How the Investment Chapter of the Trans-Pacific Partnership Falls Short

By Nathalie Bernasconi-Osterwalder on November 6, 2015

After years of negotiations behind closed doors, the text of the Trans-Pacific Partnership (TPP), concluded on October 4, 2015, by the Ministers from 12 countries—Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam—has been released.

The TPP has been characterized as “state-of-the-art” by its most ardent supporters. But as we’ll argue here, the TPP’s chapter on investment is hardly progressive.

The investment chapter closely resembles the template that the United States developed in 2012 as its negotiating text. For the most part, that text mirrors the 2004 U.S. model, which in turn is based on the text of the investment chapter of the 1992 North American Free Trade Agreement (NAFTA). In each case, the chapter has two main objectives: first, to protect foreign investors from political and other risks when they invest abroad; and, second, to accelerate investment liberalization and market access, through pre-establishment provisions (i.e. granting foreign investors the right to establish an investment on  national treatment basis unless explicitly excluded). The TPP investment chapter, in line with the U.S. approach since the nineties, does nothing to promote sustainable investment, to combat corruption, or subject investors to responsible behaviour. It contains only an extremely weak and non-binding provision on Corporate Social Responsibility. Moreover, it includes an unaltered investor-state arbitration system, which U.S. investors have used extensively over the past years against developing (and developed) countries, and which suffers an ongoing legitimacy crisis.

The TPP investment chapter stands in contrast with developments in the EU, where the parliament has ordered the European Commission to do away with investment arbitration, leading the Commission’s head of trade, Cecilia Malmström, to call for the creation of an investment court. It also stands in contrast with the developments over the past 3-5 years in emerging and developing economies. States in Southern Africa, India and Indonesia, have adopted models that more effectively protect policy space, and seek to promote environmentally and socially conscious investment. These countries have also brought more balance into the rules, introducing obligations not only for host states but also for companies. Brazil has also introduced a new approach, proposing a model that aims primarily at investment facilitation and cooperation, moving away from the traditional adversarial model of investment protection and litigation.

The TPP parties—clearly led by the US—have largely ignored these developments aimed at re-balancing and reforming. As a result, the agreement will create unnecessary risks to states, providing extraordinary legal tools to foreign investors to challenge the policies of host states; tools that local investors do not have.

To their credit, the TPP states have tried to reign in some of the most risky provisions that have caused problems for states wanting to implement environmental and other public interest measures. But this has not been done in a forward-looking fashion. Rather, the TPP investment chapter is an example of governments playing ‘catch-me-if-you-can,’ with new formulations that respond to recent cases where arbitrators have ruled against government measures that were largely perceived as legitimate or unchallengeable as an international violation. This can be seen, for instance, in the slightly more detailed formulation of the minimum standard of treatment clause in the TPP—perhaps as a reaction to the recent Clayton v Canada (Bilcon) decision which struck down a permit denial by the government for the operation of a quarry on environmental grounds. All three NAFTA parties disagreed with the award’s broad interpretation of NAFTA’s minimum standard of treatment clause. This concern is now addressed in the TPP. While the new formulation still leaves questions unanswered and offers little clarification as to what extent investors can sue for damages based on the allegation that they had “legitimate expectations,” the novel drafting is a clear attempt by the parties to address a problem that has recently arisen in investment arbitration.

Similarly, carving out decisions on changes with respect to subsidies seems to be a response to recent arbitration cases that made governments liable for damages when they made changes to their subsidies schemes. Overall, these changes are not insignificant. However, they demonstrate the trend for states to constantly have to correct rogue tribunals, instead of dealing with the root cause of the problem.  

This is also seen in the effort to address the notorious challenges raised or threatened by Philip Morris against measures taken by states to reduce smoking and related health problems and costs. In response, the TPP includes a Tobacco Control Measures clause in its Exception Chapter, allowing states to deny investors the right to initiate arbitrations against them relating to claims challenging tobacco control measures, and even to deny the rights during the arbitral proceedings. The question raised here is why this clause is so narrow, applying only to tobacco measures, when governments deal with a much wider array of health and environmental issues which would deserve being protected from arbitration proceedings just as much.

Aside from these ex-post fixes, the TPP reflects the U.S. model with such domination that it is hard to see how much say any of the other governments ever had. The U.S. approach is taken with respect to investor protection as well as liberalization through National Treatment (NT) and Most-Favored-Nation Treatment (MFN) provisions. Both of these provisions extend to the right to establish an investment, as opposed to the treatment that investors receive after an investment has been made. The MFN provision also appears to allow for substantive guarantees to be imported from other treaties. Accordingly, investors can potentially pick more favourable provisions from the other treaties that the host country has signed. Other treaties have addressed this problem by making the MFN clause apply only to treaties later in time, or to have it not apply with respect to treatment under other investment treaties or chapters at all.

Our quick overall analysis of the investment chapter shows that the U.S. has been successful at imposing its own investment treaty model upon its negotiating partners, with only a few changes made in response to new case developments. It’s unfortunate that TPP governments have accepted many of the U.S. demands that they had previously opposed. Whether these are the rules that the legislative bodies of the 12 TPP members also desire, remains to be seen. Including in the U.S.