Does ISDS Promote FDI? Asia-Pacific Insights from and for Australia and India – Luke Nottage & Jaivir Singh

Treaty-based Investor-State Dispute Settlement (ISDS) keeps attracting media attention. An example is a social media campaign by the ‘GetUp!’ group, which aims generally ‘to build a progressive Australia and bring participation back into our democracy’, objecting to ratification of the Trans-Pacific Partnership (TPP). This free trade agreement (FTA), signed in February 2016, encompasses Australia and 11 other Asia-Pacific economies generating around 40% of world GDP. Whether and how the TPP will be ratified and come into force has become very uncertain anyway, after the unexpected victory of Donald Trump in US presidential elections. Although Trump seems already to be backtracking on some of his pre-election positions, he had been opposed to the US ratifying the TPP and indeed favoured renegotiation of the longstanding North American FTA with Canada and Mexico. Both FTAs include the option of ISDS, allowing foreign investors to bring direct claims against host states for violating substantive commitments such as non-discrimination or adequate compensation for expropriation.

Nonetheless, taking advantage of the extra uncertainty now surrounding the TPP, China is already trying to get Australia’s support to progress negotiations for a broader FTA, establishing a “Free Trade Area of the Asia-Pacific” (FTAAP). China had been pressing for a FTAAP as it had not been included in TPP negotiations. After the TPP was signed, China had also tried to accelerate negotiations for the Regional Comprehensive Economic Partnership (RCEP or ASEAN+6) FTA, underway since late 2012 and involving ten Southeast Asian states along with China, Japan, Korea, India, Australia and New Zealand. Ministerial statements and a leaked draft Investment Chapter indicate that ISDS provisions remain on the negotiating agenda for RCEP (Kawharu, Amokura and Nottage, Luke R., Models for Investment Treaties in the Asian Region: An Underview, 2016).

Public opposition to ISDS therefore remains an important issue, particularly in the Asia-Pacific region. Legal professionals need to engage with this debate and understand the pros and cons of this dispute resolution procedure, especially the investor-state arbitration mechanism. On the one hand, the GetUp! Campaign against the TPP had focused on the risk of Australia being subject to ISDS claims especially from US investors, in light of their claims against Canada under the North American FTA. Yet damages awarded by arbitrators or through settlements amount to only 0.05% of US FDI in Canada, and the latter’s investors bring more ISDS claims per capita than US investors.

On the other hand, the GetUp! campaign did not adequately explain or consider why and how ISDS commitments are made. Host states have increasingly offered such protection to foreign investors in investment treaties since the 1970s. Bilateral investment treaties (BITs) proliferated especially as communist states began to open up their economies from the 1990s. Bilateral and regional FTAs, usually with investment chapters also containing ISDS protections, were concluded after the collapse of efforts to develop a multilateral investment agreement through the World Trade Organization (WTO) and Organisation for Economic Co-operation and Development (OECD).

The extra option of treaty-based ISDS was seen as a more direct and less politicized procedure compared to inter-state dispute settlement. The latter is still typically provided in investment treaties (but hardly ever used), as well as for trade disputes under the WTO (where, for example, Australia has only been complainant in seven cases – last in 2003). Credible commitments through ISDS-backed treaties were seen as particularly important for developing countries where domestic courts and legal protections did not meet international standards.

Yet ISDS has recently become a lightning rod for public opposition to FTAs (and economic globalization more generally), often after host states are subjected to their investment treaty claims (Nottage, Luke R., Rebalancing Investment Treaties and Investor-State Arbitration: Two Approaches,, 2016). For example, major debate emerged in India after Australia’s White Industries won a claim in 2011 under UNCITRAL Arbitration Rules as provided by the BIT with India (signed with Australia in 1999). The tribunal found that India had not satisfied the promised “effective means” for the investor to enforce a commercial arbitration award (against an Indian SOE). This and subsequent claims prompted the Indian government to finalise a revised (less pro-investor) Model BIT in December 2015 It is now being used in negotiating new BITs (eg that signed with Cambodia in 2016) and indeed when proposing to terminate older-generation treaties (including with Australia).

Similarly, Philip Morris Asia’s much larger claim initiated in 2011 under a BIT signed in 1993 with Hong Kong, for alleged expropriation of trademarks from Australia’s tobacco plain packaging legislation, led to escalating local media coverage – until the arbitral tribunal rejected jurisdiction in 2015 (Hepburn, Jarrod and Nottage, Luke R., Case Note: Philip Morris Asia v Australia, 2016). This cause celebre also became a factor behind the Gillard Government Trade Policy Statement announcing in 2011 a major shift for Australia: eschewing ISDS in new treaties, even with developing countries (Nottage, Luke R., The Rise and Possible Fall of Investor-State Arbitration in Asia: A Skeptic’s View of Australia’s ‘Gillard Government Trade Policy Statement’, 2011). This resulted in no significant FTAs being concluded, until a new Coalition Government gained power in late 2014 and reverted to including ISDS on a case-by-case assessment (Nottage, Luke R., Investor-State Arbitration Policy and Practice in Australia, 2016). The current Labor Opposition maintains its objections to ISDS, creating difficulties for Australia to ratify the TPP.

Australia’s temporary shift was partly due to politics: in 2011 the (centre-left) Gillard Labor Government was in coalition with the Greens, who are even more opposed to free trade and investment. But the stance also relied on arguments from some economists, even though they instead favour more free trade and foreign investment, albeit through unilateral or perhaps multilateral initiatives rather than bilateral or even regional FTAs. Developing the latter perspective , a majority report of the Productivity Commission in 2010 into Australia’s FTAs had argued against the common world-wide practice of offering foreign investors extra procedural rights such as ISDS. It did concede that such extra rights might be justified, for example if they led to greater cross-border flows in foreign direct investment (FDI). Yet the Commission pointed to a few studies suggesting that, on an aggregate (world-wide) basis, ISDS-backed treaty provisions had not significantly increased flows.

A recent econometric study by Luke Nottage (a co-author of this posting) with Shiro Armstrong casts doubt on that observation (Armstrong, Shiro Patrick and Nottage, Luke R., The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis, 2016. After an extensive review of existing empirical research and associated methodological issues, their study instead found positive and significant impacts from ISDS provisions on FDI outflows from OECD countries over 1985-2014, using a Knowledge-Capital Model with a dynamic panel indicator (effectively addressing the problem of endogeneity in variables). This impact on FDI could be found from ISDS provisions on their own, especially when ISDS was included in treaties signed or promptly ratified with non-OECD or less developed countries. The econometric study by Armstrong and Nottage also found a positive and significant impact from ISDS provisions when combined with the Most-Favoured-Nation provision, which is a key and indicative substantive treaty commitment for foreign investors. (This aspect was tested because the “strength” of treaties can vary in terms of substantive commitments by host states: we might not expect much impact on FDI even from ISDS provisions if the substantive protections and liberalisation commitments are few.)

Counter-intuitively, however, the study found that in general FDI impact was even larger for weaker-form ISDS provisions. This could be due to investors historically having been impressed by a broader “signaling” effect from states concluding investment treaties. Yet the impact from ISDS provisions also seems to be diminishing since 2001, when ISDS claims started to pick up world-wide and therefore investors (or at least legal advisors) could have begun to pay more attention to the details of ISDS and other treaty provisions. Reduced impact since 2001 may be related to more efforts from host states to unilaterally liberalise and encourage FDI. However, it could also be due to a saturation effect (as treaties began to be concluded with less economically important partner states), or indeed due to less pro-investor provisions being incorporated into investment treaties (influenced by more recent US practice, partly in response to ISDS claims (Alschner, Wolfgang and Skougarevskiy, Dmitriy, Mapping the Universe of International Investment Agreements, 2016.

Further variables impacting on FDI (such as double-tax treaties) could be investigated, as can regional differences. Data limitations also remain, as there is now considerable FDI outflow from non-OECD countries. Nonetheless, this baseline study suggests that it has been and still may be risky to eschew ISDS provisions altogether. In particular, results indicate a strong positive effect on FDI flows from ratified investment treaties overall even from 2001. So states would have missed out on that if they had insisted on omitting ISDS, and this then became a deal-breaker for counterparty states.

Further econometric research underway at a Delhi-based thinktank suggests that India was correct not to abandon ISDS provisions altogether in its revised Model BIT (and to retreat from an even less pro-investor earlier draft of the Model BIT. While this study by Jaivir Singh (one of the co-authors of this posting) and his colleagues is still ongoing, preliminary results (using instead a gravity-type model) find that although the signing of individual BITs had an insignificant impact on FDI inflows into India, the cumulative effect of signing BITs is significant and so is the coefficient associated with the signing of FTAs. Since almost all of India’s investment treaties provide for full ISDS protections, these preliminary results suggest that ISDS can have a positive influence on foreign investment, albeit in a non-obvious compound manner.

Overall, these studies suggest that ISDS-backed treaty provisions liberalising and protecting FDI have had a significant impact, but in complex and evolving ways. Agreeing to dialed-back ISDS provisions and even substantive commitments (perhaps following recent EU preferences may be an acceptable way forward. This is true especially for Australia and India, as they continue negotiations bilaterally as well as through RCEP, and perhaps eventually for the FTAAP FTA.

Luke Nottage is Professor at University of Sydney Law School & Jaivir Singh is Associate Professor at Jawaharlal Nehru University, Delhi.

This post draws on Nottage’s joint project researching international investment dispute management, funded by the Australian Research Council (DP140102526, 2014-7); and Singh’s ongoing project assessing the impact of investment treaties on FDI in India, for the Indian Council for Research on International Economic Relations. Singh was a visitor at the University of Sydney in October 2016. The article was first published by the Asia-Pacific Forum for International Arbitration, and republished here with permission.

Export of legal services in Asian Markets: the Indian context — Molina Asthana


Asialink Business’ latest research report — Australia’s Jobs Future: The rise of Asia and the services opportunity — produced in collaboration with ANZ and PwC, demonstrates that by 2030, services can become Australia’s number one export to Asia in terms of total value added, supporting a million Australian jobs in the process.

The export of professional services, including legal services, are also expected to rise. However, there are barriers faced by legal service providers who wish to operate in Asia, including nationality and residency requirements, limited recognition of Australian qualifications and limits on foreign investment in local firms.

Australia–China Free Trade Agreement

The conclusion of a comprehensive free trade agreement (FTA) with China (ChAFTA) is likely to lead to a surge in the export of services (although the final FTA is yet to be signed). China has offered Australia the best services commitments it has ever provided in an FTA (with the exception of China’s agreements with its Special Administrative Regions — Hong Kong and Macau). Most importantly, they include new or significantly improved market access for Australian services, including legal services (see the factsheet prepared by DFAT on ChAFTA’s key outcomes). Australian law firms will be able to establish commercial associations with Chinese law firms in the Shanghai Free Trade Zone. This will allow firms to offer Australian, Chinese and international legal services with a commercial presence in China, without restrictions on the location of clients.

ChAFTA also includes a framework to advance mutual recognition of services qualifications and to support mutual recognition initiatives by professional bodies in Australia and China. This is not the case with other Asian countries, where barriers continue to exist and hinder negotiations for the conclusion of FTAs.

Relationship between the Australian and Indian legal sectors

Through my own involvement in building the Australian–Indian relationship in the legal sector, I am aware that there is an interest on the part of law firms, universities and judiciaries in both countries to develop deeper ties. However, international law firms and practitioners are faced with huge barriers if they intend to set up business or practice in India.

With the growing trade between the countries, and India becoming an important international market, it will be necessary to have lawyers with expertise in both jurisdictions or for clients to have easy access to experts in both jurisdictions.

Because Australia and India are both common law countries, it should be easier for lawyers to transfer their skills across jurisdictions and make positive contributions to each’s legal systems.

The legal market in Australia is comparatively more open. However, from the perspective of the Indian legal sector, that comparative openness is largely academic; it is unlikely that Indian legal firms would be in a commercial or strategic position to enter the Australian market. There are no restrictions on establishment of foreign firms in Australia and foreign lawyers are allowed to work in Australian firms, provided they do not give advice on Australian law or profess to hold local qualifications. Australia’s accreditation requirements for foreign practitioners are still quite onerous, with up to 12 subjects and a year of practical training required before being permitted to practice in an Australian jurisdiction (See the Law Council of Australia’s publication on the admission of foreign practitioners).

On the other hand, the Indian market is much more restrictive: neither joint ventures nor foreign direct investment (FDI) in the legal sector is permitted. Foreign law firms have to largely rely on fly-in-fly-out arrangements and work with Indian law firms. In addition, foreign firms are not permitted to represent local clients in India. The accreditation requirements for foreign practitioners wishing to work in India can also be quite onerous (see this summary of the qualification process prepared by the International Bar Association).

Given these restrictions, it is imperative that wide-ranging reform be undertaken to open up the Indian legal market so that foreign firms can establish local offices and foreign lawyers can practice within India. There is also a continuing need for mutual recognition of academic legal qualifications that allows for the free movement of legal experts.

Towards deeper Australia–India legal ties

The Indian Department of Commerce has recommended a two-phase road map for the liberalisation of the legal professions. The reforms are discussed in detail here.

The first phase would include domestic regulatory reforms, implemented simultaneously with the opening of international arbitration and mediation services in foreign investment law and international law practices. Phase Two would include opening up non-litigious and non-representational services in Indian law.

However, there remains strict and ongoing opposition to FDI and third party ownership of law firms. Further, reservations continue against foreign firms who have third party non-lawyer funding from entering the Indian legal market. There is also hesitancy in respect of multi-disciplinary practices from entering the legal sector, including the ‘Big Four’ accounting firms.

The issue of reciprocal access for Indian lawyers is to be clarified at a later date.

Approval has been given for the implementation of the LLP structure in India, as well as permission for law firms to issue brochures, open websites and access bank finance. An increase in professional indemnity limits has been agreed to in-principle by representative bodies of the Indian Bar.

Deeper ties between would also be fostered if lawyer had the ability to go for internships or secondments at law firms in the other country. Thankfully, the road map also seeks to address this issue.

Despite these recommendations a lot remains to be done before it can be said that the Indian legal market is ‘open for business’. The Department of Foreign Affairs and Trade (DFAT) is working on finalising an FTA between Australia and India and the legal sector is one of the areas that it will address. To support this process, I have made a formal submission to DFAT suggesting a collaborative approach be adopted and that this be based on professional gains, academic gains, sharing of judicial advancements and commonality of legal systems. My submission will be available on the DFAT website shortly and this post will be updated to include the link when it is live.

Molina Asthana is a Principal Solicitor with the Victorian Government Solicitor’s Office. She is the President of the Victorian Chapter of the International Law Association, Chair of the International Law Section of the Law Institute of Victoria and Treasurer of the Asian Australian Lawyer’s Association. She has significant experience in the Indian jurisdiction.