The Trans-Pacific Partnership Agreement (TPPA) has attracted widespread criticism in New Zealand – whether it be regarding the secrecy surrounding the negotiations or speculation it is less of a free trade deal and more of a meta-regulatory scheme. Whatever the case, the TPPA is indisputably political in nature and undoubtedly tied to an economic ideology increasingly rejected around the globe.
There are many who are incredibly wary of the TPPA, especially given the lack of substantive comment from public officials involved in the negotiations. Unsurprisingly, the concerns of anti-TPPA groups have become embedded in the public consciousness, whether all those concerns are well-founded or not. Admittedly, it is premature to make absolutist proclamations about the TPPA based on the leaked documents, largely because they have been released only in part and therefore with limited context; however, despite knowing little about the precise terms, the leaked documents do provide a strong indication as to the character of its content.
This article focusses on the Investor-State Dispute Settlement (ISDS) clause that allows a foreign investor to sue a host state. The importance of this particular clause is that it underpins many of the concerns the public have about their governments ratifying the agreement. Indeed, the NZ Green Party has made multiple criticisms of this particular mechanism during the NZ parliamentary debates.
Traditionally, disputes between a foreign investor and a host state have been governed state-to-state via diplomatic protection rules. The guiding principle was that a given state had a right to protect its nationals from injury caused by other states. However, these rules themselves were susceptible to the politicisation of disputes. This is because the investor’s home state had discretion over the level of protection it would provide and the extent to which it would carry the claim. The obvious disadvantage for investors concerned the political relationship between their home state and the host state, with whom the dispute relates. Acknowledging the risk of abuse of state power (home or host) in respect of the investor, the international community made it a priority to ensure that private individuals could pursue disputes without the impediment of the political environment. Thus, the ISDS clause was born.
The ISDS clause is a protection mechanism for foreign investors. States acknowledge that foreign companies take a big risk investing in their economies. However, the state parties also recognise that host states have an advantage over foreign investors since they can enact legislation adverse to foreign investor interests. For the foreign investor, ISDS clauses provide “direct access to an effective international forum… should a dispute arise” and “an important element of building confidence in the legal security required for a sound investment decision.” On the other hand, the host state benefits from less costly litigation, reduced costs to the taxpayer, and through an improved investment climate with better opportunities to attract foreign investment funds.
Countries like NZ rely on foreign investment to grow their economy and as such many consider free trade agreements (FTAs) a very important aspect of our international trade policy. Proponents of FTAs claim that the exclusion of mechanisms that provide a level of security to foreign investors would likely deter investment here and subsequently reduce NZ’s capacity to build a resilient and sustainable economy. The host state also benefits by protecting itself “against other forums for foreign or international litigation” and can “effectively shield itself against the problem of diplomatic protection extended by the home state of the investor in question.”
Nevertheless, ISDS clauses are not immune to ramification. There are significant risks to the democratic participation of citizens that run counter to other international obligations to protect human rights. As argued in a submission to the UNHRC by It’s Our Future NZ: “State parties to the TPPA are bound to take measures that respect, protect and fulfil their human rights obligations, avoid measures that would constrain their ability to meet those commitments, and not undermine the ability of other countries to comply with their own obligations [Arts 26 and 30(4)(b) Vienna Convention on the Law of Treaties 1969].”
The TPPA appears to take an overtly protectionist position on foreign investment, flouting the purpose of FTAs, i.e. to liberalise trade, foster economic growth and build stronger economic ties across the region. It also potentially guarantees rights to foreign investors in contravention of pre-existing international obligations to human rights and civil liberties. The ISDS clause directly limits the ability of states to enact laws on behalf of the citizens they represent that are deemed of significant public importance. For example, regarding the leaked intellectual property (IP) chapter, the Electronic Frontier Foundation (EFF) argues: “…the IP chapter would have extensive negative ramifications for [internet] users’ freedom of speech, right to privacy and due process, and hinder peoples’ abilities to innovate,” and that “All signatory countries will be required to conform their domestic laws and policies to the provisions of the Agreement.”
The EFF explain further that: “The draft chapter of the Trans-Pacific Partnership Agreement on Intellectual Property… insists that signatories provide legal incentives for Internet Service Providers (ISPs) to privately enforce copyright protection rules. The TPP wants service providers to undertake the financial and administrative burdens of becoming copyright cops, serving a copyright maximalist agenda while disregarding the consequences for Internet freedom and innovation.”
Based on the information available, the purpose of the IP chapter is to protect industries that are struggling to compete with open source technological development. Proponents for these strong copyright protection measures insist that companies invest large sums of money in content creators such as musicians, authors and artists and are entitled to recuperate returns on their investment, which they argue can only happen with stringent copyright protection measures.
The IP chapter is protectionist because it places restraints on trade involving copyrights and seeks to compel state parties to enact specific legislation to protect the industry’s investments. The implication is that, where a host state fails to comply with the agreement by not enacting these protectionist measures, a foreign investor can sue the host state government for breach of material term of the agreement. This means that even if there is strong public opposition to the enactment of the copyright protection rules (for example), the legislature must still enact those provisions or risk litigating the matter.
The leaked TPPA documents appear also to enhance the rights of foreign companies even if those companies make no direct investment. For instance, the IP chapter appears to extend the rights of foreign investors to a foreign copyright holder to allow them to benefit from the protection mechanisms through this backdoor in the agreement. As alluded to above, ISDS clauses create a disjuncture between the democratic rights of the citizens of the host state and the legal obligations of the host state to the investor under the agreement. There is genuine concern that the host state will demote the democratic rights of its citizens in favour of settling disputes with investors.
ISDS clauses are included in other FTAs, including those that NZ is a signatory to, so it is unlikely that the negotiators will challenge the inclusion of this clause. Whether there can be comprehensive agreement on all the provisions of the TPPA is yet to be determined, and many claim highly improbable, but these contractual arrangements between states are legally binding and as such entail significant legal consequences. It’s important to note here that, while many people support FTAs, this does not necessarily translate to support for the TPPA. Critics suggest that the TPPA appears to be a different kind of trade agreement, with only a handful of the chapters related directly to trade.
In conclusion, because the ISDS clause allows a government in a representative democracy to be sued, then a responsible government must determine whether the benefits of the TPPA outweigh the risks, not simply from an economic standpoint but taking into account a broad range of factors including any prima facie limitations on human rights and civil liberties.