The recent Australian elections were decided mostly by domestic policy issues, but their outcome had an impact beyond the border as the new government decided to rethink Australia’s somewhat unique view on the international investment regime. Whereas much of the world supports a core set of investment rules, Australia had long been a skeptic, particularly with respect to investor-state arbitration. Soon after the election, the Liberal-National coalition indicated that it would be more amenable to these rules. They put their new policy into practice quickly, and have recently released the completed text of the Australia-Korea free trade agreement (FTA), which includes an investment chapter with investor-state arbitration. This FTA will soon be submitted to parliament for approval.
In changing course, has the Australian government simply joined the rest of the world? Or have they tried to deal with some of the problems and concerns with investment treaties raised by critics over the years? In this piece, I evaluate one aspect of the Australia – Korea FTA: the «general exception» to investment obligations that exists for certain policy purposes, which parallels WTO exception provisions such as GATT Article XX and GATS Article XIV.
General concerns with investor-state arbitration
One of the main problems with investment treaties comes from vague and broad legal obligations such as “indirect expropriation” and “fair and equitable treatment.” Such principles are common in domestic law, but there is no international consensus on what they mean. Elevating them to international legal status opens up limitless opportunities for litigation and thus makes for a great deal of uncertainty (as well as raising fears of intrusion into domestic policy-making).
The problem is intensified when investment obligations allow direct lawsuits by foreign investors against governments. Generally speaking, international law only allows state-state disputes, which helps filter out frivolous complaints and acts as a check on the system. The possibility of investor-state disputes opens up the floodgates on litigation. Thus, it is investor-state provisions, combined with vague obligations, that are the main cause of concern.
Australia’s history of investor-state skepticism
The international investment regime came to the average Australian’s attention several years ago when the tobacco company Phillip Morris used an obscure Hong Kong-Australia investment treaty to challenge Australia’s plain packaging cigarette laws before an international tribunal. This challenge helped cement Australian doubts about these treaties.
As a matter of government policy, this skepticism was already in place. In its 2004 free trade agreement with the United States, Australia had objected to the inclusion of investor-state rules, and these rules were ultimately excluded from the treaty. The absence of investor-state was a major departure from US policy, one that has not since been repeated. Australia’s ability to dictate the terms to the US indicates the strength of Australian convictions on the issue. A few years later, Australia made a policy of excluding investor-state rules from trade agreements permanent, based on findings of an independent agency called the Productivity Commission.
In short, Philipp Morris’ plain packaging case simply brought more attention to the issue and affirmed for many Australians the correctness of this view.
Saving the system with exceptions
Now Australia’s new government has changed course. But in doing so, the government has offered reassurance that domestic policy space will be preserved. In this regard, it can point to Article 22.1 (General Exceptions) of the Australia-Korea FTA, which provides the following exception from investment obligations:
3. For the purposes of Chapter 11 (Investment), subject to the requirement that such measures are not applied in a manner which would constitute arbitrary or unjustifiable discrimination between investments or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures:
(a) necessary to protect human, animal or plant life or health;
(b) necessary to ensure compliance with laws and regulations that are not inconsistent with this Agreement;
(c) imposed for the protection of national treasures of artistic, historic or archaeological value; or
(d) relating to the conservation of living or non-living exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.
The Parties understand that the measures referred to subparagraph (a) include environmental measures to protect human, animal or plant life or health, and that the measures referred to in subparagraph (d) include environmental measures relating to the conservation of living and non-living exhaustible natural resources.
This exception is modelled, to a degree, on WTO exceptions provisions such as GATT Article XX and GATS Article XIV. While the GATT provisions were, in the past, subject to criticism for a perceived lack of flexibility, in recent years the jurisprudence has shifted a bit, and the concerns have lessened. For example, the «strict» WTO panel decision in U.S.-Shrimp was superseded by later Appellate Body decisions that were more forgiving to government regulation.
In the investment context, such exceptions are rare, but not entirely unheard of. Some Canadian agreements have similar exceptions, as do some of Australia’s past agreements. However, the scope of Article 22.1 is unclear for at least a couple of reasons.
First, there is a question as to how such an exception would apply in the investment context. Note the language: «nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures.» It could be argued that investment obligations only require compensation, and do not actually prevent any measures. A government can still take the measure; it simply has to pay. So if a government measure violates the rules, and the government has to pay compensation, would that «prevent» a party from adopting or enforcing measures? Presumably, the answer has to be yes, or else the provision would have no meaning. Indeed, even in the WTO context, measures are not «prevented,» as governments are able to maintain measures that violate WTO obligations if they are willing to accept trade retaliation.
Second, the requirement that «such measures are not applied in a manner which would constitute arbitrary or unjustifiable discrimination between investments or between investors» is different than what is used in the GATT context. There, the discrimination at issue is between «countries where the same conditions prevail.» Thus, it is nationality-based discrimination. It is arguably much more difficult to satisfy a standard relying on investor-based discrimination.
Another question is whether the listed policies are sufficient. Are there additional policy reasons that might eventually be included in such an exception, beyond the four sub-paragraphs listed here? Can those provisions be interpreted broadly enough to cover most policy goals? A classic GATT dispute involved a «luxury tax» in the form of a higher tax rate on expensive automobiles. It is not clear that such a policy would fall within the exceptions in Article 22.1, and thus a broader list of policy exceptions might be useful.
Finally, in the WTO context, the legal obligations are narrow and bounded, for the most part. By contrast, a «fair and equitable treatment» requirement is extremely broad and vague. How would the Article 22.1 exception be applied in that context? When «due process» concerns have led to a violation, can general exceptions of this kind function as an exception? There is no experience with this situation, so the outcome remains to be seen, but there may be some doubt as to whether it will work to soften the impact of such rules.
Looking Forward: Investor-State in the TPP and Beyond
Investor-state has been controversial in the context of the Trans Pacific Partnership (TPP), as it has been elsewhere. After initially resisting the inclusion of investor-state provisions in the TPP, Australia has, with the change in government, recently expressed a willingness to give ground on this issue, if it gets sufficient market access in return. But when it gives ground, will it only do so if there is a general exception? Or would it sign on to investor-state in the TPP based on the U.S. model, which does not including such an exception? If Australia has agreed to investor-state in the Korea FTA on the basis of the exception, doing so without an exception in the TPP would seem to be a step back. And would the U.S. consider including such an exception if that were the only way to get Australia on board? It has never used such a provision before.
The debate on investor-state is far from over. Different countries are pursuing different approaches, while at the same time creating a complex web of investment obligations. A general exception provision is one idea in the mix that could help resolve the concerns of critics and establish an acceptable balance of rights and obligations.
Author: Simon Lester is a trade policy analyst with Cato’s Herbert A. Stiefel Center for Trade Policy Studies. He is also the founder of the web site WorldTradeLaw.net.