Has Australia’s priority push to secure the ‘trade trifecta’ – trade agreements with South Korea, Japan and China – come at a cost? This analysis looks at Australia’s compromise on investor-state dispute settlement (ISDS) provisions.

Australia’s trading relationships are more important than ever before, and the current Government has made no secret of its priority to secure free trade agreements (FTAs). Tony Abbott came to power in 2013 with the promise of delivering a ‘trade trifecta’ – trade agreements with South Korea, Japan and China – in the first year of governance. This was an ambitious target and the push to meet the politicised deadline seems to have resulted in a series of rushed FTAs which compromise on issues of vital importance to Australia.

The most significant of the trifecta, Australia’s FTA with China, has been labelled a ‘half-baked effort’ and a ‘compromised victory’ for a range of reasons. Some provisions in the FTA will take a number of years to completely come into force. Tariff reductions do not cover some Australian exports, including sugar, rice and some grains. Australian labour market protections are weakened by the deal, which allows Chinese investors to by-pass the local labour market testing process in some situations. And – also causing a stir – the FTA includes an investor-state dispute settlement, or ISDS, mechanism.

The purpose of ISDS is to protect investors by giving them the right to access an international tribunal if they believe actions taken by a host government are in breach of the agreement. This protection, in turn, boosts confidence and increases foreign investment. So, ISDS is a good thing, right? Not necessarily.

There is an inherent danger in ISDS, in that it allows a foreign investor to sue a country’s government in circumstances where the government’s actions impact on future profits. This right can see an investor challenge a government’s health, environmental and other regulations and policies in international tribunals. The right awarded to an investor, then, is sometimes in stark contrast to the sovereign right of a government to act in the best interest of its citizens.

The claims in ISDS cases are substantial, with many now exceeding $US1 billion, and arbitration is costly to the taxpayer. The impact of ISDS cases may also be leading to a phenomenon called ‘regulatory chill’, where policy makers are discouraged from enacting legislation for fear of possible challenges. ISDS is a contentious issue, with a debate centred around the clash between the protection of investors and the right of a sovereign country to act in the public interest.

Many of us have heard about the Philip Morris case – a case brought against Australia by tobacco company Philip Morris on the grounds that Australia’s tobacco plain packaging laws are discriminatory and will harm the future profits of the company. Philip Morris was able to pursue the case through an ISDS provision in a Hong Kong-Australia investment agreement. Australia is not alone; ISDS claims have been popping up all around the world. Most notable are cases associated with the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico. There have been dozens of cases brought under NAFTA, and Canada has been particularly hard hit. Sued nearly 20 times, Canada has already paid American corporations at least $US158 million in compensation.

A report on trade agreements released by the Australian Productivity Commission in 2010 warned against the inclusion of ISDS provisions in trade agreements. In response, the previous government introduced a trade policy in 2011 which rejected the inclusion of ISDS provisions for all future agreements. Under that government, the conclusion of Australia’s FTA with Korea was stifled because Australia did not accede to Korea’s insistence for ISDS. Despite growing concerns in Australia and internationally, the Abbott Government has decided to consider the inclusion of ISDS in trade agreements on a case-by-case basis. Last year, Greens Senator Peter Whish-Wilson expressed his concern by introducing an anti-ISDS Bill to the Senate which was significant for the magnitude of support received from the Australian public.

After a period of holding steadfast in opposition to ISDS with Korea, Australia conceded soon after the Abbott Government gained power. Australia’s ISDS compromises with Japan are a little more subtle, because the Japan agreement does not include an ISDS clause. However, this omission needs to be viewed the context of two important factors. First, Article 14.19 of the agreement provides for the review of the position on ISDS with “a view to establishing an equivalent mechanism” if Australia later agrees to an ISDS mechanism in another trade agreement. Second, unlike Korea and China, Japan is involved in the multilateral Trans-Pacific Partnership (TPP) agreement negotiations with Australia. The TPP agreement will include an ISDS clause and both countries would be subject to an ISDS regime regardless of the absence of one in the bilateral agreement. Australia already has an ISDS mechanism in place with China, but the ISDS provisions in the new trade agreement are particularly weak and its inclusion also has wider implications. Agreeing to ISDS with China will compel a review of ISDS provisions with Japan in accordance with 14.19 of that agreement. It would seem, then, that the Abbott Government’s case-by-case approach to considering ISDS is turning out to be a fairly consistent inclusion of it.

Asia is turning in to a ‘noodle bowl’ of bilateral and multilateral trade deals and Australia needs to keep up if it wants to compete in regional trading markets. Australian exporters took a hit from New Zealand’s competitive advantage with China as a result of their 2008 FTA. The Abbott Government was right to prioritise the trade trifecta because, as it has pointed out, China, Korea and Japan account for more than 55 per cent of Australia’s total goods and services exports. But, it is also paramount that the deals secured are high-quality and comprehensive. Anything less comes at a potentially significant cost to Australia. In the case of ISDS compromises, this cost could place a significant financial burden on Australian taxpayers and hinder the government’s ability to enact policy or legislation that is in the interest of its people.

Bowany Pugh is a Junior Policy Associate at the China Studies Centre. She has a Master in International Law and Bachelor’s degree in Chinese and Asian Studies from the University of Sydney. This article can be republished with attribution under a Creative Commons Licence.