We’ve agreed to Investor-State dispute clauses before – it’s all in the wording

Politicians and diplomats love free trade agreements; but the often secretive Investor-State dispute clauses bother the public. AAP/Dan Himbrechts

Economists are often sceptical about the benefits of free trade agreements. By offering preferential market access to particular countries, they have the capacity to divert, rather than create trade. Diplomats and politicians, on the other hand, often love them.

A lot of public opposition to preferential trade agreements in general, and the proposed Trans Pacific Partnership in particular - just weeks away - relate to the inclusion of Investor-State dispute mechanisms (and the secrecy of negotiations, which I will get to further down). A lot of this criticism revolves around the idea that such mechanisms might result in regulatory chill.

This is the idea that a government might be reluctant to legislate in the public interest if it that could disadvantage a foreign investor which then might be awarded damages. The 2011 Philip Morris claim (as yet unresolved) against Australian tobacco plain packaging laws under the 1993 Hong Kong-Australia bilateral investment treaty is the most commonly cited example of the dangers.

Another criticism of Investor-State dispute clauses is that foreign investors are given additional rights that are not available to domestic investors.

The original motivation for including these clauses was to encourage foreign investment though acting as a form of insurance against sovereign risk, particularly in the case of nations with poorly developed legal systems that are not independent of the executive.

It is possible to write Investor-State dispute clauses that allow a foreign investor to sue for damages in the case of a traditional expropriation in which an investment is nationalised by the host country without compensation being paid. It is also possible to explicitly exclude claims for damages from “indirect expropriation” that reduces the value of an investment if such indirect expropriation results from legislation or regulations written with the public interest in mind.

For example, claims made in response to environmental, public health, taxation, cultural heritage or safety laws could be specifically excluded. I argue that you shouldn’t characterise the inclusion of Investor-State dispute clauses as being intrinsically bad or good until you see the exact wording.

The recently released China-Australia preferential trade agreement includes an Investor state dispute mechanism with the qualification that:

Measures of a Party that are non-discriminatory and for the legitimate public welfare objectives of public health, safety, the environment, public morals or public order shall not be the subject of a claim.

The 2014 South Korea-Australia free trade agreement has similar wording:

Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

The 2015 Australia-Japan free trade agreement contains no Investor-State dispute mechanisms.

It is in the nature of preferential trade agreements that negotiations are confidential until the agreement is signed and that nothing is agreed until everything is agreed. I am sympathetic to the view that negotiations need to be kept secret, as lots of propositions are put forward that never find their way into a signed agreement.

If national negotiating positions and draft agreements were, instead, public documents, industry lobbyists from those negotiating countries that have democratically elected governments, would be able to effectively shoot down the possibility of any trade agreements ever being reached.

However, once an agreement is signed, its contents then become public. All these agreements contain both positive and negative aspects and need to be judged as a whole, as they are take-it-or-leave-it propositions. If Australian senators believe overall, an agreement is not in the national interest, then they should refuse to ratify the agreement in its entirety.

This is similar to the fast tracking authority that the US senate granted president Obama last week. This means that the US legislature can reject, but not modify, the Trans-Pacific Partnership agreement.

The former Labor government adopted the recommendations of the 2010 Productivity Commission not to agree to any new preferential trade agreements that included Investor State Dispute mechanisms. As is clear from the examples above, the current coalition government has renounced this Labor policy.