A free trade agreement between the UK and Australia is underway to include a controversial system of secret courts that will allow companies to seek compensation if their profits are affected by government policies.

In a move that alarmed unions and anti-poverty activists, Trade Minister Greg Hands said UK negotiators were in talks with Australian officials over proposals to include a closed-door dispute arbitration system .

It is understood that the UK plans to announce the framework of a trade deal with Australia ahead of the start of the G7 summit on June 11, after Prime Minister Boris Johnson invited his Australian counterpart, Scott Morrison, to at the event in Cornwall.

Commerce Secretary Liz Truss said last week that a deal would be in the best interests of the UK economy and its exporters would benefit from unfettered access to Australian markets.

The most controversial element of the proposed deal so far has been a plan to remove tariffs and quotas on Australian agricultural products, including sheep and beef entering the UK, under -counting British farmers.

The move to include an investor-state dispute resolution (ISDS) system, which allows companies to sue governments when they believe policies have left them out, could spark even more protests.

ISDS is a system of private courts convened behind closed doors and arbitrated by judges, allowing companies to bypass national civil courts. They were originally designed by Western multinationals to protect them against the seizure of their assets following a coup or by rogue states, for example a nationalized mine without reasonable compensation.

In recent decades, they have evolved to include indirect expropriation, whereby any government action affecting the actual or expected profits of a business can be called into question.

Recent ISDS cases brought against governments include Swedish energy company Vattenfall suing Germany over policies that reduce water pollution; US drug giant Eli Lilly sues Canada for trying to cut drug prices; and the French multinational Veolia suing Egypt for raising its national minimum wage.

Shadow Trade Minister Emily Thornberry said: ‘It would be deeply worrying if the government used the very first trumped-up post-Brexit trade deal to hand over the power of big companies to challenge regulations that affect their profits, limiting our capacity for new laws to protect the environment, public health and the rights of workers and consumers.

“This is yet another reason why this proposed trade deal requires proper consideration and debate, rather than being rushed in secret for a G7 signing ceremony.”

Nick Dearden, director of Global Justice Now, said the Australian company behind a coal mine project in Cumbria could sue the government for halting or delaying the project for environmental reasons.

“Right now the Dutch government is being sued in these courts for daring to phase out coal power, so we know the fossil fuel companies will not hold back,” he said.

The EU planned to include an ISDS in a free trade agreement with the United States during talks with President Barack Obama, but was forced to drop the measure after a series of marches and protests across the continent. In 2017, the transatlantic trade and investment partnership, known as TTIP, was frozen.

Asked in parliament about ISDS in the deal with Australia, Hands said: “This is a live negotiation. There will be a chapter on investment. We are huge investors in each other’s markets. I remind the House that the UK has never lost an ISDS case. “

Dearden said: “Greg Hands has confirmed our worst fears – that as most countries move away from the toxic company court system, the UK government wants to supercharge it.

“These courts would allow Australian companies to extract impressive payments from the government for taking action, from climate change to workers’ rights, tying the hands of governments for a generation or more.

Nick Crook, Head of International Relations at Unison, said: “Australia already knows what ISDS stands for. Tobacco giant Philip Morris has tried to sue Australia after seeking to pass plain packaging legislation to protect public health. Although Australia ultimately won, it cost the Australian taxpayer AU $ 24million to fight the case in private investment courts. “

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