Ratifying the TPP may be tough, but Australia needs it

Eight years in total of protracted negotiations. Twelve countries. The largest multi-continental trade agreement since APECin 1989. The Trans-Pacific Partnership (TPP) is complete.

Almost.

But the road to ratification will be rough. American unions, together with environmental and public health lobbies, are amongst those opposed, which guarantees TPP will have a tough time getting through US Congress.

Some 22 years ago, US President Bill Clinton faced a similarly-implacable union movement and a hostile legislature when he sought to pass President George Bush Snr’s legacy, the North American Free Trade Agreement (NAFTA), through Congress. “Tell your President,” America’s most powerful union leader told Labour Secretary Robert Reich, “to forget about NAFTA.”

Wrong. Clinton used the power of the presidency to push NAFTA through, although he had to make some domestic concessions. But on 1 January, 1994, NAFTA was duly promulgated.

President Barack Obama has faced similar difficulties. He finally obtained fast-track Trade Promotion Authority from Congress in June 2015. But TPP may yet fall at the final hurdle.

If TPP is passed, what will it mean for Australia? Here, we examine two of its most contentious aspects: Investor State Dispute Settlement (ISDS) and pharmaceutical intellectual property (IP) under the mooted TPP agreement.

Investor State Dispute Settlement

The TPP will incorporate controversial investor state dispute settlement (ISDS) provisions that enables corporations to litigate against governments in off-shore international fora.

Such provisions are not a new phenomenon; there are over 150 signatory countries to the UN Convention on International Trade Law (UNICTRAL) establishing ISDS. Currently, there are more than 2,700 international agreements that include ISDS provisions.

Judging by the available TPP material, the ISDS provision in the agreement is in line with other Bilateral Investment Treaties (BITs). All non-sensitive case information will be made public. Within TPP, awards are specifically limited to monetary damages.

It can take up to 18 months for a case to be heard by a tribunal, under a process that actively encourages both governments and firms to mediate. There are also numerous country-specific exceptions, as many governments have opted to include financial and foreign investment protections. Moreover, the Transatlantic Business Council asserts that “over 90 percent of the nearly 2,400 BITs in force have operated without a single investor claim of a treaty breach.”

Safeguards are in place to protect governments from being sued when they legislate in policy areas such as public health, education and the environment. During the TPP negotiations, the Australian government sought specific exclusions: tobacco companies have been explicitly identified as ineligible to utilise ISDS provisions. Australia is currently party to 26 ISDS provisions under existing trade and investment agreements (27, once the China Australia Free Trade Agreement (ChAFTA) is in force).

In Australia’s case, ISDS provisions have only been employed once: by Philip Morris Asia over tobacco plain packaging, utilising an Australia-Hong Kong BIT. The Australian High Court has already rejected Philip Morris’ arguments, while Ukraine, which brought a case before the WTO against Australia with four other plaintiffs, has withdrawn from the WTO hearing. Although the other four litigants, (which have received funding from Philip Morris) remain, it is highly unlikely that either the WTO or the ISDS tribunal would deliver outlying judgements at variance with the reasoning of the High Court.

While many are fearful over corporations’ ability to sue governments, the reality is that in a total of 608 ISDS cases globally (as of December 2014), only 87 ruled in favour of corporate litigants (that is, a poor success rate of 14%). On average, corporations were awarded financial compensation of less than 10% of the dollar amounts they sought. Of these 608 cases, European corporations were responsible for more than half (327).

In 2013, 117 cases were brought against EU member states; most these (75%) were internal (“intra-EU”) disputes brought by investors in one member state against EU member governments, governed by internal bilateral investment treaties and the Energy Charter Treaty. In addition, Spain and the Czech Republic were by far the worst offenders, accounting for 42% of all cases.

Environmentally sensitive ISDS cases have often drawn considerable attention. On occasions where governments have sought to settle cases outside tribunals, such as Ethyl v. Canada (1998), the Canadian government was, bizarrely, attempting to circumvent its own regulatory regime. In other ISDS cases, such as Metalclad v. Mexico (2000), the NAFTA tribunal made its first arbitral award to a corporation of $US16 million. However, the Mexican government petitioned the High Court of British Columbia, which partially set aside the award.

For TPP members, such as Australia, Japan and the US, such provisions are entirely manageable. However, it is true that less developed countries may face considerable costs if ISDS provisions resulted in more frequent litigation. What mitigates against this is the exceedingly limited level of success for corporations under existing trade and investment regimes, which suggests ISDS will be no more controversial under TPP than under any previous agreements.

Pharmaceutical Intellectual Property

One of the most divisive components of the TPP are the pharmaceutical intellectual property (IP) provisions. However, Prime Minister Malcolm Turnbull claims the TPP will not change Australia’s IP laws.

The US and Japan have long been pushing for a clause to include “evergreening”, when the owners of a patent create a variation of the drug – which adds little or no value – to extend the life of a patent. This prevents any generics derived from that drug from entering the market, effectively enabling the producer to maintain a monopoly on the drug.

Patent protection has become critical for pharmaceutical companies. Between 2002 and 2011, R&D investment by the world’s top 500 pharmaceutical and biotechnology companies is estimated to have increased by 93 per cent, even as the number of new drug launches in the US remained stagnant at an annual average of 25.

Critics of both ISDS and pharmaceutical IP provisions within the TPP frequently cite the current Eli Lilly v. Canada case (2013) involving patents on Strattera (an attention-deficit disorder pill) and Zyprexa (an anti-psychotic treatment), which were invalidated by Canadian courts in 2011–12. According to one of the foremost authorities on IP law, Ruth Okediji, Eli Lilly is advancing a weak claim. Okediji states that “the United States and Canada are party to the same intellectual property agreements, and Lilly was not denied protection for any category of intellectual property.” Eli Lilly has lost at every level of the Canadian legal system; its NAFTA action is likely to suffer the same fate.

Following the conclusion of the TPP negotiations, there has been no announcement regarding whether evergreening will remain in the final text. The final days of the TPP talks saw Japan and the US isolated on the issue, with all ten other members opposing the inclusion of evergreening. Watch this space.

The major sticking point that forced TPP negotiations to be extended was biologics: new pharmaceutical drugs that are derived from biological resources. Australia and the US were divided, with the powerful US pharmaceutical lobby pressing hard for 12 years’ protection for medicines. A 12-year protection period would prohibit the entry of cheaper, generic “biosimilar” vaccines, cancer treatments and other life-saving medicines.

Australia, with support from other TPP member countries, insisted upon five-year data exclusivity; extending the data protection to eight years, as Washington had insisted originally, would have cost the Commonwealth government’s Pharmaceutical Benefits Scheme hundreds of millions of dollars annually.

US concessions enabled the TPP stalemate to end. Although the precise language of the pharmaceuticals IP deal remains unknown, TPP member countries will have the option of providing either a minimum of five years data exclusivity, or eight years of biologic exclusivity. It is not yet known what option other TPP countries will select.

There will be losers, NGOs such as Medecins sans Frontieres claim developing countries will pay more for pharmaceuticals. The TPP, the MSF argues, will “cost lives” and the TPP pharmaceutical chapter will impact heavily upon future trade agreements. Generic pharmaceutical manufacturers stand to lose as well, if IP is ring-fenced for eight years in some TPP markets.

Keep calm and carry on

The fact is that governments have effectively handed significant arbitral autonomy to international organisations for decades. Australia was a foundation signatory to the General Agreement on Tariffs and Trade (GATT, 1947) and the WTO (1994), as well as the UN Convention on the Law of the Sea (1958), which spawned the International Tribunal on the Law of the Sea (ITLOS, 1982). Australian corporations may apply for remedies under the single market legal regime governed by the European Court of Justice. The lesson is clear: “hard” international law provides certainty and security for business, government and consumers. The TPP consolidates existing international trade law and extends the network of FTAs signed by successive governments since 1984, that integrate the Australian economy more closely with New Zealand, Singapore, the US, Thailand, ASEAN, Japan, South Korea and China.

Contrary to the hyperbole, the Australia-US FTA (2005) did not cause the sky to fall. Australia needs bilateral and plurilateral agreements like the TPP to apply the blowtorch of liberalisation to its trade partners who would otherwise keep their protectionist barn doors well and truly shut. The 1957 Australia-Japan agreement reignited a trade relationship that World War II had terminated. Gough Whitlam understood that slashing protectionism in 1973 lit a fire under the fat, lazy, inefficient manufacturing sector. In the 1990s, APEC, the EU Single Market and NAFTA compelled Asian economies to abandon tariff walls and monopolist, crony capitalism, in order to transform the Asian region into the world’s most dynamic production hub.

You can pine for the 1970s if you want to: replete with stagnation, stagflation, Jeremy Corbyn and morbid unemployment rates. The 1970s: when Australia’s share of world trade was slashed by half. But you cannot avoid the realities of the cut-throat business of international capital, trade and investment. Australia’s FTAs and the TPP are strategic responses to the forces of globalisation. As Renato Ruggiero, the late WTO Director-General once noted, “it is not whether you globalise that matters. It’s how you globalise.”

Jessi Canny, from Politics and International Relations at Monash University, co-authored this article.

Remy Davison's Chair is funded by the EU Commission.