Inquiry rejects ban on ISDS clauses in free trade agreements

A parliamentary inquiry has recommended against legislation that would restrict the inclusion of investor-state dispute settlement clauses in free trade agreements.

A Senate inquiry has recommended against passing a bill that would bar Australia from entering into trade agreements that include so-called 'investor-state dispute settlement' clauses.

Investor-state dispute settlement (ISDS) clauses are a class of provisions sometimes included in free-trade agreements that, broadly speaking, allow companies to take legal action against decisions by a government that is party to the agreement, if they feel those decisions are detrimental to their investments.

The inclusion of such clauses in agreements has potential ramifications for Australia's intellectual property regime as well as future government action to address the high cost of software and other digital goods, according to witnesses who appeared before the inquiry into the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014.

Another problem cited by the detractors of ISDS clauses is so-called 'regulatory chill': The impact on law-making of potential legal action by corporations.

The most prominent recent use of an ISDS clause in Australia has been the attempt to roll back legislation that enforced plain packaging for tobacco products. Tobacco company Philip Morris Asia took legal action against the Australian government under provisions of the free trade agreement Australia signed with Hong Kong in 1993.

The Foreign Affairs, Defence and Trade Legislation Committee this week released its report into the bill, which was drafted by Greens Senator Peter Whish-Wilson.

The bill states: "The Commonwealth must not, on or after the commencement of this Act, enter into an agreement (however described) with one or more foreign countries that includes an investor-state dispute settlement provision."

The committee's report recommends that the bill not be passed in favour of the current approach of assessing ISDS provisions on a case-by-case basis.

The report states that the committee is "not convinced that legislation is the best mechanism by which to address the concerns raised about risks associated with ISDS provisions".

"The committee is of the view that many of the alleged risks to Australian sovereignty and law making arising from the ISDS system are overstated and are not supported by the history of Australia's involvement in negotiating trade agreements," the report states.

"While the committee acknowledges that past experience may not be an accurate guide to the future in terms of potential ISDS claims against Australia, it stresses that the investment treaty arbitration field is evolving in positive ways to enable countries, including Australia, to put exclusions in place, limit the application of ISDS to the investment sections of agreements, and generally tighten up the wording of agreements."

Comments appened to the report by Labor senators who serve on the committee acknowledged community concern over ISDS provisions, but both they and the Coalition senators backed the report's conclusion that Whish-Wilson's bill should not be passed.

A dissenting report by Greens senators Whish-Wilson and Scott Ludlam argued that "the existing signing and ratification process does not enable Parliament to provide appropriate oversight of trade and investment agreements, including ISDS clauses."

"Although legislation banning ISDS clauses has been determined by the majority of the committee to not be the best way to deal with the risks associated with ISDS it is clear that this Government doesn't have any mechanism to deal with the risks," the dissenting report states.

"The Government has also not given any indication that it intends to develop a mechanism."

Dr Matthew Rimmer, an Australian Research Council Future Fellow and associate professor at the ANU College of Law, described ISDS as "Trojan Horse trade clauses".

Rimmer, who appeared as a witness before the Senate inquiry, said that the clauses could affect "the price of our medicines; IT pricing; the labelling of food, alcohol, and tobacco; our media content and diversity; and the protection of our food, water, environment, and climate."

"It is magical thinking to suppose that the investor action against Philip Morris against Australia's plain packaging will be a one-off," Rimmer said.

Rimmer cited figures from the United Nations Conference on Trade and Development (UNCTAD) which "show a sharp rise in the number of investor actions; a diversification of the types of disputes; and the level of awards".

The Commonwealth and state and territory governments "face increased risks of government liability" as well as the risk of regulatory chill.

"The Coalition members failed to provide any empirical or theoretical evidence for the inclusion of investor clauses," Rimmer said and "underestimated the risks associated with investor-state dispute settlement".

Rimmer said the failure to address the possibility of IP owners bringing actions was particularly concerning. He also criticised the ALP for acknowledging concerns over the provisions but rejecting the bill, particularly in the context of the plain packaging legislation introduced by the former Labor government.

Whish-Wilson condemned the committee's report. "Australia is already being sued under ISDS over the tobacco-plain packaging case and with our government gung-ho on including them in current and future trade deals like the Korea-Australia Free Trade Agreement [KAFTA] and the Trans Pacific Partnership agreement, litigation is only likely to increase," the Greens senator said in a statement.

"Including ISDS provisions in our trade deals leaves us vulnerable to being sued by foreign corporations for simply legislating to protect the environment or internet use, if those laws affect corporate profits.

"There is no evidence that ISDS clauses have any economic benefits for trade or investment, however the risks of using them are clear and supported by evidence and numerous case studies."

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