Australia's Productivity Commission has prepared a draft report on Bilateral and Regional Trade Agreements. You can read it just for your own pleasure, but note that they are looking for input, so feel free to give them comments (by Friday 10 September 2010.) Here are the draft recommendations.
Given that Australia has been more skeptical than most rich countries about investor-state dispute settlement (the Australia-U.S. FTA does not include it), I was interested to see what the report had to say about investor-state. Here's something from the draft recommendations:
DRAFT RECOMMENDATION 5
The Australian Government should be cognisant of the capacity of legal systems in prospective partner countries to resolve disputes on all relevant aspects emerging from cross border commerce.
• Where the legal systems of partner countries are relatively underdeveloped, it may be appropriate to refer cases to third party dispute settlement mechanisms.
• However, such process should not afford foreign investors in Australia or partner countries with legal protections not available to residents.
• Investor-state dispute settlement procedures should be subject to regular review to take into account changing international best practice and the evolving legal systems in partner countries.
More here:
Other benefits from BRTAs relate to improved investor certainty, particularly for Australian investors in countries where a lack of confidence in institutional arrangements may discourage investment. Typically if such concerns exist, Investor-State Dispute Settlement (ISDS) mechanisms are put in place (chapter 13). However, these arrangements are not unique to BRTAs and have been used extensively in bilateral investment treaties (BITs) — in Australia these are termed Investment Promotion and Protection Agreements (IPPAs). While little empirical work has been conducted on the impact of such arrangements in relation to BRTAs, a number of studies have examined BITs. Examining this literature, Bonnitcha and Aisbett suggest that few benefits have been created:
A basic survey of the BIT – FDI scholarship reveals eight studies that claim statistically significant findings to support the hypothesis that signing BITs increases FDI. This count includes studies that find only some types of BITs increase FDI and a study that makes a finding of a ‘minor and secondary’ relationship between BITs and FDI. A further five studies reject the hypothesis that BITs increase FDI. Not all these studies should be treated equally. Some studies draw on more comprehensive data sets and apply more appropriately specified statistical models to those data sets than others. The problem of controlling for policy shifts made concurrently with ratification of BITs and disentangling reverse-causality effects with data for such a small population is endemic to them all. However, it is clear that those studies whose empirical approach better accounts for endogeneity concerns generally do not find a link between BITs and FDI. Our appraisal of the current literature is that it does not provide any sound evidence that investor protections promote mutual direct investment. (sub. 45, pp. 5-6)
Further, during consultations over the course of this study, some participants suggested that not only were the benefits limited and questionable, but ISDS provisions also created some risk for governments when making domestic policy decisions. Further, it was also suggested to the Commission that, while Australia has included these provisions in BITs, they have not been used by Australian investors. Given the above factors, it is likely that the benefits from such provisions in BRTAs (and more broadly) are small.
And here:
Investor-State Dispute Settlement
Australia is a party to numerous Investment Promotion and Protection Agreements (IPPAs), a form of Bilateral Investment Treaty (BIT) that is concerned solely with investment rules between Australia and a partner country. Most of Australia’s current BRTAs also contain investment chapters, which are similar in form to the more targeted IPPAs. Investment chapters and the IPPAs generally provide a range of investment protections to investors in a partner country to an agreement. Australia’s agreements often require it to provide foreign investors equitable and fair treatment (including national treatment), as well as compensation for expropriation of investments.
The investment chapters of some of Australia’s BRTAs and all of its IPPAs contain processes for settling disputes arising between investors in one country and the partner country to the agreement — known as Investor-state dispute settlement (ISDS) (box 13.5). ISDS provisions are intended to reduce the non-commercial risks to foreign investors of government actions. ISDS was historically included in trade agreements between developed and developing countries, as a way of providing additional protection to those who invested in the developing country, given concerns about the state of developing countries’ legal systems. Without ISDS, investors must rely on the domestic legal system of the partner country in which the dispute arises — that is, with jurisdiction over the dispute — to achieve resolution.
...
The inclusion of ISDS in an agreement can shift the balance between domestic and foreign investment, depending on the trade-off between efficient investment and political ‘insurance’. In reviewing the economic literature on the matter, Aisbett and Bonnitcha of the Australian National University noted:
If foreign investors face greater political risk in the absence of a treaty than domestic investors, then there will be inefficiently low levels of foreign investment in the host. In other words, production will be undertaken by domestic firms which are less efficient than potential foreign entrants. To the extent that treaty protection reduces the excess risk faced by foreign investors, it is likely to improve resource allocation and productivity by encouraging more efficient foreign investors.
If, on the other hand, foreign investors do not face greater political risk than domestic firms in the absence of a treaty, then the pre-treaty level of foreign investment is not inefficiently low [compared with] domestic investment. In so far as treaty protection further reduces the political risk faced by foreign firms, it may do so inefficiently. In this case, productivity may fall as a result of the investment agreement as efficient domestic producers are displaced by less efficient but better politically-insured foreign firms. (Aisbett and Bonnitcha, sub. 45, p. 4)
Australia’s approach to date has been to include ISDS with third-party arbitration in agreements with developing countries, while not including it with developed countries such as the United States and New Zealand, and to offer protection only for post-establishment (that is, new) investments. This stems from the belief that Australia operates a stable and well-functioning legal system, and offering the ability for investors in developed countries to pursue third-party arbitration against the Australian government is not in Australia’s best interests.
There are two main concerns that arise from the inclusion of ISDS in BRTAs; firstly, that without a sufficiently well-defined meaning of ‘investment’, inappropriate claims may arise, and secondly, concerns with the way third-party arbitration operates.
Given that ISDS has the potential for foreign investors to make claims for compensation against all levels of government, for government policy changes across a wide range of areas that are otherwise domestic in nature, the importance of properly defining ‘investment’ can not be understated. Definitions of ‘investment’ that insufficiently constrain the scope of ISDS claims may give rise to future cases that partner countries cannot reasonably foresee at the time an agreement is made. Australia has largely avoided such problems in its agreements, as noted by Aisbett and Bonnitcha:
In general, post-establishment protections in Australia’s FTAs are thoughtfully drafted. Investor-state arbitrations, to which Australia was not a party, have revealed a number of potential issues with similar wording contained in Australia’s IPPAs. The Australian government has dealt with many of these issues through modifications to the mostfavoured nation clause, by tying the fair and equitable treatment to the customary international law minimum standard, by adding an interpretative annex on expropriation and by setting out the procedure for investor-state arbitration in more detail. (sub. 45, p. 9)
For example, US businesses have previously initiated arbitration against the Canadian government under the ISDS provisions in NAFTA for regulatory changes to the treatment of agricultural chemicals that resulted in losses to those businesses. To guard against this, it is important that a BRTA investment chapter’s definition of ‘investment’ is carefully drafted. In the case of the AUSFTA, the definition makes clear that a covered asset must have ‘the characteristics of an investment’ (that is, the commitment of capital or other resources, an expectation of gain or profit, or the assumption of risk). The AUSFTA definition also specifies that among the licences, authorisations, permits and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law, and also that the term ‘investment’ does not include an order or judgment entered in a judicial or administrative action.
The second main issue with ISDS concerns the international rules of third-party arbitration. These rules are currently less certain than domestic legal systems for those countries with developed legal systems capable of processing complex cases. Cases are generally not appellable and arbitration frequently operates without the benefit of precedents (an important component of legal certainty). Additionally, particular government actions that would otherwise be non-reviewable to domestic investors may be subject to ISDS actions by foreign investors. The Law Council of Australia highlighted this concern in its submission, noting that:
Where the dispute resolution mechanism chosen is the International Centre for the Settlement of Investment Disputes (ICSID), as is common practice, some ICSID arbitration panels have decided that the jurisdiction of ICSID is a matter for the institution itself to decide following the provisions of its constituent convention. Other have argued that what is arbitrable is a dispute concerning an investment as defined in the underlying treaty between the relevant States, following the interpretative rules for lex specialis in international law. (sub. 47, p. 8)
While Australia’s pragmatic approach to the inclusion of ISDS within BRTAs has not appeared to be problematic so far, concern has been raised with the Commission in the context of future agreements that contain a mix of developed and developing country partners. For example, the Trans-Pacific Partnership Agreement involves less developed countries, as well as the United States (which prefers the inclusion of ISDS, including for investments that have not yet occurred). The Commission understands that no US business has been unsuccessful in pursing an ISDS claim against a foreign government.
Aisbett and Bonnitcha suggested that:
Given that there are few benefits and potentially significant costs to offering postestablishment protection to foreign investment, we recommend that these provisions be omitted in future Australian FTAs. (sub. 45, p. 8)
The Commission recognises that to facilitate investment between countries, a robust dispute settlement mechanism is warranted. Where the legal system of partner countries are not sufficiently developed to handle disputes, it may be appropriate to refer cases to external dispute settlement mechanisms. However, the Commission’s draft assessment is that such dispute settlement processes should not afford foreign investors in Australia with access to litigation options not normally afforded to local investors.
The Aisbett and Bonnitcha paper they cite is here.
Overall, the view seems to be that investor-state may be a good idea where the other country is a developing country in which Australian companies could utilize investor-state ("ISDS was historically included in trade agreements between developed and developing countries, as a way of providing additional protection to those who invested in the developing country, given concerns about the state of developing countries’ legal systems"), but the costs outweigh the benefits if the other country is another rich country whose companies may end up suing Australia a lot ("offering the ability for investors in developed countries to pursue third-party arbitration against the Australian government is not in Australia’s best interests").
