Dangers in the addition of an 'Investment Chapter' to CER

On Thursday this week the Minister of Finance Michael Cullen and his Australian counterpart announced “solid progress” towards the creation of the ‘Single Economic Market’ between Australia and New Zealand. “ Ministers also decided to investigate the possibility of adding an investment component to the Closer Economic Relations (CER) agreement.”

Thus the idea of an ‘investment agreement’ was floated again, with no analysis or explanation of what an ‘investment’ chapter of CER would entail. Perhaps Cullen gave nothing away because giving such an explanation would reveal an ‘investment chapter’ as a direct threat to democracy.

The benchmark for ‘investment agreements’ is the infamous ‘Chapter 11’ of the North American Free Trade Agreement (NAFTA). These provisions give multinational corporations the right to sue governments for compensation or reversal of laws/regulations that threaten their profits.

For example, the Canadian Government placed a ban on a toxic petrol additive, MMT on the grounds it caused nervous system damage and interfered with car emission control systems. In response, the producers of MMT, the Ethyl Corporation, used the provisions of the NAFTA to sue for $250 million, claiming lost Canadian profits and damages. Faced with lengthy court action, the Canadian Government was forced to revoke the ban in 1998, pay the company US$13 million damages and issue an apology. There are many other similar examples. As Bill Rosenberg (2001) has noted, even the threat of such proceedings acts as a break on a government acting in the interests of its citizens. Mary Lou Malig (July 2004) reports;

Canada had good reason to want to avoid a large damage reward. Since the implementation of NAFTA, the total amount of damages claimed by foreign investors has been a total of $US13 billion - $US1.8 billion from US taxpayers, $US249 million from Mexican taxpayers and $US11 billion from Canadian taxpayers"

These provisions are a direct threat to democracy, as they give foreign investors the right to challenge the mandate of governments to implement policies in the public interest; even in the case such policies formed part of a successful electoral platform.

A likely model for the CER investment agreement is the ‘Investment Promotion and Protection Agreement’ (HKIPPA) New Zealand signed with Hong Kong in 1995 (signed by National’s former Don, Don McKinnon that is). This agreement contains equivalent ‘expropriation’ clauses to those found in NAFTA, which aim to also cover Government actions that have an ‘effect equivalent’ to direct expropriation. In NAFTA this has been interpreted to include loss of an investment’s value through loss of profitability.

It also must be noted that the Government's new Overseas Investment Bill, currently before the house, allows the Government to further liberalise investment law by regulation (such as the threshold for business investments and the definitions of associated land). In the context of negotiations over the extension of CER or any other 'free trade' agreement this would allow the government to make further concessions largely free of parliamentary scrutiny (the RR committee is not sufficient!).

While at present it may seem unlikely that an Australian investor would make such a claim, it does beg the question why overseas investors are being given greater rights than local citizens or businesses. Consider the clearly signaled, high profile policy of the Labour party in 1999 to renationalise ACC. ‘Investment protection’ agreements could have affected or prevented the implementation of this policy following the election of the Labour/Alliance Government, especially if private insurance companies had a legal presence in Hong Kong. In this case, it was probably lucky the private ACC market had not been going for very long.

To give a contemporary example, any attempt to further regulate the privatised electricity market created by Max Bradford and embedded by Pete Hodgson could be met by a challenge by the new Australian owners of Contact Energy, who could claim that Government actions negatively affected the profitability of their ‘investment’.

Given the NAFTA experience of Canada and Mexico, perhaps such challenges are not so unlikely after all. Any proposals to include NAFTA or HKIPPA like clauses in CER, or any other ‘free trade’ agreement, should be steadfastly exposed and opposed. Such provisions are a direct threat to democracy as they could prevent our Government from implementing policies given a democratic mandate by the New Zealand people. And that, at the end of the day, is what democracy is all about.