By Martin Khor
GENEVA, May 12 2014 (Columnist Service)

The tide is turning against investment treaties and free trade agreements that contain the controversial investor-state dispute system, which allows foreign investors to take up cases against host governments and claim compensation of up to billions of dollars.

Recently, Indonesia has given notice that it will terminate its bilateral investment treaty (BIT) with the Netherlands, and says it will cancel all of its 67 bilateral investment treaties.

Indonesia joins South Africa, which last year announced it was ending all its BITS.

Several other countries are also reviewing their investment treaties. This was prompted by increasing numbers of cases being brought against governments by foreign companies which claim that changes in government policies or contracts affect their future profits.

Martin Khor

Many countries have been asked to pay large compensations to companies under the treaties. The biggest claim was against Ecuador, which has to pay a U.S. oil company 2.3 billion dollars for cancelling a contract.

The system empowering investors to sue governments in an international tribunal, thus bypassing national laws and courts, is a subject of controversy in Malaysia because it is part of the Trans-Pacific Partnership Agreement (TPPA) which the country is negotiating with 11 other nations.

The investor-state dispute settlement (ISDS) system is contained in free trade agreements (especially those involving the United States) and also in BITS which countries sign among themselves to protect foreign investors’ rights.

When these treaties containing ISDS were signed, many countries did not know they were opening themselves to legal cases that foreign investors can take up under loosely worded provisions that allow them to win cases where they claim they have not been treated fairly or expected revenues have been expropriated.

South Africa had been sued by a British mining company which claimed losses after the government introduced policies to boost the economic capacity of blacks to redress apartheid policies.

India is also reviewing its BITS, after many companies filed cases when the Supreme Court cancelled their 2G mobile communications licenses in the wake of a high-profile corruption scandal linked to the granting of the permits.

But it is not only developing countries that are becoming disillusioned by the ISDS. Europe is getting cold feet over the investor-state dispute mechanism in the Transatlantic Trade and Investment Partnership (TTIP) it is negotiating with the U.S., similar to the mechanism in the TPPA.

Several weeks ago, Germany told the European Commission that the TTIP must not have the investor-state dispute mechanism.

Brigitte Zypries, a Parliamentary State Secretary at the Ministry for Economic Affairs and Energy, told the German parliament that Berlin was determined to exclude arbitration rights from the TTIP deal, according to the Financial Times. “From the perspective of the [German] federal government, U.S. investors in the European Union have sufficient legal protection in the national courts,” she said.

The French trade minister had earlier voiced opposition to ISDS, while a report commissioned by the United Kingdom government also pointed out problems with the mechanism.

The European disillusionment has two causes. In first place, ISDS cases are also affecting EU countries.

Germany has been taken to the International Centre for Settlement of Investment Disputes (ICSID), an international arbitration institution that is a member of the World Bank Group, by the Swedish company Vattenfall which claimed it suffered over a billion euros in losses resulting from the government’s decision to phase out nuclear power after the Fukushima disaster.

And the European public is getting upset over the investment system. Two European organisations last year published a report showing how the international investment arbitration system is monopolised by a few big law firms, how the tribunals are riddled with conflicts of interest, and the arbitrary nature of tribunal decisions.

In January, the European Commission suspended negotiations with the U.S. on the ISDS provisions in the TTIP, and announced it would hold 90 days of consultations with the public over the issue.

In Australia, the previous government decided it would not have an ISDS clause in its future free trade agreements and BITs, following a case taken against it by Philip Morris International which claimed loss of profits because of laws requiring only plain packaging on cigarette boxes.

So far the U.S. has stuck to its position that ISDS has to be part of the TPPA and TTIP. However, if the emerging European opposition affects the TTIP negotiations, it could affect the TPPA as this would strengthen the position of those opposed to ISDS.
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By Martin Khor
GENEVA, Aug 17 2013 (IPS)

Two new trade agreements involving the two economic giants, the United States and the European Union, are leading a charge against the role of the state in the economy of developing countries.

Attention should be paid to this initiative as it has serious repercussions on the future development plans and prospects of developing countries.

The two latest attempts towards this are through the Trans-Pacific Partnership Agreement (TPPA) and the Trans-Atlantic Trade and Investment Partnership (TTIP). A new feature of both, as compared to other FTAs, will be discipline on the operations of state enterprises and a reduction of the state’s role in development.

Martin Khor. Credit: Nic Paget-Clarke

The latter is a subject of long-standing discussion. The immediate post-colonial period saw a tendency towards a strong state, including government ownership of some key sectors, such as industry and banking.

Past decades witnessed a wave of privatisation across both rich and developing countries. But the state still owns or controls utilities, infrastructure, public services, banks and a few strategic industries in many developing countries.

Countries provide incentives for foreign companies, such as tax-free status. However, the state also offers special treatment to local companies, such as grants, cheaper-than-normal credit, subsidies, and government contracts.

The developmental role of the state in developing countries is now coming under attack from developed countries.

This is promoted by the big companies in the U.S., Europe and Japan, which seek to enter the markets of developing countries – the source of their future profits.

The support given by the state to domestic companies is seen by multinational companies as a hindrance to their quest for expanded market share in developing countries.

They are thus seeking to change the worldview and policy framework in developing countries, to get them to reduce the role of state enterprises as well as to curb the governments’ promotion of local private companies.

A sub-chapter on state-owned enterprises is a prominent part of the TPPA, which is being negotiated by the U.S. and Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Japan has just joined too.

The U.S. and Australia are leading the move to have rules to discipline the role of the government in the economy, through a two-pronged approach.

First, to get government or other monopolies to behave in a “non-discriminatory” way, including when they buy or sell goods and services. For example, they are not allowed to give preferences or incentives to local firms.

Second, companies that are linked to the government (including through a minority share) should not get advantages vis-à-vis other firms in commercial activities. Of course, the developed countries that are proposing this are thinking of their companies -how they can get more access to developing countries’ markets.

In the TTIP, a U.S.-European Union agreement, negotiations for which started in July, the EU has prepared a sub-chapter on state-owned enterprises, with rules that seem quite similar to what the U.S. and Australia are proposing in the TPPA.

Although the TTIP only involves Europe and the U.S. directly, the rules it sets are intended to have consequences for other countries.

According to press reports, the two economic giants are planning for the rules they set in the TTIP to become the standard for future bilateral agreements that also include developing countries.

They also hope that these rules will eventually be internationalised in the World Trade Organisation, which has over 130 member states.

The EU position paper on state-owned enterprises says that its aim is to “create an ambitious and comprehensive standard to discipline state involvement and influence in private and public enterprises” and for this to “pave the way to other bilateral agreements to follow a similar approach and eventually contribute to a future multilateral engagement.”

In other words, the constraints on the role of the state, and the reduction of the space for behaviour or operations of state-linked companies, will become the way of the future for all countries, if the U.S. and European plans succeed.

These attempts to curb the role of the state in the economy are worthy of serious study and counter-action.

Developing countries that succeeded in economic development were able to combine the roles of the public and private sectors in a partnership that advanced overall national development.

Asian countries, including Japan, South Korea, Malaysia, Singapore and China, have pioneered this model of public sector collaboration with the private sector.

Those few developing countries that managed to get development going were all driven by the “developmental state”, or the leadership role of government in establishing the framework of economic strategy, and the collaboration between the state, state enterprises, and commercial companies.

Ironically, agricultural subsidies, the main trade-distorting practice of developed countries and regions like the U.S., Europe or Japan, have been kept off the agenda of the FTAs negotiated by the U.S. and EU with developing countries, including the TPPA.

The developed countries are clever not to include what would be more damaging to them. Thus the developing countries are deprived of what would have been the major trade gain for them.

Naturally, there are pros and cons to any agreement, including the FTAs. Any potential gain for a country in exports or investments should be weighed against potential losses to domestic producers and consumers, and especially the loss to the government in policy space and potential pay-outs to companies claiming compensation under the FTAs’ investment rules.

But if developing countries have to come under new international rules that curb the role of the state and that re-shape the structure of their economy, then the prospects for future development will be adversely affected.
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