Legal News & Analysis – Asia Pacific

• The Trans Pacific Partnership (TPP), a free trade agreement under negotiation between twelve nations across the Pacific Rim, is nearing completion.
• The agreement will be one of the most significant free trade agreements entered into to date, covering approximately 26% of world trade.
• The agreement will likely offer significant benefits to inbound investors into Australia, including reductions in tariffs, regulatory coherence and an ability to rely on investor-state dispute settlement provisions to protect against political risks associated with investment.

Following the Coalition’s win in the Australian federal election on 7 September 2013, the Prime Minister elect, Tony Abbott, announced that Australia is “open for business”. This announcement foreshadowed a shift in Australia’s trade policy towards the promotion of “freer trade, economic infrastructure and private-sector-led growth”.¹ This shift in policy has led to a significant push to conclude several Australian free trade agreements currently under negotiation. For example, the government concluded negotiations in respect of the Korea-Australia free trade agreement in December 2013, and there have been indications that the government is set to finalise the Japan-Australia free trade agreement by July 2014. It is in this context that Australia is currently negotiating the TPP.

 
In this article, we consider the benefits that the TPP may offer inbound investors into Australia, including reductions in tariffs, regulatory coherence across the TPP region and an ability to rely on investor-state dispute settlement (ISDS) provisions to protect against political risks associated with investment.

 
The Trans Pacific Partnership

 
The TPP is a landmark regional free trade agreement that has been under negotiation since March 2010. The agreement includes twelve states across the Asia-Pacific region – namely Brunei Darussalam, Chile, New Zealand, Singapore, Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States and Vietnam. It builds upon the existing Trans-Pacific Strategic Economic Partnership Agreement between Brunei Darussalam, Chile, New Zealand and Singapore, and will consist of a single undertaking covering all key trade and trade-related areas. It is intended that the TPP will eventually evolve into an APEC-wide agreement, with countries such as Korea, Thailand, India, Costa Rica, Bangladesh, Indonesia, the Philippines, Laos and Colombia having expressed interest in participating in negotiations to date.

 
The agreement will be one of the most significant free trade agreements entered into to date, covering approximately 26% of world trade (resulting in a trade bloc second only to the European Union in the size of its total trade value), with member states’ GDP amounting to 39% of the world’s GDP in 2012.

 
The TPP aims to reduce barriers to trade and investment between member states, and facilitate economic integration, growth and innovation across the Asia-Pacific region, thereby offering lucrative new foreign investment opportunities across the Asia-Pacific rim. In addition, the TPP is expected to govern regional competition issues, capacity building, cross-border services, customs, e-commerce, environmental issues, financial services, government procurement, intellectual property, investment, trade, dispute resolution mechanisms, market access for goods, rules of origin, telecommunications and trade remedies. In this way, the TPP is intended to deal with ‘behind the border’ barriers to trade and investment, such as domestic regulatory regimes with respect to labour, local investment procedures and competition policies, in addition to cross-border impediments, such as tariffs. Negotiators indicated that they were aiming to reach agreement in February 2014 at meetings in Singapore, although reports suggest that the intellectual property chapter, and provisions surrounding the environment, state owned enterprises, competition and rules of origin remain under heavy negotiation. At the conclusion of talks in Singapore, there was no definite timeframe for the conclusion of the agreement.

 
From the perspective of entities looking to invest in Australia, the most immediate and obvious benefit will be a reduction in tariffs which will lower barriers to entry into Australian markets. Textile manufacturers, for example, are among the groups likely to benefit from the TPP with the agreement likely to result in the reduction of Australia’s relatively high tariffs in this area.²

 
More broadly, the introduction of coherent and streamlined regulation of investments across the TPP region under the agreement is likely to be attractive to companies looking to invest in Australia, given that regulatory differences are generally considered to be at least as challenging to manage as classic border barriers such as tariffs.³ Companies will be able to avoid the substantial costs associated with complying with divergent regulatory regimes when investing within the TPP region, with the agreement thus creating a level and transparent playing field for foreign companies looking to invest in Australia.

 
While the TPP is thus expected to reduce barriers to trade in many respects, it is possible that the agreement will lead to increased regulation in some areas such as intellectual property, health, labour and environmental practices. Unsurprisingly, the possibility of increased regulation in these areas has attracted criticism from certain quarters. However, from the perspective of entities looking to invest in Australia, enhanced protections in the intellectual property space may be of benefit, as such companies may be more confident that their trade secrets will remain secure under the terms of the TPP than under existing Australian laws, which do not directly criminalise the disclosure of trade secrets. Indeed, such protections may render investment structures that involve the disclosure of sensitive or confidential information, such as joint ventures, commercially viable, expanding the opportunities for companies to invest in Australia. This may be of particular relevance to companies operating in the financial services, pharmaceuticals, manufacturing, information technology and food / beverage production sectors, which rely heavily on trade secrets to protect commercially valuable confidential information.

 
Investor-State Dispute Settlement Provisions

 
One of the biggest benefits for investors into Australia and the region will be the likely inclusion of ISDS provisions in the TPP. ISDS provisions protect against political risks associated with investing overseas. Such protections are of significant benefit to cross-border investors, whose projects must often weather considerable changes to the host country’s government policies over the lifetime of the investment. This is particularly so for foreign entities looking to invest in Australia’s mining sector or in large-scale infrastructure projects, which often require significant sunk capital and which can span decades. The shelter from political risk provided by ISDS provisions may be crucial in rendering such an investment viable.

 
ISDS provisions provide both substantive and procedural protections. Substantively, such ISDS provisions generally set out the standards by which host countries must treat foreign investors – namely fairly and equitably, with discrimination against foreign investments compared with domestic investments being prohibited. Procedurally, if a dispute arises, ISDS provisions allow investors to bring claims directly against the relevant host government (rather than having to rely on their home government to take action on their behalf) and to have their dispute resolved before a familiar and independent arbitration tribunal, rather than by recourse to the local courts of the host country. While Australia of course has a robust legal system, the ability to have recourse to arbitration may be attractive to foreign investors, given the familiarity of the arbitral context as compared to the local Australian court system to such investors, and the avoidance of any perception of (real or otherwise) home-ground advantage on the part of the Australian government.

 
The inclusion of ISDS provisions represents a change in position from Australia’s former Labor government which had a policy of not including such provisions in free trade agreements and investment treaties. The new Coalition Government clarified its policy with respect to ISDS provisions in February this year, when the Coalition indicated that it will consider ISDS provisions in free trade agreements on a case-by-case basis.⁴ Such provisions will not be included if they would restrict Australia’s capacity to govern in the public interest — including in areas such as public health, the environment or any other area of the economy. However, according to the Coalition Government, the rights of governments to take decisions in the public interest can be protected by the incorporation of appropriate safeguards in ISDS provisions.

 
The willingness of the Australian government to include ISDS provisions in free trade agreements was reflected in the recent inclusion of ISDS provisions in the Korea-Australia free trade agreement. This is clearly good news for entities looking to invest in Australia, who will be able to use the ISDS provisions to reduce the risk profile of their investments through appropriate structuring of their investments.

End Notes:

1. Tony Abbott, Address to the Business Council of Australia 30th Anniversary Dinner, Sydney, 4 December 2013.
2. See Congressional Research Service, ‘Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis’, 10 June 2013, available at https://www.fas.org/sgp/crs/row/R42344.pdf.
3. Congressional Research Service, ‘Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis’, 10 June 2013, available at https://www.fas.org/sgp/crs/row/R42344.pdf.
4. Department of Foreign Affairs and Trade, ‘Frequently Asked Questions on Investor-State Dispute Settlement (ISDS)’, available at: http://dfat.gov.au/fta/isds-faq.html.

For further information, please contact:

Leon Chung, Partner, Herbert Smith Freehills

[email protected]

Homegrown International Trade Law Firms in Australia