A Comprehensive and Progressive Agreement for Trans-Pacific Partnership

Key points

  1. The ministers responsible for the Trans-Pacific Partnership (TPP) of 11 countries have announced that the core elements of a Comprehensive and Progressive Agreement for Trans-Pacific Partnership are agreed (CPTPP). While much of the original TPP looks to remain intact, 20 provisions of the TPP are suspended, in particular with respect to Investor–State Dispute Settlement (ISDS) disputes for initial approvals of investments and financial services. There are also 4 items to be finalised by the Parties’ consensus.
  2. The final impact of these changes can only be determined after the release of the full text. Current indications are that the differences will not significantly change the shape of ISDS under the TPP. Investors making investments into these 11 countries will still want to proactively consider how to take advantage of the protections given by this agreement if it comes into force.
  3. This is a significant step forward to implementing a mega-regional agreement for the Asia-Pacific region, which substantially is the form rejected by the United States early this year.

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A warning shot for investor-state dispute settlement under NAFTA 2.0?

The US Trade Representative (USTR) is reportedly finalizing a proposal to dramatically restructure NAFTA’s investor-state dispute settlement (ISDS) mechanism, transforming it into an “opt-in” regime under which each NAFTA state would elect whether or not to permit investors of other NAFTA parties to bring claims directly against it.[1] The proposal apparently remains under discussion within the US administration, and has not yet been formally communicated to Canada and Mexico.

The ambition of this reported proposal, which would fundamentally reshape investor protection under NAFTA, far exceeds what the US administration had tabled in advance of the negotiations.[2]

Developed states may have historically viewed the submission to arbitral jurisdiction to resolve disputes with certain investors under investment treaties and free trade agreements primarily as a benefit for their own investors going abroad, rather than as a potential source of liability. However, that appears to be changing with the tides of global investment flows, and as developed states have increasingly been the respondents in investor-state arbitration. US Trade Representative Lighthizer has echoed this criticism, saying that he is “troubled by the fact that nonelected non-Americans can make the final decision that the United States law is invalid“, as the US has committed itself in numerous bilateral and multilateral international agreements, including NAFTA.[3]

This is not the first time that investor-state arbitration, which has the potential to hold states accountable for measures taken in violation of their international obligations, has come under fire. In recent international practice, states have explored alternatives to the investor-state arbitration mechanism. For example, the recently concluded Canada-EU Comprehensive Economic and Trade Agreement (“CETA“) instead adopted an international investment tribunal featuring a regularized 15-person membership and limited appellate procedures, among other innovations.

While the EU has sharply broken with past practice on ISDS mechanisms, the US recently supported including investor-state arbitration in the ill-fated Trans-Pacific Partnership (TPP) and the contemplated US-EU Trans-Atlantic Trade and Investment Partnership (TTIP). ISDS has lost favor among some governments and other stakeholders, but remains popular among influential groups; for example, in advance of the NAFTA renegotiations, the National Association of Manufacturers, which includes many businesses with investments in cross-border supply chains, mobilized to lobby in favor of maintaining NAFTA’s investor-state arbitration mechanisms.[4] The USTR proposal will likely generate significant controversy, as some stakeholders will think it goes too far to strip protections for international investors, while others would prefer the wholesale abandonment of ISDS.

It is, of course, too soon to attempt to draw far-reaching conclusions about the USTR’s reported proposal, but it does appear to signal a significant shift in US policy. Businesses with global supply chains and international investments should closely follow the NAFTA renegotiations, as a move by the US away from ISDS may signal the emergence of serious cracks in the foundations of investment protection under international law.

 

This is part 2 of our ongoing series concerning the future of NAFTA. Round one of the NAFTA renegotiations ended Sunday, August 20, 2017, after which the negotiating parties issued a trilateral statement reaffirming their intentions to continue at a rapid pace. Round two of the talks will take place in Mexico from September 1-5, before moving to Canada for round three from September 23-27.

For more context, see our previous posts:

 

 

If you have specific questions about how the NAFTA renegotiations may affect your business, please contact Christian Leathley, Partner, Timothy Hughes, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 (917) 542 7812
Timothy Hughes
Timothy Hughes
Associate
+1 (917) 542 7836

 

 

[1]        http://www.foxbusiness.com/features/2017/08/22/u-s-bid-to-exit-nafta-arbitration-panels-draws-ire-from-businesses.html

[2]        In the objectives released by the US Trade Representative on July 17, 2017, the administration signaled a more modest agenda in relation to NAFTA’s ISDS mechanisms, including measures to improve transparency and expanded opportunities for non-parties to make submissions in a dispute.

[3]        http://www.foxbusiness.com/features/2017/08/22/u-s-bid-to-exit-nafta-arbitration-panels-draws-ire-from-businesses.html

[4]        https://www.law360.com/articles/952633/biz-groups-mobilize-to-maintain-nafta-investment-arbitration

 

What to watch for as NAFTA (re)negotiators get to work

On August 16, 2017, trade representatives of the United States, Mexico and Canada will convene in Washington, DC for the first of seven scheduled rounds of negotiations in relation to the North American Free Trade Agreement (NAFTA). The negotiations have been covered extensively in national and international media and, given the scope of the interests at stake, we expect that coverage to only intensify.

To provide practical insights to stakeholders in key industries, we have focused this update on the context of the negotiations, the interests and objectives laid out by the states in advance of the talks, and our strategic view of what interested observers should watch for. We will periodically publish sector-focused insights as the negotiations develop. Continue reading

NAFTA Renegotiation: ISDS reform objectives

The United States will lobby for changes to the investor-state dispute settlement (“ISDS”) provisions of the North American Free Trade Agreement (“NAFTA”) in the upcoming discussions to renegotiate the regional treaty.

ISDS reform is one of several “negotiating objectives” announced last month by the Office of the United States Trade Representative (the “USTR”), the federal agency with responsibility for US trade negotiations.  The disclosure was made public in accordance with a 2015 statute that requires the USTR to release objectives at least 30 days before the start of formal trade negotiations.  The NAFTA talks are set to begin in Washington D.C. on August 16.

On the agenda are modest proposals for increased transparency in the NAFTA ISDS process, such as the introduction of mandatory public access to NAFTA arbitration hearings, and submissions, and awards.  Those amendments would be broadly in line with the recent trend toward greater public transparency throughout the investment treaty space.  A more striking departure from current practice is suggested by the proposed introduction of a “right” of “non-governmental entities . . . to request making written submissions to a panel.”  Continue reading

EU – Japan Economic Partnership Agreement announced

On 6 July 2017 the EU and Japan announced an agreement in principle on their Economic Partnership Agreement (“EPA“).  The scale of this agreement is eye-popping: once in effect the EPA will cover nearly 40 percent of all goods exports, 10 percent of the Earth’s population, and about 30 percent of global GDP.  The breadth of goods covered by the EPA will be similarly substantial and includes agricultural and food products, the forestry sector, industrial products, the automotive sector, electronics, and services.  While some tariffs, such as those on wine, will disappear from the moment the EPA enters into force, other tariffs – including those on imports of Japanese automobiles to Europe and imports of European chocolates to Japan – will disappear over a number of years.  The net effect will be to remove tariffs from 99 per cent of all goods traded between the EU and Japan with one study suggesting consequent increases in EU exports to Japan of 34% and Japanese exports to the EU of 29%.  Continue reading

Brexit Blog launches with Brexit Q&A

As formal Brexit negotiations have now started, Herbert Smith Freehills is pleased to announce the launch of its new Brexit Notes blog, where you will find articles and updates on the latest Brexit developments.

 

As well as reporting on new developments going forward, Brexit Notes has been pre-populated with a selection of articles and posts. You can subscribe to the blog to receive notifications by e-mail as soon as items are posted, or you can visit the site whenever you choose.

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The European Court of Justice renders its opinion on the EU-Singapore free trade agreement: investment chapter is not within EU’s exclusive competence

On 16 May, 2017 the European Court of Justice (the Court) rendered its Opinion on the competence of the European Union to conclude the Free Trade Agreement (FTA) with Singapore. The Opinion recognises exclusive EU competence over most of the agreement and largely settles a long-standing dispute between the Commission and the Member States on the division of competences under the Lisbon Treaty.

Importantly, in the context of investor-state dispute resolution, the Court's Opinion is likely to render any agreement including protection for non-direct foreign investments or investor-state dispute settlement (ISDS) provisions a so-called "mixed agreement" which requires each of the Member States as well as the EU itself to become party, unless certain aspects commonly found in such agreements are removed or the Member States otherwise agree (discussed further below).  

The Opinion will have a major impact on the negotiation of future EU trade agreements, whether pending or anticipated (including the potential FTA between the UK and the EU following Brexit).

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Brexit—the future of state-to-state, investor-state and domestic dispute resolution

The Brexit White Paper

The much-anticipated Brexit White Paper, ‘The United Kingdom’s exit from and new partnership with the European Union’, was published on 2 February 2017. This post focuses on a subject that has to date received relatively little attention—what it has to say about the future of dispute resolution. In its Chapter 2 (‘Taking control of our own laws’), and Annex A, the White Paper contains perhaps a surprising amount on dispute resolution, in comparison to the text devoted to the other eleven of the UK government’s 12 stated principles.

In this blog post we review the White Paper with the aim of discerning so far as possible the potential future of dispute resolution for the UK. In particular, we consider how the UK government envisages, at this relatively early stage, that disputes will be resolved under new post-Brexit UK-EU agreements, and if and how UK businesses will be able to enforce their provisions. We also consider certain implications of the end to the Court of Justice of the European Union (CJEU)’s jurisdiction in the UK and the adoption of the acquis under the Great Repeal Bill.

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Advocate General issues opinion that the EU does not have exclusive competence to conclude the EU-Singapore Free Trade Agreement

In an opinion issued on 21 December 2016, EU Advocate General Eleanor Sharpston QC has concluded that the EU-Singapore Free Trade Agreement (EUSFTA) will need to be finalised by the European Union and the Member States acting jointly, i.e. entered into by the EU and all of its Member States (as a so-called "mixed agreement"), not just by the EU alone. Although the opinion does not bind the CJEU, the court tends to follow the approach adopted by the Advocate General. The CJEU is expected to issue its own judgment in 2017.

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Trade Post-Brexit: What would a hard Brexit mean for international trade?

The UK’s vote to leave the EU brings with it the possibility of so-called 'hard Brexit'. Business needs to understand what Britain leaving the EU without a smooth transition to a new framework might mean for cross-border trade both within Europe and between Europe and the rest of the world.

At the point when the British government announces its formal intention to exit the EU by triggering Article 50, a two-year countdown will begin to the UK leaving the EU. Understanding the various changes, analysing the risks they pose and working through potential solutions will all be essential to help firms position themselves to navigate the challenges and opportunities that lie ahead.

The peculiarity of the Article 50 process – with its two-year ticking clock – makes this preparatory work all the more urgent. If no alternative relationship or even temporary transitional arrangement were to be agreed between Britain and the EU before the two years run out, the EU treaties would cease to apply to the UK, with nothing to replace them. This has profound implications for both sides.

Herbert Smith Freehills has worked in collaboration with The Boston Consulting Group and Global Counsel to produce a report that considers the potential impact on trade in goods and services if the UK left the EU single market and the EU Customs Union without any new trade agreement in place.The report is designed to help business leaders understand and prepare for a sharp shift in the UK’s relationship with the EU: hard Brexit. Regardless of the eventual outcome, planning for a hard Brexit scenario provides businesses with a baseline to see most clearly the potential impact of the possible changes and to make corresponding plans of action.

Our conversations with business leaders suggest the mood is not necessarily one of negativity, but the scale of the potential change coupled with the lack of clarity as to how it might be effected leaves a lot of uncertainty in the short-to-medium term. Businesses are struggling to understand what Brexit would mean for them. Understanding hard Brexit is a good place to start.

‘We do not necessarily think that a hard Brexit is the most likely outcome of negotiations,’ says Lode Van Den Hende, a partner and international trade law specialist at Herbert Smith Freehills. ‘But planning for this scenario is the most effective way for businesses to compare their current position from within the EU single market with a counterfactual position in which the UK trades with the EU and the rest of the world on the basis of WTO rules. From this baseline, organisations can see most clearly the potential impact of the possible changes and make a corresponding plan of action.’

This report not only aims to help businesses understand the implications of a hard Brexit, but the role they may play in shaping that or an alternative outcome.

The report, produced by Herbert Smith Freehills, The Boston Consulting Group and Global Counsel contains expert contributions from Stephen Adams, Partner, Global Counsel, Pierre Mercier, Senior partner and managing director, The Boston Consulting Group, and Lode Van Den Hende, Partner, Herbert Smith Freehills.

Please follow this link to Herbert Smith Freehills' Brexit hub to download a copy of the report. 

Lode Van Den Hende
Lode Van Den Hende
Partner
+32 2 518 1831