With an Australia-South Korea fair trade agreement having just been concluded, and ministers meeting on 7-10 December on the Trans-Pacific Partnership agreement (TPP), developments are clearly underway in Asia-Pacific international trade.
The TPP is set to offer lucrative new foreign investment opportunities across the Asia-Pacific rim, marking a new era in the way trade is conducted in the region. But increased foreign investment brings increased operational risks, and an inevitable rise in cross-border disputes. The TPP will not offer a cure to the need for companies to take robust steps to protect their interests when investing.
As one of a new generation of investment treaties, the TPP is also expected to have a strong emphasis on companies’ social responsibilities. Companies must ensure that they maintain high standards of conduct and continue to undertake appropriate levels of due diligence when investing within the TPP region.
Trans-Pacific Partnership agreement: opportunities
The TPP, due to complete by the end of 2013, will be one of the most significant free trade agreements to date, covering approximately 26% of world trade. As at November 2013, the agreement is expected to have 12 member states, with GDP amounting to 39% of the world’s GDP in 2012. Initially member states are expected to be Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. Membership is intended to expand over time and ultimately evolve into an Asia-Pacific Economic Cooperation-wide agreement.
Financial service providers in particular stand to benefit from the TPP, with the agreement expected to address member states’ restrictions on capital and investment flows. The TPP will also allow member states’ exporters to tap into global supply chains and new markets for goods and services.
The devil in the details
As negotiations draw to a close, there are still some key outstanding questions for investors, which we will be watching closely.
One such question is whether the TPP will contain ISDS provisions binding investors and states. ISDS provisions protect against political risks associated with investing overseas, such as the risk of expropriation of investment assets or profits by foreign governments. The shelter from political risk provided by ISDS provisions may be crucial in rendering such an investment viable, for example in mining and infrastructure development projects.
If ISDS provisions are included, it is possible they will incorporate safeguards to ensure governments are able to legislate to reflect developments in thinking on health, safety and environmental issues. The provisions in the Australia-Chile free trade agreement may be instructive in this regard.
Further, it is likely that areas such as IP, health, labour and environmental practices will be subject to increased regulation. Indeed, while the TPP will increase trade and investment opportunities within the region, the agreement may have the effect of raising barriers to trade between member states and countries outside the TPP agreement – one of the criticisms of parties entering into regional multilateral preferential trade agreements.
With rights come great responsibilities. There is a new era in the understanding of companies’ responsibilities, as major international entities, in respecting human rights and being responsible for providing a remedy when those rights are affected. It is likely that the TPP will have a greater emphasis on the social responsibility of companies in the area of human rights and environmental protection. Companies must ensure that they maintain high standards of conduct and continue to undertake appropriate levels of due diligence when investing within the TPP region.