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An economy shaped by investor rights? No thanks.

Last week on The Spinoff economic lawyer Chris Gillies called for Labour to rethink its opposition to investor-state dispute settlements, a key part of trade deals like the TPP. Quite the contrary, argues solicitor and TPP scholar Oliver Hailes: New Zealand is far better off without them.

Buckle up, because the election result has reignited the Trans‑Pacific Partnership (TPP) debate. Anticipating the new government sending representatives off to negotiations at the APEC summit in Vietnam next month, Chris Gillies has written a summary of investor-state dispute settlement (ISDS). You should read it. In short, ISDS provisions are included in economic treaties to help resolve disputes between foreign investors and countries they’ve invested in.

The idea behind such provisions appears benign. Before individuals or companies will put money into a country, they want to be sure that country’s rulers will treat them fairly. The ISDS system, it is argued, provides such reassurance.

But while Gillies presents a balanced and moderate discussion of the issue, I can’t agree with his basic argument that New Zealand should stick with the TPP’s ISDS provisions, especially if we take seriously the new government’s rhetoric about abandoning neoliberalism. The TPP is a significant constitutional instrument that could bring about important changes to how public power is (and is not) exercised in New Zealand, and ISDS would serve as the gateway for those changes.

The only game in town?

First of all, we should note that ISDS is no longer the only game in town. The European Union opposes the inclusion of ISDS provisions in its future economic treaties, instead arguing for an international investment court with proper judges. South Africa, India and Indonesia are unwinding their existing investment obligations due to discontent with ISDS, and some major players such as Brazil have never handed investment disputes over from their domestic courts to international arbitrators.

Indeed, there is an emerging consensus that the problems with ISDS cannot be resolved by internal tinkering. Instead, we should look at developing different systems for resolving the claims of foreign investors.

The international appetite for alternative options also weakens any claim that ISDS is simply is a price New Zealand must pay to secure free trade benefits with its most significant trading partners. While past treaties have wedded ISDS to the reduction of trade tariffs, the marriage is by no means inevitable and appears a lot more negotiable now that the US has left the TPP table.

Furthermore, ISDS can pose a deeper threat that becomes even more important given our recent election result.

The times they are a-changin’

The incoming government has made significant claims about the economic status quo. In September, Jacinda Ardern agreed with former prime minister Jim Bolger’s assessment that neoliberalism had failed New Zealand, before this weekend describing the existing economic order as “a blatant failure”. And last Thursday, while the whole nation waited with bated breath, Winston Peters echoed this criticism by declaring: “Far too many New Zealanders have come to view today’s capitalism not as their friend but as their foe.”

All of a sudden, capitalism in Aotearoa is a contested concept, and its neoliberal flavour has been rejected outright. So what is ‘neoliberalism’? While capitalism, in general, is a market-oriented system driven by competitive profit-seeking, neoliberal ideology mobilises government toward the ends of private enterprise in order to secure profitability, come hell or high water (or homelessness).

Professor David Harvey explains this way of thinking as demands that “if markets do not exist (in areas such as land, water, education, health care, social security, or environmental pollution) then they must be created, by state action if necessary”. The neoliberal state therefore plays an active role in creating investment opportunities through, for example, transforming public property and social services into freely tradable assets.

AUCKLAND TPPA PROTESTS IN 2015 (GETTY)

New Zealand has pursued such an agenda since 1984. Domestic changes in the role of the state have been simultaneously locked in through international treaties, which form a governance structure for the global economy. These global rules seek to protect the business interests of multinational corporations by limiting the policy space available to future national governments and progressive social forces.

It is therefore important to realise that New Zealand is tangled in a web of international legal rules dictating what we can and cannot do. This is why Jacinda Ardern must renegotiate our 2015 agreement with South Korea (which prohibits restrictions on foreign ownership of residential property) in order to implement the incoming government’s preferred housing policies.

The TPP is the most expansive example of an economic treaty that places “handcuffs” on future governments. But we aren’t yet past the point of no return. We should take this opportunity to have a debate about the breadth of changes that the TPP may well bring to New Zealand’s law, politics and economy. To do so properly we must reflect on the nature of New Zealand’s constitution and the provisions included in the rest of the Investment Chapter of the TPP alongside the ISDS provisions.

Constitutional concerns

Beyond the TPP’s impact on particular sectors (reducing trade tariffs, protecting foreign ownership of land and infrastructure, extending copyright, restricting access to low-cost medicine, and so on), its Investment Chapter would involve a serious constitutional change for New Zealand.

It is well known that we don’t have a codified supreme law (a Constitution, with a capital C) that sets out the boundaries of legitimate government. Instead, our unwritten constitution consists of many rules and conventions that then are called “constitutional” because they significantly influence the generic exercise of public power. The central principle of this constitutional order is the doctrine of parliamentary sovereignty, whereby our democratically elected representatives may pass any law they think best for the country as a whole.

However, the TPP’s Investment Chapter would impose a Constitution‑like effect by placing enforceable legal limits on the state’s regulatory powers. Three features of the Investment Chapter warrant the incoming government’s attention: (1) protection from expropriation, which threatens the ability to regulate; (2) the chilling effect of arbitration, which serves to promote neoliberal governance; and (3) the expansion of arbitration, which erodes the authority of our domestic court system.

Threats to regulatory autonomy

Expropriation protections first emerged in treaties to encourage investment in low-income countries by quelling concerns that unstable governments would, for example, nationalise industry and seize privately owned plant. Subsequently, these investor rights have been imported into agreements between high-income countries and broadened to include anything and everything that can be possibly be owned. The TPP, for example, protects “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk”.

TRUMP OUT. THE ORDER THAT TOOK THE US OUT OF TPP.

Some overseas constitutions require compensation whenever government actions limit an owner’s ability to use or dispose of property rights, such as reducing the expected market value of land through environmental regulations. However, New Zealand’s parliament and courts repeatedly have rejected such a right. Expropriation protections under the TPP thus effectively introduce a new, backdoor restriction on New Zealand’s lawmaking powers by enabling investors to sue future governments if they adopt regulations that might reduce profits.

Admittedly, the TPP states that “non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.” But notice all the investor-friendly qualifications buried within this public welfare exception: “non-discriminatory”; “legitimate”; “except in rare circumstances”. Investment lawyers are trained (and paid handsomely) to exploit these loopholes.

Indeed, many ISDS cases internationally have invoked expropriation protections to challenge public welfare objectives advanced by fracking moratoriums, taxes on sugary drinks, minimum wage legislation, phasing out nuclear energy, price controls to curb financial crisis, and the reversal of privatisation policies. Some of these issues have been central to political debate in New Zealand, but the TPP threatens to divorce these matters of deep disagreement from mechanisms of democratic control.

Promotion of neoliberal governance

Direct challenges through arbitration can create a chilling effect on legislation and bring about long-term constitutional change by subordinating parliamentary politics to the logic of foreign investment. Therefore, the real effect of the TPP is likely to be in redefining what is seen as being possible. Strong protection of investment creates a threat of legal challenges which, alongside the spectre of capital flight, deters legislative innovation and steadily institutionalises neoliberal values within the organs of government.

Such threats need not be explicit. Vague investment protections and broad arbitral discretions create sufficient uncertainty to suppress policy experiments when the cost of a successfully defended ISDS case averages US$8 million. The very threat of immense arbitration damages promotes a particular mode of governance and hinders proposals that hope to carve alternative paths to prosperity.

This is no accident. The architects of the TPP intend to limit the political imaginings of national governments in service of cookie-cutter regulatory coherence across a liberalised regional market. The effect of the Investment Chapter, in particular, is not so much to reform policy but to lock it in through obligations that make it very difficult for future governments to, for example, apply the precautionary principle to public health and environmental risks. To paraphrase an Italian proverb, the TPP would change everything so that everything stays the same.

Erosion of domestic courts

The expansion of ISDS enables a swarm of new investors to challenge government actions beyond the purview of New Zealand’s courts. This parallel legal system of arbitration offers beefed-up rights that aren’t available to New Zealanders, fails to meet expected judicial standards of impartiality and transparency, and could compel the government to control the decisions of domestic courts.

In my view, due to its far‑reaching implications, decisions on the TPP’s meaning by offshore technocrats would become a form of de facto constitutional interpretation that could erode the authority of our courts as the final deciders on matters of public importance. We may be a capital‑importing nation, but we need not secure investor confidence by outsourcing dispute resolution when our courts are renowned as some of the best in the world.

In the same speech in which Winston Peters criticised “today’s capitalism”, he also acknowledged that “we live or die by exporting”. From this statement, Gillies draws the conclusion that we “must retain flexibility in negotiating better export terms in New Zealand’s best interests, including with respect to ISDS”.

I draw a different conclusion: we ought to decouple as best we can our economic trading interests from the political disciplines of international investment law. In pursuing export-driven growth, the government must be mindful that many of the policy options or social programmes it hopes to implement through enhanced prosperity may well be foreclosed by the broader investment obligations introduced by the TPP.

The Investment Chapter of the TPP establishes the legal framework for an economy shaped unduly by investor rights, neoliberal policies and offshore institutions rather than the core organ for New Zealand’s democracy: our elected Parliament as supreme lawmaker. The incoming government must not lose sight of that bigger picture when deciding whether to accept ISDS provisions, and we ought to assess collectively the constitutional impact of the TPP before Prime Minister Ardern takes her seat at the negotiating table in Danang. Time is running out.

Oliver Hailes is a solicitor based in Wellington. His work on the Trans‑Pacific Partnership has won several legal writing awards.


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