The not so 'free' trade deals

A FREE trade agreement (FTA) signed – either with a group of countries or with a single country – is not as "free" as its name sounds. It ties the country down to follow certain rules. Some of which may not be to our advantage.
One such rule allows foreign corporations to sue the government if it takes any action (say, pursuant to a policy change) which affects the profits it expected to make when it first established or intended to establish its investment. Under a provision called Investor-to-state dispute settlement – or ISDS. This is called "indirect expropriation" – a term introduced by the US in the original TPPA. And agreed to by Malaysia on US insistence by the previous government.
Notably, that TPPA was approved by Parliament in a rushed one-day sitting.
Trump promptly pulled the US out from this agreement – to fulfil his election pledge.
The remaining countries revived the negotiations and concluded the CPTPP. Which kept largely intact the previous TPP provisions.
The Mahathir administration will have to decide whether or not Malaysia should ratify the agreement. That means, become a party to the agreement. In which case we will be bound by the terms of the agreement including the ISDS claims arbitration system.
What is so wrong about ISDS?
Because these claims have mushroomed recently. They have become a new – and highly lucrative – source of massive claims by foreign corporations against largely developing countries. Goaded by ambulance chasers and vulture funds – exposing vulnerable developing countries to needless litigation.
The latest 2018 World Investment Report by a UN organisation, UNCTAD, revealed that in 2017 alone, investors initiated at least 65 ISDS cases. As of January 2018, the total number of ISDS claims had reached 855.
As in previous years the majority of new cases were brought against developing countries.
It reports that looking at the totality of the decisions on the merits, about 60% of the cases were decided in favour of the investor and 40% in favour of the state. In cases decided in favour of the investor, the average amount claimed was US$1.3 billion and the median US$118 million. The average amount awarded was US$504 million and the median US$20 million.
Cases are decided by a private group of arbitrators. From the 500 people appointed as arbitrators, about half have served on more than one known case. A small number (13) have been appointed to more than 30 cases each, with three having received the most appointments. All but one are citizens of European or North American countries.
These private arbitrators are known to create work for themselves. One day they act as adjudicators; yet another, they are lawyers for the claimant.
It is now suggested that we need not worry any more about the ill-effects because under the CPTPP, the ISDS provisions have been suspended in two situations: where there is a breach of an investment agreement and an investment authorisation.
A closer scrutiny shows that the suspension is only in respect of a marginal set of situations.
To qualify for this suspension, the investment agreement:
a. Must be in writing;
b. Concluded and takes effect after the CPTPP enters into force;
c. Must be between the central level of government (ie the federal government) and the investor of another party;
d. Only for rights granted:
i. With respect to national resources controlled by a national authority;
ii.To supply services on behalf of the party for consumption by the public for power generation, water, telecommunications or such like; and
iii. To undertake infrastructure projects – provided that the infrastructure is not for the exclusive or predominant use and benefit of the government.
Further, a claim can still be made for an existing agreement that is renewed or extended in accordance with its terms; and on the same or substantially the same terms and conditions; and the agreement subsists before the CPTPP entered into force.
Notably the ISDS suspension relates only to future agreements with the federal government; it does not cover the extension or the renegotiation of past agreements.
So the type of scenarios that will still be the subject of ISDS claims in the CPTPP: the Bakun Dam agreement – as it is with the state government; Lynas – as it is not an agreement with the federal government; and the renegotiation of the ECRL and the HSR – as these would rely upon the original agreement concluded before the CPTTP entered into force.
Hence any policy, administrative or legislative change that will affect or "alter the legal and business environment in which the investment is made" will attract an ISDS claim by the investor against the government.
All to be decided by a small coterie of private arbitrators as mentioned earlier. On this basis the ISDS tribunal under a bilateral investment agreement with the US, ordered Ecuador to pay a US investor US$2 billion for cancelling a contract of an oil company.
Ecuador had responded to demands by environmental and indigenous groups for environmental damage and human rights abuses. And acted within its rights as the oil company transferred its share without the requisite government approval.
As regards investment authorisation, the suspension for an ISDS claim is limited to an authorisation given by a party's foreign investment authority (and not by any other body) granted to an investment.
Even the conservative Economist magazine describes the ISDS process as "a way to let multinational companies get rich at the expense of ordinary people".
A formidable battery of eminent scholars and jurists has warned against approving a TPP with ISDS as it "empowers companies to challenge laws and regulations they don't like with friendly corporate lawyers instead of judges deciding their disputes".
And almost in response to our government's election pledge, they warn that ISDS "threatens the rule of law and undermines a nation's democratic institutions".
Gurdial Singh Nijar, a former University of Malaya law professor, currently practises law. Comments: letters@thesundaily.com