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Abstract
Treaties allowing investors to initiate arbitration claims directly against host states for illegally interfering with cross-border investments are becoming increasingly common in Asia, but Australia announced in 2011 that it will no longer include such protections in future treaties. The backdrop to this decision includes keen interest from Asia in foreign direct investment (FDI) into Australia’s resources sector, meaning that potential investors may not be significantly deterred by a lack of arbitration provisions in future treaties. This article argues, however, that Australia’s policy shift risks undermining the entire investor-state arbitration (ISA) system, with the earliest impact being felt by major pending treaty negotiations by Australia with Japan, China and Korea (respectively); and that the shift may significantly reduce FDI flows or have other adverse effects. The article criticises the cost-benefit analysis of ISA protections in one pivotal study conducted in 2010 by an Australian Government think-tank, arguing that this assessment is insufficiently nuanced. Instead, the article presents a justification for more tailored and moderate changes to ISA provisions in future treaties. Its tentative interest-group analysis suggests, however, that there may be surprisingly few public or private constituencies that would prefer such moderate reforms, and that most may well prefer the more extreme position recently adopted by Australia, despite the damage that will be done to the ISA system as a whole. The article also argues that Australia’s policy shift and think-tank analysis may make Asian countries more cautious about ISA, especially those (like the Philippines and Vietnam) which have traditionally been more cautious about this dispute resolution system.
Acknowledgments
This article draws on research for the project on ‘Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific’, supported by the Commonwealth through the Australia-Japan Foundation which is part of Australia's Department of Foreign Affairs and Trade. For helpful feedback on earlier versions of this article, thanks are due to anonymous reviewers as well as Shiro Armstrong, Kate Barclay, Peter Drysdale, Graeme Smith and other participants in the symposium on ‘International Politics of Resources: China, Japan and Korea’s Demand for Energy, Minerals and Food’ held over 28–29 July 2012 at the University of Technology Sydney.
Notes
3. See http://www.dfat.gov.au/publications/trade/trading-our-way-to-more-jobs-and-prosperity.html (emphasis added).
4. See Productivity Commission, 2010, p. 285. Available at http://www.pc.gov.au/projects/study/trade-agreements.
5. Although it was subsequently justified due to Australia’s confidence in America’s well-developed legal system, Australian negotiators around 2003–04 would not have been unaware that Australia had traditionally been a net capital importer (thus opening itself up to more potential arbitration claims, from future US investors), while the US itself had been reassessing its own stance relating to ISA in light of some recent claims brought by Canada under the North American Free Trade Agreement. See Nottage and Miles, Citation2009.
6. Conceivably, the Gillard Government could have argued that its Trade Policy Statement simply takes the Productivity Commission’s Recommendation to a logical conclusion. That is, because ISA almost always gives foreign investors “greater procedural rights” than local investors (limited to local court proceedings against governmental interference with investment rights), the Commission was suggesting that Australia should eschew ISA completely. The Government has not, however, justified its stance in this way. Rather, it has acknowledged going beyond the Commission’s Recommendation, emphasising Australia’s preference for “non-discrimination” (cf Nottage, Citation2013). In any case, the Commission did not seem to intend to advocate abandoning ISA altogether; otherwise, it would have recommended precisely that.
7. Most such claims have also been brought (always against central governments) by well-resourced foreign investors, according to case filings at http://icsid.worldbank.org/ICSID/. See, for example, Chevron v Bangladesh (ICSID Case ARB/06/10), Alstom Power v Mongolia (ARB/04/10), Impregilo v Pakistan (ARB/03/3), Fraport v The Philippines (ARB/03/25), SGS v Pakistan (ARB/01/13) and Mobil Oil v New Zealand (ARB/87/2).
8. The ostensible reason is that such termination could prejudice the rights of existing investors. Yet Australia’s treaties routinely provide that protections endure for 10–20 years after (unilateral) termination anyway; and states can also agree to terminate or revise treaties on agreed terms. See Nottage, Citation2013.
9. Compare, for example, the extra variables used in Crotti et al., 2010: this study then found significant effects on inbound FDI into Australia particularly from FTAs with investment chapters (albeit without differentiating between the levels of ISA protections contained in them).
10. See Robertson, Citation2012. On India’s active investment treaty program nowadays, especially as it emerges as a major source of outbound FDI, see generally Ranjan, 2011.
11. Carnegie Minerals (Gambia) Limited v Republic of The Gambia (ICSID Case No. ARB/09/19) at http://icsid.worldbank.org/ICSID/.
12. See Submission No. DR62 (from Mark Kantor), reiterated in Submission No. DR63 (from myself), available at http://www.pc.gov.au/projects/study/trade-agreements/submissions; and http://www.eastasiaforum.org/2010/09/08/australian-versus-Japanese-approaches-towards-investor-state-arbitration/. Unfortunately, following its usual practice, the Draft Report (July 2010) is no longer available on the Commission’s website.
13. For a summary of these and more extensive alternative reform options, including major disadvantages associated with each, see Appendix A in Nottage, Citation2011 (available at http://ssrn.com/abstract=1860505).
14. Political risks insurance, both formal and informal (mobilising the home state), may be particularly problematic for small- and medium-sized investors, with less financial and political bargaining power. Conversely, such firms appear to be significant users of ISA: OECD, 2012, pp. 16–17.
15. This is likely to have been one factor behind the lack of Australian business sector input into the Commission’s Inquiry over 2010. Peak business interest groups have become much more interested in ISA protections since the Philip Morris Asia claim against Australia was widely reported from mid-2011 (as outlined in Nottage, Citation2013). For an example of a large Australian firm that seemed capable of indirectly exercising diplomatic leverage to extract itself from a resources investment in Africa, see Askew and Ayala, 2006.
16. The picture is further complicated in countries such as Australia, as large law firms have generated an increasing proportion of fee income from litigation and other legal services provided to the Government since deregulation in 1999; see Nottage and Green, 2011. If foreign investors sought to retain such firms when claiming against the Australian Government, they might be reluctant to take on such cases as they might have a conflict of interest or it might jeopardise other potential work for the Government.
17. See, for example, the ‘Public Statement on the International Investment Regime’ (31 August 2010), available at http://www.osgoode.yorku.ca/public_statement/.
18. Consider the invitation-only workshop on ISA policy convened by the Commission on 29 September 2010, in response to various Submissions including some (like mine) critical of its Draft Report. It involved a few other academics (economists including Dr Emma Aisbett, one of the abovementioned ‘Public Statement’ signatories), some officials, and representatives from AFTINET (the Australian Fair Trade and Investment Network) and the Australian Council of Trade Unions. The business sector was not represented. See the participant list in Productivity Commission, 2010, p. 336.
20. See, for example, The ACICA News, September 2011, especially pp. 10–19, available at http://acica.org.au/assets/media/news/TheACICANewsSeptember2011.pdf