Feature Articles
Cite as: (2005) 79(7) LIJ, p. 36
The level of protection and the dispute resolution mechanisms available to exporters and investors under free trade agreements can vary significantly.
By Ross Becroft, Andrew Hudson & Lynne Kinnear
Since mid-2003, the Australian government has entered into free trade
negotiations with Singapore, Thailand and the US, and negotiations have begun on
new free trade agreements (FTAs) with China, Malaysia, the United Arab Emirates
and ASEAN-New Zealand.[1] In the rush to pursue
high-profile market access issues, some of the practicalities of the legal
framework concerning FTAs are not necessarily given a high priority. Commercial
parties are often unaware of what level of protection recent FTAs offer their
investments and exports. Given the increasing amount of international trade and
investment activity, lawyers will have an important role in advising clients on
the operation of FTAs and acting where necessary through available mechanisms to
protect their interests.
An FTA will generally afford investors or traders of one country the same
rights as local investors or traders (as part of the “Most Favoured
Nation” concept). Specific improvements in market access are also provided
by both countries. However, behind the FTA framework there are significant risks
for exporters and investors if countries do not abide by their FTA obligations.
These risks may be assessed by reference, first, to the ability of the host
country to renege on or frustrate concessions made under an FTA, and second, to
the type of dispute resolution mechanism available to cure conflicts arising
from the carrying out of FTA commitments. A number of FTAs allow for investors
to take action against foreign governments, whereas others only provide for
government to government dispute resolution forums.
Potential risk areas for traders and investors
The most obvious way that a host nation may frustrate its FTA obligations is
to use customs administration and quarantine measures as a disguised barrier to
trade. For this reason, an FTA must, where necessary, build in protections to
allow traders the ability to move their goods without delay into a foreign
market. The more obvious barriers include quotas and special permit or licensing
regimes.
However, there are also a number of “softer” forms of trade
barriers, such as rules of origin, which under FTAs determine whether goods
qualify for preferential treatment. These rules may be complex and difficult for
traders to understand or comply with. For example, under the Australia-US Free
Trade Agreement (AUSFTA), the rules of origin for plastics and textiles are
extremely complex.[2] There is also the need for
customs procedures to be workable and transparent and for binding legal review
avenues to be available to traders to resolve customs and related disputes with
authorities. This may be particularly relevant to articulate in an FTA where the
other party does not have sophisticated administrative procedures or where the
other party’s track record in this area has been poor.
The abuse of trade remedies by FTA partners is also a significant risk for
exporters. Trade remedies refer to measures such as anti-dumping and
countervailing duties and safeguards that countries may impose on imports. FTAs
should limit both the circumstances in which a party may impose a trade remedy
and the severity of the measure. The outcomes in FTAs in this regard should also
be considerably more trade liberalising than under the present World Trade
Organization (WTO) rules. For example, under the AUSFTA, safeguards in the form
of temporary increases in tariff levels are permitted to protect domestic
industries from a surge in imports.[3] The US has
used safeguards regularly in recent years to protect politically sensitive
sectors such as steel and lamb, both of which have required action by Australian
interests to roll-back or eliminate these
measures.[4] The AUSFTA contains complex
safeguard mechanisms relating to agricultural and horticultural products and
exporters in affected industries need to have a thorough understanding of the
available measures and how they may be applied. This safeguard regime is in some
respects more restrictive than under the WTO Agreement on Safeguards. For
example, safeguards may only be invoked once in respect of any given product and
may only be instituted for a maximum initial period of two
years.[5] However, the extent of any commercial
benefit that will flow to exporters from a tightened regime will to some degree
depend on the way safeguards and similar remedies, such as anti-dumping duties,
are administered by the relevant domestic agencies.
Protection via dispute resolution avenues in FTAs
Dispute resolution provisions in FTAs customarily take the form of an
arbitral panel chosen by the parties and standing is normally restricted to
governments and in some cases private foreign investors. There is presently no
access to this type of regime for exporters. Accordingly, the only way for them
to directly enforce legal rights is through the domestic legal system in the
foreign market.[6] This obviously increases the
risk for exporters, who must look to eliminate these risks through other means
such as commercial instruments like letters of credit. There is, of course, no
guarantee that the Australian government will take up a complaint by an
Australian exporter or investor that they have been subjected to practices or
measures inconsistent with a party’s obligations in an FTA. By contrast,
in the US, s301 of the Trade Act 1974 allows exporters to formally
require the US government to investigate measures or decisions of foreign states
that may be inconsistent with international trade
obligations.[7] There is presently no equivalent
formal legal avenue available to Australian companies.
The following represents a short summary of the dispute resolution provisions
in FTAs to which Australia is a party.
New Zealand and Australia
The Closer Economic Relations Free Trade
Agreement (CER) does not contain any specific dispute resolution procedures
generally or any specific provisions in relation to investors. There is no
provision for an Australian investor to take action against New Zealand
directly. Arguably, this regime reflects the existence of a legislative
framework, which is perceived as adequate to protect the rights of investors in
both countries.[8]
Singapore and Australia
The Singapore Australia Free Trade
Agreement (SAFTA) came into force on 28 July 2003 and was Australia’s
second bilateral FTA. For investors, the SAFTA provides a mechanism for
resolving disputes between a party (Australia or Singapore) and an investor of
the other party (investor-state disputes). An investor in one country may
directly seek to settle disputes with the other country where the investor
believes that the party is not complying with its obligations under the
investment chapter.
If consultations fail to resolve the dispute within six months, the matter
may be referred to either the courts of the country, the International Centre
for Settlement of Investment Disputes for conciliation or arbitration or
arbitration under the United Nations Commission on International Trade Law
(UNCITRAL). However, this can be quite expensive and time consuming and
therefore even though the provisions are available, these factors may mean that
dispute settlement is prohibitive.[9]
Thailand and Australia
The Thailand-Australia Free Trade Agreement
(TAFTA) came into force on 1 January 2005.
The TAFTA also provides additional protection for investors. Article 917
allows an investor of one country to directly challenge the government of the
other country in relation to any breach of any obligations under the investment
chapter. If consultations do not resolve the matter, the investor may choose
either to have the dispute submitted to the review bodies of the country or have
recourse to an international arbitral tribunal established under UNCITRAL.
However, there are limits on Article 917. An investor of Australia or
Thailand cannot pursue a claim against the other country in relation to a
decision by a foreign investment authority regarding a condition imposed on or
the establishment, acquisition or expansion of an investment by the investor. In
light of these concerns, Chapter 14 of TAFTA also provides that the parties must
ensure that appropriate domestic procedures are in place to enable prompt review
and correction of final administrative
decisions.[10]
The US and Australia
The AUSFTA, which also came into force on 1
January 2005, contains no “investor-state” dispute provision. This
is reportedly to recognise the open economic environments and shared legal
traditions, and the confidence of investors in the fairness and integrity of the
respective legal systems. Any grievances must be addressed at the “state
versus state” level.
However, the AUSFTA does provide that both countries must supply a mechanism
for appeals against administrative and bureaucratic decisions, and therefore any
decisions affecting Australian investors of this nature will be reviewable at a
domestic level against the relevant administrative body which made the
decision.[11]
China and Australia
On 18 April 2005, Australia and China announced
they would commence negotiations for an FTA.
The Joint Feasibility Study (JFS) into the FTA found regulatory impediments
in China restricted trade and investment. The JFS also found that this could be
redressed by the FTA removing or reducing existing restrictions and enhancing
the transparency of the foreign investment regime.
Because of the early stages of the negotiations, it is unclear what the
relevant dispute resolution procedures will involve. On the basis of previous
FTAs and the comments in the JFS, it appears likely that Australia will seek an
investor-state dispute resolution procedure similar to that in the TAFTA to
reflect the state of the Chinese economy and the differences in the legal
systems and political
circumstances.[12]
Malaysia and Australia
On 7 April 2005, the Prime Minister
announced that negotiations would begin for an FTA with Malaysia.
In recent years, Malaysia has begun to liberalise its foreign investment
regime. The Australian Scoping Study considered that there are significant
opportunities through the FTA for future liberalisation, but the FTA would need
to address regulatory and other issues that discourage investment. In light of
this, as with the TAFTA, it is likely that any dispute resolution will include
an investor-state protection
mechanism.[13]
Conclusion
Overall, there is a significant divergence in the approach to dispute
resolution and the level of protection afforded to exporters and investors in
the various FTAs. This largely reflects the differing perceptions of the
economies that are the subject of the FTAs and their respective legal
frameworks. However, even where individual investors are granted rights against
other countries, the issues of cost and accessibility may create practical
difficulties. Over the next few years any problems in the administration of FTAs
and the workability of formal dispute resolution mechanisms summarised above
will become apparent to the commercial community. Lawyers will increasingly need
to understand the operation of the myriad of trade regulation contained in FTAs
so as to promote and protect their clients’ interests.
ROSS BECROFT is a solicitor with Louis Gross & Associates. He
practises in trade and customs law and is undertaking a PhD which deals with WTO
dispute resolution. ANDREW HUDSON is a partner with Hunt & Hunt. He
specialises in trade and customs law and is the chair of the customs trade and
transport special business group within Interlaw, an international alliance of
lawyers. LYNNE KINNEAR is a solicitor with Hunt & Hunt. She works in
the commercial practice and has a particular interest in trade and customs law
and investment and capital markets.
[1] See http://www.dfat.gov.au for a summary
or copies of the agreements and details of the negotiations. There is also a
government website dedicated to FTAs at http://www.fta.gov.au.
[2] The rules of origin are contained in
chapter 5 of the AUSFTA.
[3] See chapter 9 of the AUSFTA for
safeguards.
[4] See, for example, the WTO dispute
“Safeguard measures on imports of fresh chilled or frozen lamb from New
Zealand and Australia”, WT DS178 and Proclamation 7529 issued by President
Bush on 5 March 2002 instituting safeguards in the form of additional tariffs on
steel imports.
[5] See Article 9.2 of chapter 9 for details
of conditions imposed on safeguard measures. Note that provisional safeguards
may be applied for up to 200 days where threat of damage to industry requires
urgent action and prior investigation is not possible.
[6] There are, of course, other private legal
avenues such as commercial arbitration, but this will rely on the consent of the
parties or a compulsory arbitration clause in the contract between the
parties.
[7] Section 301: legislation establishing
domestic procedures to enforce US rights under international trade agreements as
well as to eliminate unfair foreign government trade practices that adversely
affect US investment and exports of goods and services. Under s301 of the
Trade Act 1974 as amended by the Trade Act 1988, the US Trade
Representative is required to take appropriate action to obtain the removal of
any policy or practice of a foreign government that violates a bilateral or
multilateral trade agreement or is “unreasonable, unjustifiable, or
discriminatory” and “burdens or restricts US commerce”.
Section 301 authorises the President to retaliate against foreign countries that
impose such burdens. Such retaliation can take the form of suspending the
benefits of trade concessions previously granted by the US, or restrictions or
fees on the trade of the offending nation.
[8] For more information, see
http://www.fta.gov.au.
[9] See http://www.fta.gov.au.
[10] See http://www.fta.gov.au.
[11] See http://www.fta.gov.au.
[12] For more information, see
http://www.dfat.gov.au/geo/china/fta.
[13] For more information, see
http://www.dfat.gov.au/geo/malaysia/fta/index.html.