Hold the TPP? What is this ISDS?

my Trade Tripper column in the 26-27 February 2016 issue of BusinessWorld:

Lost amidst in what essentially was the Manny Pacquiao non-issue and the death of legal giant Antonin Scalia, the Trans-Pacific Partnership (TPP) was signed almost without fanfare last Feb. 4 in New Zealand. With Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, it’s a humongous agreement representing 10% of the world’s population, covering 40% of global GDP, and 13% of international trade.

And yet, the TPP is confronted with profound obstacles.

Current internal politics from both the US (key Republican and Democratic leaders, of the latter notably Hillary Clinton, are against it) and Japan (its TPP ratification momentum encountering a bump after the resignation of economic minister Akira Amari), and the new Canadian government’s seeming lukewarmness towards the deal, make the odds of the TPP coming into effect this year miniscule.

One reason for the continued reluctance on the TPP has to do with the Investor-State Dispute Settlement system (or the ISDS). Though a set of provisions that are present in other trade deals, most notably the North American Free Trade Agreement (NAFTA), the TPP’s ISDS has set off alarm bells due to its reach and possible consequences to a country’s sovereignty.

The US Trade Representative Office described the TPP’s ISDS as that which “deters foreign governments from imposing discriminatory or abusive requirements on American investors, and protects the right to regulate in the public interest.”

Such sounds neutral but note that it works both ways.

Essentially, the issue is this: if a government decides, for example, to enact a measure designed for the public interest (i.e., the environment, health, morals, etc.), a foreign investor disagreeing with that local law can sue that government under the provisions of the TPP before an international TPP arbitral tribunal, and have such law overturned and compensation paid.

Columbia University’s Lise Johnson, Lisa Sachs, and Jeffrey Sachs (“The real danger in TPP,” February 2016) put it this way: the “investor-state dispute settlement (ISDS) gives multinational companies outlandish sway over regulatory policies, including environmental protection.”

With the ISDS, “the arbitrators have the authority to review the President’s decision, give their own opinion on what the appropriate course of conduct should have been, and order the US government to compensate the investor if they believe a different decision should have been made or if they disagree with the policy rationale for the decision.”

Note that what Johnson, Sachs, and Sachs say is applicable to all TPP members.

If the Philippines for example, is a member of the TPP then it’s possible that while our “citizens must play by the rules established by Congress,” with limited rights to sue our government, “foreign companies don’t have to follow those rules” because they are afforded different rights under the TPP.

Related to the foregoing is the fact that, under the TPP, foreign companies can sue a government on the ground that the latter violated the “minimum standard of treatment.” This is the standard applied to the “treatment of aliens” to be “afforded to covered investments.” This includes situations relating to “criminal, civil or administrative adjudicatory proceedings” and “the level of police protection required under customary international law.”

Now, “minimum standard of treatment” is lackadaisically defined in the TPP as that which is “in accordance with ‘Customary International Law,’” which is then further unhelpfully described as “a general and consistent practice of States that they follow from a sense of legal obligation. The customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the investments of aliens.”

The width of its coverage but the ambiguity of its content should be obvious. And in terms of managing compliance, that there will be differences of interpretation as to what is the applicable minimum standard between a developed country and a developing country (such as the Philippines) is reasonably expected.

Finally, there is the issue regarding “technology transfers.”

For a developing country like the Philippines, which is supposed to permit the entry of foreign goods and services that will undoubtedly compete with domestic products, the possibility of attaining technology transfer is a good motivation for agreeing to such.

That is why even under the WTO’s Trade-Related Investment Measures (TRIMs), government mandated technology transfers were not prohibited. And in the specific instances where it was, like the membership condition imposed on China for entry into the WTO, such were not strictly enforced.

The TPP, on the other hand, frowns explicitly against mandatory technology transfers: “Article 9.9 -- No Party shall, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory, impose or enforce any requirement, or enforce any commitment or undertaking: x x x to transfer a particular technology, a production process or other proprietary knowledge to a person in its territory.”

Clearly, a more profoundly comprehensive study has to be done regarding the TPP.