Government-less arbitration: why trade officials like ISDS

By David Donaldson

Wednesday November 11, 2015

The negatives of investor-state dispute settlement mechanisms in free trade agreements have long been canvassed: they restrict the ability of governments to regulate on social and environmental policy — indeed, Philip Morris is currently suing Australia over its tobacco plain packaging legislation.

Yet the Australian government recently concluded the China and Trans-Pacific Partnership free trade agreements with ISDS provisions firmly intact, including “safeguard” provisions that have been criticised as inadequate. So why are trade negotiators so keen to include ISDS provisions in free trade agreements?

Because it takes governments out of the arbitration process, says former trade negotiator Alan Oxley.

Although he does acknowledge “there is an issue” with ISDS, Oxley, who was the first Australian to serve as chair of the General Agreement on Tariffs and Trade (or GATT), thinks the issue has been “overegged” by those who are fundamentally opposed to free trade.

Indeed, the plain packaging case, which is being brought under the 1993 Australia-Hong Kong bilateral investment treaty, is the first to have been brought against Australia under ISDS provisions, though around the world 57 new ISDS cases were commenced in 2013 under some of the 3000 or so agreements featuring ISDS provisions.

While many expect Philip Morris’ case to fail — acting as an expensive but temporary hurdle in Australia’s journey towards cutting smoking rates — uncertainty surrounding the outcome is causing significant concern that any attempt to introduce plain packing in poor countries, such as Papua New Guinea, might take a significant chunk out of an already threadbare national budget.

Alan Oxley
Alan Oxley

But speaking to the Economic and Social Outlook conference in Melbourne last week, Oxley argued both business and trade officials like ISDS.

Under bilerateral agreements that don’t include ISDS arbitration, there has to be agreement between the two party states to trigger a dispute resolution process. This means it’s easy for governments to agree to look the other way to avoid questions of investor rights undermining other foreign policy goals. It’s not an effective way of ensuring investor confidence that they’ll be treated equally, particularly in countries with weak rule of law.

Before becoming a point of contention in Australia, ISDS were initially created primarily as a way of protecting rich world companies from governments in developing states which might, for example, physically seize property owned by a company or change regulations as a means of arbitrarily discrimination, for example.

There has been some push back against ISDS by countries such as Bolivia, Venezuela and Ecuador, though these states have a “habit” of expropriating foreign assets, as one international arbitration expert has put it.

Oxley offered an example where ISDS arbitration could prove useful under an agreement like the TPP.

“I always like to think that for one of our big shopping centre businesses establishing in Chicago or Michigan, where in the United States state authorities do intervene, and I can envision a circumstance where they would erode the right in the free trade agreement for that investment to take place, then the natural response would be to use the ISDS system of arbitration to address that,” he suggested.

Under a system that required both the United States and Australian governments to agree to arbitrate, it’s plausible they might agree to not allow the dispute to be heard to avoid irritating sensitive relations elsewhere.

International agreement on ISDS standards?

Shadow Minister for Trade and Investment Penny Wong, on the same conference panel, said she didn’t think ISDS is good policy.

She cited Chief Justice Robert French’s comments that there are significant issues with the fact ISDS tribunals can make far-reaching decisions despite being subject to much lower standards than the courts.

“I don’t see in a nation like Australia what the public policy or economic benefit is to having a private arbitration system that operates both separately to, and in some instances above, domestic law,” Wong argued.

“… the international system does need to consider improving it, making it more transparent …”

“Having said that I think the reality is — and Labor has said if we were in government we would not include them … — the reality is that they are already part of a great many agreements.”

Given ISDS tends to have very few guidelines around the use of precedent, the process of coming to a decision or the handling of conflicts of interest for those sitting on the tribunal, governments should look at how to standardise the operation of such arbitration.

“I do think, given that they have become more common and more available to more corporations in more economies globally, that the international system does need to consider improving it, making it more transparent, dealing with some of the conflict of interest issues which have arisen,” she suggested.

“Certainly were we to be elected I think one of the things you would need to do, apart from thinking about future agreements, is to do what we could to add Australia’s voice to reform of ISDS. That’s not a position that shifts our principled opposition to them, but a reality of how you would deal with the existing provisions.”

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