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June 2015

[Updated 2 July 2015. An abridged earlier version of this posting can be found at http://www.eastasiaforum.org/2015/07/01/compromised-investor-state-arbitration-in-china-australia-fta-2/. It forms the basis of my Submission presented to parliamentary inquiries into the FTA by JSCOT and a Senate Committee.]

Australia signed its bilateral free trade agreement with China on 17 June 2015, after announcing last November that negotiations had been concluded – including investor-state dispute settlement (ISDS) provisions. These provide another way for foreign investors to claim against host states that violate substantive commitments, if the investor's home state doesn't use the inter-state arbitration protections also given in the treaty, for political or diplomatic reasons. ISDS is especially useful when the host state’s laws and procedures do not meet commonly-accepted minimum international standards.

ISDS variants are included in most of the treaties concluded by Australia as well as many by China. In fact, as it emerges as a major capital exporter, China’s recent treaties have expanded the scope of protection reinforced through ISDS provisions. Australia has instead become more cautious, like other countries after being subjected to an initial ISDS claimPhilip Morris Asia’s claim in 2011 regarding Australia’s tobacco plain packaging law, still pending along with WTO claims. Indeed, the Gillard Government Trade Policy Statement (2011-13) went as far as eschewing ISDS in any future treaties. Since September 2014, however, the Abbott Government has reverted to including ISDS on a case-by-case assessment. It was incorporated into the (long-stalled) FTA signed with Korea last year, but not the FTA with Japan. Relevant factors seem to be whether the counter-party presses strongly for ISDS and offers enough in return during negotatiations, and whether Australia may have concerns about investor protections available through the counter-party’s local courts.

Australia’ reversion to pre-2011 treaty practice has not stilled public debate. It has escalated, particularly given negotiations for an expanded Trans-Pacific Partnership agreement (including also Japan and the US, but not China). A Greens Senator introduced an “Anti-ISDS Bill” last year to prevent ISDS being included in future agreements, but even Labor Senators on the Committee agreed that this encroached too far on the executive branch’s constitutional responsibility to negotiate treaties. Labor parliamentarians initially opposed ratification of the Korea FTA, raising ISDS concerns, before agreeing in October 2014 to vote for legislation implementing tariff reductions, even in the Senate where the Abbott Government lacks an absolute majority. This year the Greens and others highlighted ISDS again in a broader Senate inquiry into the role of the legislature and public consultation in Australia’s treaty-making process. Parliament will now inquire into the China FTA, including of course ISDS, and there is a (small) chance that Labor Senators will vote against tariff implementation legislation to prevent ratification and the treaty coming into force.

Against this backdrop, Australia’s major newspapers reflect and encourage polarized views over ISDS. The Sydney Morning Herald (like The Age in Melbourne) is consistently opposed, as explained below.

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On 25 June 2015, the federal Senate's Foreign Affairs, Defence and Trade References Committee tabled its Report on its Inquiry (initiated 2 December 2014) into the "Commonwealth’s treaty-making process, particularly in light of the growing number of bilateral and multilateral trade agreements Australian governments have entered into or are currently negotiating". The Terms of Reference included "j. exploration of what an agreement which incorporates fair trade principles would look like, such as the role of environmental and labour standard chapters". This opened the door to many of the 95 public submissions discussing an issue more related to the contents or substance of trade and investment agreements: the investor-state dispute settlement (ISDS) mechanism. These are typically included nowadays as an extra avenue for foreign investors to claim for violations of host state commitments (such as Australia's Free Trade Agreements reached last year with Korea and China, but not with Japan).

Out of 14 organisations and individuals (including myself) invited to give evidence at public hearings in May 2015, based on their written submissions, nine volunteered opinions on ISDS and a further three were questioned on it by Greens Senator Peter Whish-Wilson. He initiated an "Anti-ISDS" private member's Bill last year, although the Coalition and Labor Senators on the Foreign Affairs, Defence and Trade References Committee recommended against enactment.

In the present Inquiry, the three (out of six) Committee members presented an extensive majority Report, entitled "Blind agreement: reforming Australia's treaty-making process". Senator Whish-Wilson presented a short Dissenting Report urging more wide-ranging reforms to enhance public participation and parliamentary scrutiny of the negotiation and implementation of trade agreements. The (two) Coalition Senators also issued a short Dissenting Report, arguing for the adequacy of the present system of public consultation by current government politicians and officials as well as scrutiny by the Joint (house) Standing Committee on Treaties, conducting an inquiry and making recommendations to Parliament after the treaty is signed and tabled but before Australia takes binding treaty action (ratification etc).

The majority Report noted that "While a number of issues specific to individual trade agreements, such as inclusion of [ISDS] clauses and intellectual property ... and copyright chapters, are controversial and the subject of public debate, they are only considered in this report to the extent that they shed light on the treaty-making process" (para 1.7). However, the majority Report did later mention ISDS and indeed recommended that Australia develop a model investment treaty or chapter including indicative provisions.

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[The following is a longer and un-footnoted draft of a fifth Policy Digest prepared for a Sydney Southeast Asia Centre joint research project and an ASEAN Secretariat project on harmonising consumer protection law. It is highly relevant also to Japan in light of Kanebo's large-scale recall of some of its skin-whitening products across the region as well as in Japan in 2013.]

1. Introduction

Consumer goods associated with higher risks, and often also extent of harm, tend to generate public regulatory interventions. Food is one example, for which nation states have often legislation quite early on. However, national legislation and implementation is increasingly impacted by international law, particularly World Trade Organization (WTO) or bilateral and regional free trade agreements agreements insist that food safety measures be based on rational and proportionate public health risk assessments, and not constitute disguised trade barriers. This is facilitated by such agreements expressly stating such requirements will be presumed to be satisfied if the national measures are based on food standards agreed in the Codex Alimentarius, administered by two United Nations bodies. The Codex process has remained relatively unpoliticised, based instead on scientific risk assessments, partly because most countries both export and import foods but also because food is a necessity for everyone. This backdrop has also made it easier for other international and regional bodies, including ASEAN and APEC, to collaborate with national regulators and the private sector to develop shared food safety standards in Southeast Asia and world-wide.

Pharmaceuticals and, more recently and in a less interventionist way, cosmetics (goods without, necessarily, any medicinal properties) have also tended to generate regulatory regimes at the national level. At the international level, however, the WTO’s 1994 Technical Barriers to Trade (TBT) Agreement does not expressly create a presumption of conformity from adhering to standards set by specified bodies, when national regulators introduce measures applicable to imports. There is no counterpart to the Codex process; different countries and regions maintain more disparate approaches to assessing and regulating non-food sectors, partly because they may not be exporting as much as importing certain types of goods.

Overall, moreover, the United States (US) often adopts more lenient regulatory regimes compared to the European Union (EU). This is particularly noticeable with respect to cosmetics: the US relies much more on voluntary industry self-regulation (plus more threat of private lawsuits for product liability), whereas the EU favours more interventionist public regulation. Nonetheless, the EU’s 1976 Cosmetics Directive aimed to balance consumer protection with harmonized standards to facilitate cross-border trade, especially within and into Europe. Because the regulatory regime remains stricter than in the US, and EU’s cosmetics manufacturers are more likely to sell into the more regulated European markets than American manufacturers, the EU can also support European manufacturers by encouraging countries and regions in other parts of the world to “trade up” to the EU rather than laxer US regulatory approach, when developing their own laws and practices. Already, by 2004, the lists of ingredients set under the 1976 EU Cosmetics Directive had been adopted by 30 countries, including countries in South America party to the Mercosur and Andean Pact regional arrangements. Other countries, including China and India, have reproduced significant features of the EU model.

Furthermore, although this is not widely known, the EU model has been adopted in Southeast Asia through the “Agreement on the ASEAN Harmonized Cosmetics Regulatory Scheme”. This was signed in 2003 to advance the ASEAN Free Trade Area program, albeit also against the backdrop of the WTO’s TBT Agreement. Schedule A creates the ASEAN Mutual Recognition Arrangement of Product Registration Approvals for Cosmetics, allowing individual ASEAN Member States (AMSs) to agree with other AMSs to allow, without further requirements, the import of products that satisfy the regulatory requirements of the other state(s). However, any such mutual recognition agreements (anyway possible under the TBT Agreement) were envisaged as a temporary step towards harmonizing cosmetics regulation in the region. More importantly, under the 2003 Agreement (Art 2(3)) the AMSs committed to implement by 1 January 2008 the “ASEAN Cosmetics Directive” (ACD) set out in Schedule B. This closely tracks the EU Directive, including by requiring the AMSs to “adopt the Cosmetics Ingredients Listings of the EU Cosmetics Directive 76/768/EEC including the latest amendments”. Supported by the ASEAN-EU Programme for Regional Integration Support, by early 2008 six AMSs had started implementing the ASEAN Directive into their national laws, followed by Thailand, Cambodia, Laos and Myanmar a year and half later, and finally Indonesia from 2013. The ACD regime has therefore been described as “one of the first concrete instances of economic integration between ASEAN countries”.

Meanwhile, however, the EU itself replaced its Directive in 2009 with a Cosmetics Regulation, which on 11 July 2013 came into direct effect in the (now 27) EU member states, rather than having to be implemented by national legislation – sometimes not straightforwardly – as occurs when harmonisation is attempted by means of a Directive. The EU Regulation similarly attempts to enhance cross-border trade through harmonisation, expanding consumer choice while respecting public health, for example by adding new requirements to label cosmetics (such as suncreens) that include nano-particles.

Part 2 below therefore takes a closer link at key features of the ACD, including some differences that remain compared to the original EU model (and especially the US regulatory regime), as well as implementation and other challenges. As elaborated in Part 3, as well as various concrete improvements that could be made to this approach for harmonizing consumer product safety law, the model might eventually be extended to other sectors and anyway is relevant to general consumer regulators, even if the primary jurisdiction over cosmetics usually remains with health officials.

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