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[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.

Citing the Australian Fair Trade and Investment Network (which has criticised ISDS in all the parliamentary hearings), Peter Martin objected on 22 June that the provisions "are less open than the provisions in other agreements, including the Australia-Korea free trade agreement, not being subject to a requirement that the dispute hearings and associated documents be made public". Academics in Canberra and Toronto make a similar critique in the Herald.

But look at China FTA Investment chapter Article 9.17 on "transparency". Respondent (host) states must publicise the notice of arbitration and the tribunal's decisions etc. They may publicise pleadings and transcripts of hearings. They may also publicise submissions from the home (non-disputing) state if the latter agrees. The main difference with Korea FTA Article 11.21 is that hearings themselves shall be public only if the host state agrees (as with inter-state WTO proceedings, incidentally). But Australia would probably agree in the (unlikely) event of being subject to a claim. And proceedings under other recent investment treaties allowing for open hearings attract few spectators - especially if the host state can publicise transcripts and pleadings anyway. Interestingly, the ISDS procedures under the China FTA include a Code of Conduct for arbitrators (Annex 9-A), not elaborated in other Australian treaties but similar to requirements for arbitrators of inter-state disputes.

The more important point about the China FTA is that it limits substantive commitments protected by ISDS anyway, compared to say the Korea FTA. [At present, the only ISDS-backed protection is "national treatment", so a discriminatory tax cannot be imposed on Australian investments once made in China, for example. Another protection under the treaty is "most favoured nation" treatment, so Australian investments can benefit from stronger protections that China may offer other countries’ investors under future treaties. But this is not currently enforceable via ISDS, only an inter-state arbitration process.] China’s FTA with Australia does not commit to "fair and equitable treatment", including "denial of justice" by local courts. Fortunately this protection is available under a 1988 bilateral investment treaty, but it can only be enforced under an inter-state arbitration process. Maybe the Australian government didn't want its investors embarrassingly making direct ISDS claims against China if they find themselves being egregiously treated in courts there. Australians have already had disturbing run-ins with the Chinese courts.

Also writing for the Sydney Morning Herald, on 20 June, Michael West is worried about Chinese investors bringing ISDS claims if Australia refuses to grant a mining permit due to environmental concerns. But this would only be possible under this FTA if the refusal was discriminatory, and anyway there is an express exception for proper environmental protection measures. [Another provision anyway allows the host state to seek agreement from the home state that such measures do not violate the treaty, whereupon the investor's ISDS claim will be suspended.]

He also frets over other claims if the venture’s costs blow out, but this FTA doesn't provide relief just for that. And West warns generally about the risks of ISDS for Australia, citing a French company's claim versus Egypt. But he doesn't mention a more pertinent claim: Al Jazeera claimed last year that Egypt had closed down its media operations and detained (critical) journalists. Other media companies have brought ISDS claims against Chile (after Pinochet's coup), Hungary, Ukraine and the Czech Republic. ISDS-backed commitments can help enhance good governance in host states, as well as cross-border trade and investment.

Both Martin and West are also worried that the China FTA’s investment chapter is not “finalized”, particularly regarding ISDS. Article 9.9 does indeed provide for negotiations after a work program reviewing the chapter (and the 1988 BIT) is completed within 3 years of the FTA entering into force. This will consider adding provisions such as fair and equitable treatment, compensation for expropriation (partially covered by ISDS in the 1988 bilateral treaty), “application of investment protections and ISDS to services supplied through commercial presence”, as well as “scheduling of investment commitments by China on a negative list basis”. This actually presents a good opportunity for broader public consultation on the compromise achieved between investor and host state rights reinforced through ISDS in this FTA, alongside the protections under the 1988 treaty due for renewal again anyway in 2018, or whether the protections go too far in some respects but not far enough in others.

Finally, if and when the China FTA comes into force containing any form of ISDS-backed protections, Australia’s FTA in force with Japan contains an unusual Article 14.19.2. This requires bilateral negotiations to be commenced within 3 months, and a report within 6 months, if “Australia enters into any multilateral or bilateral international agreement providing for a mechanism for the settlement of an investment dispute between Australia and an investor of another or the other party to that agreement, with a view to establishing an equivalent mechanism”. This is another good reason for Australia to undertake wider public consultations to develop a model investment treaty or chapter, or at least model provisions, in order to improve public debate particularly over ISDS. Yesterday, the majority Report from Senate’s Inquiry into Treaty-Making agreed with my submission along those lines.

Otherwise, misapprehensions and concerns are likely to proliferate. In New Zealand, for example, its 2008 China FTA has a comprehensive investment chapter, including fair and equitable treatment commitments backed by ISDS. No claims have been filed or threatened by Chinese investors (or any other foreign investors). Nonetheless, ISDS attracted debate in New Zealand parliamentary inquiries this year into the Korea-NZ FTA, and a legislator from the minority NZ First Party has introduced his own Anti-ISDS Bill. Ill-informed discontent risks adding an extra roadblock towards negotiating regional FTAs such as the Trans-Pacific Partnership (although this week the US Congress passed fast-track negotiating authority for President Obama), or the (ASEAN+6) Regional Comprehensive Economic Partnership, let alone a well-balanced multilateral investment treaty.

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Japanese Law in Asia-Pacific Socio-Economic Context