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[A version of the second half of this Comment, on the potential impact of Australia's new policy against treaty-based Investor-State Arbitration provisions on the pending FTA negotiations with Japan, appears also on the East Asia Forum - cited by Rowan Callick 'Arbitration Hitch Holds Up FTAs' The Australian (2 November 2012, p10).]

The remarkably well-attended and interactive 50th Anniversary Australia Japan Joint Business Conference took place in Sydney over 8-9 October. It was hosted by the Australian Committee, established in 1962 and comprising Australia-based firms involved with Japan. But the conference program was developed with its counterpart in Japan, which hosts there a Joint Conference in alternate years. This cooperative arrangement has become unusually close, and provides an inspiration for other bilateral business community centred relationships. (By contrast, for example, the Australia China Business Council hosts its own main events quite independently of those organised by its Chinese counterpart, comprising firms interested in doing business in Australia.) The Australia-Japan Committees’ arrangement is also very longstanding: the first joint conference took place in 1963 at the Tokyo Chamber of Commerce, with the second in 1964 at the Australian National University.

As ANU Emeritus Professor Peter Drysdale reminisced in his keynote address at this year’s conference in Sydney, this cooperative arrangement – and indeed the entire bilateral relationship between Australia and Japan – proved to be an unexpected success. After all, both countries were bitter foes during World War II. For several ensuing decades Australia maintained concerns about engaging with Asia, as well as trade liberalisation and inbound foreign investment more broadly, with Japan also habouring mercantilist tendencies.

The 1957 Treaty of Commerce between Australia and Japan therefore represented a significant breakthrough, contributing to a sixfold increase in Japanese exports to Australia over the following six years. Amendments in 1963 added further encouragement for inbound investment particularly into Australia’s emerging resources sector, with associated innovations in developing long-term contracts that facilitated bank financing for large-scale projects. The 1976 Basic Treaty of Friendship and Cooperation consolidated bilateral cooperation, soon after the last remnants of the ‘White Australia’ policy were dismantled and immigration from Asia began to expand dramatically.

The development of Australia-Japan links therefore had a positive wider impact on both countries and their region. As noted at the Sydney conference by Australia’s former Treasury Secretary, and primary author of the imminent ‘Australia in Asia’ White Paper, Australia’s pre-War trade diversion policy (favouring links with the British Commonwealth) ended up generating perverse effects on regional security as well as economic welfare.

Dr Ken Henry, like Professor Drysdale and several other high-profile speakers at the conference, went on to emphasise the broader regional significance of finalising the Australia-Japan Free Trade Agreement. Several participants added queries or opinions as to why those FTA negotiations are still underway: the 16th round was held in Tokyo in June 2012, with the first round dating back to April 2007.

Early conclusion of these negotiations was urged by Australia’s Prime Minister Julia Gillard (in her conference dinner speech), but also Japan’s Prime Minister Yoshihiko Noda (in a prepared statement for the opening ceremony, led by the Premier of New South Wales). One senior Australian official indicated that both countries were now close to agreement, although the FTA aspired to cover some novel ground (such as ‘behind-the-border’ issues) in order to maximise economic benefits. But it is quite hard to imagine what those issues might be. Regulatory regimes and practices in both countries are often now very closely aligned (for example, in the fields of consumer product safety, competition law and policy, or intellectual property rights), compared to the situation in less developed countries (like Malaysia, which finalised its FTA with Australia in May 2012).

The more obvious impediment is agricultural market access into Japan, as alluded to indirectly by one Japanese official at the conference. This individual mentioned generally the need for delicate political manoeuvring in Japan, given that benefits from the FTA are widely dispersed whereas potential negative impacts tend to be more localised.

A broader political impediment may be that both Prime Ministers and their governments find themselves quite precarious situations, with general elections looming. This may generate a temptation to wait and see whether any new government in the other country might offer a better deal. In addition, the ruling political party in both Australia and Japan sometimes seems less enamoured of free trade and ‘economic rationalism' than their respective main political opponents, especially given problems highlighted by excessively ‘light-handed regulation’ of financial markets in the wake of the Global Financial Crisis. However, such concerns can be addressed by building into FTAs additional safeguards for consumers and others.

Some good news from the Sydney conference was that the delays in finalising the Australia-Japan FTA do not seem to be direct result of the ‘Gillard Government Trade Policy Statement’, announced in April 2011 and derived primarily from recommendations from a Productivity Commission report in late 2010. Both documents had re-emphasised that Australia stood to gain most from multilateral trade and investment liberalisation (or even unilateral deregulation), and that more care had to be taken when assessing net economic benefits from FTAs. Nonetheless, it seems that this lesson in basic economics has not led to significant stalling on bilateral negotiations in the vain hopes of a prompt conclusion of the WTO Doha Round. Nor do the Australia-Japan FTA negotiations seem to be lagging because Japan is still deciding whether and when to commit formally to joining Australia (and now 10 other states) negotiating the Trans-Pacific Partnership, although in theory such a broader FTA should generate larger net economic benefits.

***

Despite indications of some good progress in negotiating the Australia-Japan FTA, or at least renewed scope for concluding it soon, one specific aspect of Australia’s 2011 Trade Policy Statement may well be unnecessarily complicating the picture. The Statement declared that Australia will not longer agree to any form of investor-state arbitration (ISA) provisions in future treaties, even with developing countries – thus breaking with Australia’s practice dating back to 1988 (with its investment treaty with China). Accordingly, foreign investors subject to illegal interference by a host state will only be allowed under the treaty to encourage their home state to commence an inter-state arbitration. This is indeed the only avenue provided under the 2012 Australia-Malaysia FTA (although eschewal of ISA in that treaty is mitigated by such provisions being included anyway in the ASEAN-Australia-New Zealand FTA, signed in 2009 ).

By contrast, Japan is on the record (in November 2009) for having sought ISA protections in the FTA negotiations with Australia. This would be consistent with Japan’s longstanding treaty practice, even with developed country parties. For example, the recent Japan-Switzerland includes ISA protections.

Admittedly, especially in the wake of last year’s horrific ‘3-11 disasters’, Japan’s energy security and other economic needs generate considerable pressure to give up on insisting on ISA in the FTA with Australia. (Japan may anyway have another opportunity to press for such protections if it joins negotiations for the TPP, and that ends up providing for some form of ISA.) Japan’s investments in Australia have generally not suffered from major political controversy, at least over the last few decades. But if things do go wrong, Japanese investors may now be more aware that the alternatives of inter-state arbitration, or local court proceedings in Australia, are not always optimal or even feasible.

After all, Japan Tobacco recently failed in its claim before the High Court that Australia’s new plain packaging legislation amounted to an unconstitutional ‘taking’ of its (intellectual) property, whereas Philip Morris Asia may well have more likelihood for claiming ‘expropriation’ in violation of the 1993 Australia – Hong Kong investment treaty. Nor has Japan joined three other countries in bringing inter-state WTO claims against Australia under the TRIPS Agreement. Yet Japan Tobacco remains a government-linked company (generating significant profits and taxes), therefore presumably better able to encourage the Japanese government to initiate such a claim compared to smaller or purely private Japanese investors.

Certainly, nothing comes free in life – especially when economists are involved. In exchange for having ISA excluded from the bilateral FTA with Japan, Australia will be expected to make some sort of concession to conclude the overall agreement. One distinct possibility is reduced market access for Australia’s agricultural exporters. Normally, such a group might raise concerns about this possibility with Australian government negotiators. It could object, for example, that such an outcome disproportionately favours inefficient domestic industries – facing less chance of being opened to Japanese investors, which may be deterred by the lack of ISA protections when considering investment in Australia compared to other countries.

However, it will be very difficult to quantify or even find out roughly how much Australia may be ‘paying’ for eschewing ISA in the bilateral FTA, at the expense of groups like its agricultural exporters. Anyway, some parts of the Australian agricultural industry may well be concerned about inbound foreign investment, and therefore quite happy for ISA protections to be excluded. Perhaps due to such complications, so far Australia’s peak agricultural industry groups have not joined with the Australian Chamber of Commerce and Industry or others in recently urging the Gillard Government to revert to a more flexible stance regarding ISA in future treaty negotiations. (The ACCI’s major interest lies in securing such protections for Australia’s outbound investors, in investment treaties with countries with less reliable legal systems.)

ISA provisions can be drafted in various ways to balance the interests of both foreign investors and host states. For example, the scope for claiming ‘expropriation’ can be limited to that closer to standard set anyway by Australian constitutional law (similarly to the Annex in the Australia-Chile FTA, signed in 2009). States might also add express provisions allowing them to suspend an investor’s arbitration claim if they agree that the host state’s impugned measures do not or should not amount to treaty violations. Such agreement could then have the salutary effect of the home state itself introducing similar measures, such as non-discriminatory and proportionate public health safeguards.

By excluding any possibility of compromising on ISA provisions, even along such lines, Australia risks end up with sub-optimal bilateral FTAs, even in the context of negotiations with Japan. In the longer run, this stance may also unravel the investment treaty framework that has been emerged world-wide from the bottom up, including throughout Asia. Australia’s new policy position on this point risks significantly complicating and delaying both bilateral and regional FTA negotiations, as well as impeding chances of generating a comprehensive multilateral investment treaty that effectively balances both public and public interests.

[This comment draws on research for my project on "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. The views expressed are obviously my own, and do not represent Australian government policy.]

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Japanese Law in Asia-Pacific Socio-Economic Context
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