international investment law generally tend to favour additional targeted reforms, through careful treaty drafting.

The Labor Party’s dominance of Australia’s upper Home of Parliament, at least until July 2014, may as well impede implementation of the Australia-South Korea FTA (as ratified treaties must as well 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 % of respondents were opposed to the (putative) US ‘request’ that ‘foreign companies be allowed to sue the Australian government if laws or regulations are passed that reduce the next profitability of foreign companies operating in Australia’. It is as well worth remembering that the again opposition in South Korea as well delayed implementation of the Korea–US FTA, half due to concerns about ISDS.

The issue therefore remains a live one not only for Australia but as well other nations 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 next 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).