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Foreign Affairs, Defence and Trade Legislation Committee - 06/08/2014
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RIMMER, Dr Matthew, Private capacity

TIENHAARA, Dr Kyla, Private capacity

[09:34]

CHAIR: Welcome. Thank you for your submission, which we have as No. 104. If you would like to make an opening statement, we will then go to questions.

Dr Rimmer : A decade ago I appeared before the Australian Parliament considering the Australia-United States Free Trade Agreement. At that particular time, Prime Minister John Howard was adamantly opposed to the inclusion of an investor-state dispute settlement regime in that agreement between Australia and the United States. The Department of Foreign Affairs and Trade boasted at the time that such a clause was unnecessary. They said:

The Agreement preserves Australia's foreign investment policy and maintains our ability to screen all investment of major significance.

The Department of Foreign Affairs and Trade emphasised:

Reflecting the fact that both countries have robust, developed legal systems for resolving disputes between foreign investors and government, the Agreement does not include any provisions for investor-state dispute settlement.

That is a very useful context in which to consider today's bill on whether or not investor-state dispute settlement clauses should be banned in Australia.

A very important initial point to make is the need to think about the question of the relationship between domestic courts and investor tribunals. A really important theme in Australia, Canada, the United States and the European Union has been the way in which corporations have tried to deploy investor clauses to challenge decisions of superior courts. Retired Justice Elizabeth Evatt and leading jurists made an interesting statement couple of years ago on investor-state dispute settlement. She emphasised:

Investment arbitration as currently constituted is not a fair, independent, and balanced method for the resolution of disputes between sovereign nations and private investors.

That is a really critical issue. Think about the battle over plain packaging of tobacco products in Australia, where you had the High Court of Australia very decisively—six to one—ruling in favour of the Commonwealth government against the big tobacco companies and then Philip Morris trying to attack plain packaging through an investment clause.

Very similar issues have been happening in Canada. The Supreme Court of Canada refused special leave for Eli Lilly to appeal against the rejection of some of its patent applications and Eli Lilly have tried to bring an action, under the investor-state dispute settlement clause in the North American Free Trade Agreement against the government of Canada. I think that is a really important theme to think about.

The other important theme to think about is the impact of investor-state dispute settlement upon the role of governments. There has been a lot of concern about the chilling impact of investor-state dispute settlement upon public regulation and government activity, and it has been particularly prominent with the rise and rise of disputes in relation to investor-state dispute settlement.

Senator WHISH-WILSON: Dr Rimmer, sorry to interrupt you: could you clarify the word 'chilling'? Did you mean that figuratively or did you mean that in a technical sense?

Dr Rimmer : There has been a lot of debate, particularly in relation to the impact of the North American Free Trade Agreement, about the way in which the threat of investment actions have been used against government proposals across a wide range of different subjects. In my submission I cite a little piece that explains how the Canadian parliament is deluged with threats in relation to a range of different regulatory measures that have been proposed and discussed—that is, 'If you introduce that measure, we will bring an action against you under an investment'—

Senator WHISH-WILSON: So you are referring to regulatory chilling specifically there in that comment?

Dr Rimmer : Yes.

Senator WHISH-WILSON: Thank you.

Dr Rimmer : So there has been a great deal of concern about that kind of particular issue. The United Nations Conference on Trade and Development, UNCTAD, has highlighted the rise in investor-state dispute settlement cases and some of the significant issues relating to public regulation and government liability. It is well worth having a look at that study. This morning I was also having a look at a study on some of the awards that have been made in relation to investor-state dispute settlement. That is a particularly pertinent issue in thinking about some of the costs associated with entering into agreements with investor-state dispute settlement clauses. It is magical thinking to believe that the action by Philip Morris against Australia is a one-off action. I think big tobacco are very keen on challenging tobacco control measures throughout the world and have indicated that they are very keen to take other actions.

If you look at the statistics from the UNCTAD report, you really see a sharp rise in the number of actions that are being brought against a wide range of different countries, both developed countries and developing countries. The UNCTAD report emphasises that, by the end of 2013, 98 states had been respondents in a total of 568 known treaty based cases. The overall number of concluded cases reached 274. Of these, approximately 43 per cent were decided in favour of the state and 31 per cent in favour of the investor. Approximately 26 per cent of the cases were settled.

The global law firms who are keen on investor actions have shown a great deal of creativity in the sorts of actions that they have brought. The UNCTAD report emphasises that claimants have challenged a broad range of government measures, including changes related to investment incentive schemes, alleged breaches of contract, alleged direct or de facto expropriation, revocation of licences or permits, regulation of energy tariffs, land zoning decisions, invalidation of patents and others. I think it is really important to engage with some of the empirical evidence about the way in which the investment regime has operated.

CHAIR: Thanks, Dr Rimmer. That is probably a good spot to ask you to take a breather and it provides me with the opportunity to welcome Dr Kyla Tienhaara. Would you like to make an opening statement in support of your submission before we go to questions from the panel?

Dr Tienhaara : I will make a few comments. Hopefully I will not repeat too much of what Dr Rimmer has already told you. First I would like to thank the committee for giving me the opportunity to speak today. As noted in my submission, I strongly support the proposed Trade and Foreign Investment (Protecting the Public Interest) Bill, which would ban investor-state dispute settlement, or ISDS.

In recent years the Australian public has become increasingly aware of the shortcomings of ISDS and the risk that it poses to public policy, particularly since the launch of the case against plain packaging by Philip Morris. Australia is lucky to have only been sued once so far. As my colleague just mentioned, according to UNCTAD, by the end of 2013 98 states had been respondents in a total of 568 known treaty based cases. Argentina has faced 53 ISDS cases, Canada 22 and the United States 15. The vast majority of ISDS cases—about 75 per cent—are bought by American and European investors.

ISDS is based on commercial arbitration, which is fundamentally unsuitable for dealing with claims brought against a state acting in a regulatory capacity. Investment arbitration differs in many important aspects from our domestic court system. Arbitrators lack the independence of judges because they are chosen by the parties to the dispute and paid by the hour. Additionally, individuals may act as an arbitrator in one case and as a legal representative for a claimant in another, which creates serious issues of conflict of interest. There is also no system of precedent or any process for appeals, which makes the outcome of ISDS cases difficult to predict, creating uncertainty for regulators.

ISDS is also very expensive. Governments can spend millions of dollars defending themselves in arbitration and may not recoup these costs even if they eventually win a case. ISDS is also expensive for investors, so the system privileges large corporations with deep pockets over small and medium sized enterprises.

ISDS also privileges foreign companies over domestic ones who cannot avail themselves of the system. In other words, ISDS increases the power of big multinational corporations that are already incredibly powerful actors And to what end? There is no substantial body of evidence that suggests there is any benefit to a country like Australia, which has a robust legal system and is already very attractive to investors, to agree to ISDS.

Some may argue that the system of ISDS, while problematic, simply requires a bit of reform—some minor tinkering here and there. However, to truly deal with the procedural issues outlined above would require a significant international effort along the lines of the development of an international investment court. Even if there were any momentum for such an initiative, Australia's involvement would entail an outlay of substantial government resources that I would argue could be better utilised on more important issues. Although banning ISDS would certainly be a bold move, it would not be out of step with the current trend globally, which is of states increasingly distancing themselves from the system.

The European Commission has suspended negotiations on ISDS in a treaty with the United States, pending the conclusion of a public consultation on the matter. The commission has received nearly 150,000 submissions from the public. News reports have suggested that Germany is particularly concerned about ISDS in the US treaty and may also reject a treaty with Canada because it contains ISDS provisions. Germany has been sued twice by the energy company Vattenfall, first for environmental regulations imposed on a coal fired power plant—a case the government settled—and then for the decision to phase out nuclear power following the Fukushima disaster.

South Africa, which had its black-empowerment laws challenged under ISDS has cancelled its bilateral investment treaties with Belgium, the Netherlands, Germany and Spain and is planning to terminate treaties with several other European states. A new domestic legal framework for investment has been established that protects investors in line with the country's constitution but does not provide access to international arbitration. Brazil, a country that has been the recipient of significant inflows of foreign investment, has never ratified a bilateral investment treaty. Although the country is now seeking to negotiate some treaties, it has been reported that negotiations do not include ISDS.

Australia has signed treaties with the US and, more recently, Japan that do not contain ISDS provisions. Discontent with ISDS is not restricted to one end of the political spectrum. The Greens may have proposed the bill that we are discussing today but it was the Howard government that excluded ISDS from the Australia-US free-trade agreement. In the US, the director of trade-policy studies at the right-wing Cato Institute recently published a piece in Forbes magazine arguing that the American government should 'purge ISDS' from its treaties. He refers to ISDS as overkill, arguing that while foreign investment is a risky proposition 'that does not necessitate the creation of institutions to protect multinational corporations from the consequences of their business decisions'. On that note, I will conclude. Thank you for your attention. I welcome your questions.

Senator GALLACHER: Given the history of the ISDS and the free-trade agreements, 21 bilateral agreements, it appears as if we have launched three actions and there has been one action against us. Given that Australia is, as the chair has said, heavily dependent on export, does the ISDS actually provide us with another level of international protection, if someone does something against us? Would that not be a situation we are in right now?

Dr Rimmer : I think your question raises a really interesting point about whether or not Australia will be the subject of other investor-state dispute settlement actions and what advantages there might be to Australian exporters in other jurisdictions. I will deal with it in terms of two parts. The first point to make is that the challenge against Australia's plain packaging of tobacco products is an incredible, singular challenge.

Dr Margaret Chan, the director-general of the World Health Organization, mentioned the dispute in her address to the World Health Assembly this year. She said one particularly disturbing trend is the use of foreign-investment agreements to handcuff governments and restrict their policy space. For example, tobacco companies are suing governments for compensation for lost profits, following the introduction—for valid health reasons—of innovative cigarette packaging.

In my view, something is fundamentally wrong in this world when a corporation can challenge government policies introduced to protect the public from a product that kills. It is well worth remembering that other tobacco-control measures around the world are also being challenged under investment clauses. Graphic health warnings in Uruguay are being challenged by the tobacco industry under a very similar clause. The current Prime Minister, Tony Abbott, introduced graphic health warnings into Australia. I think it would be wishful thinking to believe that the tobacco industry will halt at those kinds of actions. Given that Australia is a pioneer in public health policy, I would anticipate that Australia would have to battle away with many more actions like that.

Andrew Mitchell and Tania Voon have just released a new book called The global tobacco epidemic and the law. It is just out now. There is a whole chapter on investor-state dispute settlement. One of the points that is made in a chapter about investor-state dispute settlement is that it is entirely unsuited to dealing with questions about public policy in relation to public health both in terms of some of the procedural aspects of investor-state dispute settlement and some of the substantive issues in relation to that. I would answer the first part of your question by focusing upon that and looking at the statistics, both in terms of the actions and the sums of money involved. I think there is very significant exposure in terms of government liability for investor-state dispute actions.

The second part of your question related to exports. It is an interesting question. It is particularly important to think about what is meant to be the purpose of investor-state dispute settlement. Originally it was meant to protect investors operating in risky jurisdictions. The thought was that that would provide an avenue to take action where there were issues around rule of law. There are a variety of different means that can be used to try to protect investments overseas. Investor-state dispute settlement seems, to me, a very crude hammer that is deployed by corporations for a wide range of different purposes. But foreign investments can also be protected by insurance.

The Cato Institute has been asking questions about to what extent governments should provide protection for companies operating a free enterprise. They are complicated questions when it comes to some Australian exporters. Agriculture is a complicated issue in that Australian agricultural exporters in a jurisdiction like, say, Korea might be able to bring an action. But Korean companies might in turn bring actions against Australian agricultural producers. The exceptions, limited as they are, do not necessarily provide an exception in relation to agriculture. Sometimes it is hard to know who will come out best in the equation in the operation of investor-state dispute settlement.

Senator WHISH-WILSON: Can I ask a point of clarification or perhaps ask Senator Gallacher's question another way. Is there any evidence that investor-state dispute settlements facilitate trade and investment flows?

Dr Rimmer : At the moment there is a huge controversy over just that issue. I saw a conference being announced on investor-state dispute settlement and its leading line was that it is commonplace to say that there is a legitimacy crisis in relation to international investment law. Really there is a debate about whether or not investor-state dispute settlement mechanisms are necessary to encourage trade and investment. The history of Australia trading with the United States without a investor-state dispute settlement clause would suggest that, in the particular case, there is no need for such an additional or exceptional regime to resolve disputes. The European Union and the United States are having a lot of debates at the moment about whether or not there is a need for an investor-state dispute settlement mechanism, particularly given the long history of very extensive trade between them. So there is a lot of very fundamental debate about what are the intentions of the investor-state dispute settlement regime and what has been happening in practice in some of the current disputes that have been occurring.

Dr Tienhaara : Could I respond to that?

Senator GALLACHER: What I want to talk about is what happens in practice. We have had 25 years and three cases for us and one case against us—

Dr Tienhaara : Could I actually respond to that?

Senator GALLACHER: The volume of trade has been increasing end on end on end. I accept your comments about the tobacco case, where they used a 1993 Hong Kong free trade agreement to take their action—that is fine. But I cannot see, outside of that example, where we are at risk historically.

CHAIR: Perhaps Dr Tienhaara can respond.

Dr Tienhaara : Yes, and if I could respond to your first question as well. First of all, there is a lack of transparency in many of the older treaties, so it is hard for me to know whether we are talking about the same three cases that so-called Australian companies have brought, but, to my knowledge, there is one Australian mining company that has brought a case and two Australian subsidiaries of foreign companies have brought cases. So it is a question of whether that is really anything to do with Australia's interests. If a UK company uses an Australian subsidiary to access an Australian treaty, does that have much to do with benefiting Australia? I am not sure. There is that issue—really I would say there is maybe one case where an Australian company has used ISDS in an Australian treaty—but there is also the issue that they were all mining companies, to the best of my knowledge, all which typically—

Senator GALLACHER: Is that a problem?

Dr Tienhaara : No, but mining companies typically are large companies which, when they go to a developing country, sign a contract because they want to protect their investments. Those contracts almost always have investor-state dispute settlement clauses within them. So they are protected by the contract and do not need a treaty. They only access the treaties because they want to gain broader rights than they have negotiated one on one with the state. Furthermore, there is also investment insurance which is available to companies when they go abroad, so there are myriad ways that companies can protect themselves without treaties. Treaties are an added layer of protection that is not necessary.

As for the data on investment flows, many economists have tried to link investment flows to bilateral investment treaties and have failed. It is a very complicated area and I am not an economist, but the Productivity Commission did look into this issue in 2010 and could not find any economic justification for ISDS. As Dr Rimmer was saying, back in the days when it was developed, it was really something to deal with the post-colonial period, where you had very substantial risk of direct expropriation and there were not proper court systems in many countries. These days, we do have court systems operating in countries like Korea, and obviously Australia and the US have good court systems, as does Japan, which is why we do not have ISDS in those treaties. But, even in countries where you do not necessarily think that the court system is excellent, there are other ways for investment to be protected and there is no evidence that Australia offering additional protection represents any benefit for the country.

An anecdotal thing to add to that is that Brazil, as I mentioned, has never signed a treaty with ISDS, and yet it has huge volumes of foreign direct investment. I have also seen reports that, since South Africa has started terminating its BITs, it has not seen any reaction from investors; they are still keen to invest. Other factors are far, far more important.

Senator GALLACHER: Where does ISDS punish Australia?

Dr Tienhaara : If you look at the example of Canada, Canada has been sued—

Senator GALLACHER: No, where is Australia being punished under an ISDS given that we have had 25 years of them?

Dr Tienhaara : But we have mostly signed treaties with developing countries that do not have large inflows of investment into Australia. If we had signed a treaty with the United States that included ISDS, it might have been a very different story. Canada has been sued exclusively by the United States investors under NAFTA.

Senator GALLACHER: This will be an Australian piece of legislation, so the relevance to Canada is—

Dr Tienhaara : No, what I am saying is that, if we continue to sign treaties containing ISDS with other countries—such as in the TPP if we signed one containing ISDS that gave American investors access to ISDS with Australia—you would see the number of cases increase. Also, it is a field that, as Dr Rimmer explained, has been rapidly developing. Fifteen years ago you would not have been worried about this at all, but the number of cases increases every year and, as more investors become aware of the fact that they can use this to challenge regulations, the number of cases will increase. The fact that—

Senator GALLACHER: With respect, the value of global trade is increasing, and there are more markets opening up; there are more places that we are going on free trade. So we would expect trade to grow and also the volume of disputation to grow. That is not an unusual thing, is it?

Senator WHISH-WILSON: No, that was not the case in the past.

Dr Tienhaara : I do not think that that is necessarily linked.

Senator WHISH-WILSON: That ignores the reality of the opening of our economy in the last 30 years.

Dr Tienhaara : And, as I said, trade and investment has grown in Brazil without them having an investor-state dispute settlement division.

Senator WHISH-WILSON: Exactly.

Dr Tienhaara : So I do not think there is necessarily a link there.

Senator GALLACHER: Sorry; you do not think there is a link between the value of trade globally growing and the value of potential disputation growing with that?

Dr Tienhaara : I do not see that trade will grow if you offer investor-state dispute settlement.

Senator GALLACHER: No, no. I am saying trade grows, and the value of disputes will probably grow too. That would be common sense, wouldn't it?

Senator WHISH-WILSON: But that has not happened in the past. That causation has not been there in the past, so I do not see your point.

Senator GALLACHER: I will rest on that, Chair.

Dr Rimmer : You can see why some of the big law firms are particularly interested in investor-state dispute settlements. I think you got a submission from Clifford Chance, a very well known global law firm. I saw Carter-Ruck were busily running an action for Al Jazeera against the Egyptian government. The publicly reported damages awarded for investor-state disputes exceeded nearly $4.5 billion. There was a very big announcement about an action against Russia. So one of the drivers in terms of the operation of investor-state dispute settlement is global law firms seeing it as a real opportunity to advise transnational corporations that they have a chance to challenge decisions or regulations that they do not like across a wide range of different subjects. The history of actions also shows a great diversity of disputes.

What I am quite interested in is the question of intellectual property. 'Investment' has been defined very broadly to include intellectual property. The problem in that context is that intellectual property owners are then kind of given superpowers to run actions in relation to investor-state dispute settlement, and that could affect a wide range of different areas of regulation. In copyright law at the moment, there has been a lot of debate in this parliament over IT pricing, with the fair IT inquiry. Adobe, Apple and Microsoft were called before parliament to give evidence. If the current government or a future government introduced reforms in relation to IT pricing, one of the things that Adobe, Microsoft and Apple could do would be to try to challenge such a decision in terms of an investor-state dispute settlement if you agree to such a regime in terms of the Trans-Pacific Partnership.

Another important area of debate in this parliament has been drug patents and drug pricing—the committee that considered drug pricing. There was the inquiry led by Nick Gruen and Di Nicol that recommended a number of different reforms to drug patents to try to reduce costs associated with patent term extensions. That sort of reform, if it was carried out by the current government, could be challenged in an investor-state dispute settlement regime. Trademark holders could also bring an action. You might see that in relation to plain packaging.

So the very broad definition of 'investment' does lead to the potential for a wide diversity of different sorts of disputes. That is why I think Australia is exposed not merely in terms of battles in relation to plain packaging but, really, in relation to a wide variety of different topics—because the definition of 'investment' is so open ended and broad.

CHAIR: That provides me with the opportunity, following on, to ask you about this. DFAT in their submission made the comment:

ISDS only applies to investment-related commitments and not, for example, to obligations in an Intellectual Property or Environment Chapter.

Now, that would appear to cut across the comments you have just made with regard to patent law and intellectual property issues for Microsoft, Adobe et cetera. Do you agree with DFAT's statement? I do not know if you have read it in their submission; but do you agree with it? And, if not, how would you take issue with that statement that they have made in their submission to the committee?

Dr Rimmer : They are really talking there about the interaction between the intellectual property chapter and the investment chapter. If you look at the definition of 'investment' in, say, the Korea-Australia Free Trade Agreement, the definition clearly includes intellectual property. If you have a look at, say, the Eli Lilly and Company v The Government of Canada case, you then have those battles that start raging in terms of: what grounds can you bring an action in relation to intellectual property in relation to investor-state dispute settlement.

Eli Lilly went both in terms of focusing upon the investment chapter and the intellectual property chapter in relation to the North American Free Trade Agreement. It is a really big issue and, for instance, UNITAD, who are with the World Health Organization, highlight this particular action as raising much larger concerns in relation to intellectual property—

CHAIR: This one being Eli Lilly for Hansard.

Dr Rimmer : access to essential medicines and pharmaceutical drugs. That issue is engaging a lot of minds internationally in terms of the broad definition for investment really enables intellectual property holders to bring actions. That is exactly why the Canadian government in current negotiations with the European Union have been trying to argue that they should exclude from the definition of investment, intellectual property, because they do not want any European drug companies bringing any more actions against them.

CHAIR: Thank you.

Senator WHISH-WILSON: Just in relation to your question, Chair, I think one of the witnesses, Dr Weatherall, at the JSCOT inquiry recently talked about the interaction between ISDS and intellectual property as well so maybe we can ask her a similar question. I notice Joseph Stiglitz, the Nobel laureate, wrote for the Washington post recently that trade deals ain't what they used to be. I think this cuts to the heart of Senator Gallagher's question: that in the recent decade our trade deals have included investment chapters and areas that we have never seen included before such as intellectual property and healthcare issues around pharmaceutical patents et cetera. Do you think that in terms of their proliferation—which I think Dr Tienhaara, you say in your submission that there are now 563 actions being taken mostly in the last decade.

Dr Tienhaara : Yes, the vast majority of cases emerged following a few cases in the late 1990s under NAFTA where, all of a sudden due to some sort of creative lawyering and interpretations, investors realised that they could use these treaties for much more than they had thought of before. For example, when NAFTA was first negotiated and signed, everyone in Canada and the US just thought it was meant for Mexico. They wanted to protect investors operating there from the more traditional concerns about direct expropriation but, through these cases against Canada and the US, investors started to realise, that actually these treaties could be used for much broader purposes. The intentions of states were arguably not for them to be used that way. That is why many countries have tried to put so-called safeguards into treaties to try to restrict how arbitrators interpret them. The problem is that, because of the vague nature but also the lack of accountability in the arbitration system, arbitrators are still able to reach very broad conclusions about what these treaties mean. Fair and equitable treatment is probably the best example.

Senator WHISH-WILSON: I might come back to that specifically in a sec, because I have some specific questions about carve-outs. I have looked at this issue very closely; probably more than most, including recently in the JSCOT inquiry. It seems to me that the agricultural side of our trade deals, when they have been asked about ISDS, have not had an issue with it because it does not really impact them—the Winemakers' Federation, for example, said that yesterday. We got the same thing from other groups. It seems to relate more directly to investment or direct foreign investment where a company is building assets in another country or establishing subsidiaries et cetera.

Dr Tienhaara : I noticed in the JSCOT inquiry that even the Chamber of Commerce did not mention that they were glad to see ISDS in KAFTA. It did not seem to be a big issue for them.

Senator WHISH-WILSON: I think this is a general issue for the committee to look at. We have exports, which Senator Gallagher is referring to, which are really important and you have mostly agricultural businesses behind them. They do not have a problem with ISDS, because they do not really see how they will ever use it or how it will ever impact them. It is very different to what we are discussing here when we are talking about large multinationals and new areas of trade and investment that are opening up that are subject to potential litigation. I think there has almost been a changing of the guard in the way we conduct trade deals internationally, especially in the last decade, if not the last few years.

Dr Rimmer : Can I respond to the two parts of your question. The first point is on Joseph Stiglitz. Joseph Stiglitz has been a very ardent critic of the Trans-Pacific Partnership and the state dispute settlement. He has argued that the Trans-Pacific Partnership proposes to freeze into a binding trade agreement many of the worst features of the worst laws in the Trans-Pacific Partnership countries, making needed reforms extremely difficult, if not impossible.

He has written a piece suggesting that countries should follow the lead of the past Australian government and ban investor-state dispute settlement clauses from trade agreements all together. He has also been very concerned about rent-seeking activity in relation to international trade agreements. He is very concerned that foreign investors will use investor-state dispute settlement clauses to engage in rent seeking. He has also been quite concerned about intellectual property proposals being bundled into the mix of such trade agreements. So he has written a few opinion pieces on the topic, and he has been very concerned about questions of equality in relation to outcomes resulting from the Trans-Pacific Partnership.

Your question about investor-state dispute settlement and agriculture is a really important issue in a wide range of different sectors. I do not think it has been properly explored yet, in Australia. I have been thinking about the issue on a number of different levels. It seems to me that there are a range of different sorts of questions that might come up for debate or challenge in relation to investor-state dispute settlement. Questions about foreign ownership are always going to be quite complicated and are going to interact with—

Senator WHISH-WILSON: Can I stop you on that point, because I noticed that you put it in your submission. We know that Archer Daniels Midland have been litigious on ISDS with the Mexican government. When their bid for Graincorp was rejected under Australia's national interest test, could that have been seen as discriminatory under an ISDS clause if we had an agreement?

Dr Rimmer : I am sure that they thought it was discriminatory.

Senator WHISH-WILSON: But we did not have an ISDS clause so they could not use it to sue the government.

Dr Rimmer : I think that sort of issue is going to pose really complex questions. A company like that obviously has interest in breaking down some sorts of regulations that are in place in Australia. That might be one possibility for them to try to break open that block. Then you have questions about whether that was a fair decision or not. But that is a really interesting example of a big agricultural company using such measures.

There has been a lot of debate, particularly over the Supreme Court of the United States decision in relation to Myriad Genetics on gene patents. So there has been a lot of debate about whether or not some of the agriculture biotechnology companies are going to think about trying to challenge that decision, which said that genes are products of nature, but applications of genes can be the subject of patent protection.

The question of wine is very interesting. The Europeans have been very aggressive in relation to wine IP, and geographical indications. I have appeared before committees a couple of times on agreements with the European Union to have better protection in relation to European geographical indications. That is certainly an area that they have been willing to litigate on and push for policy reform and push for treaty changes. So I do wonder, if Australia has deals with the European Union, whether some of the European Union wine producers might think about some of the impacts of some of the naming practices in other jurisdictions in terms of foreign investments. But 'investment' is defined so broadly it could cover such a wide range of different things.

Senator WHISH-WILSON: Could I ask you another question in relation to what you said there on agriculture. Would there be potential, under food labelling laws, if they changed in this country—particularly with Australia-made logos or conditions around disclosure—for that to be seen as discriminatory?

Dr Rimmer : In the United States in relation to the Trans-Pacific Partnership, your counterparts in the United States Congress are very concerned about just that question in terms of whether or not American-made labelling and procurement rules might be affected by the agreement. That has been a sticking point in the battle between the Obama Administration and the United States Congress. Certainly there are going to be issues over a wide range of different forms of labelling in Australia. Food labelling is obviously going to be contentious, and big food companies are going to be quite concerned about the introduction of tougher standards in relation to food labelling. Food labelling can take on many different forms. In the States, Vermont has just introduced GM food labelling, and immediately there has been an action by agricultural groups. I have seen a live discussion about whether or not food companies would use investor-state dispute settlement regimes to tackle issues in relation to GM food labelling.

Professor Sharon Friel at the Australian National University has done a lot of work on food labelling and nutrition and trade. Her project with the Australian Research Council is particularly concerned about some of the issues related to health and food and labelling. But she sees it as a very significant issue given some of the past disputes that have taken place under the North American Free Trade Agreement.

Senator WHISH-WILSON: You mentioned local procurement there as well, in relation to what you were saying around food labelling, but my understanding is that local procurement policies where local government or federal or state government give preferential treatment to local businesses would also be seen as discriminatory under ISDS, including with the carve-outs that we are looking at.

Dr Tienhaara : There is currently a case in Canada. In the last year there has been a large number of cases arising over renewable energy, which is a twist on what I have usually looked at. There have been some requirements in Ontario for local content in producing wind turbines, and that has been challenged under NAFTA. I do not know the carve-outs on that, but my general feeling about the safeguards in general is that they always leave open some area for interpretation.

Dr Rimmer : Climate change policy is interesting in terms of how investor-state dispute settlement might affect climate change policy—very tumultuous in terms of Australian politics in terms of all the different options, but the Direct Action policy and an ETS and carbon pricing will all affect foreign investors in a range of different ways.

Dr Tienhaara : As will changes to the Renewable Energy Target.

Dr Rimmer : Yes. So it is worthwhile thinking about in terms of the operation of investor-state dispute settlement. If you are a supporter of Direct Action, renewable energy companies might think about whether or not investor-state dispute settlement could be deployed in relation to impacts with respect to their foreign investments. ETS, carbon pricing—there has been a lot of debate and concern about whether mining companies would use investor-state dispute settlement regimes in relation to such measures. So, it kind of cuts either way in terms of the way in which foreign investors could potentially deploy investor-state dispute settlement regimes.

I think Kyla's point about local government is really important. Her book on the expropriation of environmental governance talks about the dispute in Metalclad v Mexico. I think one of the really interesting things about that dispute is that it shows that investor-state dispute settlement clauses could apply to potentially local government or territory government or state government, so it is not necessarily going to be focused just upon federal decisions; there are a lot of other potential players that could be affected by investor-state dispute settlement.

Dr Tienhaara : That is something for states and local governments to worry about, but it is also something for a federal government to be conscious of—that you do not have control over whether or not these disputes arise. Even if your government is very open to business, and pro and keen to make investors happy, if a state changes a regulation—for example, if New South Wales wanted to change regulations relating to coal seam gas development because of the huge political problems with that within the state—that could result in an investor-state dispute. And it is not the state of New South Wales that has to deal with the dispute; it is the federal government, because that is the way the treaties are set up.

Senator WHISH-WILSON: I am sensing that what is really important to the committee and to the whole debate is whether we ban these things or whether they can be structured in a way that reduces the risks we are all looking at. Regarding the carve-outs in the Korean deal, we have seen recent information out of the European Union that they put the ISDS area up for a three-month submission rather than have their internal departments make decisions about carve-outs. They put it out to experts, such as yourself and others, which I note Australia has not done.

There has been some commentary in recent weeks, from 100 prominent legal academics in this field, saying that there are extensive carve-outs. Firstly, are you aware of those carve-outs they are discussing in Europe now and are they more substantial than what we have seen in KAFTA? Secondly, would you like to comment on those legal minds who said the carve-outs were highly risky and they should ban ISDS rather than go down this road?

Dr Tienhaara : Carve-out I think is a misnomer. It gives the sense that environmental regulation or health regulation is completely excluded, which is not the case at all. These are just minor tweakings to provisions, such as fair and equitable treatment standards. That example is probably one of the best. Basically, you are required to give foreign investors fair and equitable treatment. What does that mean? Obviously, that particular language is open to a huge amount of interpretation. So the carve-out has attempted to link fair and equitable treatment to customary international law and the treatment of aliens, which dates back 100 years.

However, the problem with linking anything to customary international law is that customary international law is not static, and many arbitrators and other legal pundits have argued that it has evolved over time and now includes 3,000 bilateral investment treaties that exist and the broad interpretations that have come out of arbitration. That example of a safeguard I just do not think has any chance of really being helpful, because an arbitrator can simply say, 'No, customary international law has now changed and we see it as covering this particular issue.' I could talk about the other carve-outs or safeguards if you want.

The other thing I would note is that many of the problems with investment arbitration are not just the substantive issues, it is also about the procedures. None of the proposed changes or the changes that have come into KAFTA deal with that. There is a proposal for consideration of an appellate body, but such a similar proposal was also in the Central American free-trade agreement, the other CAFTA, and nothing has come of it. There has been no substantial procedural reform.

If we are looking at it from the perspective of whether we care about democracy and whether we care about how these cases are decided, there simply is not anything in KAFTA or any of the other proposed treaties that deals with the fundamental problems that I mentioned of my opening statement about conflict of interest, about structural bias towards investors and so forth.

In terms of the specific standards in the European treaties, I have not looked at them closely. I believe they are on the same issues. I think most countries are looking at safeguards on the same types of issues that Australia is. I do not think they are sufficient and I am signatory to that particular submission you mentioned because I do not think the European treaties go far enough either.

Dr Rimmer : The Korea-Australia Free Trade Agreement tries to rely upon some general provisions and exceptions. My comment, looking at the provisions, would be that they are highly qualified and limited. They are:

subject to the requirement that such measures are not applied in a manner which would constitute arbitrary or unjustifiable discrimination between investments or between investors, or a disguised restriction on international trade or investment—

Say, someone like a big tobacco group argued that plain packaging was a discrimination or disguised restriction on international trade or investment—

nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures:

(a) necessary to protect human, animal or plant life or health;

(b) necessary to ensure compliance with laws and regulations …

I guess there has been a lot of debate about that kind of approach. In my submission I talk about the debate over such provisions in the World Trade Organization, and public citizen has been very concerned that there have been very few successful efforts at relying upon such exceptions.

My other concern, much like my fellow speaker, would be that there are many more problems associated with investor-state dispute settlement. The European Commission received about 150,000 submissions on the inclusion of investor-state dispute settlement regimes, so you should consider yourselves lucky to—

Senator WHISH-WILSON: It has been on the front page of major European newspapers as well, unlike here.

Senator FAWCETT: There has been a lot of talk about what this might mean for Australia. The US and Korea have had a free trade agreement with an ISDS in it for a while now. Do you have any evidence you can present to the committee about how that has worked? Everyone has highlighted that, if we had an ISDS with the US, watch out, there is going to be a tidal wave of claims coming in. In the Korea-US relationship, what has the environment been like? Have there been many claims?

Dr Rimmer : It is a good question. The really big patent dispute happening globally at the moment is between Apple and Samsung. So there is this huge global patent battle breaking out in various jurisdictions between the lead, big multinational company of Korea and one of the lead, big multinational companies of the United States.

Senator FAWCETT: Sure, but is that facilitated by the ISDS provision?

Dr Rimmer : I am coming to that. When I appeared before the Joint Standing Committee on Treaties talking about the Korea-Australia Free Trade Agreement, I wondered whether Korea's enthusiasm for an investor-state dispute settlement might be explained by the Australian litigation going on at the moment between Samsung and Apple. To me, that is going to be a key dispute both in terms of will intellectual property and trade and investment between those two countries and they have such diametrically opposed views over who owns such technology. The Korea-United States Free Trade Agreement has been the subject of a big debate although a lot of the members of the United States Congress have been upset that the United States has not done very well out of the deal with Korea and some reservations about agreeing to a fast track in relation to the Trans-Pacific Partnership have related to a certain amount of disappointment that they have not got the best possible outcomes from some of the trade deals they have entered into. I think that is the dispute to watch. There is so much money involved in that particular one. It could play out in a variety of ways but Samsung have been weighing their options in that dispute.

Dr Tienhaara : I might be biased because I was born in Canada but I always think the best comparator to look at is Canada. We have so many similarities between the two countries.

Senator FAWCETT: Sure, but I am asking specifically about this one with Korea because we are looking right now at a relationship with Korea and the comment has been made that we have not had many to date because most of our relationships have been with Third World countries. Well here we have essentially a newly-emerged First World economy and a newly established First World economy, the US being the one that is supposed to be the most litigious. I am asking what is the experience of that relationship with an ISDS?

Dr Tienhaara : I cannot say that I have done a lot of research on the Korea-US situation. I am not sure hold old the treaty is—a few years. I just cannot keep track of all the 568 cases that go on and also threats. The other aspect of all of this is that a lot of the impact of these treaties happens without a case actually coming to public light. So a multinational corporation can simply go to a government and say, 'If you do what you are planning on doing, then we will bring a case to investor-state dispute settlement. It will cost you millions if not hundreds of millions of dollars, so we strongly suggest that you do not do what you are planning to do.' That is called 'regulatory chill' in the literature and is obviously very difficult to prove, but it is worth nothing that the Australian government has suggested that Philip Morris is currently engaged in trying to achieve global regulatory chill through its case by basically showing other countries that might want to introduce plain packaging legislation 'Look what we're doing to Australia.' This is actually working because countries are saying, 'We're going to wait to find out what happens with that case before we go ahead with our regulations.' So I cannot say specifically whether the US or Korea have had any formal disputes lodged but there could be other things going on behind the scenes that we do not know about.

Senator FAWCETT: Are you familiar with the Congressional Research Service paper from the US that looks specifically at investor-state dispute settlement provisions within that Korea-US agreement?

Dr Tienhaara : No.

Senator FAWCETT: They talk, there, a bit about the stuff you are talking about—being fair and equitable—and looking more to customary international law. They talk also about the annex that states what constitutes the parties' shared understanding of the quoted terms, specifically that such law results from a generally consistent practice of states that follow from a central legal obligation.

Dr Tienhaara : A similar provision can be found in the Central American Free Trade Agreement, CAFTA. Despite that, several disputes have been launched against countries under that treaty. They are not finished yet, so we cannot say for certain how the arbitrators are going to interpret what that means but, as I said, some arbitrators are of the opinion bilateral investment treaties which have been signed by states reflect customary international law. So the vague provisions in the 3,000 existing treaties, in some views, is custom now.

The ultimate thing for me to say is that these safeguards may work in some cases. They may not work in other cases. The problem is with the system. People are always saying that we need investor-state dispute settlement because we do not have decent court systems in developing countries. But replacing poor court systems in developing countries with a completely inadequate international system that is set up very poorly does not make any sense to me.

Senator FAWCETT: The Congressional Research Service paper basically indicates that they feel as though the US has learned from NAFTA.

Dr Tienhaara : Yes, they certainly have.

Senator FAWCETT: Hence, they have put these provisions in. In the light of that, what comment do you make about article 20.5 of KAFTA? That is on the rules of interpretation.

Dr Rimmer : We could take that on notice. I would respond to you by saying that there is a really fascinating debate going on at the moment in the United States Congress about investor-state dispute settlement, particularly in the context of the Trans-Pacific Partnership. So the Democrats have refused to give fast-track authority to Obama to fast track the Trans-Pacific Partnership. That is critically important because it means that the Congress can pick apart the Trans-Pacific Partnership bit by bit.

Some of the Democratic leaders have some very particular concerns about the way in which investor-state dispute settlement has been used. Senator Elizabeth Warren from Massachusetts has been particularly concerned about financial regulation. She has been concerned that the wolves of Wall Street will use investor-state dispute settlement to try to undermine financial regulations, particularly in the wake of the global financial crisis. She has been very critical of Froman, the United States Trade Representative, particularly in relation to banking and financial regulation.

Some of the other members of Congress—particularly Democrats with associations with the unions—have been quite concerned about labour rights. They have been quite concerned about the interaction between investor-state dispute settlement and labour rights in the Trans-Pacific Partnership. Quite a few Democrats have also been very concerned about environmental issues. Senator Barbara Boxer, for instance, has been very concerned about the impact of the Trans-Pacific Partnership upon environmental regulation in relation to air, land and water. That has been a bit of sticking point because Froman was busy boosting the Trans-Pacific Partnership as a good deal for the environment, and then WikiLeaks leaked a draft of the environmental chapter, and that undermined, somewhat, the Trade Representative's efforts to convince the congressmen and congresswomen otherwise.

The Republicans are a bit more divided in terms of their views on the investor-state dispute settlement. The Tea Party—that particular faction of the United States Congress—is quite concerned about supernational tribunals interfering with government decisions. There is a segment of the Republicans who are quite keen on investor-state dispute settlement. So a lot will depend upon the election in the United States Congress in terms of how that might play out. The Obama administration and the United States Congress are kind of at logger heads at the moment on the Trans-Pacific Partnership but also on investor-state dispute settlement.

Dr Tienhaara : I think at the end of the day it is unfair to ask me or Dr Rimmer to try to predict what will happen in any given case or how these so-called safeguards will work, because it is a fundamentally unpredictable system. The real question we should all be asking is: why are governments taking so much effort to tinker with the system and try to fix it when it has proven to have no value? I think we are looking at it the wrong way; we should look at it and say, 'The system hasn't really given us anything and it clearly has problems, so why don't we just get rid of it?'

CHAIR: Yes and no. It is always a good opportunity to get the views of people like you. Obviously, you are not obliged to give your predictions, but I think it certainly adds to the debate. Senator Gallacher has a point of clarification.

Senator GALLACHER: The point I would like clarified, Dr Tienhaara, is that you said earlier that there are plenty of jurisdictions around in developed countries without ISDS.

Dr Tienhaara : I said that Brazil has never ratified a treaty containing ISDS.

Senator GALLACHER: I think you also said earlier that, without ISDS, there are plenty of places you could take disputes.

Dr Tienhaara : No, what I said, specifically in response to your points about the three companies, is that mining companies almost always sign a contract directly with the state that they are investing in if it is a developing country. Those contracts usually contain an investor-state dispute settlement clause—not an ISDS, sorry, but an arbitration clause. They go to the same type of system.

Senator GALLACHER: I will put a more blunt question to you: in the absence of an ISDS, are there appropriate safeguards for people's rights under trade obligations?

Dr Rimmer : It is also worth—

Senator GALLACHER: I was asking Dr Tienhaara.

Dr Tienhaara : Companies can always negotiate their own contracts directly with states—

Senator GALLACHER: It is almost a yes or no, isn't it, given that you do not believe in ISDS?

Dr Tienhaara : Yes, there are plenty of other mechanisms. There are domestic courts in countries like Australia. There are contracts if you are worried about the courts in the country you are investing in. There is investment insurance. There is also the fact that, as the Cato Institute has pointed out, foreign investment is a risky proposition and that is also why it is so profitable—because companies take risks.

Senator GALLACHER: That is fine—so that is a yes. In the absence of any economic benefit, according to the advice from the Productivity Commission, Australia must be a net winner from ISDS, given our three-to-one track record.

Dr Tienhaara : I think that is very short-sighted.

Senator WHISH-WILSON: You are ignoring what you are—

Senator GALLACHER: I would have preferred if the witness answered the question.

Dr Tienhaara : First of all, as I said, it was one company, as far as I understand, and then two subsidiaries of foreign companies—

Senator GALLACHER: I will rest there, Chair. I am not going to badger the witness.

Dr Tienhaara : But, furthermore, thinking that you are just going to face one case—and it is an incredibly big and concerning case—and that that is a good track record is something I disagree with.

Dr Rimmer : Sorry to interrupt before, Senator. It is also worthwhile thinking about the dispute resolution system in terms of the World Trade Organization. You have a multilateral system for country-to-country disputes and, in relation to particular trade agreements, you could have a country-to-country dispute—in the Australia-United States Free Trade Agreement and the Korea-Australia Free Trade Agreement. If your government was of the view that there was a systematic issue affecting a particular industry, that could then be a basis for an action. That is the real difference. In relation to, say, plain packaging, the tobacco industries have had to get various different countries to bring an action in the World Trade Organization against Australia.

Senator GALLACHER: I was in Indonesia last week. They had photographs of lungs on the packets. It is the same in Thailand. It is happening all over Asia.

Dr Rimmer : Yes.

Senator McEWEN: Dr Rimmer raised already the issue of labour rights. A number of trade unions have mentioned to me their concerns with ISDS. Would you elaborate on what you meant when you were talking, in the context of the American congress, about how an ISDS could impinge on labour rights in a country like Australia.

Dr Rimmer : My submission and a number of submissions from particular unions raised concerns about the role of investor-state dispute resolution in relation to matters of industrial relations. From an Australian perspective, it has been bubbling along for a few years. The ACTU raised concerns about investor-state dispute settlement a few years ago. There was a lot of interest in the case of Veolia Proprete v Arab Republic of Egypt, in which a French multinational company launched a claim against Egypt over labour wage stabilisation promises as well as a terminated waste contract. So there have been instances in which investor-state dispute settlement has been deployed in relation to questions about labour rights. There has been—

Senator McEWEN: Is that on the basis that a country's labour laws—for example, Australia's labour laws—could in some way impede the ability of a foreign investor to make a return on their investment? Is that what the basic line is?

Dr Rimmer : The concern is that decisions in relation to labour rights have adversely affected the foreign investments of a company, and that then provides them with a basis for a complaint. Trade unions have been quite concerned about the general operation of investor-state dispute settlement in relation to labour rights, but there has also been a bit of debate about exceptions, defences and safeguards, particularly in relation to labour and safety. The European Trade Union Confederation has been very adamant that there is a need to reform the investor-state dispute settlement process, particularly to ensure that investors comply with relevant ILO core labour standards and other human rights. So, from that perspective, there is a concern about the interaction between investor-state dispute settlement and the international regime in relation to labour rights. In some ways, it echoes the battles over investor-state dispute settlement and international health law; there is a parallel, a similar concern, in that context.

In the United States, the Democrats are very upset with the Obama administration because the Bush administration needed Congress to do trade deals, and the Democrats, particularly led by Henry Waxman, were able to secure statements about the need to protect labour rights in some of the trade deals. Obama has not necessarily made any similar commitments, and that is a real tension point at the moment in the relationship between the Obama administration and the Democrats in the US Congress. A lot of the big unions in the United States have been heavily lobbying Congress not to accept the Trans-Pacific Partnership unless and until questions about labour rights are dealt with. But it is quite an interesting issue.

A number of the submissions to this committee also raised concerns about privatisation. I think the New South Wales Nurses and Midwives' Association were concerned about investor-state dispute settlement supporting the privatisation of health care. Some of the educational unions were concerned about investor-state dispute settlement being used to support privatisation of education. I think a lot of those organisations have been very concerned about how foreign investors might use investor-state dispute settlement as a Trojan horse of sorts for the deregulation of labour standards and rights. But there is always a big battle as to whether or not trade deals will adversely or positively affect jobs, employment, in a country.

Senator McEWEN: All right. Thanks very much, Dr Rimmer.

Senator WHISH-WILSON: On the same subject, Chair—

CHAIR: Very quickly.

Senator WHISH-WILSON: The other thing I think is worth noting and getting on the record is that there seems to be a concern that there are double standards in trade deals. Corporations can use an ISDS type tribunal to seek binding outcomes, whereas there does not seem to be any way that unions, for example, can hold a corporation or government to account on labour and environment standards. So there seem to be inherent double standards in our trade deals. I just wanted to make that point.

CHAIR: So your summary, Dr Rimmer, is that you do not think Congress is going to give Obama the capacity to fast-track the TPP which he would require? Is that your overview?

Dr Rimmer : Yes.

CHAIR: Thank you both very much. Now, you do have some homework, and that is to respond to Senator Fawcett's questions regarding article 20.5 of the Korea-Australia Free Trade Agreement. I thank you both for your submissions and for your evidence this morning.

Proceedings suspended from 10:44 to 10:58