In this article we talk about how the TPP will affect state governance in member countries. Governance is the processes through which a country is run, and the interactions between different governmental and non-governmental entities to make decisions based on national interest. How will the TPPA work within the relationships between federal, state and local governments? What about issues of corruption and law breaking?

This series is brought to you by TPPDebate.org 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 Parts 2 and 5 of the talk. The index of the series is attached at the end of the article.

Video starts at 10:38

ISDS is binding across local, state, federal governments

With the Investor-to-State Dispute Settlement, to enforce the investment chapter, the US investor can sue the Malaysian government if they don’t comply. Remember that it is binding on all levels of government, so say the PJ Government doesn’t comply, and they ban something that is not allowed to be banned. The Malaysian national or federal government gets sued by the US company. The national government must defend itself, and sometimes it says, ‘I don’t want to defend very hard lah, this is some other political party’s policy in this state. It’s not my political party, why should I defend this action? Or they make them pay. They say to the state or local government, ‘It’s your fault, you pay my legal fees. Eight million US dollars, fifty million US dollars to defend – because it’s your fault, you broke the law.’

Then the national government defends the case, hard or not hard we don’t know, but let’s say they lose. And they have to pay the fifty billion US dollars to the foreign investor. If they don’t pay, under the TPP, the home country of the investor, the US government, can raise the tariffs, taxes on Malaysia’s exports until it pays the fifty US billion dollars to the American investor. So there’s a double enforcement. Then, say the Malaysian national government, the federal government pays the fifty billion, and they turn around and say to PJ ‘It was your fault, you banned this fellow.’ So, can he get the money back from the PJ local government, or in another case, the Penang state government? It depends on each country’s law.

Which government pays when investor sues because of a state government action?

In Canada, the provinces kept violating the US free trade agreement, and the national government kept getting sued, and kept paying, and they got sick of it. And they said, ‘Next time, provinces, you pay!’ So now the provinces are having to pay when they ban a mine, for example, when they get sued and if they lose, they settle, whatever, they pay.

But in Mexico, the same thing happened. The Mexican local government and state government banned a toxic waste dump because it was going to pollute the water supply, which people were drinking. The national government got sued. They lost. They had to pay sixteen million US dollars to the investor. The national governments sued the local and state governments in the Mexican Court, under Mexican law, saying ‘Give me back the US$16 million I paid because it was your fault.’ But under the Mexican Constitution they could not get their money back.

Federal government will be signing on behalf of local, state governments

So, it’s interesting consequences both ways, right? Because under the TPP, it’s the national government that is responsible for the state governments, which can be from a different political party and which under the Malaysian Constitution have some things that are state rights, right? The Malaysian Constitution has Federal list, state list, concurrent list… The national government cannot control the subnational governments but the national government would be liable for the subnational governments’ actions. That’s one option.

The other option is that maybe in Malaysia the federal government can withhold the allotments, or withhold the discretionary spending on highways that the federal government was going to give the state, and thus force them to pay back the compensation the federal government had to pay when it lost the ISDS case for a subnational government’s actions. If that’s the case, then the federal government on the 4th of February will be signing on behalf of all the state governments and all the local governments, including PJ, and binding them in those chapters and making them liable because the federal government can and will get the money back from them. So have all the subnational governments been informed? Have they all been consulted? Did they realize? Have they consented? Have they set aside in their budgets enough money to pay the legal fees, the damages, the compound interest?

Because they will all be on the hook once the TPP starts. Because the federal government is signing on their behalf on the 4th of February. And I understand in Malaysia there is some discretion whether the federal government can hold back money from, say, Penang, in the allotments or in the highway funding or something. So it looks like in Malaysia, politically, the federal government can say, ‘It’s your fault, I’m going to hold back your money,’ now the state doesn’t get the money or whatever.

Video starts at 9:17

Ecuador: Had to pay law-breaker

There was a famous case in Ecuador where the oil company broke the law. And when you break the law in Ecuador for this matter, the law says you can punish the company by canceling the permit. So Ecuador canceled the permit. The oil company sued the Ecuador Government under equivalent provisions that have been agreed in the TPP that Tok Pa will sign next month, and the oil company won. Ecuador must pay the law-breaker 2.4 billion US dollars. Because the investment chapter of the TPP is about the rights of the investor. It doesn’t matter if the investor has done something wrong. Not clean hands, broken the law, it doesn’t matter, the investor always has his rights. And if the rights of the investor are infringed, he can sue and he can win.

Ecuador again: ordered to interfere in its own court system

I don’t know if anyone’s interested in separation of powers, independent judiciary…? OK. The Chevron case. Again in Ecuador, Chevron polluted the rainforest, you probably remember, in the Amazon, 30 thousand indigenous people sued, in a class action. They sued Chevron in the Ecuador courts and they won, 18 billion US dollar fine on Chevron, to clean up. Chevron didn’t want to pay. They sued the Ecuador Government under the investment chapter, saying this court decision is expropriating their profits. Chevron was going to make profits and now it must pay the fine.

So that case is not decided yet, but along the way, the ISDS tribunal, the same kind that Malaysia can be sued at in the TPP, ordered the Ecuador Executive branch of Government, the president, to interfere with his courts, to stop the 18 billion US dollar fine on Chevron becoming final. Ecuador has separation of powers, like Malaysia. The Executive is not supposed to interfere with the courts. In Ecuador, if the president does it, he goes to jail. Never mind, the ISDS tribunal repeatedly ordered the president to put himself in jail by interfering in his own court system. There is no constitutional safeguard, or separation of powers in this system.

Video starts at 11:47

India: Had to pay the corruptor

And lastly, those of you who are interested in anti-corruption? There are a lot of ISDS cases, I’m just telling you about the cases that might be interesting for you. In India, I don’t know if you remember, they had a 2G phone licence scandal. Remember 2G, 3G, 4G, that mobile phone spectrum is limited, right? It’s a limited amount. All the phone companies want it. So you auction it, and you make a lot of revenue for the government, billions of dollars.

In India, for 2G, the Minister just gave out the licenses, there was no auction. He was tried for corruption, he went to jail for corruption, the Indian Government said, ‘We’ll cancel the licenses that were given corruptly, because of corruption we lost billions of dollars of potential revenue.’ The investors who corruptly got those licenses are suing the Indian Government, for the billions of dollars of lost profits they would have made if they could have kept their corrupt licenses. One has already won. The Indian Government must pay the corrupt fellow 672 million US dollars. Pay the corrupt fellow, pay the law breaker, pay the environmental polluter. The opposite of what you normally think: ‘don’t pay the polluter.’ This is the investment chapter.

Index of the Series

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

• Introduction
• TPP Basics
  • Before signing – the negotiation process
  • After signing – ratification and certification process
  • What-ifs – if we do not sign, or violate the agreement, or withdraw
  • Investment Chapter/Investor State Dispute Settlement (ISDS) – what it means for the country
  • Export Taxes on Goods – may restrict Malaysia’s movement up value chain
  • Liberalisation of services – is binding across all levels of government (federal, state and local)
• TPP Stakeholders
  • Taxpayers and citizens – who will pay for lawsuits against Malaysia
  • Business owners and investors – local businesses and Malaysian investments overseas
  • Students – intellectual property rights in education
  • Patients – intellectual property rights in medicine
  • Farmers – agriculture and food security
• TPP Impacts
  • On sovereignty – regulation, colonisation, ISDS
  • On governance – different levels of government (federal, state and local), corruption, separation of power (you are here)
  • On economy – trade balance, GDP
  • On environment – environmental regulations and the environment chapter
  • On society – human rights, labour, privacy
• TPP Miscellaneous Topics
  • Geopolitics – the link with China, and TPPA as a geopolitical tool of the US
  • Corporate dominance in the US – corporate influence in US FTAs, cleared advisors within the TPPA
  • Yarn Forward Rule – How zero tariffs may still mean less exports

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