Trade Agreements Pre-empt Dissent: An Interview With AFTINET’s Dr Patricia Ranald

Thousands of Aymara Indians held a series of protests in southern Peru back in May 2011, calling on the government to cancel the licence of the planned Santa Ana silver mine in the Puno region. The local Indigenous people asserted the project would contaminate nearby Lake Titicaca.

After two weeks of demonstrations against the mine, the protests turned violent, with demonstrators ransacking the local tax office, as well as targeting a number of other public buildings and banks. And the actions brought a halt to business at the nearby border crossing with Bolivia.

The protests continued on until the government cancelled the mine licence of Bear Creek Mining Corporation towards the end of June, as it was found that the Canadian company hadn’t obtained free, prior and informed consent from the local Indigenous land owners.

So, Bear Creek Mining decided to sue at an international tribunal, claiming the Peruvian government had unfairly expropriated the mine. And the tribunal ruled that the Canadian company be paid $24 million in compensation, despite it having disregarded the land rights of the Aymara Indians.

An international rights guarantee

Bear Creek Mining Corporation was able to sue the Peruvian government over a domestic decision made in the face of rising civil unrest, because the Canada-Peru Free Trade Agreement contains an investor-state dispute settlement (ISDS) arrangement.

ISDS is a mechanism contained in many free trade agreements that provide foreign investors with specific rights – not available to locals – allowing them to sue the government of a country in which they have business interests if local authorities make a decision adverse to those interests.

As can be seen in the Peruvian case, ISDS provides foreign investors with guaranteed rights under threat of legal action. And this adds the interests of international corporations to the list of reasons why the Morrison government might baulk at implementing public interest policy change.

Indeed, despite the Labor government making it official policy to exclude ISDS from international trade agreements, when the Liberal Nationals coalition took office in 2013, it began including these provisions in agreements with Korea, China, and the Trans Pacific Partnership Agreement (TPP-11).

Rights-based trade

So, it seems that while climate activists are taking to the streets en masse, even if Scott Morrison suddenly wanted to act on climate before the Torres Strait islands go under, the idea of opening up the nation to numerous international lawsuits might quell his desire.

The Australian Fair Trade and Investment Network (AFTINET) supports “free trade based on human rights, labour rights and environmental sustainability”. The network campaigned heavily against the establishment of the TPP-11 and the ISDS arrangement within it.

Sydney Criminal Lawyers spoke to AFTINET convenor Dr Patricia Ranald about how the ISDS regime developed, the reasons why these mechanisms are so detrimental, and the impact the TPP-11 agreement could have on Australia.

Firstly, investor-state dispute settlement arrangements developed during the post-World War Two decolonisation period.

They established bilateral trade agreements, which were designed to compensate the colonising power over actual property lost due to the nationalisation and expropriation of industries.

Dr Ranald, how has ISDS developed over its time in operation? And what sort of impact would you say it has?

ISDS was originally designed to compensate for nationalisation, such as when Egypt nationalised the Suez Canal in the 1950s. But, as the rules and policies changed, ISDS developed concepts like “indirect expropriation”.

Tribunals have interpreted this to mean that corporations can claim compensation, not just for direct expropriation of property, but for actions by government – whether it’s laws or policy, or even in some cases, court decisions – that corporations argue are harming their investment. This includes future profitability.

There are other legal concepts that have developed, like “fair and equitable treatment”, which means they can claim compensation if the corporation wasn’t consulted in advance about changes that might affect their investment or future profitability.

There are other concepts like “legitimate expectations”, which, essentially, means that the corporation can argue that at the time they made an investment, it had a legitimate expectation that there wouldn’t be changes in laws or policy that would harm the investment.

Since the 1990s, these provisions started to be put in international trade agreements, certainly the North American Free Trade Agreement (NAFTA). But, before that they were mostly in bilateral agreements between industrialised and developing countries.

These specific legal rights are only available to foreign investors, not local investors. And they’ve increasingly been used by corporations to argue for compensation for changes to health regulations, such as the Philip Morris tobacco company case against Australia’s plain tobacco packaging laws.

There’s also been a lot of cases by mining companies against environmental regulations. And pharmaceutical companies have brought cases against court decisions or other policies affecting the price of medicine.

Pharmaceutical companies already have 20 years of monopoly on new medicines. And they’re very sensitive to moves from government that may refuse them a patent on a medicine or reduce their access to monopoly rights.

They’re not the only cases of course. But, the ones that we are concerned about are the sorts of cases that can be used essentially against changes in legislation that are actually responses to community demands.

They’re responses to public interest laws or regulations. That’s why we’re critical of them. And there are a lot of legal experts that have been critical of these measures as well.

ISDS exist in numerous trade agreements. But, of particular interest of late, are the provisions within the TPP-11. The Turnbull government agreed to that ISDS arrangement, after the Howard government rejected an earlier version.

What does the TPP-11 ISDS entail? And why has it garnered so much opposition?

The Howard government didn’t agree to have ISDS in the Australia-US Free Trade Agreement.

Then the Labor government was elected in 2007. In the middle of their term, they were sued by the Philip Morris tobacco company. Labor then developed a policy against having it in any trade agreement.

So, it’s not in the Australia-US Free Trade Agreement that was developed by Howard. It’s not in the Malaysia-Australia Free Trade Agreement or the Japan-Australia Free Trade Agreement. And while it was in office, the Labor government didn’t agree to it being applied to Australia in the TPP.

But, when the Coalition came in, they had a different policy – a case-by-case policy. But, actually, they’ve agreed to have it in every trade agreement since the TPP.

The TPP-11 version has the basic features of ISDS, in other words, it gives special rights to foreign investors or corporations to sue for compensation if they can argue a certain law or policy will harm the value of their investment. They do so in ad hoc tribunals. They’re not permanent courts.

There was a lot of debate about ISDS from the time the TPP was being negotiated from 2010. There is one clear exclusion for a certain type of regulation and that is a clear clause that says cases may not be brought against tobacco regulation.

Then there are a number of other “safeguards”, which are not exclusions, but they say things like “except in rare circumstances” or “generally speaking” governments will have the right to regulate in areas like health, environment and other public interest areas.

But, those clauses are extremely general, and they have loopholes, like these “rare circumstances”.

The safeguard clauses don’t actually prevent cases from being brought by corporations. But, they might make it easier for a government, in that they can argue whatever the measure they’re being sued about falls under these safeguards.

So, within the TPP, it’s what they call a more modern ISDS, compared with some of the older, bilateral agreements.

Is there a case that best exemplifies what you’re describing?

Well, the old versions – 1990 versions – don’t have any safeguards or exclusions at all. They just say, “foreign investors will have the following rights…” They include things like indirect expropriation and fair and equitable treatment.

Whereas, the TPP now has the one tobacco exclusion, due to the Philip Morris case. What happened with that was Australia passed plain packaging for tobacco, as a public health measure.

It was designed to discourage people – especially young people – from taking up smoking. And it was based on World Health Organisation recommendations, so it was a public health measure. It was passed in 2011 and came into force in 2012.

The tobacco company actually took the legislation to the High Court and claimed compensation under Australian law, arguing that it was an expropriation of their trademarks and they were claiming up to billions of dollars.

They lost comprehensively. They launched the case in 2011 and it was finalised in 2012.

The High Court awarded costs against them, so they had to pay the government’s costs. The court said it was not expropriation under Australian law and it was a public health measure, so they weren’t entitled to compensation.

Philip Morris is a US-based company. It couldn’t sue under the Australia-US Free Trade Agreement, because Howard hadn’t agreed to have it in that agreement.

So, what it did was it looked around and found the Hong Kong-Australia Bilateral Investment Treaty of 1993, which has an ISDS.

Philip Morris then shifted some assets to Hong Kong and said, “We’re now a Hong Kong company. And we are suing you under the provisions of the Hong Kong agreement.”

So, a tribunal was set up under the rules of the ISDS in that agreement. And it took that tribunal nearly five years to decide that Philip Morris was not a Hong Kong company, and there was no jurisdiction for such a claim. It then took a further two years to hear the case about costs.

We had to do a freedom of information request to find this out, and it emerged that the case cost the Australian government $24 million in legal and arbitration fees. And the Australian government was only awarded half of that, $12 million.

The whole case cost years and years of litigation. And it still cost taxpayers $12 million, even though the tribunal found that it was an abusive process for Philip Morris to claim to be a Hong Kong company.

That just gives you an idea between the contrast of national systems, and the way that ISDS works.

The Hong Kong agreement was one of those old agreements: the worst ones. But, if the substantive case had been heard, it’s not clear if Australia would have won, because the agreement didn’t have any exceptions or safeguards.

The TPP has the one exception for tobacco, and safeguards with lots of loopholes. And there are various grounds on which these ISDS cases can be brought.

And what’s an example of those grounds?

This thing about legitimate expectations. There was a recent Bilcon case, which they won against Canada. It was an environmental case, where they were suing Canada, because a provincial government had denied them a licence for a quarry in an environmentally sensitive area.

Bilcon argued successfully that when they first contemplated the investment that they had a legitimate expectation that such a decision wouldn’t be made.

Now, what that’s really saying is governments have only a qualified right to make new regulation about the environment or public health. And these are things that are often as a result of democratic processes.

Obviously, in that particular case, it was the community, as well as the environmental regulator, that had said that they wanted to preserve this area, because it was an environmentally sensitive area.

That’s where democracy and sovereignty come in. ISDS can directly challenge the right of government to have new laws and regulations, which are a response to community concerns. And it can also have a freezing effect on other governments producing such legislation.

For instance, in the Philip Morris case, Australia was the first country in the world to have plain packaging regulation for tobacco. New Zealand had plans to introduce it as well. And they delayed their introduction until the Philip Morris case was decided, because they didn’t want to be sued.

And lastly, Dr Ranald, AFTINET campaigned against the TPP, which the Australian government ratified in October last year. The trade agreement came into force on 30 December. What sort of impact is the TPP-11 likely to have?

There are ten other countries in the TPP. Six have ratified it. And they include Japan, Canada and Mexico. They are all countries that have corporations, with substantial investments in Australia.

So, what having ISDS in that trade agreement does is it exposes Australia to a wider range of possible cases. For instance, there are quite a lot of Japanese investments in mining and energy companies in Australia.

Let’s say a future government introduces a new regulation to do with climate change. That could expose us to an ISDS case. Similarly, Canadian companies have mining investments in Australia.

My argument is that if foreign investors want to protect their investments, they can take out risk insurance, or they can have commercial contracts with the government concerned with the security of those investments.

But, they don’t need to have a general right that’s enshrined in a trade agreement, which gives them these very broad abilities to claim compensation for what’s essentially public interest legislation.