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ISDS: The trap the Australia-Japan Free Trade Agreement escaped

Sydney Morning Herald, Australia

Opinion: ISDS: The trap the Australia-Japan Free Trade Agreement escaped

By Peter Martin, Economics correspondent

7 April 2014

Australia’s latest trade deal with Japan is admirable in its simplicity.

So straightforward was Australia’s first trade deal with Japan that the Japanese thought it was a trick.

Twelve years after the war and with the Thai-Burma railway still fresh in Australians’ minds Australia offered Japan ‘’most favoured nation’’ status for its exports in return for Japan giving its exports the same treatment.

Japan’s lead negotiator Ushiba Nobuhiko stayed in Canberra for six months going through the proposal line by line.

At one point Australia’s exasperated lead negotiator Alan Westerman told him he was wasting their time. “I am telling you right now that Australia will remove all discrimination. Now let’s get on to what you will do and then let’s go and have a game of golf,” he said.

Mr Nobuhiko cabled Japan, they still thought the Australians were trying to trick them and Mr Nobuhiko was recalled. In his biography of trade minister Jack McEwen Peter Golding reports that eventually Mr Nobuhiko convinced his superiors that the Australians meant what they said and prime ministers Kishi Nobusuke and Robert Menzies signed the deal that went on to make both nations rich.

Japan’s present prime minister Shinzo Abe is Kishi Nobusuke’s grandson. The deal he will sign with Tony Abbott is in some ways similar to the simple one his grandfather signed 57 years ago.

It doesn’t include an ISDS. The initials stand for Investor State Dispute Settlement procedures and they’re everywhere. Conducted by specially-constituted often private tribunals, usually in secret, there have been 400 cases heard in the past 10 years. There have been 58 in the most recent year for which the United Nations Conference on Trade and Development has done the sums, although it says it can’t be sure because the mere existence of some hearings is kept secret.

One of them is against Australia. Philip Morris Asia acquired Philip Morris Australia in 2011 for the express purpose of using the ISDS provisions of an obscure Hong Kong Australia trade treaty, a process known as “nationality planning”. It says Australia’s plain packaging legislation deprives it of the value of its investment. Australia is attempting to have the case laughed out of court on the grounds that Philip Morris Asia only bought Philip Morris Australia after the plain packs legislation was already public (and for that reason) so it can’t say Australia’s action wasn’t expected.

But fighting the case is costing Australia millions and its mere existence is frightening poorer countries that might want to follow Australia’s lead. Philip Morris has already lost its case under Australian law in the High Court. It is using rights not available to other Australian companies to get yet another bite of the cherry, this time in a tribunal that doesn’t need to take account of precedents, doesn’t need to publish transcripts and whose decisions are unappealable. The ’’judges’’ are also less independent than real ones. They take turns acting for (sometimes big-paying) litigants and sitting in judgement on them.

The United States loves investor state dispute settlement procedures. It has insisted on them in every one of the 14 free trade agreements it has signed and the 17 it wants to sign. Its companies use them to browbeat and potentially bankrupt governments that introduce environmental or health-related laws they don’t like, a practice Australia’s productivity Commission refers to as "regulatory chill".

Only one world leader has successfully stood up to the US over a demand for an ISDS. It was John Howard, who in 2004 told George W. Bush he wasn’t having one in Australia’s free trade agreement.

It has not hurt us at all. Indeed, when the Productivity Commission examined investor state dispute settlement procedures in 2010 it found no evidence that they boosted investment in nations likely to be sued. It recommended the government "seek to avoid" them in the future.

Labor banned them saying it would "not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses".

The Coalition went to the election saying it would be prepared to consider them on a case by case basis. It has said yes to one with Korea, with what it said are safeguards for health and environmental legislation. But they were similar to safeguards that have failed to stop ISDS proceedings on environmental matters overseas.

It said yes in order to have something to trade away in return for more market access. The US wants one in the 12-nation Trans Pacific Partnership. Australia is under pressure to say yes to sell more sugar.

Other nations are saying no. Indonesia has just announced it will terminate all 67 of its treaties with an ISDS. France, Germany, Brazil and Argentina are thinking along similar lines.

And now Australia has said no to an ISDS in its free trade agreement with Japan. The agreement will be better and simpler because of it. Robert Menzies and Shinzo Abe’s grandfather would be proud.

Peter Martin is economics editor of The Age.