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Doubts over Abbott Govt's "safeguards" in trade agreements

18 February 2014 By Dr Patricia Ranald, AFTINET

Reply to the Trade Minister's claims that "safeguards" in trade agreements prevent investors from suing governments over health and environmental legislation.

This article was first published on the AFTINET website on 11 February 2014 - click to read the item there

The Abbott Government policy is to negotiate the inclusion of Investor-State Dispute Settlement (ISDS) in trade agreements. ISDS enables foreign investors to sue national, state or local governments for hundreds of millions of dollars of damages if they can allege a domestic law or policy “harms” their investment. The disputes are heard in international tribunals without the legal protections of national legal systems: the hearings are secret, arbitrators can be practising advocates and there are no precedents or appeals.

Trade Minister Robb announced in December that ISDS would be included in the Korea –Australia Free Trade Agreement. He claimed that the government has ensured the inclusion of appropriate carve-outs and safeguards in important areas such as public welfare, health and the environment, and will do so if ISDS is included in the Trans-Pacific Partnership Agreement (TPP).

Despite widespread public calls and a resolution passed by the Senate, the government has refused to publish the text of trade agreements before the decision to sign them is made by Cabinet. After the Cabinet decision to sign, agreements are reviewed by a parliamentary committee, but the text cannot be changed. Parliament only gets to vote on the changes to legislation required by the agreement. ISDS does not require legislative change.

Since we cannot see the text before it is signed, the effectiveness of the claimed safeguards is difficult to judge. But we do have some clues about their nature. The Government is most likely relying on some revisions the US made to its standard clauses on ISDS in 2004. These revisions have been included in some recent trade agreements which are in place and have become public, so we have access to the text.

These include the Central American Free Trade Agreement, the Peru-US Free Trade Agreement, and the Korea-US Free Trade Agreement, which is the most likely model for the Korea-Australia free trade agreement. The clauses in these agreements are all the same.

The key concept which enables foreign investors to sue governments over domestic legislation is the concept of "indirect expropriation" which has which has been interpreted by tribunals to mean any law or policy of government which could be seen as harmful to the investment in terms of reducing its value.

The so-called safeguards seek to limit the definition of indirect expropriation. One of the key clauses reads as follows:

"Except in rare circumstances non-discriminatory regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations".

Many legal experts have pointed out that the phrase "except in rare circumstances" leaves a very big loophole, which recent cases have used to advantage.

Another safeguard is a more restrictive definition of "fair and equitable treatment" for foreign investors. Previous interpretations by tribunals of "fair and equitable treatment" for foreign investors have applied a much higher standard of treatment to foreign investors than to local investors. This amounts to a situation where any change to policy or legislation without very extensive and detailed consultation with foreign investors can be interpreted as unfair treatment. The safeguard clauses try to limit this interpretation. However tribunals have ignored these limitations and applied the previous higher standard, leading to damages being awarded against governments.

Two ongoing cases involving ISDS clauses provide examples that corporations have ignored the safeguards and have continued to mount cases against environmental regulations.

The Government of El Salvador has been sued by Pacific Rim Mining Corporation under the Central American Free Trade agreement, over a ban on mining to protect the nation’s limited groundwater resources. In Peru, the US-based Renco Group is using ISDS in the Peru-US Agreement to contest a local court decision that it was responsible for pollution from its lead mine. Both cases are ongoing and may take several years.

Even if these cases are eventually decided in the governments’ favour they will have spent years and millions of dollars in legal fees. There will be no guarantee that the safeguards will work in future cases. The ambiguity of language and the fact that arbitrators do not have to base their decisions on previous precedents mean that the outcomes of future cases are unpredictable.

These cases show that safeguards have not prevented foreign investors from suing governments over environmental legislation.

The only guaranteed safeguard is to exclude ISDS from trade agreements. Many governments have done so, including Brazil, Argentina, eight other South American countries, South Africa and India. Many of these governments have made their decisions since 2004, despite the claimed safeguards. The Howard Government did not include ISDS in the 2004 US-Australia Free Trade Agreement and the previous ALP government did not include ISDS in any trade agreements after a 2010 Productivity Commission Inquiry found they had no economic benefits and posed a high risk of huge costs for governments.

The government should exclude ISDS from trade agreements and should release the text of all trade agreements for public and parliamentary debate before they are signed off by Cabinet. This is the only way to have a proper public debate about the implications for the public interest of all aspects of trade agreements.

Contact Details
Name: Greg McLean, ASU Assistant National Secretary
Telephone: 0419 796 801