Controversial protections for foreign investors have reared their head in UK-Australia trade talks. Sam Sachdeva looks at the history of ISDS provisions and whether they could make their way into New Zealand’s own trade deal with Britain.

ANALYSIS: As free trade talks between the United Kingdom and New Zealand pick up pace, the biggest issue in need of resolution has seemed to be getting a suitable market access offer for Kiwi exporters without alarming British farmers.

That is still the case, but talk of the Investor State Dispute Settlement (ISDS) mechanism may add another possible area of angst.

The ISDS provisions, which allow foreign investors to take action against a country through an arbitration tribunal if they believe it has breached its investment rules, have proved controversial around the world – yet they appear to be on the table in ongoing negotiations for a trade deal between the UK and Australia.

Asked in the House of Commons in late May whether the British government could rule out the inclusion of an ISDS mechanism, Minister of State for Trade Policy Greg Hands said: “It is a live negotiation, and there will be a chapter on investment.”

“We are huge investors in each other’s markets, and I remind him that the UK has never lost an ISDS case,” Hands added.

Hands’ comments have created some unrest in the UK and Australia, with Australian Fair Trade and Investment Network honorary convenor Dr Patricia Ranald arguing in The Guardian the Australian government “should not hand UK corporations a weapon to use against democratically decided public interest legislation”.

The spectre of ISDS may also cause unease for some in New Zealand given the Government’s own, ongoing trade deal negotiations with the UK.

The investor protections were among the most contentious components of the Trans-Pacific Partnership, or TPP (later renamed the CPTPP), which the Labour-led government had to finalise early in its first term having opposed the deal in opposition.

The ISDS provisions of the Trans-Pacific Partnership trade deal were among those to attract the greatest concern at New Zealand protests. Photo: Lynn Grieveson.

In late 2017, Prime Minister Jacinda Ardern said the Government would “do our utmost” to strip the ISDS clauses from the CPTPP, enlisting its ambassadors to lobby the 10 other countries to sign side-letters suspending the investor provisions at a bilateral level.

While it had only mixed success in that endeavour, Ardern said at the time that New Zealand would oppose ISDS provisions in any of its future FTAs.

ISDS’ critics cite concerns about a lack of accountability for the tribunals making rulings and a framework that puts corporations on the same footing as the state, while its defenders here argue the mechanism provides vital protections for Kiwi companies doing business in foreign countries.

Newsroom understands the issue of investor protections, such as a ISDS provision, remains a ‘live issue’ still under discussion in the UK-New Zealand talks.

While New Zealand has made clear its opposition to the inclusion of any such clause, the British side in turn is believed to have emphasised the importance of some form of investor protections in the agreement.

One alternative option would be the use of a multilateral investment court system developed by the European Union, which former trade minister David Parker spoke positively about during the last term of government.

However, that model has still caused some concern with other countries, while it is unclear whether the UK would support such an EU-designed solution given the remaining post-Brexit tensions.

A United Nations working group is developing a range of ISDS reforms which could address countries’ problems with the system, but at its most recent meeting in May it was suggested its work would not finish until 2025 (even then, some countries suggested that deadline was “overly ambitious”.

“We look at it through the lens of not a strain on sovereignty, but a protection for our multilateral exporters and their investments overseas.”

National’s trade spokesman Todd Muller told Newsroom the party remained “relaxed” about the use of ISDS clauses and did not see their exclusion as a prerequisite for any trade deal.

“We look at it through the lens of not a strain on sovereignty, but a protection for our multilateral exporters and their investments overseas – we have our companies who invest overseas on the basis that a law isn’t going to change suddenly overnight [in an unfair manner].”

Muller said it was ultimately a matter for the Government as to whether ISDS became a point of debate during negotiations, and if so whether it became a non-negotiable.

“Ultimately Damien O’Connor has to land a deal that’s going to deliver for New Zealand exporters. You never get everything you want in every negotiation, and any trade agreement at some level is a constraint on sovereignty.”

A spokesman for Trade and Export Growth Minister Damien O’Connor did not respond to questions from Newsroom before this story’s initial publication about whether the UK had raised the possibility of including an ISDS scheme in its negotiations with New Zealand, or whether such a proposal would cross a ‘red line’ for the Government. But at a press conference on Sunday following the APEC trade ministers’ meeting, O’Connor said ISDS had not been raised in negotiations and he was confident it would not be included in any deal.

A spokeswoman for the Ministry of Foreign Affairs and Trade noted New Zealand’s opposition to ISDS clauses was included in the “high-level negotiating objectives” for the FTA negotiations, and that position had not changed.

Given that stance, and the fact it was Labour that set it, it seems highly unlikely – to say the least – a fully-fledged ISDS provision will make its way into any final agreement.

But wherever the two sides do land may still cause some consternation within New Zealand and, while it lacks the pure economic significance of the UK’s market access offer, could prove similarly tricky to navigate for the Government.

* This article has been updated with comment from Damien O’Connor regarding ISDS, provided at a press conference on Sunday.

Sam Sachdeva is Newsroom's national affairs editor, covering foreign affairs and trade, housing, and other issues of national significance.

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