The Trans-Pacific Partnership: a New Year's resolution of special significance

Following a further round of negotiations for the Trans-Pacific Partnership Agreement (the TPP) held in Singapore at the start of December 2013, it is expected that the agreement will be signed in early 2014 after more than three years of highly secretive negotiations. The TPP is a regional free trade agreement which, if the negotiations are successfully concluded, could create a trade bloc second only to the European Union in the size of its total trade value. The conclusion of this agreement is expected to have enormous significance for the dynamics of global trade and the outcome is keenly anticipated.

Although the negotiations have taken place behind closed doors, which is itself a source of great concern for many observers, speculation has centred on the public commentary by the participating states around issues central to the agreement. This has been augmented by the leak of several draft chapters of the agreement over the past three years. While the negotiations are likely to have moved on significantly since they were disclosed, the leaked chapters continue to shape the discussion around the content of the TPP and its highly contentious provisions.

With the twelve state parties - including the United States, Canada, Japan, Australia and Singapore – having set the ambitious goal of reaching agreement by the end of last year, this twenty-first round of negotiations was anticipated as the potential turning point for issues believed to be the source of significant rifts in the partnership. However, reports indicate that while a resolution has not yet been reached, the agreement is likely to be concluded early in 2014.

 The Trans-Pacific Partnership Agreement: an overview

The TPP is a free trade agreement unrivalled in the breadth of its inter-regional scope, designed to bring together key Asia Pacific countries with significant Latin American countries and seeking to liberalise trade in nearly all goods and services. The TPP is intended to be a greatly expanded version of the Trans-Pacific Strategic Economic Partnership Agreement (the TPSEP), an existing trade agreement concluded in 2005 between Singapore, New Zealand, Chile and Brunei designed to liberalise trade in the Asia Pacific region.

The twelve states currently negotiating the TPP are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Taiwan, South Korea, Thailand, India, Costa Rica, Bangladesh, Indonesia, the Philippines, Laos and Colombia have also expressed an interest in joining the discussions as potential partners. The TPP is aimed at reducing - and ultimately eliminating - trade barriers in the Asia Pacific, including going far beyond the commitments made through membership of the World Trade Organisation through increasing opportunities for trade in new markets for goods and services and tackling new trade issues arising from changes in the global economy.

In particular, the TPP is expected to set out agreements on a wide variety of trade issues, including regional competition issues, cross-border services, customs, e-commerce, environmental issues, financial services, government procurement, intellectual property, investment, labour, dispute resolution mechanisms, market access for goods, rules of origin, telecommunications, and trade remedies. While the TPP is expected to reduce barriers related to many of these issues, it is likely that the agreement will lead to increased regulation in some areas such as intellectual property, health, labour and environmental practices. The more restrictive regulations applicable to intellectual property rights under the TPP have been a major source of contention in the negotiations.

Twenty one rounds of negotiations have now taken place, including the negotiations in Singapore in early December. No draft texts of the TPP have yet been officially released but various chapters have been leaked to the public through Wikileaks. Notably, a draft chapter on intellectual property rights was leaked first in February 2011 followed by a more recent draft on 13 November 2013 , and a prospective chapter on investments was leaked in June 2012.

The investor-state dispute settlement provisions

The investment-related dispute resolution procedures provided in the investment chapter of the TPP have proved to be one of the most contentious elements of the agreement and a major battleground in the negotiations. The disagreement on this point, which has been largely between the United States and Australia, has centred on the provision for investor-state dispute settlement (commonly referred to in this context as ISDS). ISDS potentially allows investors from the signatory states to bring a claim for compensation directly against another signatory state where an investment in the "host" state has been subject to treatment that breaches the investment protections set out in the TPP. This is a well-established mechanism found in bilateral and multilateral investment treaties that assists investors in safeguarding their investments against the political, regulatory and other state-driven risks that are especially significant in cross-border transactions.

It is understood that the United States has been advocating for ISDS provisions in the TPP which are based on the mechanisms used in the US model bilateral investment treaty, as well as in some existing free trade agreements to which the US is a party (notably the Central American Free Trade Agreement and the North American Free Trade Agreement). These instruments provide for investor-state arbitration, the mechanism which is used in a broad range of investment treaties.

In stark contrast, Australia announced categorically in 2011 that it would no longer enter into investment-related treaties which provide for investor-state arbitration and other ISDS mechanisms. This announcement was seen to be, in part, driven by Australia being on the receiving end of an arbitration claim by Philip Morris in relation to the legislation mandating plain packaging for tobacco products, brought under the Hong Kong-Australia bilateral investment treaty. This concern about the impact of ISDS provisions in international agreements has been echoed in civil society in Australia, with a robust movement voicing opposition to this element of the TPP.

Following a change of government earlier this year, there were indications that the Australian negotiating position may have softened on the ISDS issue, including statements during the election by the political party which now forms the Australian Government that it would "take a pragmatic approach to trade negotiations", including "remaining open to utilising investor-state dispute settlement…clauses as part of Australia’s negotiating position." However, Mr Andrew Robb, the current Australian trade minister, stated subsequently that the Government's negotiating position regarding the ISDS mechanism remains in place.

Nevertheless, the recently concluded free trade agreement between Australia and South Korea did include an ISDS mechanism of the sort to which Australia had previously categorically refused to sign up. Consequently, it is thought that a moderate concession to the Australian position is a more likely outcome than the complete removal of the ISDS provision from the TPP.

It is speculated that the US may be prepared to include a carve-out for Australia in the TPP by which elements of the dispute resolution section of the investment chapter will not apply to Australia. The details of such a carve-out (if any) have not been disclosed, making the consequences of this asymmetry in the TPP difficult to evaluate. Aside from generally complicating the negotiations, there may be implications for any joint interpretation mechanism by which the parties to the TPP can jointly request that an adjudicator clarify the meaning of an element of the TPP through a judgment that is binding on all the TPP parties. The extent to which Australia, or any other party with only partial accession to the TPP, could participate in this process or would be bound by the decisions resulting from it is uncertain.

A more likely result is that the ISDS provision will include certain public interest carve-outs for particular issue areas (for example, public health). This could allow the ISDS mechanism to have the effect desired by the US in providing investors with a means of dispute resolution while removing the most sensitive areas of public policy from its ambit. The content of any such carve-outs will be of great interest to parties across many sectors and regions.

For more information on the debate around the ISDS provisions, see the IFLR article Trans-Pacific Partnership: what will it achieve? (11 December 2013) authored by Herbert Smith Freehills partners, Don Robertson and Leon Chung.

The future of investor-state dispute mechanisms and the TPP

The outcome of the TPP negotiations will be watched with keen interest. As an inter-regional free trade agreement of unrivalled scope, the TPP will have an enormous influence on global trade dynamics and will form the framework through which economic and political relationships develop across the Pacific.

Whether the TPP includes the full ISDS provisions as originally envisaged by the US, some amended version as a concession to Australia, or a carve-out to exempt Australia from the application of the ISDS provisions entirely, the final form of the agreement will be an important indicator of how future treaty negotiations may play out. The outcome of the negotiations may have implications for how future investment treaties are negotiated and structured, and it will be a significant gauge of state attitudes to the use of investor-state dispute resolution mechanisms going forward.

Herbert Smith Freehills is monitoring reports of the negotiations closely. If you would like to discuss how the TPP may affect you or any issue above then please do not hesitate to get in touch with any of our dedicated international arbitration team.