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Investment is one of the areas of the Trans-Pacific Partnership (TPP) negotiation that attracts the most interest. We have had questions and views on investment issues from a number of people since the negotiation was launched. Some people have views about the general value of investment rules in trade agreements. Others are concerned about whether we are looking at doing something new or different on investment in TPP. This post tries to offer a general picture of how we are approaching investment in TPP at this stage in the process.
The existing Trans-Pacific Strategic Economic Partnership agreement (known as the P4) did not include a comprehensive investment outcome when it was signed in 2005. The countries who negotiated that agreement (Brunei, Chile, New Zealand and Singapore) decided instead to come back to the table later. This work began again in 2008 but in an expanded configuration (with the United States also involved), thus kicking off the expansion of the P4 to the P5 and then leading eventually into the current nine-country TPP negotiations.
Getting the P5 to the table on investment was important for a number of reasons. Investment chapters are a standard element of a modern and comprehensive FTA. Most countries acknowledge that alongside goods and services trade, FTAs also need to address the conditions around capital flows. Investment plays a central role in fostering economic growth and deepening trade relationships, so it is more than appropriate to be addressing investment issues as part of a comprehensive trade agreement. Making commitments on investment in FTAs can also help facilitate investment flows by providing some certainty for investors that their investments will not be negatively affected by discriminatory treatment or government actions that violate well established international norms. The fact that the original P4 did not address some of these issues was something of an anomaly that the TPP will be correcting.
New Zealand has always been a net capital importer. As a country, we do not have large capital reserves, and foreign investment has contributed strongly to our economic growth. Support for foreign investment, however, is not universal. It is apparent from the continuing debate in New Zealand that some people start from a position of unease or even opposition to the idea of having an open investment regime. But successive governments have taken the view that foreign investment is necessary and should be welcomed – with the caveat that, in addition to the domestic rules that apply to everyone, there need to be some additional rules around the entry of foreign investment, in the form of the Overseas Investment Act and regulations. The challenge for New Zealand negotiators in free trade agreements that we have negotiated over the past decade has been to strike the right balance between setting rules that reflect our openness to investment, while still enabling the government to regulate appropriately to ensure that investment continues to reflect broader values and expectations.
Elements under discussion in the investment negotiations of TPP are not dissimilar to those we have worked on in other recent agreements. Mostly they are about reinforcing a set of standard principles of treatment of foreign investors including non-discrimination (i.e. treatment that is comparable to the treatment given to domestic investors or to investors from other countries), rules around when and whether a government can nationalise (“expropriate”) an investment, and undertakings to allow an investor to freely access and transfer their investment funds. Many of these provisions are fairly uncontroversial in terms of international investment practice, particularly from the perspective of a country like New Zealand with an open, transparent and non-discriminatory regulatory framework. New Zealand investors in turn stand to benefit as other TPP countries extend the same commitments to us.
Certain aspects of international investment law tend to be more controversial. Some of these difficult issues are on the table in TPP.
One of these is what is known as an investor-state dispute settlement mechanism, which would allow foreign investors to take international arbitration against a government if it breached an undertaking it had made in a trade or investment agreement. Many people cite the North American Free Trade Agreement (NAFTA) as embodying the typical model of this sort of mechanism. But that’s just one approach and that approach in itself has evolved over time.
New Zealand governments have been cautious about including provisions of this type in free trade agreements but we have included investor-state dispute settlement mechanisms in several of our agreements where it has been in New Zealand’s interests (the main examples are the China-New Zealand FTA and the ASEAN-Australia New Zealand Free Trade Agreement). A key consideration has been the potential benefits to New Zealand investors of having access to such a mechanism to protect their own investments in other countries. In a process such as TPP, where our ultimate goal is rules that will apply across the Asia-Pacific region, this is a significant factor. In cases where we have negotiated investor-state rules, we have also insisted on clear and transparent provisions that help to mitigate the risks of being involved in a dispute. This approach is also guiding our engagement in discussions on investor-state issues in TPP.
Another issue we often get asked about is the extent to which a TPP investment outcome might mean changes to our current foreign investment regulation and legislation. New Zealand already operates an open regime for foreign investment – we consistently get kudos from organisations like the World Bank for ease of doing business and openness to investment. Our typical FTA practice has been to agree to lock in certain areas of our overseas investment framework, thus providing certainty for foreign investors going forward that they will continue to be able to enjoy the open regulatory framework as it exists today. Recognising that there are domestic sensitivities around some of these issues, however, and recalling our earlier point about needing to strike a balance, FTAs do provide a number of ways in which the government can preserve future policy flexibility. One of the ways in which we do this is through listing “non-conforming measures” for investment – that is, the list of potential government actions that might deviate from some of the FTA obligations described above. In TPP, the discussion on each country’s non-conforming measures has only recently started. It is a complex area, one we will save for discussion in a future column.
