TPP Basics: Investment Chapter/ISDS (Workshop by Sanya Reid Smith)

In this article, we address the investment chapter and the Investor-to-State Dispute Settlement (ISDS). The investment chapter can be seen as a bill of rights for investors, and can affect regulations at all levels of government. It overrides other chapters such as those on environment and labour, and is very enforceable given that there are economic sanctions and legal recourse for non-compliance. It is also noted that many other countries are withdrawing from similar investment treaties that have the ISDS. Why is Malaysia entering into one?

This series is brought to you by based on a recent NGO briefing on the Trans-Pacific Partnership (TPP) in Malaysia by Ms Sanya Reid Smith, an expert on Trade and Investment Rules. She has been monitoring the Trans-Pacific Partnership Agreement (TPPA) since 2011, and is also the resource expert for Bantah TPPA Malaysia. The entire talk is uploaded on YouTube in a seven part series and can be accessed here; this article is drawn mainly from Part 1, Part 2 and Part 3 of the talk. The index of the series is attached at the end of the article.

A bill of rights for investors

So then we come to the infamous investment chapter, where the ISDS, or Investor-to-State Dispute Settlement is. The investment chapter is about protecting the rights of investors in Malaysia. It’s a bill of rights for the investors. Not human rights. Investors’ rights.

What gets protected by this chapter? This chapter is strictly binding across all levels of government. The local government must comply. And all the negeri governments, and the federal government. What is protected in this investment chapter? The things you would think – like a factory, foreign direct investment. But also their patents, their copyrights, their shares, stocks, bonds, futures, options, licenses, permits, contracts, future profits, expected profits… these are all protected investments by the chapter.

Governments cannot make laws that affect private investments

So the rights of the investor, are things like “to be treated fairly and equitably”. What’s the problem, right? We must treat everybody fairly and equitably. But, recently, this has become widely interpreted by the international tribunals who decide the case. One of the ways that it can be interpreted, is that the government cannot change the laws and regulations, or have new laws and regulations, in a way that harms the foreign investor from the other TPP countries.

Because, when Philip Morris the tobacco company came to Malaysia 45 years ago, he expects constant laws and regulations until he leaves Malaysia in 99 years’ time. Never mind that along the way they found smoking kills people, and you want to ban tobacco advertising, and you want to have health warning labels, and you want to have a tobacco tax. Too bad. Unfair to the foreign investor. He must have a constant regulatory environment, otherwise it’s unfair to him.

If that is the case, then parliament close shop lah, what’s the point? The parliament’s job is to make laws, change laws, amend laws – often in response to new circumstances. I don’t know if you remember the plastic in baby bottles – the BPA in baby bottles right? We banned the BPA in baby bottles. Ten years ago we didn’t know. We found that it was a newly dangerous chemical and it was banned. Banning is a problem under this.

This is further explored within the Sovereignty article (link to the article will be updated)

“Direct Expropriation” with a broad definition of investment

There’s also a provision saying, you must not expropriate the foreign investor. This in the old days was about the Government nationalizing the company. If you remember, when Iran became independent or something, they nationalized British Petroleum, they’d take it over. So that’s ‘direct expropriation’. If you take over the company, or the land, you must pay compensation.

So in Malaysia you have some version of that, if the Government builds a highway, right? If my house is in the way, and they have to bulldoze my house, they must pay me compensation. But in most countries, I think in Malaysia too, it’s just for land, right? It’s not for your patents, for your profits, your future profits, your expected profits, just land. In the TPP, remember the broad definition of investment, if you expropriate his profits, his future profits, his patents…

“Indirect expropriation”, even wider

Can you think of something called tax? Tax sounds like expropriating profits. So, they have to try and have an exception for that. Because the other, second type of expropriation in the TPP is what we call ‘indirect expropriation’. Direct is you’re taking the title, you nationalize it so now the Government owns the factory.

Indirect is, he still owns the factory, the investor still owns the factory, but I, the Malaysian Government, have reduced the value of his investment. Because I made him put a scrubber on his chimney so it doesn’t have carbon dioxide. Because I made him raise the minimum wage. Because I made him stop polluting the river. I haven’t taken over his factory, but I’ve reduced the value of his investment, which includes his profits, by my laws and regulations – so indirect expropriation.

Expropriation, direct or indirect, must pay fair market value compensation, plus interest at a commercially reasonable rate, because you have harmed the foreign investor. It used to be that investors used expropriation more when they were suing, now they are using fair and equitable treatment. In US free trade agreements and investment treaties I think 74% of the time when they sue, they sue on fair and equitable treatment. 80% of the time when they allege it they win. They almost always win on this.

TPP is very enforceable, with economic sanctions

And how is it that they enforce these rules? Most of the TPP is enforced by the governments suing each other. So if Malaysia signs, and the TPP comes into force, and Malaysia doesn’t comply with the services chapter, or the export taxes restrictions, the US Government can sue the Malaysian Government at an international court, or tribunal, Malaysian Government would lose, the US Government could raise the tariffs, the taxes on Malaysian exports of electronics, clothes, to the US, until Malaysia changes its law to comply.

So it’s very enforceable compared to your human rights treaty, your labour treaty, your environment treaty, right? Nothing happens if you don’t comply with those, right? Nobody sues you, no tariffs, no nothing. This one has economic sanctions. So if they clash, and the government has a choice, do I comply with my environment, my human rights treaty? Or do I comply with the TPP? Most governments would comply with TPP, because of the economic sanctions if you don’t.

And so, even though they are supposed to be equal in international law, TPP has the economic sanctions, whereas for these environment, labour, human rights, argh [4:08 making a face], no sanctions then never mind. And so this means that even if your Constitution violates the TPP, you have to change your Constitution, because if they raise tariffs on your exports until your exporters are crying, then they will say ‘change change lah.’ So, they are very enforceable, generally, these chapters.

Corporations can sue Malaysia with no maximum damages

The TPP’s investment chapter has another level of enforcement. Not just governments can sue each other, but the foreign investor, eg: Lynas in Malaysia, can sue the Malaysian Government at the international tribunal, for money. Unlimited monetary damages. No maximum in the TPP.

So one government lost a case last year I think, and had to pay the foreign investor 50 billion USD. Lima puluh bilion US dollars. They had 180 days to find the money. Malaysia Government got or not? A spare US$50billion to spend like this? So, that’s the damages. In addition to that, pay the investor interest, and in the TPP, this interest can be compound interest, ie interest on the interest. Not compounded once a year, it can be compounded every month. From the day the government took the action five years ago, at commercial borrowing rates, not government borrowing rates. So the interest alone can be 500 million USD. Just in interest.

Further information can be found in the TPP Stakeholders: Taxpayers and Citizens article. For those who are interested in past US FTA ISDS cases, click here.

Countries are withdrawing from similar investment treaties

Because this Investor State Dispute Settlement has been so problematic, other countries have learnt their lesson. South Africa was sued for their affirmative action for black South Africans after Apartheid, and they settled, and they removed it for that mining company. And then they said, ‘Alamak, that affirmative action is in our Constitution, this means that our Constitution is going to be challenged under these treaties’. So they are withdrawing, from these investment treaties.

Indonesia got sued by some big mining companies, they have not yet lost, but they are already withdrawing from all their investment treaties. India is reviewing its investment treaties and putting in exceptions and safeguards.

Brazil has no investment treaty in force, because the Executive branch of the Government signs, happily signs the investment protection treaties, but under the Brazilian Constitution, it must pass the Brazilian Parliament. In the Brazilian Parliament all the political parties got together and they looked at it, and they said ‘these investment protections restrict our policy space, our ability to regulate, too much. We will never pass one of these.’ So Brazil has none of these treaties in force.
And yet they are the 5th largest recipient of foreign direct investment in the world.

Foreign investments come based on other factors, not signing the TPP

Because foreign investment comes if you have a big population, a lot of people to sell to, Walmart, Tesco want to come to sell to your people, right? So that’s Brazil, India and China. Foreign investment comes if you have natural resources: oil and gas, minerals. Foreign investment comes if you have human capital, people who can work in the factories. Foreign investment comes if your electricity doesn’t go off ten times a day, your roads are not jammed, and you don’t have people bombing your factories in the middle of a war zone. These are what the economists agree are the main reasons for getting foreign investment. It’s not whether you sign this treaty or not.

So, a lot of countries after being sued have seen the light, and saying ‘actually this gives too much rights to the foreign investor, we are not able to regulate, and we’ll withdraw’. Malaysia is going the opposite way and signing a treaty, on the 4th of February 2016, the TPP, with these same investment protection provisions, exposing themselves to the most litigious investors in the world, who almost always win, for the huge stock of American investment in Malaysia plus the stuff that comes afterwards.

Index of the Series

This series contains 20 articles on the TPP, and can be read in any order:

Transcriptions are kept chiefly ad verbatim, with some minor edits for readability. The text has also been checked by Ms Smith for accuracy.

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