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Coming & going: protecting FTA traffic

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.

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