Indonesia's TPP debate
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Indonesia's TPP debate

Critics say dispute settlement and arbitration provisions amount to 'corporate warfare' on state sovereignty.

Among the myriad issues that need to be addressed in Indonesia if it intends to join the Trans-Pacific Partnership (TPP), dispute settlement could prove one of the most contentious.

The US-led trade and investment pact contains some provisions that its harshest critics say could threaten a country's sovereignty over writing economic laws in its national interests if they do not conform to foreign investors' wishes.

A chapter in the TPP agreement that outlines the terms and conditions of investor-state dispute settlement (ISDS) gives foreign investors the right to directly challenge a host state via international arbitration, should they find local regulations constrain their ability to do business.

International arbitration is not something that Indonesia has had good experience with, given the reputation of past governments for poor transparency and arbitrary interpretation of rules that often were seen as not investor-friendly. The country has been involved in several disputes in international courts and the lengthy legal proceedings abroad have cost the taxpayers a lot of money.

Indonesia's intention to join the US-led trade agreement was announced in October when President Joko Widodo visited Washington. Thailand is also considering joining the 12-country agreement, which currently has just four Asean members: Malaysia, Singapore, Vietnam and Brunei.

In Indonesia, domestic and international arbitration falls under the Arbitration Law (1999). It is not based on the Model Law drawn up by the United Nations Commission on International Trade Law (Uncitral) and used in many countries. However, legal experts say that Indonesian courts in recent years have shown increasing willingness to recognise international arbitration rulings, though enforcing them can be very time-consuming.

Indonesia has been dealing with four international arbitration cases for the past five years, according to Abdul Kadir Jailani, director for Economic, Social and Cultural Agreements at the Foreign Ministry.

In all four cases, foreign investors have sued the Jakarta government for trillions of rupiah in compensation for losses they claim to have suffered as a result of unsatisfactory investment conditions in the country.

These cases were brought to arbitration when the disputes between the two sides reached a deadlock in the court system. In all cases there was mutual agreement by the two disputing parties to seek an alternative solution -- and it is mutual consent that is the key.

"The ISDS clause in TPP grants the right to foreign investors to sue the government without prior consent," Mr Abdul told Asia Focus.

As well, "corporate warfare" launched by foreign investors against a sovereign government could stem from not only direct losses but also from indirect losses, said Bachrul Chairi, director-general for International Trade Cooperation at the Trade Ministry.

Bhima Yudhistira Adhinegara, a researcher at the Institute for Development of Economics and Finance (Indef) said the state could also face the risk of having assets seized if arbitrators ruled in favour of a company or investor.

"In this case, the state is being positioned as an enterprise," he said.

Mr Abdul added that an investor-state dispute brought to international arbitration could oblige a state to pay anywhere from 50 trillion to 70 trillion rupiah in compensation should the state lose the case.

The ISDS has been one of the most controversial issues not only in multilateral trade agreements such as the TPP but also in bilateral investment treaties.

Mr Abdul said that in every trade negotiation there were always contrasting views between the need to protect the rights of foreign investors and to uphold state economic sovereignty.

"But based on the experience of many countries, the rights of investors can limit state sovereignty in implementing national development policies. In addition, these rights are prone to misuse by foreign investors to challenge national policies they deem contradictory to their interests," he said.

According to data from the Investment Coordinating Board, the Indonesian government is in the process of reviewing 64 bilateral investment treaties signed with other countries. As of April 2015, there were 19 such pacts that had expired or had not been extended.

The board has proposed maximum limits for treaty extensions, saying each one should be based on a proposal made by one of the signatories and with mutual consent from both parties.

But despite the prospect of some constraints in the TPP agreement, Mr Bachrul remains optimistic that joining the TPP would be good for Indonesia,

"We will see how it goes in the future. Of course, there will be negotiations," he said without elaborating.

He acknowledged, however, that Indonesia needed to weigh the potential for the considerable benefits that the TPP could bring.

He said membership would allow the country to join a global value chain for certain products that would enjoy preferential trade treatment in other TPP member countries.

"If we don't do that, eventually Indonesia can sell only natural resources that will be depleted," he said. "Our industrialisation will be hampered because no buyers would want to buy our goods because we don't get preference."

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