The Investment Chapter and
Investor-State Dispute
Settlement in the TPPA
Fauwaz Abdul Aziz, Third World Network
26 June 2013
The TPPA is an agreement that its
proponents such as the US hope
- To be the most comprehensive and
ambitious regional FTA to eliminate trade
barriers and increase opportunities for
trade, investment;
- a broader platform for trade liberalisation;
- to establish new rules on emerging trade
issues.
New demands, higher standards
- intellectual property
- labour standards
- competition policy
- investment rules
- environment
- state-owned enterprises
ASEAN’s RCEP
1. Built on ASEAN’s experience, integrating
all ASEAN+1 FTAs
2. More accommodative of the development
differences of ASEAN
3. Flexibility and adjusting mechanisms
4. More attention to physical, institutional
and people-to-people connectivity
5. Narrowing development gaps
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1. Market Access for
Goods
2. Textiles and apparel
3. Customs
4. Trade facilitation
5. Sanitary and
Phytosanitary
(quarantine)
6. Technical Barriers to
Trade (labelling and
standards)
7. Trade Remedies
8. Subsidies
9. Government
Procurement
10. Investment
11. Cross Border Services
12. Financial Services
13. Telecommunications
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14. E-commerce
15. Temporary movement
of natural persons
16. Intellectual Property
17. Labour
18. Environment
19. Development
20. Trade Capacity
Building
21. Competition
22. State owned
enterprises
23. Supply chains
24. Transparency
25. Regulatory Coherence
26. Initial Provisions
27. Dispute Settlement
28. Exceptions
29. Final Provisions
Benefits?
• 1. Greater prominence of
‘behind the border’/trade
facilitation measures
• Introduce domestic reforms
• To address the “noodle
bowl” effect of overlapping
and inconsistent smaller
FTAs
• Support and stimulation of
the emerging international
production network
Benefits?
“The TPPA has the potential both to harmonize
and to fragment. It reflects both a convergence
of economies seeking to form a broader alliance,
and a divergence from the multilateral trading
system. The TPP has the potential to create a
new paradigm for trade agreements, to form the
basis for a Free Trade Area of the Asia-Pacific
(FTAAP), and to provide an alternative power
center within Asia-Pacific Economic Cooperation
(APEC) in ways that are distinct from the models
that have been jockeying for favor the past
several years. Nevertheless, if the TPP is not
negotiated properly, these results are unlikely to
materialize.”
- Meredith Kolsky Lewis
FTA = FDI?
- UNDP: There is no convincing evidence that an
FTA with developed countries increases FDI
- Brazil does not have a long list of FTA partners
from among developed countries, but still
receives large amounts of FDI due to its large
population.
- World Bank
- UN Conference on Trade and Development:
FDI connected to country’s
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market size
per capita income
market growth
natural resources
low cost unskilled labour
skilled labour
physical
infrastructure
telecommunications, etc)
- low input costs
(ports,
roads,
power,
TPPA: A ‘trade’ agreement that would
1. Protect, promote foreign investors and investments in
Malaysian health and land use policies, government
procurement decisions, regulatory permits, intellectual
property, regulation of financial instruments (e.g.
derivatives), contracts to operate utilities, environment,
democratic policy-making, etc;
2. Limit how Malaysia can regulate foreign investors;
3. Require government to provide foreign investors greater
rights than domestic firms
• The Investment Chapter, if on the
basis of the NAFTA’s Chapter 11 and
other problematic provisions,
should be kept out of TPPA.
Some common
elements of investment
agreements
• (Article 12.11): a right to challenge capital controls
and other macro-prudential financial regulations
that promote financial stability13.
• Definition of “investment” that goes far beyond
“real property” as defined under domestic law
would expose wide swaths of common domestic
policy to attack.
• Overreaching definition of “investor” and lack of
robust “denial of benefits” provisions allow firms
from non-tppa countries to exploit the privileges for
foreign investors and enforcement regime
Some common
elements of investment
agreements
• “Denial of benefits” terms are not particularly
robust, since even having a staff person or two and
a minor paper trail in the claimed home country can
pass the “substantial business activities” threshold.
• Procedural rights not available to domestic
investors to sue governments outside of national
court systems, unconstrained by the rights and
obligations of countries’ constitutions, laws and
domestic court procedures
Investor-State Dispute Settlement
• Promotes globally a two-track legal system: foreign
firms can skirt domestic courts and laws, directly sue
governments in external tribunals
• Demand compensation for domestic financial, health,
environmental, land use laws and other laws they claim
undermine their new privileges
• International arbitration tribunals empowered to order
payment of unlimited government Treasury funds to
foreign investors
International arbitration tribunals:
Section B: Would not meet standards of
• Transparency
• Consistency
• Due process common to domestic legal systems
• fair, independent or balanced venues for
resolving disputes
• Private sector lawyers rotate as “judges” and
advocates for the investors suing the
governments
• No general exception to safeguard
environmental, health, labor and consumer
protection policies
• The foreign tribunals would be staffed by
private sector lawyers who rotate between
acting as “judges” and representing
corporations suing governments, posing major
conflicts of interest
• Foreign tribunals empowered to order
governments to pay unlimited cash
compensation out of national treasuries.
• Article 12.6 on minimum standard of treatment:
Investors can demand compensation if new
policies that apply to domestic and foreign firms
alike undermine foreign investors’
“expectations” of how they should be treated,
claim damages for government actions (such as
new environmental laws) that reduce investors’
expected future profits (Article 12.12 on indirect
expropriation) or go against the expected level
of regulatory scrutiny that an investor might
have had when dealing with a previous
government.
• Right to claim compensation for indirect
expropriation allows foreign investors to
demand government payments for regulatory
costs all firms operating in a country must
meet.
• Indirect expropriation provision in investment
agreements has been interpreted to require
compensation based on the impact of the
government measure on the value of an
investment, regardless of whether there has
actually been some appropriation of an asset by
a government.
• The provision (article 12.6) used in most
successful investor compensation demands
would be extended. The most successful (and
controversial) basis for investors’ challenges of
government policies in past agreements is
alleged violations of the guaranteed minimum
standard of treatment for investors or the
closely linked “fair and equitable treatment”
(FET).
• Domestic policies that apply equally to domestic
and foreign firms can violate investors’ TPPA
rights.
First investment treaties signed in
1959, second in 1965
• Different context: fears of nationalization,
expropriation - international investment rules
sought to provide foreign investors protection,
compensation if land/plant
• Domestic court system did not provide for
compensation.
• By 1999, only 69 cases (less than 2 cases a year)
filed at the International Centre for the Settlement
of Investment Disputes
• Now, ICSID’s cumulative case load is over 385 –
460% increase since 1999; over US$719 million
paid out under U.S. FTAs and BITs; 70 % are
from challenges to natural resource,
environmental policies
UN Conference on Trade and
Development (UNCTAD) 2012
• 62 new ISDS cases initiated
• 68% involved developing, transition countries
as respondents;
• 63% brought on by developed country
investors;
• 70% rulings against the State;
• US$1.77 billion awarded to Occidental vs
Ecuador
ISDS arbitrations initiated most
frequently by claimants from
• The US (123 cases, or 24% of all known disputes)
• The Netherlands (50 cases)
• The UK (30)
• Germany (27)
INFAMOUS ISDS CASES
• Vattenfall vs Germany
• Ethyl v Canada
• SD Myers v Canada
• Renco v Peru
• Metalclad v Mexico
Recent government review /revision
• South Africa has decided not to sign any new BITS;
will attempt to exit from or re-negotiate existing
ones, and will formulate a new model BIT;
• Australia no longer agreeing to USDS provisions;
• India is reviewing its BITS;
• Latin American countries (including Ecuador,
Venezuela, Bolivia) quitting ICSID, formed a
coalition to tackle ISDS challenges
With so many problems arising and
so many cases being taken against
countries, the review and reform of
investment treaties should be
accelerated at both national and
international levels.
Thank you.