Investor-state dispute settlement and the China-Australia Free Trade Agreement

In brief

The Australian and Chinese governments have concluded negotiations on a free trade agreement that will reduce tariff barriers on the majority of Australian exports to China. The Australian Department of Foreign Affairs and Trade has confirmed that the treaty will include an investor-state dispute settlement mechanism. Partner Peter O'Donahoo, Managing Associate Hilary Birks and Associate Anna McMahon report.

Background

On 17 November 2014, the Australian Prime Minister Tony Abbott announced that Australia and China had concluded negotiations for the ChAFTA. The announcement was followed by the signing of a Declaration of Intent by Australian Trade and Investment Minister Andrew Robb and Chinese Commerce Minister Gao Hucheng, undertaking to prepare the legal texts in both languages for signature in 2015. The Department of Foreign Affairs and Trade (DFAT) has published an overview of the agreed terms, pending release of the text of the treaty (the ChAFTA overview).

The conclusion of negotiations for the ChAFTA marks the third bilateral trade agreement that the Coalition Government has finalised since coming to power in September 2013, following conclusion of negotiations of the Korea-Australia Free Trade Agreement (the KAFTA) in December 2013 (followed by the signing of the KAFTA in April 2014), and the conclusion of negotiations for the Japan-Australia Economic Partnership Agreement (the JAEPA) in April 2014 (followed by signing of the JAEPA in July 2014). We reported on the KAFTA and the JAEPA in Focus: Investor-State Dispute Settlement under the Korea-Australia Free Trade Agreement and Focus: The Japan-Australia Economic Partnership Agreement. Both the KAFTA and JAEPA are still to enter into force.

One of the issues we have been keenly monitoring is the Australian Government's negotiating position relating to ISDS mechanisms in trade agreements, whether bilateral, multilateral or regional. This has been a controversial issue in Australia since the previous Federal Government announced in April 2011 that it would not include an ISDS mechanism in any future investment or trade agreements. Upon its election in 2013, the Coalition Government stated that it would consider the inclusion of an ISDS regime on a case-by-case basis and, where adopted, would include limitations and carve outs to sufficiently protect a government's right to make decisions in the public interest.¹ The ChAFTA overview confirms that the ChAFTA will include an ISDS mechanism, although the exact scope of the regime is unknown.

Outcomes

The following is a high-level summary of the outcomes of the ChAFTA for Australian and Chinese producers and exporters, based on the information outlined in the ChAFTA overview. For a detailed analysis of these outcomes, please see our Focus: The China-Australia Free Trade Agreement.

Australian producers and exporters

In the ChAFTA overview, DFAT announced that once fully implemented, the ChAFTA will provide a number of Australian producers and exporters with a significant competitive advantage. On full implementation, 95 per cent of Australian goods exports will enter China duty-free and Australian service providers will also benefit.

Tariffs are expected to be eliminated or reduced across the following industries:

• Agriculture and processed foods: tariffs will be eliminated on exports including dairy products, beef, wine, barley and seafood.
• Resources, energy and manufacturing: tariffs will be eliminated on products including coking coal and thermal coal within two years (this is significant given China's announcement in October 2014 that it was applying a 3 per cent and 6 per cent tariff to imports of coking coal and thermal coal respectively²). Tariffs will also be eliminated on products including refined copper and alloys, aluminium oxide, nickel mattes and oxides and unwrought zinc.

When it enters into force, the ChAFTA is expected to guarantee Australian service suppliers access to the Chinese market in areas such as financial services, education, telecommunications and legal services, and includes a commitment to participate in future negotiations on access to China's public sector procurement market.³ DFAT has announced that the ChAFTA delivers China's best ever service commitments, including the provision of new or significantly improved market access not included in any of China's previous free trade agreements (other than China's free trade agreements with Hong Kong and Macau).⁴

Chinese producers and exporters

Over time, the ChAFTA will eliminate Australian tariffs on Chinese imports of agricultural products, processed food, resources, energy and manufactured goods. Furthermore, the ChAFTA should promote Chinese investment in Australia by raising the screening threshold at which private Chinese investment in non-sensitive areas will be considered by the Australian Foreign Investment Review Board, from $248 million to $1,078 million. There are expected to be carve outs for the review of Chinese investment proposals in agricultural land and agribusinesses, which are considered to be some of the more politically sensitive industries.

ISDS provisions, ChAFTA and the future of ISDS in JAEPA

Unlike the recently concluded JAEPA, the Investment Chapter of the ChAFTA will contain an ISDS mechanism, under which certain obligations can be enforced against the applicable host state directly by a foreign investor. According to the ChAFTA overview, the ISDS provisions will contain safeguards to 'protect governments' ability to regulate in the public interest and pursue legitimate welfare objectives such as public health, safety and the environment'.⁵

The Investment Chapter of the ChAFTA may be similar to the KAFTA's. The KAFTA Investment Chapter includes broad carve outs limiting the scope of claims that a foreign investor may bring against the host country and provides the governments of the parties with a discretion to regulate on 'public welfare' objectives.⁶ We refer to our review of these provisions in our publication on the KAFTA.

In contrast to the ChAFTA and the KAFTA, the recently concluded JAEPA does not include an ISDS mechanism. However, Article 14.19 of the JAEPA does provide for the review of the JAEPA Investment Chapter, including the position with respect to an ISDS procedure. Notably, article 14.19(2) of the JAEPA states that if, after the JAEPA's entry into force, Australia agrees to an ISDS mechanism in another multilateral or bilateral agreement, the parties shall conduct a review of the JAEPA Investment Chapter, 'with a view to establishing an equivalent mechanism under [the JAEPA].'⁷ We will continue to monitor further developments in this respect, in particular, whether the review process in the JAEPA is triggered at any time.

Comment

The ChAFTA is likely to enter into force in 2015 following the necessary Australian and Chinese parliamentary approvals and will offer Australian producers and exporters particular competitive advantages.

Subject to implementation of the ChAFTA, the availability of an ISDS mechanism is a welcome development for foreign investors, although the scope of the carve outs foreshadowed by the Australian Government will need to be carefully considered once the terms of the treaty are released.