Few current issues in international trade are as contentious or polarising as the Trans-Pacific Partnership (TPP), a proposed multilateral trade and investment agreement between 12 States of the Pacific Rim, including Australia. Following negotiations in Hawaii this week, it could finally be nearing a deal. The ambit, both substantive and geographical, is remarkable. Among other things, it would cover trade, services and investment for countries comprising approximately 40 per cent of global GDP. Proponents expound the economic and strategic benefits, while critics complain that the negotiations are being conducted 'in secret' and argue that the process is beholden to 'corporate interests'.

Considerable public attention has been given to Investor-State Dispute Settlement (ISDS): a mechanism whereby qualifying investors can commence international arbitration proceedings against a state in which they have invested for treatment that violates substantive standards. Those standards could include non-discrimination, the prohibition of expropriation without compensation and a denial of justice. ISDS is a common feature of the vast majority of the 3000-plus investment treaties worldwide, but it has recently encountered criticism in Europe in the context of a proposed trade and investment treaty between the EU and the United States.

In Australia, ISDS has become a particularly hot political topic following the commencement in 2011 of (ongoing) investment arbitration proceedings by Philip Morris against Australia regarding plain-packaging legislation for tobacco. That year, in a departure from the approach taken by other developed countries, the then Labor-led government stated that it would cease including ISDS provisions in its investment treaties and trade agreements. That stance was reversed by the Abbott government in 2013, which announced that it would consider ISDS provisions on a 'case-by-case basis'. The Labor Party passed a motion at its national conference this week to remove ISDS clauses from Australia's existing trade agreements. Trade Minister Andrew Robb has warned that this could weaken Australia's position as a 'reliable trading partner'.

Much of the commentary on ISDS confuses international arbitration as a means to resolve investor-state disputes with the nature of the substantive investor protections under treaties. It is possible to maintain arbitration as a dispute resolution mechanism for investor-state disputes while narrowing substantive standards of protection for investors. Indeed, the TPP states are reportedly considering doing precisely that.

A key issue is whether there is a role for international arbitration to resolve disputes between investors and states, or whether local courts are always the appropriate forum. Many investors and states appear to consider that ISDS should continue to play a role in the international investment architecture and that local courts do not represent a panacea. Whether ISDS ultimately features in the TPP remains keenly awaited.

First published in Australian Financial Review, July 2015

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