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The Rise of the Sovereign Corporation

The rise of the sovereign corporation:
dangers of a new Hong Kong free trade agreement


By Bill Rosenberg

Will future New Zealand governments ever again be able to create a People’s Bank to make other banks reduce their fees, regain ownership of ACC to ensure safety comes before profits, or force electricity companies to sell assets if they fail to perform adequately?

Will local governments be able to strengthen environmental codes to reduce air pollution, tighten controls on rubbish dumps, or prevent fast ferries from endangering small craft and damaging shorelines?

Not if governments sign international agreements which allow foreign corporations to demand unaffordable “compensation”, or a reversal of those actions because their profits are undermined.

Let’s be clear. Corporations could overturn actions legally taken by duly elected governments and demand “compensation” for not charging us excessive fees, for not excessively polluting our air, or for not damaging shorelines.

This could happen here at any time under investment agreements signed by New Zealand. Many North Americans are outraged at similar events happening under NAFTA.

In 1990, a new government took power in Ontario, Canada, with a popular promise to establish an automobile insurance system because private insurance had been gouging customers for years. The parallels with the People’s Bank are obvious. With the backing of the US Trade Representative, private US insurance companies invoked the Canada-US Free Trade Agreement claiming C$2 billion compensation. Ontario’s government shelved the proposal.

In 1998, the Ethyl Corporation used NAFTA to sue the Canadian government for US$250 million for restricting use of its petrol additive MMT because of the danger to people’s health and car emission systems. Canada was forced to repeal its ban, pay US$13 million in damages to Ethyl and withdraw its assertion that MMT caused damage.

Last year the US Metalclad Corporation was awarded US$16.7 million when a small Mexican local government refused it permission to re-open a toxic waste dump because it covered subterranean streams supplying water to the local community. The Mexican government says “Metalclad knew the local community opposed it and they decided to force the situation, ignored the issue of the local permit and built without having a permit.”

Why should we worry? Because in 1988 and 1995 “Investment Promotion and Protection Agreements” were signed with China and Hong Kong. Similar agreements were developed with Argentina and Chile in 1999, deliberately avoiding public scrutiny, and await only their ratification. All have provisions similar to those in NAFTA endowing corporations with these powers.

The deal the government is now negotiating with Hong Kong will build on the 1995 investment agreement and on last year’s wide-ranging Singapore agreement. The result will further extend overseas investors’ ability to undermine democratically determined policies.

Two provisions lead to this situation. First is so-called “creeping expropriation”. “Expropriation” usually means government confiscation of an asset, but this provision extends that to include loss of profits or the asset’s value. All the examples at the beginning of this article could be considered “creeping expropriation”.

Second, disputes procedures allow overseas investors to take central government to international arbitration. US attorney Lydia Lazar describes this as having “had a profound impact on the balance of power between private economic interests and sovereign states”. Another commentator describes this as the rise of the “sovereign corporation”.

Lazar says arbitration tribunals, which the parties to the dispute appoint, “reflect the economic interests of businesses. Arbitrators do not explicitly incorporate any other interests, such as environmental, social, or political concerns”

Affected local authorities, neighbours or employees cannot take part in the normally secret hearings, even if they are aware that a dispute is being heard. The final decision is secret unless both parties agree to release it.

Investors need not be from Hong Kong to benefit under the investment agreement. All they require is a Hong Kong shelf company. Easily registered, it may also be useful to avoid tax and other legal constraints. Many overseas investments in New Zealand are held through Hong Kong subsidiaries, owned in countries as diverse as Australia, Bangladesh, China, Indonesia, the UK, and the US.

This is not the only danger of an extended agreement with Hong Kong. For example, we would lose further control over “hot money” that undermines our currency, and over foreign investment rules. This control is essential to protect ownership of land and fishing, and economic development.

Is Hong Kong investment so desirable that we should take these risks? As we have seen, some of it is not “Hong Kong” at all. Much is owned through tax havens such as the British Virgin Islands (Hong Kong’s biggest investment partner).

Examples include Big Fresh and Woolworths, owned by Jardine-Matheson, incorporated in Bermuda; and CDL Hotels, the largest hotel owner in New Zealand, owned by a Hong Kong-based Cayman Islands subsidiary of a Singapore company.

“Real” Hong Kong investors have focused on commercial property and construction, providing relatively few jobs, and hardly sectors crying out for investment. Their assets include central Auckland buildings, and majority ownership of the largest listed property company in New Zealand, Trans Tasman. The formerly New Zealand owned construction firm, Downer Group, is majority Hong Kong owned.

Hong Kong interests also own farms and high country stations, and numerous investors hold small blocks of forestry land.

Billions get parked here temporarily, probably to avoid tax.

Rather than continuing the stampede down the free trade and investment slope which is so inconsistent with this government’s rejection of the free market, we should be extricating ourselves from dangerous agreements such as those with Hong Kong and China.

ENDS

Bill Rosenberg researches and writes on foreign investment and New Zealand's economic relationship with the world with Action Research & Education Network of Aotearoa (ARENA), GATT Watchdog and the Campaign Against Foreign Control of Aotearoa (CAFCA).

Last month, ARENA published a study, “Globalisation by Stealth, The proposed New Zealand-Hong Kong Free Trade Agreement and investment”, by Bill Rosenberg, available from ARENA, P O Box 2450, Christchurch, Phone: (03) 381 2951 fax (03) 366 8035, email: arena.nz@clear.net.nz. It is also available at http://canterbury.cyberplace.org.nz/community/CAFCA

Bill Rosenberg is available at (03)332 8525 (h), (03)364 2801 (w), email: w.rosenberg@it.canterbury.ac.nz. Sources for this article are available from the above study or from the author.

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