Reply to the Trade Ministers’ claims that “safeguards” in trade agreements prevent investors from suing governments over health and environmental legislation

by Dr Patricia Ranald

The Abbott Government policy is to negotiate the inclusion of Investor-State Dispute Settlement (ISDS) in trade agreements. ISDS enables foreign investors to sue national, state or local governments for hundreds of millions of dollars of damages if they can allege a domestic law or policy “harms” their investment. The disputes are heard in international tribunals without the legal protections of national legal systems: the hearings are secret, arbitrators can be practising advocates and there are no precedents or appeals.

In December 2013, Trade Minister Robb announced that ISDS would be included in the Korea –Australia Free Trade Agreement. He defended the inclusion of ISDS by claiming that more recent versions of ISDS, since revisions in 2002, have clauses which aim to safeguard health, environmental and public welfare policies.

However, these clauses contained in the KAFTA are identical to those contained in past agreements, and have not been effective in deterring investors from suing over environmental regulation.

The first “safeguard” sentence in the KAFTA reads: "except in rare circumstances non-discriminatory regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations" (KAFTA, 2014: chapter 11, annex 2B). Many legal experts have pointed out that the phrase "except in rare circumstances" leaves a very big loophole, which recent cases in other agreements with this clause have used to advantage.

The second “safeguard” is a more limited definition of "fair and equitable treatment" for foreign investors (KAFTA, 2014, chapter 11, clause 11.5.2 and Annex 2A). However tribunals have ignored these limitations and applied the previous higher standard.

A third “safeguard” is a reference to the general protections for “human, animal or plant life” in article XX of the WTO General agreement on Tariffs and Trade (KAFTA, 2014, Article 22.1). This article has only been successful in one out of 35 cases in the WTO which have attempted to use it to safeguard health and environmental legislation.

Two ongoing cases involving ISDS clauses provide examples that corporations have ignored the safeguards and have continued to mount cases against environmental regulations.

The Government of El Salvador has been sued by Pacific Rim Mining Corporation under the Central American Free Trade agreement, over a ban on mining to protect the nation’s limited groundwater resources. In Peru, the US-based Renco Group is using ISDS in the Peru-US Agreement to contest a local court decision that it was responsible for pollution from its lead mine. Both cases are ongoing and may take several years.

These cases show that safeguards have not prevented foreign investors from suing governments over environmental legislation. Even if these cases are eventually decided in the governments’ favour they will have spent years and millions of dollars in legal fees. There will be no guarantee that the safeguards will work in future cases. The ambiguity of language and the fact that arbitrators do not have to base their decisions on previous precedents mean that the outcomes of future cases are unpredictable.

The only guaranteed safeguard is to exclude ISDS from trade agreements. Many governments have done so, including Brazil, Argentina, eight other South American countries, South Africa and India. Many of these governments have made their decisions since 2004, despite the claimed safeguards. The Howard Government did not include ISDS in the 2004 US-Australia Free Trade Agreement and the previous ALP government did not include ISDS in any trade agreements after a 2010 Productivity Commission Inquiry found they had no economic benefits and posed a high risk of huge costs for governments.

The government should exclude ISDS from trade agreements and should release the text of all trade agreements for public and parliamentary debate before they are signed off by Cabinet. This is the only way to have a proper public debate about the implications for the public interest of all aspects of trade agreements.

Updated 2/06/2014