Reassessing the utility of Investor-State arbitration: what lessons should be taken from the recent Australian policy shift?
The zeitgeist of international investment law is one of deep and fluid change. After decades of stability (if not rigidity), many states are now engaged in a remarkable process of transforming the investment treaty network. Australia is the most recent entry to that group. In June 2011, the Australian Government publicly announced in a Trade Policy Statement that it would no longer include investor-state dispute settlement (ISDS) provisions in future trade agreements.
The Australian policy shift is surprising on a number of fronts. It is certainly a visible break from the preferred strategy of other developed states when recalibrating their exposure to investment law commitments. The U.S and Canada, for instance, have tended to manage their risk profile by tightening the substantive provisions within investment treaties and/or inserting exceptions clauses modeled on the law of the World Trade Organization (WTO).
Unlike a number of Latin American countries also, the Australian policy shift is not explicable simply by reference to individual state experience as respondent to investment arbitration. Until very recently, Australia had never been subject to investor-state arbitration and there are a mere handful of publicly reported investor-state claims initiated by Australian companies. Instead, the policy shift is grounded in the specific recommendations of an independent statutory agency – the Australian Productivity Commission – whose past work has injected admirable rigor and objectivity in the Australian policy-making process.
Yet even to those sympathetic to recalibration of investment law, the Productivity Commission’s approach is disappointing. The framing of the Commission’s inquiry is, quite properly, an attempt to identify the cost-benefit calculus (to Australia) on the question of treaty-based disciplines on foreign investment. But as actually implemented by the Commission, that methodology is marked by a set of problematic assumptions and omissions that necessarily cast doubt on its substantive recommendations.
This includes no real attempt to balance the significant costs of investment rules (understood conceptually as the restriction of Australian policy space against a counterfactual of full sovereignty) to any likely benefits that can flow from entry into such rules. When it comes to the question of benefits, it is important to note that Australia is both a capital importer and exporter. Indeed, as recorded by the Commission itself, there was steep growth in outward investment by Australian companies in the mining sector from 2001 to 2008. Yet those particular Australian companies face unique political economy risks abroad because natural resource projects are usually location or relation specific, have a long duration and are characterized by high, up-front capital costs.
Those enormous costs then are truly sunk, having little or no alternative use value thereby significantly constraining the ability of foreign investor to exit the host state. It is this deep ex post immobility of FDI in the resources sector that creates strong potential for host government to opportunistically raise demands on foreign investment. It may well be therefore that investment treaty protections could play a logical role in countering these type of particular risks (in the absence of credible and sufficient alternatives).
Politics too however has clearly played a hand in shaping the Australian Government’s sudden hostility to investor-state dispute settlement over the course of 2010 to 2011. During this period, Australia began to put in place steps for pioneering public health regulation of tobacco consumption.
The new legislation triggered a wave of litigation both in the form of domestic constitutional challenge by affected cigarette producers (recently successfully defended by the Australian Government) and pending claims both under investment treaty protections (by Philip Morris Asia Ltd under the 1993 Hong – Kong Australia BIT) and before the World Trade Organization.
It is difficult to escape the impression that it is simply anathema to the current Australian Government that legal regulation appropriately directed at a compelling public health objective should even be subject to international legal complaint. Even for those attracted to that position, it is important to recall that the very contingency of investor-state claims against Australian public health measures is partly the result of poor choices made by past Australian governments (and their advisors).
Almost all of Australia’s older BITs contain no general exception modeled on Article XX of the General Agreement on Tariffs and Trade 1947 which enables state to regulate for, inter alia, public health purposes. Even though that exception has been in place as a matter of Australian treaty practice on foreign trade since 1947, it has not been deployed in Australia’s BITs.
Ultimately, the story of the Australian policy shift is one of opportunity lost. A powerful case can be made for deep contemporary reconsideration of investment disciplines, both substantively and procedurally. Regrettably however, the analysis that underpins the policy shift simply produced more heat than light. Commentators sympathetic to the direction of the new Australian policy will inevitably be tempted to ignore these superficialities and sizeable process failures. That option should, however, be foreclosed for those states that wish to rigorously and accurately reconsider their own future engagement with investment treaty disciplines.
For a fuller assessment of the process and reasoning that led to the Australian policy shift on investor-state arbitration (on which this summary is based), please see Jurgen Kurtz, “Australia’s Rejection of Investor-State Arbitration: Causation, Omission and Implication” (2012) 27 (1) ICSID Review 65-86.
See also IPFSD clauses: