The short answer is all trade reduces sovereignty to some extent. The TPPA is no exception, but its effect is probably small.
Allow that we had to give away something, such as increased copyright extensions, for better access for our exports; the real issue for us in the TPPA is that it reduces ‘sovereignty’. To report my conclusion at the beginning: all trade and all trade deals reduce sovereignty to some extent. This has been going on in New Zealand since its first European economic engagement. The Investor State Dispute System (ISDS) is another step. As far as I can judge, the ISDS provisions in the TPPA do not represent a great loss of sovereignty – but then the TPPA benefits from increased market access are not huge either.
I use the term ‘sovereignty’ here to mean the ability to act independently of others – ‘the full right and power of a governing body to govern itself without any interference from outside sources or bodies’. The governing body may be the state but it could also be the individual or a host of institutions in between. Once the body comes to an agreement with another party it loses some of its sovereignty. Since trade involves such agreements, every trading action involves some loss of sovereignty – it may be small, it may temporary, but it is a loss.
Modern trade increasingly requires a formal framework between the participants. To take a simple illustration: transaction costs between traders are reduced by common standards for weights and measures and the like. New Zealand is a signatory to various international agreements It did not have to adopt them but it would be troublesome for our exporters and importers if they had to keep converting local measures into international ones.
Because it is a small country New Zealand has been very keen that there be an international framework based on a rule of law so that, typically, there are enforcement provisions in each agreement to make them work. On occasions they have definitely worked in our favour. For instance, we have had favourable WTO rulings in regard to apple access to Australia and lamb access to the US – in each case a larger power was pushing us around but they had to give up some sovereignty and do what the WTO tribunal decided. When we are on the wrong end of a decision, we will also have to agree to something we do not want to do too.
The ISDS extends the framework to foreign direct investment. For economics, investment is a kind of trade characterised by it taking place over a longer period than a conventional export or import. Its effect is to bind the destination of the foreign investment to treat the investor in certain ways. Illustrative is that the first ISDS appears to have been between Germany and Iran in 1979 with the purpose of preventing expropriation of German investments without compensation. Today’s provisions are much more complicated although they exclude some areas which the foreign investors may not take action over – the environment, health care, the Treaty of Waitangi. for instance.
No investor will absolutely trust the state legal processes since the law may be changed, the courts stacked. Thus investors seek a dispute resolution procedure outside the state even though New Zealand probably has a better reputation than most states.
My ideal, would be a world court for investor state dispute resolutions, something like that proposed by the EU. But the US Congress will not countenance such a court system, and its fallback is an arbitration system between the state and investor.
It is not be the first time we have agreed to an ISDS process in a free trade deal; it wont be the last. (Instructively, some who oppose the ISDS provisions in the TPPA are willing to take human rights issues to the international tribunals – even though that represents a potential loss of sovereignty too.)
What I think is going on here, is that economic globalisation is undermining the ability of states to govern themselves exclusively. Economic transactions now cross their borders. We have to create supranational institutions to govern them. Such institutions undermine national sovereignty.
As I have indicated, the US is also nervous about this loss of its sovereignty. It is possible that the ISDS provisions will affect whether the US Congress votes to adopt the TPPA or not. In particular there must be some anxiety that foreign investors in the US have privileges that US domestic investors do not have.
The US as hegemon has an alternatives to the ISDS to solve investment disputes. It imposed sanctions when Cuba privatised some US businesses with offers of negligible compensation. New Zealand would never be able to do that as effectively. As a small economy we need an international rule of law to enable us to pursue our international objectives and to protect us from bullying (although, alas, it still happens to a lesser extent).
Of course we could easily avoid the need for an ISDS by repatriating all foreign investment. Ridiculous? Yes. But it illustrates that ISDS is not an autonomous change but a response to another change, the rise of foreign direct investment. (To be clear, I am not against all FDI, but I have argued that our failure to save adequately means we have too much of it.)
Is an ISDS necessary? In principle we do not need one, but we would face the challenge of being less attractive to foreign investors compared to those that were a part of the ISDS (say Australia); so we would attract less FDI and it would be more expensive.
It is argued by some proponents of the ISDS in the TPP, that they already exist in other FTAs and that New Zealand has never had to a claim under one. I say, ‘thus far’. And it is also a matter of concern that the few cases involving other jurisdictions mean there is not a lot of case law.
So the ISDS in the TPPA reduces our sovereignty, or rather it reinforces the reduced sovereignty that foreign direct investment is already causing. In my judgement the reduction is not great compared to all the many international concessions New Zealand has already made. But the benefits from improved market access (offset by the copyright extension) are not huge either even though they are there.