TPP – it comes down to trust

The controversy over the TPP looks likely to continue right up to the signing and in the days afterward, with Prime Minister John Key confronting Maori indignation over lack of consultation, and Labour battling internal divisions. 

Jane Kelsey and other academic commentators have prepared papers for the New Zealand Law Foundation. While we don’t doubt the academic veracity of Ms Kelsey or the other contributors, her position is well known. The process could have benefitted from some fresh oversight. 

I encourage you to look at the papers yourself and make up your own mind. But here are my takeaways. In the end, it comes down to trust. 

Economics
We’ll start with the money. Rod Oram was one of the commentators and has already canvassed these issues in his weekly column. There are definitely economic benefits to the TPP – worth an estimated $2.7b each year by 2030. However, Mr Oram argues we need to put this number in context – the economy will grow by 47% without the TPP and 48% with it. Most of the benefits revolve around guesstimates of the benefits of removing non-tariff barriers on goods (these non-financial barriers are thought to be a bigger problem than the taxes put on our goods), so we don’t really know for sure. 

On the other side of the ledger, the changes will cost Pharmac more, the only question is whether they will be compensated by the government or will they subsidise fewer drugs.  Copyright changes are probably the major cost to NZ Inc, because we will have to pay to use copyrighted material for longer. So whether the TPP is a good thing depends on who you are – a beef farmer or someone who needs a lot of medicine.

The commentators warn the TPP could perpetuate foreign agricultural subsidies, lock us into low value-added commodity production. Nothing new there then! On the other hand it is hard to see how not signing the TPP would make these issues better – indeed being ‘outside the club’ could hurt our economy – it is hard to know the counterfactual (how the world would look if we didn’t sign). So economically the TPP still looks like a good deal overall, though not the great one it could have been if it had led to genuinely free trade. A win’s a win no matter how much you moan about what more might have been possible.

Might someone else do better out of it than we do? Quite possibly, but is that relevant?

Foreign Buyers
This is where Labour seem to have got stuck. The agreement makes it difficult to discriminate against foreign investors, for example by banning them. Practically speaking, such a ban would be very difficult to implement in a small open economy, so Labour are probably barking up the wrong tree anyway. Fees or taxes for foreign buyers could still be possible, but as we have discussed before, the government should close the tax loopholes around housing and land for everyone, not just foreigners. There would be nothing in the TPP to stop that. 

Treaty of Waitangi
The Treaty is expressly excluded from the TPP, but the academics don’t agree this is enough. There is a claim before the Waitangi Tribunal that will put those arguments to the test. 

Environment
Most of the environment critique talks about what the TPP doesn’t include, but this is a trade deal, not an environmental declaration. 

Of greater concern is the claim that the Investor State Dispute Settlement (ISDS) mechanism could have a ‘chilling effect’ on environmental regulation. If proven true, this would be concerning, but as we will see below the academic critique hasn’t quite dealt a knockout blow. 

Investor State Dispute Settlement (ISDS)
It looks like the TPP has catered for the concerns raised:

“Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.”

However, Kelsey and the other academics are not convinced by this – they think that investors could use other sections to make their case and avoid this exception. They point out that the case law in these tribunals is not well developed, and there are still risks. No definite answers here I’m afraid. 

Let’s step back – why we even have this ISDS thing is because a lot of developing nations have shonky governments or corrupt legal systems. Companies from developed countries wanted an independent place to take their case in case anything happens – e.g. if their investment got nationalised. Of course they could go through the World Trade Organisation but that only applies to disputes between two governments – so companies end up relying on their politicians to argue their case. 

ISDS became a standard clause in any negotiation with a developing country – we already have them in many of our trade treaties. Over time things have got more complex; not all investments are in tangible buildings or machines, and investments flow both ways. ISDS clauses didn’t cause concern until Phillip Morris sued Australia over plain packaging, using the Australia trade agreement with Hong Kong. Australia won that case, but despite the tobacco giant losing, the fear over the potential of ISDS to derail governments’ public policy remains. 

As a result Aussie were allergic to the ISDS clause when it came to their trade agreement with the United States; they basically said ‘don’t you trust our courts’? There was no ISDS clause in that agreement. NAFTA on the other hand does have an ISDS. Indeed ISDS clauses have been around for almost 50 years, there have been 18 challenges launched by corporates against the US government and not one has been upheld. The latest is the challenge against President Obama’s decision to prohibit the Keystone pipeline, on the grounds of US climate change policy. Canadian oil company TransCanada is currently challenging that under NAFTA as “aribitrary and unjustified”  so the ISDS Tribunal arbitrators will have to rule.

The legacy then of ISDS clauses being used to overturn government’s decisions of national interest, is weak.

The TPP includes developing countries, so the ISDS clause was back on the table. And this is what it comes down to – if a New Zealand company makes an investment in Vietnam and gets stuffed over – do we want them to have an independent tribunal to resolve their dispute so they don’t have to wade through the Vietnamese courts? We probably do, and so we have to give Vietnamese companies the same option here. 

The question is why the developed countries in this agreement have signed up to ISDS between them? We didn’t have to – New Zealand and Australia have agreed that companies will use each other’s courts instead. Why didn’t we negotiate this out with the United States, Canada and Japan as well? They are all mature democracies like us with a strong judicial tradition. That simple move would have taken a lot of heat out of the whole ISDS debate. 

So should we sign?
Regardless, the deal is as it stands and the question is whether we should sign the TPP in the current state. 

Without dairy included the deal isn’t fantastic, but is the threat of ISDS enough to put us off? There seem to be risks, and in the eyes of Ms Kelsey and co, any risk of a threat to our sovereignty is intolerable. 

From my (albeit non-lawyer) reading of the critiques, I am not too scared of the TPP per se. Companies should be compensated if they make an investment and the carpet gets pulled out from under their feet. I want New Zealand companies to have that right overseas, so overseas companies should have that right here. Of course the proviso is that they haven’t overstepped the mark and damaged the social license to operate. That is where balance is needed.

My greatest fear under the TPP is poor governance – and we have quite a bit of that as we have seen with some regions handing out the right to pollute our rivers and lakes. Under the TPP if we make a bad decision, and then try to change our mind and reverse it, we would have to compensate a company for their investment. If we have good governance and make the right decisions, I don’t think we have much to fear.

However, I’m not convinced that we aren’t vulnerable as the recent fall in the Transparency International rankings for New Zealand would suggest. Small councils struggle with resource decisions and an ISDS case brought against them could easily bankrupt them. 

So assuming the TPP is ratified – and there is a lot of water to go under the bridge there – it seems like New Zealand should be on board. But if it is signed the public and policymakers at all levels will need to pay a lot closer attention to how decisions are made.

Geoff Simmons is an economist working for the Morgan Foundation. This post first appeared on Gareth's World.

RAW DATA: The Text of the Agreement can be found here.

The Annexes of the Agreement can be found here.

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