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April 2014

There has been a flurry of media attention paid to Australia-Japan relations this week. For example, I was asked to appear on “The Wire” radio on 7 April, on the eve of the conclusion of 7 years of negotiating this major bilateral Free Trade Agreement (transcript here). At that stage, the inclusion of Investor-State Dispute Resolution (ISDS) protections for foreign investment in the treaty was still a real possibility, but I argued that there was no need to panic. Japanese investors have never experienced major problems with Australian government authorities illegally interfering with their investments, and indeed have never directly invoked ISDS (especially arbitration) procedures already provided by Japan’s treaties with around 30 countries.

Both governments subsequently announced key features of the Japan-Australia FTA, which ultimately did not include ISDS – unlike the Korea-Australia FTA concluded in December 2013 (and formally signed this week in Seoul). On this blog and then the East Asia Forum, I argued that this presumably meant that the Australian negotiators were happy enough with market access commitments offered by Japan, especially for agricultural products. This may be true but it is hard to be sure, and he argued that omitting even a weak form of ISDS in the FTA with Japan may complicate Australia’s ongoing regional and bilateral FTA negotiations (including with India and Indonesia).

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Australia and Japan finally concluded a bilateral Free Trade Agreement on 7 April 2014. Some Australian media outlets had prior inklings that negotiations had achieved significant breakthroughs, especially for agricultural market access into Japan, but a frequent assumption was that Australia must have “given up” something major in return. Concerns were expressed that this included measures favouring Japanese investors into Australia, especially protections from investor-state dispute settlement (ISDS, especially arbitration) provisions [listen to my radio interview here]. These provide an extra avenue for foreign investors to enforce the substantive treaty rights limiting a host state’s capacity to illegally interfere with foreign investments (eg through expropriation). They add to the (more politicised) inter-state arbitration procedure invariably included in investment treaties, as well as any rights under domestic law available through the host state’s court system – particularly problematic in developing countries, such as Indonesia.

ISDS provisions had been added to the Korea-Australia FTA concluded in December 2013 by the Abbott Government, which also declared that it was reverting to a case-by-case approach to ISDS. This contrasted with the position taken by the 2011 Gillard Government Trade Policy Statement, which had reversed Australia’s longstanding treaty practice by declaring that it would not agree to any forms of ISDS in future treaties – even with developing countries. The 2012 Malaysia-Australia FTA omitted ISDS, although that was meaningless in practice as ISDS remains available to enforce similar substantive rights under the 2009 ASEAN-Australia-NZ FTA. Curiously, however, the new Australia-Japan FTA ultimately omitted ISDS provisions as well. Why is this, and what are the broader implications?

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I am pleased to provide this Submission on The Trade and Foreign Investment (Protecting the Public Interest) Bill 2014. I specialise in international and comparative commercial and consumer law, and have produced extensive academic publications and media commentary on treaty-based investor-state dispute settlement (ISDS). My interest is in the policy and legal issues associated with this system; I have never provided consultancy or other services in ISDS proceedings.

The Bill simply provides, in clause 3, that:

“The Commonwealth must not, on or after the commencement of this Act, enter into an agreement (however described) with one or more foreign countries that includes an investor-state dispute settlement provision.”

The Explanatory Memorandum provides no guidance as to the background to this proposal, or its pros and cons. However it seems to be aimed at reinstating the policy shift announced by the April 2011 “Gillard Government Trade Policy Statement”. That is no longer found on Australian government websites and is inconsistent with the present Government’s policy on ISDS, which allows for such provisions on a case-by-case basis (as evidenced by the recent Korea-Australia FTA).

The Bill, like the previous Trade Policy Statement in this respect, may be well-intentioned, but it is premature and misguided. Treaty-based ISDS is not a perfect system, but it can be improved in other ways – mainly by carefully negotiating and drafting bilateral investment treaties (BITs) and free trade agreements (FTAs). This may also have the long-term benefit of generating a well-balanced new investment treaty at the multilateral level, which is presently missing and unlikely otherwise to eventuate.

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Japanese Law in Asia-Pacific Socio-Economic Context
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