Norman Russel: Third Readings — 
Text is incorporated into the Bound Volume 
Norman Russel: Third Readings — 
[Sitting date: 24 July 2008. Volume:648;Page:17425. Text is incorporated into the Bound Volume.] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 This trade agreement between New Zealand and China fails to protect the sovereignty of the democratically elected Government of New Zealand and it places significant restrictions on the future ability of the New Zealand Government and Parliament to pass regulations to protect the people and environment of Aotearoa New Zealand.  
There are many reasons why the New Zealand Government should not have signed this preferential trade agreement with China not least of which is the fact that New Zealand signed this agreement while China was involved in the murderous oppression of the people of Tibet. It is also of grave concern that this agreement has no binding labour or environmental standards. The lower wages and standards in China will effectively be a non-tariff barrier to fair trade giving corporations that pollute or pay inhumane wages a competitive advantage over those that do not.  
However here I wish to focus on the investment provisions and expose the risks to our people our environment and our sovereignty. The investment chapter of the agreement chapter 11 taken together with the annex defining expropriation annex 13 effectively forms a bilateral investment treaty between our two countries. This bilateral investment treaty inhibits the ability of the two Governments to regulate the businesses of foreign investors without compensating those investors for the cost of those regulations.  
The investment treaty means that a Chinese corporation operating in New Zealand can sue the New Zealand Government if the Government changes regulations resulting in a loss of value for that corporation. And if there is a dispute between a Chinese investor and the New Zealand Government as to whether the Government should compensate the investor and to what extent then the dispute is to be resolved in an international forum established under the auspices of the World Bank or the United Nations.  
The effect of this investment treaty will be to place a chill over the ability or willingness of the New Zealand Government and Parliament to regulate the business activities of Chinese corporations operating in New Zealand for fear of facing binding claims for compensation in international tribunals. This will make it much harder for our Government to carry out its duty to protect and advance the well-being of the people and environment of Aotearoa New Zealand.  
Bilateral investment treaties have received an increasing amount of attention in the international law literature. This is for the simple reason that more and more bilateral investment treaties are being signed and more and more cases are ending up in international courts or tribunals of one description or another. Corporations are suing Governments in international judicial hearings on a regular basis. In Canada the University of Victoria’s Faculty of Law has an investment treaty arbitration website that provides access to all publicly available investment treaty awards and lists over 200 cases since 1996. 
It was long standard fare for treaties to protect corporations from expropriation; from the direct acquisition of a company by a Government without compensation. What is new is that now corporations are successfully suing Governments for what they call “indirect expropriation”. Indirect expropriation is where a Government changes laws or regulations or acts in some way that impacts on a corporation’s activities resulting in loss of profits and hence value for that corporation. In these cases the owner’s title to an asset is protected but the value of that asset declines.  
The New Zealand - China preferential trade deal contains two components that together constitute a bilateral investment treaty between New Zealand and China. Those are chapter 11 and annex 13. The core of chapter 11 is article 145 which I imagine almost none of the members of this House have read except me. It says that the New Zealand Government cannot expropriate Chinese investors unless the expropriation is fully compensated and vice versa. If there are any disputes between a Chinese investor and the New Zealand Government the investor can seek redress at the International Centre for Settlement of Investment Disputes or through the United Nations Commission on International Trade Law.  
Central to such disputes is the definition of “expropriation”. This definition has been of critical importance to bilateral investment disputes overseas. There have been several cases where arbitrators have deemed that measures taken to protect the environment have expropriated investors and that is extremely and directly applicable to this treaty. For example in the case of  
Metalclad v Mexico 
 an international trade tribunal ruled that Mexico had violated the North American free-trade agreement in preventing Metalclad Corporation from opening a hazardous waste treatment and disposal site in Mexico. The tribunal found that local government opposition to the project amounted to expropriation of the company’s profits.  
Public protest against Metalclad’s approval for the waste treatment led to local authorities investigating the potential environmental impacts of the treatment site. An environmental impact assessment revealed that the site was on top of an ecologically sensitive underground alluvial stream. As a result the governor refused to allow Metalclad to operate the facility and later declared it part of an ecological zone.  
Metalclad claimed that this action effectively expropriated its future expected profits and although it was awarded less than the $90 million in damages it sought its claim was successful. There are more cases like this in international tribunals and it is clear that measures taken by States to protect human health or the environment can be found by international arbitrators to be expropriation resulting in large financial penalties. The key question is whether State action to regulate is considered a form of indirect expropriation. The definition of expropriation is addressed in annex 13 which I cannot imagine many other people here have read. This is really at the core of the agreement and what it might mean for the ability of the New Zealand Government to regulate without compensation.  
I will assess annex 13 from the perspective of its relationship to the ability of a State to regulate when such regulation results in the partial loss of value to a Chinese investor’s asset. Annex 13 has five paragraphs. Paragraph 1 states: “An action or a series of actions by a Party cannot constitute an expropriation unless . . . it interferes with a property right”. This is a simple test to meet. Most State actions would interfere with property investment when the State is trying to regulate and it costs something. Paragraph 2(b) states that indirect expropriation occurs “when a state takes an investor’s property in a manner equivalent to direct expropriation in that it deprives the investor in substance of the use of the investor’s property”. The kind of State action where State regulation costs money to a corporation protecting the environment is exactly the kind that would be caught by paragraph 2.  
Paragraph 3 states: “In order to constitute indirect expropriation the state’s deprivation of the investor’s property must be: (a) either severe or for an indefinite period; and (b) disproportionate to the public purpose.” Clearly if the State was trying to regulate to protect the environment it would be permanent and the question of whether it would be disproportionate would be decided by an international panel. Whether the Government’s judgment was allowed would be determined by an international disputes panel. Paragraph 4 states that if one targets a particular class of investor one is very likely to get caught up in expropriating. That is an easy provision to meet if for example one targets a bunch of agricultural producers or dairy farmers and tries to clean them up.  
Paragraph 5 states—and this is probably what the Government is hoping will protect it—“such measures taken in the exercise of a state’s regulatory powers as may be reasonably justified in the protection of the public welfare including public health safety and the environment shall not constitute indirect expropriation.” Paragraph 5 gives the appearance of protecting State action. It says that State actions to protect public welfare do not constitute indirect expropriation. But there is an important exemption and an important qualifier. The exemption is that it does not cover the kinds of actions where any particular industry or class of investors is targeted. The qualifier is the term “reasonably justified”. Even if the State action does not meet the terms of paragraph 4 in that it does not target a class of investors it must still be reasonably justified and an international panel will decide whether the actions of the Government are reasonably justified. There is not even any guidance.  
Once the exemption and the qualifier in paragraph 5 are included the protection to State action looks weak. This is why Professor Matthew Porterfield from Georgetown University an international expert in trade law said that in our agreement with China we are actually exposing ourselves to greater risk of legal action than the US Government faces under its investment clauses. So a close reading of chapter 11 and annex 13 makes it clear that any kind of New Zealand Government regulatory action that negatively affects the value of Chinese investors’ assets is wide open to action being taken against the New Zealand Government by the Chinese investors.  
Where the New Zealand Government action particularly affects a class of investors then the Government’s only defence is to show that its actions were proportionate to the public purpose intended. It will be up to an international panel to decide whether the action was proportionate regardless of the view of the people or Government of New Zealand. Where a State action does not affect a particular class of investors or is not in breach of a contract then the Government has a better opportunity to win its case but only if the tribunal agrees that the Government’s action was reasonably justified to protect public welfare. Thus the New Zealand Government will have two lines of defence but both of them involve convincing a non-elected international panel that the actions of the Government were proportionate or reasonable to achieve the public purpose desired.