Tobacco corporations don’t garner much sympathy these days, what with all those early deaths and so forth. So when Phillip Morris Asia decided to use a process called Investor State Dispute Settlement (ISDS) to challenge Australia’s 2011 plain packaging legislation, scrutiny of the already controversial process intensified. And with the Trans Pacific Partnership Agreement expected to include ISDS provisions, ISDS is gaining increased attention in New Zealand. So what is it?
ISDS provisions in investment treaties allow foreign investors to sue national governments for violating the rights which they have agreed to confer on investors by signing the investment treaties. In the case of Australia’s plain packaging legislation, a 1993 investment agreement with Hong Kong required Australia to accord Hong Kong investors (such as Phillip Morris) fair and equitable treatment. Phillip Morris has argued that the plain packaging law was an expropriation of its intellectual property (those fancy cigarette brand designs) and was thus unfair and inequitable.
So at this point, ISDS sounds pretty indefensible. Why would anything which might limit Australia’s ability to pursue its anti-smoking policy be a good thing? Don’t Australians have enough lethal things to contend with without seductively packaged death sticks lining the shelves of their “milk bars”?
Firstly it’s important to bear in mind that the case remains undecided and Phillip Morris may well lose. It’s also important to recognize that ISDS provisions are actually pretty common these days, appearing in New Zealand’s recent agreements with China, ASEAN and Malaysia.
The simplest rationale for the process is that ISDS allows investors to directly seek remedies against foreign governments which breach the terms of a treaty leading to investor loss. For a fairly uncontroversial example of what ISDS might achieve, imagine an investment treaty between the creatively named nations of Blueland and Redland. The treaty guarantees that investors from each country will not have their property confiscated by the government of the other country, and it includes an ISDS provision. Billy Bonker, an investor from Redland, then establishes a caramel factory in Blueland. But two years later, the government of Blueland decides to take Billy’s factory without compensation. Billy could then invoke the ISDS provision and sue Blueland before an arbitration panel, seeking compensation for the loss of his beloved factory.
Without ISDS, Billy might not have set up his factory in the first place. This would have been a shame, as the vertically challenged workers of Blueland so enjoy their new jobs, toiling over the steaming caramel vats, singing songs of moral virtue. If the investment agreement had only allowed claims to be brought by the governments, Billy would have had to rely on the government of Redland bringing suit against Blueland. Redland might be unwilling to do that, perhaps because the Prime Minister of Redland loves playing golf with the President of Blueland and wouldn’t want to spoil their picture perfect friendship.
But why can’t Billy just use the local courts in Blueland to sue the government? If Blueland is a “dualist state” like New Zealand is, then treaties only have domestic legal effect if they are incorporated into the national law. If the provisions of the treaty are incorporated into Blueland’s national law, then Billy ought to have legal rights against the confiscation of his factory. But the laws of Blueland, which previously incorporated the terms of the treaty, may have been changed to allow the confiscation. Or the courts might be corrupt. Or they might be subject to the influence of the Blueland government. They may simply be very slow and inefficient. For various reasons, the domestic courts may not provide a remedy.
And if the interests of Billy Bonker seem a bit remote to you, remember that if you have a Kiwisaver account, you almost certainly own shares in multinational corporations which benefit from ISDS. Corporations might not be people, but an awful lot of actual people rely on them for jobs, savings opportunities and all manner of products.
On the other hand, ISDS has been criticized for some very good reasons.
Most significantly, when the contents of investment treaties clashes with unassailably good legislation (that protects the environment, the well-being of citizens etc), ISDS provisions may allow the investment treaties to come out on top. This constrains the power of governments to serve their citizens. Important regulations aimed at advancing the public good, like the Australian plain packaging law, have been challenged under investment protection provisions. Numerous challenges to fairly innocuous legislation were made under the investor protection provisions of the North American Free Trade Agreement. In New Zealand, our politicians disagree over whether a claim against New Zealand over plain packaging legislation would succeed. It all depends on the extent of the protection afforded and what exceptions are available to national governments seeking to pass legislation in the public interest. Whether the claims succeed or not, fighting them could be extremely costly.
Criticisms have also been levelled against the panels themselves. The United Nations Commission on International Trade Law has set standards for international arbitration. But not all treaties have reference to these regulations. The panels do not have the institutional safeguards seen in the judicial systems of liberal democratic countries like New Zealand.
It has also been suggested that the process is unfairly skewed against developing countries. Empirical analysis by Susan Franck in 2009 suggested that in terms of the number of claims against developing countries versus those against developed countries, this is simply not the case. But because developed countries invest more abroad, it seems likely that they should gain more from ISDS. As developing world firms like Huawei and Tata spread their tentacles abroad, this criticism may be refined to focus more on the more pressing question of whether ISDS is unfairly skewed in favour of big multi-national corporations, regardless of their national origins.
Another argument against ISDS provisions is that they create a perception problem. While no one denies foreign companies operating in New Zealand should be able to bring claims against the government in our own courts, the notion of claims being brought before a neutral panel in Brussels or Singapore by powerful American corporations is much less palatable. So too is the notion of legislation itself being challenged. After all, in New Zealand we are used to our democratically elected legislature being able to pursue whatever legislative agenda it chooses, even when that means curtailing the customary rights of our indigenous people as in the Foreshore and Seabed saga. An aversion to ISDS could make it very difficult for New Zealand’s politicians to partake in regional trade agreements like the Trans Pacific Partnership Agreement. It feeds into anti-globalization and protectionist narratives which threaten the trade links on which countries like New Zealand rely for their prosperity.
Clearly the question of whether ISDS makes the world a better place is a multifaceted issue which cannot be resolved in a single blogpost. The overly simplistic narratives of ISDS hardliners, protectionists and anti-globalization activists should be taken with a bucket of salt. Because the process is an enforcement mechanism for economic treaties, it is the content of those treaties which will, to a great extent, determine the effect of the process itself. The fact that it is an enforcement mechanism is what ultimately makes ISDS so controversial. It raises a fundamental question about the international system. Namely, whether international agreements, from environmental treaties to human rights treaties to investment treaties, be enforceable not just by governments, but by the individuals and non-governmental organizations which are affected by them? This will prove to be a critical question of our time.
Simon Lester “Investment Treaties and International Rights” http://worldtradelaw.typepad.com/ielpblog/2011/06/investment-treaties-and-international-rights.html
Simon Lester “Is Investment Treaty Arbitration Biased Against Developing Countries?”
Luke Peterson “Approaches to Investment Protection: Hardliners, Caution, Abandonment” http://worldtradelaw.typepad.com/ielpblog/investment/. Accessed at 27/09/2014.
The New Zealand Herald “Tobacco giants can’t sue the Government – Key” http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10736380. Accessed 27/09/2014.
Australian Government: Attorney-General’s Department “Tobacco plain packaging—investor-state arbitration” http://www.ag.gov.au/tobaccoplainpackaging. Accessed 27/09/2014.