Should Norway be the new template for our China FTA?

Should Norway be the new template for our China FTA?

Further FTA Analysis By Gordon Campbell

The China FTA photo ops are over. Parliament now has to bed in over the next few months to consider the FTA deal – and if we’re crazily in luck, it may even try to weigh the likely costs against the possible benefits. It should begin by taking a long hard look at Norway’s draft bilateral investment treaty, released last December. The Norwegians have sought to grapple with many of the risks to national sovereignty and the possible compensation claims from distraught multinationals highlighted recently by Scoop, and US trade expert Matthew Porterfield. Those risks are quite real. Cry for Argentina. In desperation, it changed some of its socio – economic settings when its economy started to turn turtle a few years ago, and it has been paying thgrough the nose ever since. Even though it thought its investment treaties gave it a ‘ state of emergency’ defence for its actions, that line of argument has cut precious little ice with the very same kind of international tribunals that would be deciding any disputes under the China FTA. Perish the thought, but if a natural disaster – say a cyclone or an outbreak of foot and mouth disease – ever devastated our economy, would we still be forever beholden to the terms of the China FTA, as signed in 2008?If Argentina is anything to go by, yes we would. At last count, Argentina has had to pay British Gas $185 million, a further $135 million to the US energy company CMS, another $107 million only last year to Enron (yes, THAT Enron) an initial award of $128 million plus $36 million in unpaid subsidies to another US firm Sempra, and a $57 million damages claim to the US based L G & E firm. Ironically, this tab has been run up partly because Argentina had taken on board during the 1990s the ‘Washington consensus’ wisdom on how to run a market economy – and when these failed and it took steps to protect its citizens from the impact, Argentina found that the international arbitration tribunals were far more sympathetic to the plight of the multinationals than they were to the hapless Argentinians.

To date, there has almost no public analysis of the risks that the China FTA could pose to taxpayers. or to our ability to freely pass our own laws. In the past, aggrieved multinationals could only sue for compensation through the domestic courts, but now they can sue governments in global forums. The Norwegians have thought about this a lot. The March 27 2008 ITN newsletter of the International Institute for Sustainable Development points out that Norway has chosen not to enter into any new bilateral investment treaties (BITs) since the mid 1990s. And why not? Because of its “concerns about the compatibility of such international agreements with Norway’s own constitution, and the impact of such agreements upon policy making.”

In particular, the Norway draft treaty has tried very hard to move away from ‘one-sided agreements that safeguard the interests of the investor’ and has plumped instead for agreements that ‘ safeguard the regulatory needs of both developed and developing countries, making investors accountable, while ensuring them predictability and protection.” In particular, Norway has tried to safeguard “the ability of governments to regulate for purposes of social welfare, environmental protection and other important interests.”

As Scoop and Georgetown University trade expert Matthew Porterfield pointed out recently, the China/FTA trade deal in its current form gives New Zealand no such protections. The expropriation provisions in Annex 13 and the investment rules in chapter 11 do make an attempt to do so – but as Porterfield’s analysis on Scoop, showed, they largely fail.

So how has Norway proceeded? By recognizing – albeit in a footnote – that there may be genuine and legitimate grounds for governments to treat foreign investors differently, including for the protection of public health, safety, or the environment. Furthermore the treaty commentary underlines there are reasons for regulating foreign investors in a less favourable fashion, to achieve social goals – provided the state can produce ‘objective grounds for discriminatory treatment.”

In other words, New Zealand should be following the Norwegian lead, and including far stronger wording to protect New Zealand’s ability to make and interpret its own laws. At present, the China FTA does virtually the opposite : it leaves key terms not only undefined but also without guidance as to what they could be taken to mean. Thus, sub-clauses four and five of the crucial Annex 13 on expropriation provide only nominal protections. It is now up to Parliament to strengthen the wording, or defer/reject the treaty until these problems are fixed.

Beyond even the dangerously loose and vacuous wording there is a more basic problem. At heart, the FTA gives an un-elected panel of foreign trade bureaucrats sitting in Geneva the ultimate say in whether actions by a New Zealand government are truly proportionate to the public purpose intended. Why would Phil Goff want to give away this level of sovereignty and call it a victory? True, it does give NZ firms similar leverage within China – but is that investment opportunity for some firms really worth exposing the taxpayer to massive compensation claims ? Not to mention infringing our capacity to freely make and change laws as our social, economic and environmental circumstances may demand, and the public may wish.

The problematic definitions? Key terms such as whether a state actions may be ‘ reasonably justified” – in Annex 13 subclause 5 or ‘ disproportionate to the public purpose’ in subclause 3 remain gloriously undefined, without any indication as to what ‘reasonable’ or’ disproportionate’ is to be held to mean. Geneva will eventually tell us, in ways we might not like. Elsewhere, mere guidance is given when firm boundaries are needed – as in sub-clause 4, which utterly fails to prevent foreign tribunals from declaring particular cases to be indirect expropriation.

While the Norwegians haven’t quite managed to find the perfect balance between giving investment security to multinationals while protecting the sovereignty rights of host governments, they have gone further down the track than we have. In one striking innovation, Norway has chosen to tackle the issues of expropriation not through trade law – but through human rights law, citing the European Convention on Human Rights as a better framework than international trade law on this issue. As the ITN analysis says. this human rights law approach “ strikes a clearer balance between the protection of property and the rights of states to make regulations and administrative decisions without having to pay compensation to affected business interests.”

Parliament needs to consider the Norway template. Nor that it can it simply import the same wording into the FTA. At first blush, it may look as if the Norwegians have a catch all safeguard in their Article 6 (2) on expropriation, which reads : “ the preceding provisions shall not however in any way impair the right of a Party to enforce such laws as it deems necessary to control the use of property in accordance with the general interest, or to secure the payment of taxes or other contributions or penalties.” That’s a nice try, but it means only that states can pass and enforce laws. It does not exempt them from compensation claims for doing so, not even ( in my view at least) by implication. So that clause alone will not quite do the trick, but it is a good starting point.

What the process underlines is that Parliament now has to give serious scrutiny to the bilateral investment treaty lurking within the China FTA. It should not be a mere rubber stamp, though its capacity to affect the outcome is limited. On the evidence to date, it cannot simply take MFAT’s word that the nominal protections against indirect expropriation contained in Annex 13 or the investment provisions in chapter 11 will actually protect New Zealand – if say, we chose in future to take action against Chinese imports for reasons of public health and safety, or against certain industries for reasons of environmental protection.

The real issue is political, not economic. Clearly, global trade rules and global human rights rules are two areas in which we habitually surrender a degree of autonomy, for the public good. In one case, this surrender is done to protect the wealthy and more powerful, in the other to protect the vulnerable. As the Norwegians are indicating, maybe we should sign away our sovereignty in FTAs only if and when the principles of global trade and human rights have been brought much closer into alignment.