Additional comments - Report 165

Michael Danby MP, Deputy Chair; Senator Jenny McAllister; Josh Wilson MP; Susan Templeman MP; Senator Kimberley Kitching; Senator Sam Dastyari
From the time of the Hawke-Keating government, Australia has looked to participate openly in the global market on the basis that fair and free trade is in our national interest – economically, socially, and geopolitically – and because it is supportive of developing nations in our region. Labor has pursued tariff reduction and the winding-back of non-tariff barriers, and we recognise that multilateral agreements are preferable to a ‘noodle bowl’ of bilateral arrangements.
Labor governments have been the driving and sustaining impetus behind the establishment of the Asia Pacific Economic Cooperation (APEC) forum, which helped to lower or remove tariffs and to strengthen trade. Building stronger economic relationships between nations in the Asia-Pacific increases security in the region and reduces the chance of conflict.
The Trans-Pacific Partnership (TPP) is a plurilateral trade and investment agreement that joins together a not insignificant group of nations in our region and elsewhere. While the modelled aggregate benefit of the TPP is modest, and recognising that the projected benefit of earlier trade agreements has not been achieved (see Report paras 5.36-5.37), the TPP does contain some meaningful improvements for a range of Australian producers and manufacturers in tariff reduction, market access, regulatory harmonisation, and the removal of non-tariff barriers.
The TPP also includes some welcome provisions on environmental and labour standards, though the compliance and enforcement mechanisms for these commitments are much weaker than those related to the trade and investment provisions.
But Labor Committee members are disappointed that the TPP contains provisions that are well outside the core purpose of achieving fair and free trade, and that some of these provisions are not only extraneous, but risky or harmful to Australia’s interests.
The Labor members of the Committee have concerns about ratifying the TPP in terms of both process and substance.
There have been clear shortcomings in the process through which Australia’s participation in the TPP has been negotiated and determined, namely:
The inadequacy of stakeholder engagement in the negotiation phase, and the absence of independent economic analysis or modelling, including analysis for specific consideration by this Committee; and
The present haste to ratify when it appears certain the TPP will not proceed with the United States as a participant, which would be fatal to the agreement.
Labor members of the Committee support the inclusion in the Report of a recommendation that goes to the question of providing wider, earlier, and more substantial engagement with stakeholders from industry and civil society. We believe, however, that the Report should also include a recommendation with respect to the provision of independent economic analysis and modelling, and this is explored further below.
In circumstances in which President-elect Trump has indicated that the United States will not ratify the TPP, and while there is a Senate Inquiry afoot that will not report until February 2017, it seems either pointless or foolhardy, or both, to rush into ratification. For those reasons, on 21 November 2016, Labor members of the Committee sought, unsuccessfully, to have the finalisation of this Report 165 held over until an appropriate date next year.
The TPP requires the ratification of the United States to come into force. The unequivocal position of President-elect Trump means the agreement is dead. If a form of the TPP agreement should be considered by the signatory nations other than the US, the Australian government should obtain fresh economic and cost-benefit analysis confined to that scenario. As the Minister for Trade said on 13 November in relation to whether such a scenario could unfold, “Well, in theory yes, but really with the United States not being part of it, first of all, one: officially the TPP would not get up, but, secondly: if we then looked at ‘Is there enough merit to look at a trade deal among the 11 of us?’ – it changes the metrics substantially.”
In any case, the Labor members of the Committee have particular concerns about those aspects of the TPP that are not directly trade related, and are not essential to the trade benefits of the agreement. These include: expanded monopoly rights protection for pharmaceuticals which may impose costs on health consumers or on the public health system; provisions that ‘lock-in’ Australia’s intellectual property framework and prevent future reform; lopsided concessions on temporary labour market access, with a dangerous weakening of regulations that cover labour market testing and skills assessment; and risky, unnecessary exposure to investor-state dispute settlement arrangements.
These matters are discussed below.

Provide independent economic analysis

The absence of independent economic analysis of the benefits and concessions contained within the TPP was noted in numerous submissions, and was identified as a serious shortcoming repeatedly in evidence given at public hearings. The Productivity Commission was commonly cited as an appropriate organisation to undertake this independent analysis.
On that basis, Labor members of the Committee sought to have the following recommendation included in Report 165, and were grateful this was supported by the Committee as a whole.
The Committee recommends that the Australian government consider implementing a process through which independent modelling and analysis of a proposed trade agreement is undertaken by the Productivity Commission, or equivalent organisation, and provided to the Committee alongside the National Interest Assessment (NIA) to improve assessment of the agreement.
On this issue, and reinforcing the merit of the recommendation, it is important to note that in Blind Agreement: reforming Australia’s treaty-making process, the June 2015 Report of the Foreign Affairs, Defence and Trade References Committee, stated:
The Opposition favours incremental change building on the package of sensible reforms introduced by government in 1996. This is why the report makes practical recommendations aimed at improving the level of transparency in negotiating treaties and the quality of consultations between DFAT and stakeholders, and making parliament a real player in treaty-making.
Specifically, the report's key recommendations are that JSCOT engage more in the oversight of trade agreements under negotiation and not wait until the end of the process; that parliamentarians and stakeholders be given access to treaty text on a confidential basis during negotiations and not a token look at the end as with the TPP; that trade agreements be subject to an independent cost-benefit analysis prepared up front at the commencement of negotiations.
Indeed, Recommendation 8 of the Blind Agreement report was as follows:
Recommendation 8
5.31 The committee recommends that a cost-benefit analysis of trade agreements be undertaken by an independent body, such as the Productivity Commission, and tabled in parliament prior to the commencement of negotiations or as soon as is practicable afterwards. The cost-benefit analysis should inform the government’s approach to negotiations.
5.32 The committee further recommends that:
treaties negotiated over many years be the subject of a supplementary cost-benefit analysis towards the end of negotiations;
statements of priorities and objectives, and cost-benefit analyses stand automatically referred to Joint Standing Committee on Treaties for inquiry and report upon their presentation to parliament.
This recommendation was repeated in broad terms by a number of people who appeared before the Committee in the course of the TPP inquiry.
For example, Pat Ranald of AFTINET gave evidence in Sydney on 26 September:
Briefly on the process: trade agreements are conducted behind closed doors and the text is not made available until after it has been agreed. The decision to authorise the signing of a trade agreement is made by cabinet, and it is only after that when the agreement is tabled in parliament and examined by this committee. As you know, parliament votes only on the implementing legislation, not the whole agreement. This process was examined by a Senate committee last year, and they produced a report which was quite critical of the process, aptly called Blind agreement. We have made detailed recommendations for changes to this process. We believe that draft text should be released and, in particular, the final text of trade agreements should be released for public and parliamentary scrutiny before it is actually signed by government. There should also be independent studies done and made available to parliament before signing—and certainly before the implementing legislation is endorsed.
We note that in the case of the TPP the call for independent assessments of the economic, health, human rights and environmental impacts of the TPP has come not only from a broad range of community organisations like our network but also from the Productivity Commission, the Australian Competition and Consumer Commission and public health experts. So there is quite a strong, wide range of opinion about the need for such studies to be done.
Alan Kirkland, CEO, Choice, gave the following evidence (Sydney, 26.09.16):
Due to these concerns, we would encourage the committee to recommend that implementing legislation for the TPP not be introduced or passed until there is an independent cost-benefit analysis conducted by a body such as the Productivity Commission […]
We are not here to represent the interests of producers, but I would say that what we think should happen is proper analysis that weighs up the costs and benefits to the Australian community that is done in a way that allows people participating in the debate to see that independent analysis and reach their own view, and we do not have that sort of information available at the moment.
Dr Elizabeth Thurbon, appearing in her personal capacity, gave the following evidence (Sydney, 26.09.16):
I would suggest that under the previous Labor government we came a long way towards having a set of clearly articulated principles to guide our trade policy that reflected Australia's long-term national economic interests. Those principles outlined in the Gillard government's trade policy statement included no ISDS, the rejection of TRIPS-Plus IP provisions, ensuring that the Productivity Commission reviews all trade agreements in order to assess their economic value and not signing trade deals that do not have demonstrable independently-modelled economic benefits for our nation.
[…] Wherever possible, it is the responsibility of the government to make decisions based on evidence. I think the best evidence to draw on would be independent modelling by the Productivity Commission.

Monopoly rights protection for biologics

Labor is committed to providing Australians with affordable medicines and to minimising the cost of medicines within the ambit of the public health budget. The TPP contains provisions, especially with respect to the emerging category of ‘biologics’, that could in future make important medicines inaccessible and unaffordable.
The former Labor government refused to increase data protection for biologic medicine beyond the current five-year period, while the United States has been adamant it must be extended to twelve years.
The current government has stated the TPP will not increase the price of medicine or delay access to it, and the Committee heard evidence from the Department of Foreign Affairs and Trade to the same effect; specifically, the claim was made that no legislative change will be needed to biologic data protection for Australia to be compliant with its obligations under the TPP.
This appears to be disingenuous. As Dr Deborah Gleeson detailed in her submission, the text of the TPP is conveniently ambiguous, and in fact Australia has committed to maintaining administrative arrangements that deliver an equivalent of eight years of data protection, rather than five years as claimed. This commitment has the potential to be very costly if a future Australian government was prevented from relying on the five-year maximum data protection under current law.
Intellectual property and ‘safe harbours’
The intellectual property clauses of the TPP are of concern, not least because they have the potential to lock-in aspects of Australia’s current intellectual framework at a time when there are widespread calls for reform. There are, for example, recommendations advanced by the Productivity Commission in the Intellectual Property Arrangement draft report that would not be possible under the TPP. Given the final report has not been released, Labor members of the Committee believe there has been insufficient consideration of the implications of this policy ‘lock-in’ and as such believe no action should be taken at this time.
Lopsided labour market concessions and the weakening of labour market testing and skills assessment
The TPP will undermine Australia’s 457 visa system by failing to apply labour market testing for ‘contractual service suppliers’ for six signatory countries. This will mean jobs in Australia will be able to be filled by workers from Canada, Peru, Brunei, Mexico, Malaysia and Vietnam without being offered to Australians first. This policy shift comes at a time of rising unemployment, record under-employment, and numerous sectoral and geographical areas of structural job weakness and instability.
It is worth highlighting that more than 650 professions are currently covered by the term ‘contractual service supplier’ and this includes electricians, plumbers, carpenters and nurses. No other country has provided Australia with such generous reciprocal visa rights and it is unclear why such concessions were offered up by this government, unless it is a lateral means of undermining existing pay and conditions.
While Labor members of the Committee acknowledge that foreign workers have an important role within the Australian economy, it is important that Australians are given the chance to work and that temporary foreign workers are brought into the country only once there is a demonstrated need. The 457 visa system is supposed to supplement the skills of the Australian workforce and bridge labour gaps on a temporary basis; it was never intended to obstruct Australians in search of work, nor to undermine safety and other workplace conditions.
Labor is also concerned about the TPP’s dangerous weakening of Australia’s current approach to mandatory skills assessment. Australia has the best-trained tradespeople in the world. This standard must be protected, and, where possible, extended for the benefit of worker safety and community safety in other countries. The Committee heard compelling evidence that insufficiently qualified and inexperienced tradespeople have come to work in Australia as a result of similarly eroded skills assessment standards under previous trade agreements, resulting in serious and, in some cases, fatal accidents.
Evidence provided by the Electrical Trades Union of Australia presented the potentially lethal consequences to workers and consumers alike if Australia’s current regime is not maintained, especially with respect to inherently dangerous industries like electrical trades, stevedoring, construction, and so on.
Labor members of the Committee sought unsuccessfully to delete a number of paragraphs in the Report. For example:
The Committee notes that many of the concerns expressed about temporary entry for business persons during the inquiry are not borne out by the evidence.
In relation to the temporary entry for business persons, the Committee has found that the majority of concerns about the provision for contractual service suppliers to work temporarily in Australia are unfounded.
Labor members of the Committee sought unsuccessfully to amend a number of paragraphs in the Report, including:
In relation to the potential for contractual service suppliers entering Australia under the TPP depriving Australian workers of employment opportunities, the Committee notes the evidence of a number of employer organisations that using Australian workers is almost always preferable to using overseas workers, but accepts that there is clear evidence to the contrary and the TPP does effectively bypass the existing labour market testing requirements.
In addition, contractual service suppliers must meet the mandatory skills assessment test to work in Australia, but that test can amount to recognition of skills accreditation achieved in other countries rather than by actual skills assessment, and this presents a risk that temporary foreign labour may not be equipped to perform effectively and safely according to Australian standards.

Investor-State Dispute Settlement (ISDS)

There was no compelling evidence before the Committee that suggested Australia would benefit by the introduction of ISDS arrangements with the United States, Canada, Japan, and Peru for the first time – which is the substantial change delivered by the TPP.
On that basis, Labor members of the Committee sought to have the following recommendation included in Report 165, but were unsuccessful.
The Committee recommends the Australian government pursues any available opportunity to avoid being subject to any ISDS arrangements, or to the introduction of ISDS provisions between Australia and nations, like the USA, that are in any case low-risk in terms of direct expropriation that cannot be challenged within a domestic judicial system, and yet high-risk in terms of ISDS action that undermines public policy sovereignty.
Labor Committee members were successful in making some minor amendments to Chapter 6 which at least reflected the risks that ISDS provisions represent in terms of future legal costs, compensation, and regulatory chill, and the fact that the Commonwealth will be liable for ISDS actions in respect of laws made or actions taken by state and local governments.
Unfortunately, Labor Members of the Committee were unsuccessful in deleting a number of paragraphs that make unbalanced and inaccurate claims about ISDS, and create a false impression that ISDS has no potential to affect the sovereign capacity of the Australian government. For example:
“The ISDS provisions in the TPP will not prevent an Australian Government from pursuing regulation in the public interest, even if there is a finding against the Australian government.”
This statement is either false or meaningless, and there is no evidence for it in any case.
If Philip Morris had won their case, Australia would have been faced with abandoning the ‘plain packaging’ public health initiative or paying compensation to Phillip Morris. The latter outcome would be untenable, and does not fit with any reasonable interpretation of being able to regulate in the public interest.
It is important to remember that the TPP introduces an ISDS mechanism between Australia and four other countries for the first time, namely: the USA, Japan, Canada, and Peru. Under the TPP an ISDS arrangement will be excluded between Australia and New Zealand by a side letter to the agreement.
If the incoming Trump administration chose to renegotiate the TPP, as unlikely as that may be, the government should take that opportunity to avoid ISDS provisions in a future agreement.
The Australian government has previously chosen to avoid the introduction of ISDS mechanism between Australia and the United States.
In 2010, the Productivity Commission’s Bilateral and Regional Trade Agreements report said the Australian government should “seek to avoid accepting provisions in trade agreements that confer additional substantive or procedural rights on foreign investors over and above those already provided by the Australian legal system”.
It also stated:
There does not appear to be an underlying economic problem that necessitates the inclusion of ISDS provisions within agreements. Available evidence does not suggest that ISDS provisions have a significant impact on investment flows.
Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions.
[p. xxxiv]
Against this background, the Commission considers that Australia should seek to avoid accepting ISDS provisions in trade agreements that confer additional substantive or procedural rights on foreign investors over and above those already provided by the Australian legal system. Nor, in the Commission’s assessment, is it advisable in trade negotiations for Australia to expend bargaining coin to seek such rights over foreign governments, as a means of managing investment risks inherent in investing in foreign countries. Other options are available to investors.
[pp 276-277]
In the context of a more recent review of trade agreements, Paul Lindwall of the Productivity Commission said, on 25 July 2016, in relation to ISDS provisions and the Phillip Morris case: “As it was resolved on a technicality, and costs are apparently yet to be recovered, this success should not be taken as an indication that ISDS is essentially harmless.”
The relevant evidence before the Committee can therefore be considered in two streams, each of which argues against the unnecessary and risky introduction of ISDS provisions, especially between Australia and other ‘low-risk’ but frequently litigious nations like the United States. Those streams of evidence are:
The fact that there is no demonstrated or reasonably anticipated benefit in terms of investment flow from ISDS between Australia and countries like the US, Japan, and Canada.
The fact that there are well-established risks of ISDS imposing costs on Australian taxpayers (whether for compensation or legal costs or both), and the potential for ISDS to prevent Australian governments from regulating in the public interest.
What’s more, the Productivity Commission’s Trade & Assistance Review 2013-14 included the following observations and recommendations:
[…] it is not clear ISDS provisions respond to a demonstrable market failure or have been associated with the fostering of foreign investment flows, particularly between advanced economies with transparent and well-functioning legal systems.
[page 61]
The inclusion of investor-state dispute settlement (ISDS) provisions in Australia’s preferential trade agreements and bilateral investment treaties has become contentious.
The provisions depart from national treatment principles by affording substantive appeal rights to foreigners not available to domestic firms, risk impeding domestic regulatory reform (regulatory chill), include safeguards and carve-outs of uncertain effect, lack transparency and have inadequate parliamentary scrutiny.
ISDS provisions also expose the Australian Government to potentially large unfunded contingent liabilities dependent on decisions by international arbitration tribunals.
Concerns are heightened by increases in the number of ISDS cases internationally.
[page 61]
In its report on Bilateral and Regional Trade Agreements (PC 2010a, p. 271), the Commission concluded there was an absence of an identifiable underlying economic problem on market failure grounds that necessitates the inclusion of ISDS provisions. The apparent lack of evidence regarding the effects of such provisions on Australian foreign investment leads the Commission to emphasise its previous recommendation that:
The Australian Government should not include matters in bilateral and regional trade agreements that would serve to increase barriers to trade, raise costs or alter established social policies without a comprehensive review of the implications and available options for change.
On specific matters, the Australian Government should:
seek to avoid the inclusion of investor-state dispute settlement provisions in BRTAs that grant foreign investors in Australia substantive or procedural rights greater than those enjoyed by Australian investors. (PC 2010a, p. xxxviii)
[page 80]
The weight of evidence and expert opinion is clear on two fronts with respect to the introduction of ISDS provisions between countries that are considered low-risk because they have robust governance and judicial systems: (1) the benefits of ISDS are uncertain and minimal with respect to both the flow of investment into Australia, and the protection of Australian investment abroad; and (2) the risks of ISDS in terms of legal costs, compensation, interference with the ability of governments at all levels (local, state, and federal) to regulate in the public interest, and the influence of ‘regulatory chill’.
Even in the case of so-called ‘high-risk’ investment jurisdictions there is a strong argument to be made that the risk of direct or unfairly indirect expropriation can be dealt with by means other than ISDS which are equally effective, but which avoid the capricious nature of the ISDS process/institutions and provide an incentive for developing nations to evolve a mature regulatory and judicial system.
Michael Danby MP
Josh Wilson MP
Senator Jenny McAllister
Susan Templeman MP
Senator Kimberley Kitching
Senator Sam Dastyari

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About this inquiry

This inquiry will examine the following treaty: Trans Pacific Partnership Agreement between the Government of Australia and the Governments of: Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States of America and Vietnam, associated side letters and proposed Australian notification on tobacco control measures (Auckland, 4 February 2016)

Past Public Hearings

07 Nov 2016: Canberra
17 Oct 2016: CANBERRA
07 Oct 2016: MELBOURNE