Article – Julian Ang

This opinion piece is written in two parts. The first part is a critique on the report written by NZIER on ISDS provisions and the second touches sparingly on gains our negotiators have made on tariff reductions across a range of industries when the …

TPPA – NZIER article and tariff reductions

Julian Ang

This opinion piece is written in two parts. The first part is a critique on the report written by NZIER on ISDS provisions and the second touches sparingly on gains our negotiators have made on tariff reductions across a range of industries when the TPPA was ratified on the 5 October 2015.


The NBR published an article about the findings of an NZIER report commissioned by Export New Zealand on the Investor State Dispute Settlement (ISDS) clauses in free trade agreements on 21 September 2015.

ExportNZ has generously provided me a copy of that report and I would like to discuss a few major points highlighted in the document that purport to alleviate our fears about ISDS clauses.

In summary the NZIER report claims that the furore and “scaremongering” created by opponents to the TPPA on ISDS clauses is overblown. It claims that all 13 trade agreements that New Zealand has currently signed up to with other economies include ISDS clauses or versions of it and that up to 2014, not one multinational corporation has taken the New Zealand government to task on any breaches of the ISDS. Hence, based on the balance of probabilities, it really is not an issue that we should get our “knickers in a twist about”.

Firstly, it states that the whole purpose of ISDS clauses are to ensure that investors who invest in any country will have legal recourse if the foreign government expropriate the investment. In short, they provide regulatory certainty for investors who seek to part with their money and safeguards against governments’ nationalising such foreign investments at their whim.

Secondly, it states that modern ISDS arbitration hearings adopt best practice by referencing international trade bodies such as the United Nations Commission on International Trade Law (UNCITRAL) and the International Centre for Settlement of Investment Disputes (ISCID) precedents. It also states that such tribunals are increasingly transparent and publicly accessible and that in limited circumstances, there may be a right of appeal.

Thirdly, it claims that ISDS clauses have no direct effect on influencing a sovereign country’s ability to legislate in the public interest and that any chilling effects are negligible.

Fourthly, it also states that up to 2014, only 25% of cases have been ruled in favour of the multinational corporations through these arbitration tribunals.

I would now like to unpack some of these claims that “all is calm and that we just need to trust Monsieur Groser and his wonderful team of negotiators” when it comes to ISDS clauses.

What the opening summary fails to mention is that the current trade agreements that we have are with countries such as the ASEAN countries, Australia, China and South Korea which do not have a history of prolific litigation, unlike the United States which has a multi-billion dollar industry that thrives on litigious actions and is the main player in this agreement. Yes, the top 12 prolific claimants include the United States and Canada (which are signatories to the TPP), Germany, United Kingdom, France, Spain, Austria, Belgium, Turkey and Switzerland. One obvious reason why we have not been sued under these provisions could be due to the fact that we have not had agreements with ISDS clauses with anyone of these prolific claimant countries, so watch this space …

On the first point, yes, it is important to provide investors with some semblance of certainty when it comes to protecting their investments and this works both ways, ie for foreign investments in New

Zealand and for foreign investments in other jurisdictions by New Zealanders. Hence, it could be argued that ISDS attempts to treat each treaty country’s investors fairly. However, there needs to be a delineation between first world countries which possess a sound regulatory framework and that of “at risk” countries where the architects of the ISDS clauses have deliberately designed them so as to discourage the likelihood of governments expropriating foreign investments by the threat of imposing financial penalties. A country of New Zealand’s standing in terms of transparency, corruption and adherence to the rule of law, being a member of the UN Security Council should automatically qualify us for exemption from such a clause or at the very least, have the clause stripped back so it is significantly less onerous.

On the second point, having an arbitration panel of three lawyers in which two appointments are made by the plaintiff and defendant and the third by a mutually agreed-upon person or failing that, a third panellist appointed by an international organisation, does not imbue me with much confidence on tackling the issue of independence, or lack of. Who decides what international organisation will be the appropriate arbiter to appoint the adjudicator? Are there any checks and balances to ensure that such an organisation is not or has not been captured by corporate or governmental interests?

On the third point, it is rather mischievous for the NZIER to claim that these clauses will have a negligible effect on a government’s capacity to legislate in the public interest. A simple case in point is the Tobacco Plain Packaging Amendment Bill that has stalled in our parliament. Why has it stalled? Well, the reasons are writ large here, ie the bill has stalled because parliament has decided that it would be in our best interest (and I agree with them) to await the outcome of the tobacco giant taking action against the Australian government. Philip Morris has taken action against the Australian Federal government for breaching an ISDS-like provision by attempting to introduce plain packaging to promote public health by discouraging smoking. This is likely to cause a drop in tobacco consumption and thereby affect their profits and Philip Morris is suing for loss of profits. So parliament is basically waiting for any fallout from that action taken against a government before deciding if we should continue with the bill. Chilling effect? It might be a case of hell freezing over. At the point in writing, it has been confirmed courtesy of Radio New Zealand’s nine to noon programme on 6 October 2015 that tobacco companies and only such companies have lost the right to invoke ISDS clauses in the TPP.

On the fourth point, it states that only a minority of litigants have been successful in pursuing action against government for breaches of the ISDS through arbitration panels. The percentage quoted is 25%. However I would like to stress that according to their findings, another 28% did not go to arbitration but instead were settled out of “court”. This brings the total percentage of monetary penalties that governments had to pay out, whether through arbitration or out of court settlements, to be a not insubstantial 53%. That is a cost ratio that we all have to bear if there is an action taken against our government or if there is a threat of action taken against our government. Hence, there is more than a 50% likelihood that we taxpayers will have to reimburse multinational corporations for loss of profit if these clauses are invoked. It is significant to remember that the decisions made by the arbitration panels are binding and override a sovereign state’s domestic laws and that any right of appeal is limited at best.

Ultimately, the efficacy of invoking the ISDS clause to mount a successful action hinges on what constitutes expropriation. The definition appears to be deliberately vague so it can be left open for wider interpretation. I believe the definition of what constitutes expropriation in the ISDS clause needs to be tightened markedly as suggested by the NZIER report. Perhaps a simple framework of tests could be applied when determining whether a breach has occurred?

For example:

• Does the government in question have a history of expropriation?

• If not, why is there an alleged expropriation occurring at this time?

• Is there sufficient evidence that the perceived health or environmental risk that the government claims would occur could unduly disadvantage or compromise the wellbeing of its citizens?

In a nutshell, the NZIER report, though balanced in parts, is not conclusive and does not provide me with sufficient comfort that ISDS clauses will not be invoked to the detriment of a sovereign’s state ability to make public policy in the public interest and for the public good.

Of course, many of my scribbles are conjecture at present as the government is refusing to release any texts. It will be interesting to do the post mortems when the text gets released in due course (30 to 90 days from the date of ratification?)

It may all be alright in the end as claimed by Mr Groser but if we did indeed sign up to a lemon, the price to pay will be very high for generations to come and, if there are no sunset clauses in this agreement, we may need to demand changes that prohibit cabinet from signing up to any such treaty unless it passes through the House of Representatives for scrutiny …

Much of the campaigning around the TPP by its proponents centres on the need to remove or significantly reduce trade barriers so our exporters have significantly increased access to markets. After the TPP was ratified on 6 October, MFAT released this information sheet which breaks down the monetary savings and gains each New Zealand industry is likely to benefit from when the TPP is fully implemented. At first glance, the potential savings look fairly substantial until you compare it with the total value of exports and suddenly the savings almost disappear into obscurity. In summary, the potential savings gained are miniscule at best – see table below

Removal of Trade Barriers

Industry/Sector Current exports (NZD) Potential savings when TPP fully implemented (NZD) Potential savings in percentage terms
Meat 2.3 billion 72 million 3.1%
Dairy 4.6 billion 102 million 2.2%
Fruit and Vegetables 1.2 billion 26.3 million 2.2%
Wine 839 million 10 million 1.2%
Forestry 1.5 billion 9 million 0.6%
Fish and Fish Products 564 million 8 million 1.4%
Wool, leather and textiles 621 million 4 million 0.65%
Manufactured goods 7.0 billion 10 million 0.14%
Other Agricultural goods 1.6 billion 18 million 1.13%
Total 20.2 billion 259.3 million 1.28%

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