United States: Narrowing Prospects For Investor Protection: Failure Of The TPP Would Affect Investment Security In Malaysia

Last Updated: September 16 2016
Article by Marcus S. Quintanilla

No matter the outcome of the next presidential election, United States ratification of the Trans-Pacific Partnership ("TPP") is uncertain given the positions taken by the presidential candidates of both major political parties. What is more, non-ratification by the United States would doom the TPP as a whole. The treaty will come into force only if all original signatories ratify it within two years, or if, after two years, at least six TPP nations—accounting for at least 85 percent of the group's GDP—do so; both avenues require U.S. ratification for the TPP to enter into force.1 Consequently, the future of the TPP may hinge on the ability of the Obama administration to achieve ratification during the "lame duck" session of Congress, following the presidential elections but before President Obama leaves office.2 During a recent visit to Laos, President Obama expressed optimism that the treaty would indeed be ratified,3 but he faces an uphill battle in the U.S. Congress.4

With the future of the TPP at stake, the time is now for lawmakers and voters to weigh the treaty's potential benefits and burdens—including those that, until now, have stood at the margin of public debate. One such aspect is the treaty's mechanism for Investor-State Dispute Resolution ("ISDR"). Addressed in Chapter 9 of the TPP, the treaty's ISDR regime confers an array of international-law protections on the investments that nationals of one signatory country make within the territory of the other signatory states. Most importantly, Chapter 9 grants aggrieved investors a private damages remedy directly against the host nation and access to an international arbitral tribunal—rather than the respondent state's home courts—as the forum to resolve those claims.5

In the United States, the TPP's ISDR regime has been largely overlooked in the mainstream political debates. While those provisions are a common target of academic and ideological opposition to free-trade agreements,6 the ISDR provisions of the TPP have not been frequently cited by either presidential candidate as grounds for opposition. Both Hillary Clinton and Donald Trump have focused instead on the alleged impacts the TPP could have on American jobs threatened by increased international competition.7 To the extent the treaty's ISDR provisions have raised concern, the criticisms have been voiced by politicians like Senator Elizabeth Warren and disappointed presidential hopeful Senator Bernie Sanders8—progressive lawmakers whose influence on national foreign policy remains limited. Setting aside philosophical objections to the ceding of U.S. sovereignty, or conjectural concerns over how ISDR protections could impair American efforts at economic or industrial regulation, there is little empirical evidence that ISDR actually chills valid regulatory efforts.9 On the other hand, there can be no doubt that ISDR helps to protect foreign investments by U.S. companies and individuals and facilitates redress when U.S. investments are harmed.10

From the standpoint of capital-exporting firms in the United States, failure to ratify the TPP would involve a missed opportunity for investment protection—particularly for those with investments in TPP countries where there is some material level of political risk but where U.S. investors do not already enjoy ISDR protections under other treaties, such as NAFTA or an applicable bilateral investment treaty ("BIT").

Among the TTP's initial 12 signatories, Malaysia is the country where U.S. investors will likely lose their most important opportunity for investment protection if the TPP is not ratified. Currently, the United States does not have an ISDR scheme with Malaysia because negotiations for a free trade agreement between the two countries fell through in 2008. Nevertheless, U.S. foreign direct investment ("FDI") in Malaysia stood at $15 billion by 2012—a 21.1 percent increase from the previous year11—and the growth trend in U.S.–Malaysia investment showed no sign of significant interruption in the years that have followed.12

More than 600 U.S. companies currently have operations in Malaysia.13 According to the U.S. Department of State, the most significant U.S. investments are in the manufacturing, oil and gas, and financial services sectors.14 U.S.-backed manufacturing in Malaysia has involved machinery, electronics, scientific and measuring equipment, chemical products, and foods and beverages.15 As investment activities in these sectors continue, Malaysia will also target growth in the solar energy and aerospace industries in the years ahead.16

The growing influx of U.S. investment in Malaysia reflects the widely held perception that Malaysian policymakers are business friendly,17 but the existence of political risk in Malaysia cannot be discounted.18 In recent years, the ongoing corruption scandal involving Prime Minister Najib Razak offers the most concrete example. In 2009, Mr. Razak founded 1 Malaysia Development Bhd. ("1MDB") to help promote the Malaysian economy.19 But on July 20, 2016, the U.S. Department of Justice filed civil lawsuits seeking to recover more than $1 billion in assets resulting from 1MDB's alleged misappropriation of $3.5 billion, some of which is alleged to have been laundered through and used for purchases in the United States.20 Although the Malaysian government has never been accused of directly misappropriating U.S. assets in Malaysia, the current scandal makes clear that U.S. investments in that economy may face substantial exposure—whether from official government action or by government officials improperly manipulating state-affiliated commercial entities. That risk is exacerbated by the fact that the Malaysian government has large discretion over authorizing investment projects and is already reported to use that power to maximize its profit from foreign investors.21

The ongoing scandal may also lead to a change of administration22 and a handover of power to elements with more nationalistic positions23—potentially including augmented preferential measures for some or all Malaysians at the expense of international investors. As is so often the case, ISDR protections become most valuable, not against the trade-friendly regimes that adopt them, but against successor regimes that often hold very different agendas.

For U.S. companies interested in investing in an attractive Malaysian market, the TPP marks a material opportunity to add security to their investments. Lawmakers on Capitol Hill would be well advised to weigh that opportunity—along with the considerations more prominently in the headlines—as they decide the treaty's fate.

Footnotes

[1] Ian F. Fergusson et al., Cong. Research Serv., R44278, "The Trans-Pacific Partnership (TPP): In Brief" (Feb. 9, 2016) (Entry into force requires "ratification by all 12 TPP countries within two years of signing for the agreement to enter into force, or, after two years, requires ratification of six countries accounting for 85% of TPP GDP, a condition that would require both U.S. and Japanese participation.").

[2] See Associated Press, "President Obama makes trade deal a top priority in remaining months," CBS News (Sep. 5, 2016); Jackie Calmes, "Trans-Pacific Partnership Supporters Pin Hopes on Lame-Duck Vote," The New York Times (June 1, 2016).

[3] Remarks by President Obama at YSEALI Town Hall (Sep. 7, 2016) ("I believe it will be ratified because it's the right thing to do. ... [A]fter the election, I think people can refocus attention on why this is so important. ... I believe that we'll get it done, but it's always going to be hard. Nothing is easy in the U.S. Congress right now.").

[4] Eric Bradner, "Obama pushes trade in Asia, but has 2016 killed the TPP?," CNN (Sep. 7, 2016).

[5] For a summary of the specific guarantees the TTP affords the investors of signatory states, see Steve Smith, "Investment: Protection for U.S. Investors in TPP Countries," Jones Day Trans-Pacific Partnership Blog (May 19, 2016).

[6] Alex Lawson, "Scholars Continue Assault on TPP's Arbitration System," Law360 (Sep. 7, 2016).

[7] See Hillary Clinton, MSNBC Democratic Primary Debate in New Hampshire (Feb. 4, 2016) ("[W]e have failed to provide the basic safety net support that American workers need in order to be able to compete and win in the global economy. So it's not just what's in the trade agreement that I'm interested in."); Hillary Clinton, CNN Democratic Primary Debate in Las Vegas (Oct. 13, 2015) ("[I]n looking at it, it didn't meet my standards. My standards for more new, good jobs for Americans, for raising wages for Americans."); Donald J. Trump, "Disappearing middle class needs better deal on trade," USA Today (March 14, 2016), ("TPP is the biggest betrayal in a long line of betrayals where politicians have sold out U.S. workers.").

[8] See Elizabeth Warren, "The Trans-Pacific Partnership clause everyone should oppose," The Washington Post (Feb. 25, 2015); Bernie Sanders, "The Trans-Pacific Trade (TPP) Agreement Must be Defeated" (last visited Aug. 4, 2016).

[9] See Charles N. Brower and Sadie Blanchard, "What's in a Meme? The Truth About Investor-State Arbitration: Why It Need Not, and Must Not, Be Repossessed by States," 52 Colum. J. Transnat'l L. 689, 720-56 (2014).

[10] FACT SHEET: Investor-State Dispute Settlement (ISDS), Exec. Office of the President, Office of the U.S. Trade Representative (last visited Aug. 4, 2016).

[11] Malaysia, Exec. Office of the President, Office of the U.S. Trade Representative (last visited Sep. 9, 2016).

[12] See, e.g., Leong Hung Yee, "US among top three investors in Malaysia," Star Online (April 24, 2014); Rupe Damodaran, "Mida sees brighter investment climate," New Straits Times (March 19, 2016); Investment Climate Statements for 2016, Malaysia, Bureau of Econ. & Bus. Affairs, U.S. Dep't of State (last visited Sep. 9, 2016).

[13] Ian E. Rinehart, Cong. Research Serv., R43505, Malaysia: Background and U.S. Relations (Nov. 19, 2015).

[14] Investment Climate Statements for 2016, Malaysia, Bureau of Econ. & Bus. Affairs, U.S. Dep't of State (last visited Sep. 9, 2016); see also Ian E. Rinehart, Cong. Research Serv., R43505, Malaysia: Background and U.S. Relations (Nov. 19, 2015); Malaysia, Exec. Office of the President, Office of the U.S. Trade Representative (last visited Sep. 9, 2016); U.S. Relations with Malaysia, Bureau of E. Asian & Pac. Affairs, U.S. Dep't of State (lasted visited Sep. 9, 2016). See generally Malaysia: Foreign Investment, Santander (last visited Sep. 9, 2016) (noting that the main investment sectors in Malaysia are manufacturing, mining/oil and gas, and finance, followed by IT and agriculture/forestry/fishing).

[15] Leong Hung Yee, "US among top three investors in Malaysia," Star Online (April 24, 2014).

[16] Rupe Damodaran, "Mida sees brighter investment climate," New Straits Times (March 19, 2016).

[17] Malaysia Among Top 20 Best Economies and First Among Emerging East Asia Economies for Ease of Doing Business, World Bank (Oct. 28, 2015).

[18] Political Risk Map, Aon (last visited Aug. 4, 2016).

[19] Sara Schonhardt and Yantoultra Ngui, "Malaysia's Najib Razak, Beset by Growing Scandal, Demands Respect," The Wall Street Journal (Aug. 2, 2016, 10:05 AM).

[20] Bradley Hope and Tom Wright, "U.S. Links Malaysian Prime Minister to Millions Stolen From Development Fund," The Wall Street Journal (July 21, 2016, 12:26 PM).

[21] Malaysia: Foreign Investment, Santander (last visited Sep. 9, 2016).

[22] See, e.g., Opinion, "1MDB and Malay Nationalism," The Wall Street Journal (Sep. 8, 2016, 7:12 PM).

[23] See, e.g., Shotaro Tani, "TPP not beneficial for member nations—Malaysia's Mahathir," Nikkei Asian Review (May 31, 2016, 4:49 PM); Joe Fernandez, "Dr M: With TPPA, we will be submitting to foreign forces," Free Malaysia Today (Jan. 20, 2016).

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