UK joins the CPTPP

Last week, in one of the more confusing recent developments in international trade law, the UK reached an agreement in principle to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trading bloc that already includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The confusion does not only arise from geography, although the UK’s presence in what was designed as a regional trading agreement is not particularly rational. It’s also an economically mysterious move. There will certainly be a few industries affected by the agreement: the UK has agreed to drop tariffs on Malaysian palm oil, for example, and bananas from Peru, and rice from Vietnam. And Malaysia will reduce its tariffs on British whiskey.

But the UK already has trade agreements with all the CPTPP members except Brunei and Malaysia, and so the economic impact of the deal will be minimal. The UK government’s own estimate is that the deal might increase the UK’s GDP by 0.08%. In ten years’ time. If everything goes well.

So why is it happening? The first and obvious answer is that it’s a political gesture, a symbol of the “post-Brexit freedoms” Britain now enjoys, having decided to leave its own regional trading bloc. That was the line pushed by trade secretary, Kemi Badenoch, who announced that the deal was an expression of “post-Brexit freedoms to reach out to new markets around the world and grow our economy.” It’s generally accepted that leaving the European Union has cost the UK around 4% of GDP, so it only needs another fifty or so deals like the CPTTP to make up lost ground.

But there is one potentially significant impact for Australia. It isn’t yet clear whether the UK’s accession to the CPTPP will introduce, for the first time, a system of investor-State dispute settlement (ISDS) between Australia and the UK.

The CPTPP contains an ISDS mechanism, under which investors of one member state are empowered to bring claims against other member states who breach provisions of the treaty. The most controversial of these provisions – and the most fruitful for investors seeking to protect themselves against loss – is the one requiring that investments must receive “fair and equitable treatment”. When a government introduces a law or regulation that impacts upon the value or profitability of a protected investment, it exposes itself to an ISDS claim. Typically (though not always), these are claims that could not be made by an investor of the host state, because typically (though not always), the measures that are said to breach the treaty are legitimate under the host state’s laws.

Before this year, Australia had received only one ISDS claim, the Philip Morris claim arising from the legislation requiring plain packaging of tobacco products. The Commonwealth defeated that claim by arguing, successfully, that the company bringing the claim was unable to invoke the jurisdiction of the tribunal. Last week, however, Australia was served with another claim, this time by a Singapore company named Zeph, which is associated with Clive Palmer. The claim arises from controversial Western Australian legislation which quashed an arbitration between Zeph and the State government, and the damages claimed are enormous. It’s hard to see that the Australian government has any great appetite for more ISDS at present – especially as the UK’s accession to the CPTPP is unlikely to have any impact at all on Australia’s balance of trade. And there are many, many UK investors in Australia, several of them in industries (like mining, oil and gas) that are highly sensitive to government action.

There has been no statement yet from the Department of Foreign Affairs and Trade concerning this aspect of the CPTPP. But it’s possible that Australia will attempt to modify the treaty by entering into a side letter with the UK, excluding ISDS between it and the UK. Australia has already modified the CPTPP in this way through a side letter with New Zealand. This would make sense, since Australia and the UK recently entered into a Free Trade Agreement which contained no ISDS provision, so it would be odd if the two countries then embraced ISDS through a multilateral treaty. Then again, it might not be the strangest thing about the UK joining a Pacific-rim trading bloc for no obvious benefit to anyone other than a handful of Malaysian palm plantation owners.