Campbell: US Trade Expert Finds Fishhooks in FTA
US Trade Expert Finds Fishhooks in China/NZ Trade Deal
By Gordon Campbell
While media coverage of the China-NZ
Free Trade Agreement has focused almost entirely on the
possible dollar gains, scant attention has been paid to the
equally valid exposure of New Zealand to compensation claims
- should any NZ government be so bold in future as to pass
laws or regulations that a foreign investor feels will
impact on profitability. Last week, I forwarded the China/NZ
FTA investment rules to Professor Matthew Porterfield at
Georgetown University, and he has come back with a list of
the possible traps the FTA document contains.
Porterfield has written extensively on
international trade law, and the trade rules about
expropriation. Clearly, he begins, New Zealand’s
sovereignty wouldn’t be endangered if the FTA investment
rules proved no different to the compensation mechanisms
currently available under domestic law to local firms.
“[But} I’m under the impression that your law generally
doesn’t require compensation for ‘indirect
expropriation’ or what we refer to in the US as regulatory
takings.’
Not so under the China/NZ FTA. The way
Porterfield reads the relevant Annex 13 provisions, the FTA
exposes our government to greater risk of being sued than
the US government faces – even though its laws on property
rights are generally regarded as being the world’s most
stringent.
“Even under U.S. regulatory takings
law,” Porterfield says, “which is considered to be among
the most protective of property rights of any country,
regulatory measures must generally cause complete or near
complete destruction of the value of property in order to
constitute acts of indirect expropriation.
Not so,
he points out, with the FTA. The wording meant to safeguard
New Zealand’s position, as a I warned in Scoop last week,
could well fail to withstand the full blast of international
trade law. Porterfield cites an example : “Clause 3(a) of
the China-NZ agreement, in contrast, suggests that
regulatory measures that cause ‘severe’ deprivations of
property constitute acts of indirect expropriation. Many
routine regulatory decisions - such as land use planning
measures - can have significant adverse effects on the value
of property, which arguably could be construed as
‘severe.’”
This is not the only point where
the language used in the FTA to try and insulate New
Zealand against aggrieved foreign investors proves to be
insufficient. Porterfield explains : “The language of
clause 3(b) - indicating that measures which are
‘disproportionate to the public interest’ can
constitute acts of indirect expropriation - is also
problematic, given that the balancing of the relative
benefits and burdens of regulatory measures is highly
subjective, and is a function traditionally assigned (in
democracies) to the legislative branch of
government.“
This is a delicate way of saying that
democracies usually retain for themselves the right to
decide whether on balance, a social, economic or
environmental need requires it to change the investment
rules within its own territory. Governments do not normally
and happily sign away their freedom to make decisions on
whether such actions are ’ disproportionate to the public
interest.’ Yet in the FTA, we have surrendered the power
to make final rulings on such matters, and outsourced the
ultimate call to an un-elected arbitration panel sitting
somewhere overseas, in the likes of Geneva.
It is not
as if Porterfield, or anyone else, is saying that foreign
firms should not qualify for compensation if a host
government changes the investment rules, mid stream. The
point is whether such rules are more favourable to the
foreign investor than to local firms under domestic law.
That danger is real. Post NAFTA, US trade and business
groups lobbied Congress very aggressively for “ no greater
rights” provisions to be inserted retrospectively into
NAFTA, and within any future US trade agreements.
They had only limited success. As Porterfield wrote
in 2004, the changes to expropriation conditions in NAFTA
and in proposals for the Free Trade Area of the Americas
pact, ‘provide foreign investors with significantly
greater rights’ than the Takings Clause that governs US
domestic law.
The impact can be considerable.
Consider say, if a future New Zealand government wanted, for
climate change reasons, to limit the development of a class
of economic activity, such as the coal industry. Or merely
wanted to change zoning rules.
The FTA inhibits such
ability. Porterfield cites zoning as an example of the risks
to which that the China NZ FTA now exposes us. “Clause
4(a) indicates that regulatory measures that have a
‘discriminatory effect’ against a class of which an
investor is a part can constitute acts of indirect
expropriation. This language could potentially make NZ
vulnerable to a wide range of claims.”
“Note,”
Porterfield adds,” that the language does not indicate
that the class must be based on foreign nationality.
Legislation generally singles out different classes of
economic actors for different treatment. Zoning
regulations, for example, divide different types of land use
(residential, commercial , agricultural, etc.), into
different classes and subclasses and subject them to
different rules, which can have significant economic
impacts of the members of these different classes . This
is perfectly legal – at least under the domestic law of
the United States - but could
potentially be subject to
challenge under the China-NZ agreement. “
There
are further problems. “ Paragraph 4(b) appears to convert
contractual breaches by the government of NZ into acts of
indirect expropriation that could be challenged under the
agreement. Typically, contract disputes are handled by
domestic courts,” Porterfield says laconically,
“although there is a growing trend towards adjudication of
these types of claims before international tribunals, which
are generally viewed as being more friendly fora for foreign
investors. “
So much for Annex 13, and its attempt
to enable New Zealand to enjoy the benefits of foreign
investment, without risk to our sovereignty. Other aspects
of the FTA strike Porterfield as posing equal, or even
greater cause for concern. “You didn't ask about it, but
I'd urge you to take a look at Article 143 – ‘Fair and
Equitable Treatment’ - which has been the basis for more
successful claims by foreign investors against government
sunder investment agreements than provisions regarding
‘indirect expropriation.’ Fair and equitable treatment
has been interpreted by international tribunals to include a
right to a ‘stable and predictable regulatory
environment,’ which has been used to successfully
challenge changes in regulatory and tax standards.” The
infamous MAI treatry, for that very reason, sought to bind
governments to 20 year investment rule regimes, without any
right of variance.
Trade law reality has been a steep
learning curve for New Zealand. During the Lockwood Smith/
Tim Groser era of trade negotiations during the 1990s, we
were the free love hippies of global trade. We rarely sought
protection, and virtually gave our bargaining positions
away, in the apparent belief that if we voluntarily lived
the free trade life ( no tariffs, maan) New Zealand would
become an inspiration for all of our uptight trading rivals.
It didn’t quite work out that way.
Thankfully, our
attitudes have since hardened somewhat. In the wording of
the China FTA, New Zealand has tried to install protections
for our ability to make our own rules and to pass our own
laws and regulations in future, without inviting foreign
investors to launch compensation claims when we do so.
Porterfield’s analysis suggests that the attempt has
largely failed, and we are stuck with the investment rules
regime contained within the China/NZ FTA.
Obviously,
we need to learn from the experience and should not simply
seek to import the China FTA investment rules wholesale into
the “P4” deal now looming on the horizon. In February,
Trade Minister Phil Goff welcomed the United States’ interest
in joining our existing trade pact with Chile, Singapore and
Brunei. Perhaps significantly, the US is interested in the
extension of that deal into financial services and
investment.
Goff’s enthusiasm for US involvement in the P4 deal needs to be tempered by these comments from New Zealand’s former ambassador to the US, Dr John Woods. In a lecture at Canterbury University last October, Dr Woods observed :
“ One perhaps surprising proposition was that the United States did not really negotiate in any generally accepted sense of the word, and as a corollary did not know how to negotiate very well at all. The U.S. came to the negotiating table in it’s role as the world’s only super-power, it understood its own status and brought with it not so much bargaining positions as truths. As one participant put it, “cultural traits impinge heavily on negotiations if the United States regards the issues as of critical importance to it. Impatience and arrogance come to the fore, with the U.S. pushing so hard that the situation can become ugly”. The United States’ underlying stance was that the other negotiating party should either accept it’s proposals, or adjust to the reality of them anyway. This elucidation clearly struck a nerve with some foreign participants.
More consistent with my own experience, it was remarked that the U.S. did indeed negotiate but at least 80 per cent of the time internally, with itself, within the American system. As the result of that domestic process, at the beginning of negotiations proper the foreign negotiating partner would be presented with the take-it or leave-it proposition: “This is the best we can get for you from our system, and you’d better believe it.” The lead U.S. negotiators were always conducting at least two simultaneous negotiations, worried about how the issues themselves would play out with the other side, and much more importantly how the negotiations would be viewed from the Hill i.e. by the U.S. Congress.”
ENDS