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[Slightly updated on 2 September. A shorter version of this posting appeared in a Roundtable on "The Conversation" blog (25 August 2011). It draws on research for the project, "Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific", supported by the Commonwealth through the Australia-Japan Foundation which is part of the Department of Foreign Affairs and Trade.]

Australia’s Tobacco Plain Packaging Bill passed the federal House of Representatives on 24 August, although a week before it had looked like foundering. The Bill received its second reading in the Senate today, but it should pass without further change or controversy. The Bill passed by the House has already attracted commentary, mostly lauding this admittedly well-intentioned legislation.

But the legislation stuck to the original proposal for implementation: sales will have to be in the plain packaging from 1 July 2012. So Philip Morris Asia (PMA) are likely to commence investor-state arbitration (ISA) proceedings after expiry of the 3-month “cooling off” period under Art 10 of the 1993 Australia – Hong Kong bilateral investment treaty, calculated from notification of the dispute on 27 June.

By passing the Bill in this form the Gillard Government has closed off one avenue for settling this dispute, namely by enacting the legislation but delaying its implementation, to give more time for PMA and other companies to prepare for the new regime. Even if the possibility of delaying implementation comes up in arbitral proceedings, the Government will now find it politically difficult to backtrack in this respect.

However, it and PMA should authorize and perhaps even require their arbitral tribunal to try to help facilitate a settlement even after the arbitration commences. Such ‘Arb-Med’ attempts might also include sequencing proceedings so that quantification of damages is discussed first. If everyone broadly agrees that the Government is indeed liable for several billions of dollars in damages if PMA succeeds, then pressure may still build for a settlement. (PMA does have a reasonable chance on the Art 6 claim for indirect ‘expropriation’ of its intellectual property ‘investment’, arguably more than Professors Mitchell and Voon concede in their recent paper.)

Again, however, it may be politically difficult for the Government to agree to a lesser sum in damages (discounted for the possibility that PMA will fail to prove expropriation). And it may be calculating that a one-off compensation payment to PMA will be outweighed by reducing many more billions in annual costs incurred by Australia for tobacco-related illnesses.

More cynically, the Gillard Government may be thinking that it will get votes in the short-term by coming down hard on tobacco companies with this legislation, without having to take much responsibility for a compensation payment if and when the tribunal reaches a final decision – that may take several years. A similar phenomenon can be observed in inter-state WTO disputes, like the one Australia recently lost against New Zealand over apple imports. A state can persist with a dispute that it is unlikely to win in order to maximize votes in the short-term, and later blame the tribunal for an adverse ruling. Australian taxpayers typically still end up picking up the legal bills.

This recent escalation of the Gillard Government’s dispute with PMA is unfortunate for another reason. It will entrench the view in the April “Trade Policy Statement” that ISA should not be included in any future investment treaties. This stance goes far beyond the Productivity Commission’s recommendation on ISA in its Inquiry Report last year, yet the Commission’s economic theory and evidence was already questionable. Australia seems now to have thrown out the ISA baby with the bathwater. This has serious implications for economic integration initiatives particularly in the Asia-Pacific region, including ongoing FTA negotiations with post-'3-11' Japan.

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Japanese Law in Asia-Pacific Socio-Economic Context