Investment Developments in the Trans-Pacific Partnership Agreement

Advocates for the Trans-Pacific Partnership Agreement (TPPA) describe it as a “new generation agreement for the 21st century” that will go further behind the border than any previous free trade agreement (FTA). This signals significant changes in the investment regime found in the current generation of FTAs and bilateral investment treaties (BITs).

Precisely what those changes will be is a matter for speculation. The draft text and background papers remain secret, reversing the trend to disclose documents and working texts during negotiations on the World Trade Organization (WTO) Doha round, Anti-Counterfeiting Trade Agreement and Free Trade Area of the Americas. Indeed, the nine participating countries have agreed that no background documents will be released until four years after the agreement comes into force or the negotiations collapse.

In what is more an investment than a trade agreement, the investment chapter itself seems reasonably predictable. So as to provide the reference point for a paper on investment presented to the “stakeholder” forum at the February 2011 negotiating round in Santiago, Chile, a composite square bracketed text was prepared using the investment chapters in the existing FTAs between countries involved in the TPPA negotiations.

Since then some novelties in the proposed agreement have become clearer, thanks largely to leaked texts. It seems that the “21st century” nature of the TPPA rests in the complex interplay of rules and obligations on investment, financial services, transfers, transparency, regulatory coherence, competition, state-owned enterprises, government procurement, intellectual property, most-favoured-nation treatment, sectoral disciplines, supply chains, and more.

These negotiations date back to the four-country Trans-Pacific Strategic Economic Partnership Agreement among Chile, Singapore, Brunei and New Zealand in 2006, known colloquially as the “P4”. Financial services and investment were held over for several years. President George W. Bush brought the United States into those talks in 2008, as the global financial crisis was unfolding. Three rounds of negotiations produced draft texts based on the US FTA template.

The Trans-Pacific Partnership negotiations were born when the United States, and later Australia, Peru, Vietnam and Malaysia announced they would “accede” to the P4. After some delay, the Obama administration confirmed US participation. In reality, the TPPA is the US + 8. That is not simply because the US is economically dominant in an agreement that has limited commercial value as a traditional FTA, given the extensive web of existing agreements among the parties, or because the US Congress has an effective veto over trade deals. The underlying game plan, confirmed at the November 2011 APEC meeting in Honolulu, is for the TPPA to serve as the economic limb of the US geopolitical strategy for “America’s Pacific Century,” alongside a stronger military presence, as a counterforce to China in the Asia Pacific.

Nine full rounds of negotiations have been held since March 2010. The original deadline for completing negotiations was November 2011 at the APEC leaders’ meeting in Honolulu. Although the joint communiqué released by the parties at APEC set no new deadline, the unofficial target is a consensus legal text when the APEC Trade Ministers meet in Russia in mid-2012 and completion of schedules by the end of that year. Japan, Canada and Mexico, who indicated their wish to join the negotiations, are on a parallel track while they convince all parties they will meet the “gold standard” set for the deal.

What are the likely implications for investment law? The draft investment chapter is largely completed. It generally follows the 2004 US model BIT, with a few significant square brackets.

A number of issues have arisen. There are apparently no special flexibilities for developing countries. The insistence that commitments on market access, national treatment and MFN for investors and investments are made using negative lists is already proving a problem for Malaysia and Vietnam. This is in contrast to the WTO approach for trade in services, for example, which only liberalizes sectors that are listed positively in a schedule of commitments. Further, those exclusions provide no protection against expropriation or minimum standard of treatment claims or from transparency, domestic regulation or competition disciplines. The US-driven State-owned Enterprises (SOE) text is designed to open new opportunities and protections for foreign firms, especially in developing countries. The development implications would be hugely significant if more low-income APEC members were to join and far exceed the investment obligations those countries rejected at the WTO.

Investor-state dispute settlement (ISDS) is also controversial. Australia excluded ISDS from the 2004 Australia US FTA. Its resolve has strengthened following recent moves by American tobacco giant Philip Morris International (PMI) to challenge Australia’s plain packaging tobacco laws using an Australia-Hong Kong BIT. Australia now has officially stated that it will no longer agree to any investor-state dispute settlement provisions in its FTAs. An agreement that excludes Australia or the “developed” country parties would be hard to sell to the others. Peru’s newly elected left-leaning government is under pressure to demand a similar carve out after the Renco Group lodged a case under the Peru-US FTA relating to its failure to remediate a highly-polluting metal smelter in La Oroya, Peru. Differential treatment in ISDS could also open the door to demands for exceptionalism in other parts of the TPPA, undermining the “gold standard” ambitions. Requiring exhaustion of domestic remedies, not found in current US FTAs, could ease some concerns, but would not solve the problem given the potential for BIT-shopping. A country could also face parallel cases involving investment arbitration under a non-TPPA BIT and domestic litigation under the TPPA. Australia, for example, currently faces that situation with PMI suing under the Australia-Hong Kong BIT and British American Tobacco in its domestic courts.

The controversy over dispute settlement spills over to moves to contain the expropriation and minimum standard of treatment/fair and equitable treatment provisions. There are significant differences in the interpretive annexes on expropriation in the various parties’ FTAs. The US version requires indirect expropriation claims to be considered on a case-by-case, fact-based inquiry. The first factor is the economic impact of the state’s action on the investor, although adverse impact is not determinative in itself. Other factors are the extent to which the action interferes with distinct, investment-backed expectations and the character of the government action. The ASEAN Comprehensive Investment Agreement and the Australia-New Zealand-ASEAN FTA, to which six of the nine negotiating countries are parties, is tighter. An inquiry’s case-by-case assessment must consider whether the action breaches the government’s prior binding written commitment to the investor, as well as considering the government’s objective and applying a proportionality test in relation to the public purpose.

Both versions have language that carves out non-discriminatory regulatory actions that are directed to “legitimate public welfare objectives” from the scope of indirect expropriation. The indicative non-exhaustive list refers to public health, public safety and environment, not financial or economic instability. However, US FTAs and several others that TPPA parties have signed qualify this carve-out presumption by the vague words “Except in rare circumstances.”

Parties’ FTAs also vary significantly with respect to the minimum standard of treatment/fair and equitable treatment and the relation of the standard to customary international law. The United States, for example, ties the minimum standard of treatment provision to the customary international law standard in order to constrain broad interpretations (although the international law standard still leaves scope for expansive arbitral interpretations). It is known that some countries have pushed for broader exceptions in the TPPA, but without leaks it is impossible to know if the US has been prepared to adjust its model terms.

A further tension involves the standard obligation in US FTAs to ensure unrestricted transfers and payments, even in balance of payments emergencies. The revival of capital controls, including among a number of APEC countries and countenanced by the International Monetary Fund, shows the danger of locking in a declining orthodoxy. Irrespective of whether the controversial prudential exception is revised, it does not normally apply to transfers. The general obligation and lack of balance of payments exception have been raised in the negotiations, but the result is unknown.

Repeated leaks do show that foreign investors in technology-related industries and services, as well as intellectual property rights holders, would gain directly enforceable rights if US proposals for much stronger patents and copyright provisions succeed. There is strong push back from a number of countries.

The agreement is expected to allow investors to use the most advantageous term in either the TPPA or a bilateral agreement between the parties. The outcomes on the above issues will therefore matter most to countries that do not yet have far-reaching obligations with their negotiating partners. For example, the relevance of the TPPA investment chapter will be particularly far-reaching for New Zealand and Malaysia, which do not have an investment treaty or an FTA with the US, and Australia which has excluded investor-state dispute settlement in its FTA with the US.

What new investor rights and protections might emerge in other parts of the TPPA? The leaked texts on transparency and regulatory coherence suggest there will be complementary avenues for foreign commercial interests to demand privileged input into behind the border regulatory decisions.

The leaked and highly disputed transparency text on healthcare technologies proposes mechanisms for producers of pharmaceuticals and medical devices to influence the domestic policy-making processes. A broader transparency chapter is expected to require disclosure of criteria and data, opportunities for prior comment by affected interests and regulators’ responses to those comments, explanations for final decisions, and access to review or appeal procedures. This is likely to empower only interested commercial actors, with no equivalent access rights to public interest groups that might hold contrary views.

The regulatory coherence chapter draws heavily on work in APEC and the OECD. All parties will be required to adopt a central process, preferably a body, to coordinate the development of “covered regulatory measures,” as yet undefined. One “overarching characteristic” is to advance disciplines in the transparency chapter; another is to promote “systemic regulatory reform”. In pursuit of good regulatory practices states are expected to conduct Regulatory Impact Assessments whose content includes assessments of net benefits and distributional impacts and consideration of less burdensome alternatives, providing ammunition for challenges based on “necessity” and “proportionality” tests in other chapters. These processes are to interact with substantive disciplines, such as sectoral chapters on telecommunications, financial services or express delivery, or procedural rules governing technical barriers to trade, SOEs or competition.

The Regulatory Coherence chapter relates to the internal regulatory decisions and choices of the state, not convergence across the parties, although statements from the United States have tended to blend the two. At the TPPA level, the parties agree to promote successful collaboration between themselves and their respective “stakeholders.” That will be overseen by a Committee on Regulatory Coherence which must establish mechanisms to ensure meaningful opportunities for “interested persons” to provide views on approaches to enhance regulatory coherence through the agreement. In reality, it is likely that only those entities with the financial and organisational resources, knowledge, connections and permission to participate will have a seat at that table, providing a vehicle for major corporations and lobby groups to press their case for future deregulation.

If agreed to, this combination of guaranteed opportunities to provide input and receive detailed information within a legal framework of strongly pro-market regulatory disciplines would provide structured opportunities for large corporations to influence regulatory decisions at the national level and mechanisms to advance deregulation at the TPPA level. By taking rules on “transparency” and “regulatory coherence” to new levels of international commitment the TPPA would likely strengthen the hand of investors in challenging states’ domestic regulation, especially on grounds of indirect expropriation or breaches of minimum standards of treatment and fair and equitable treatment.

Author: Jane Kelsey is Associate Dean (Research) at the University of Auckland’s School of Law, New Zealand.

Further information:

Jane Kelsey (ed) No Ordinary Deal. Unmasking the Trans-Pacific Partnership Free Trade Agreement, Bridget Williams Books, Wellington NZ, Allen & Unwin, Sydney Australia, 2010

For various documents and analyses referred to above see:;; and