TPP Absentees: Russia and China

On 4 October 2015, it was announced that negotiations for Trans-Pacific Partnership Agreement (“TPP”) have been concluded. The TPP is now in a ratification pattern, the outcome of which is by no means certain (especially given several key members have election cycles at advanced stages of maturity). If the TPP does come into force, it will be the largest Free Trade Agreement (“FTA”) in the Asia-Pacific, covering 40 percent of global trade.

To date, most of the commentary on the TPP has focused on the substance of the treaty, particularly its investment chapter and the Investor-State Dispute Settlement (“ISDS”) provisions contained within it. Less has been said about what – or more importantly who – is missing from the TPP: Russia and China.

There appears to have been some divergence amongst the TPP parties on the wisdom of excluding these powers, especially China. As Japanese Prime Minister Shinzo Abe said recently, the TPP would have more “significant strategic meaning if China joined”.

Russian President Vladimir Putin has made his views clear:

“[T]he absence of two major regional players such as Russia and China in the TPP composition will not promote the establishment of effective trade and economic cooperation. The multilateral system of economic relations in the Asia Pacific Region can only be strong if the interests of all states across the region are taken into account. This approach is reflected in the draft of the Beijing road map for the establishment of an Asia-Pacific free trade area.”

Having been excluded from the TPP, Russia and China now appear to be accelerating their negotiations with other Asia-Pacific nations. For example, at the APEC Summit in Beijing, Russia and China discussed the integration into the Asia-Pacific region of Siberia and the Russian Far East, with its vast natural resources and infrastructure investment opportunities. One of the focuses of the Summit was the establishment of a Free Trade Area of the Asia Pacific (“FTAAP”), which is intended to unite all 21 APEC member economies, including China and Russia. He Weiwen, a former Chinese Commerce Ministry official, said that the potential of the FTAAP could be up to three times greater than that of the TPP.

The TTP may incentivise China to conclude talks on its own Regional Comprehensive Economic Partnership (“RCEP”), which would link the ten ASEAN nations with Australia, China, India, Japan, New Zealand and South Korea – countries that between them make up 30 percent of global GDP.

While these developments do give some credence to predictions that the TPP would act as a catalyst for trade and investment liberalisation and cooperation in the Asia-Pacific, they also raise the difficult question of how these blocs will interact (if and when they are formed). This question is made more complicated by the diverse diplomatic and security situations of the countries concerned.

Based on the final text of the TPP, the negotiating parties appear to have paid significant attention to the prospect of non-parties accessing the new bloc. Article 9.15(2) of the Investment Chapter of the TPP contains a carefully crafted Denial of Benefits clause that provides as follows:

"A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of that other Party and to investments of that investor if persons of a non-Party own or control the enterprise and the denying Party adopts or maintains measures with respect to the non-Party or a person of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments."

This is not the typical "anti-mailbox" Denial of Benefits (“DoB”) clause found in many multilateral treaties. In its reference to "measures [...] that prohibit transactions", the TPP DoB clause clearly contemplates members using their sanctions programmes to exclude certain investors and investments from the protections of the treaty. This, it should be noted, is not a novel objective. Certain United States BITs from the early 1990s contain DoB clauses that permit the denial of advantages to both free-riders and companies "controlled by nationals of a third country with which the denying Party does not maintain normal economic relations", the latter covering situations in which sanctions have been imposed.

Out of the TPP's 12 member-states, five maintain sanctions regimes against Russia: the US, Canada, Australia, New Zealand, and Japan. It is quite possible that the United States' TPP negotiators, and perhaps delegates from these other countries, had Russia in mind when the TPP DoB clause was drafted.

Understandably, the sanctions-related DoB provision of the TPP has caused Russia concern. In a recent interview, President Putin said that:

“Russia believes that free trade agreements should not fragment the multilateral trading system, but rather complement them, contribute to its consolidation and the growth of interconnectedness. The regional unions should not be turned against each other or otherwise divided.”

Russia maintains significant presence in what is to become the TPP area. Indeed, the TPP group includes countries with which Russia has long-standing political and economic relations. The obvious example is Vietnam, where Russian State-Owned Enterprises are active in a number of sectors (including oil and gas). A lesser known example is Singapore – an increasingly important routing point for Russian capital in the region.

Assuming the sanctions-related DoB clause in the TPP forms part of the final accord, Russian-controlled companies and their investments will be exposed to denials of protection under the TPP. They will likely rely on other instruments, such as older BITs and other regional FTAs – at least while they wait for the FTAAP.

There does, therefore, now seem to be a risk that the principal virtue of multilateral trade and investment treaties – the harmonisation of rules-based trade and investment – will be lost in a web of competing instruments in the Asia-Pacific. Of course, the risk of "fragmentation" will be reduced if the TPP's accession rules would allow Russia and China to join, but this is not to be taken for granted given the obligations that the TPP imposes on its member-states with respect to their State-Owned Enterprises. In the end, the FTAAP and the RCEP may be more significant than the TPP. 

Jurisdictions: 

Clifford Chance, Counsel

Dr. Luttrell is a counsel with the international arbitration practice of Clifford Chance in Perth. He is a prolific writer in the areas of trade and investment law. His practice covers both international commercial arbitration and investor-State arbitration. In 2016, Dr. Luttrell was named in Australia’s Best Lawyers for international arbitration. Noted for his "very good advocacy skills" (Global Arbitration Review), he is recognised as a "rising star" of dispute resolution in Australia (Doyle's Guide) and a "key contact" with "experience in sovereign State arbitrations across the Asia Pacific region" (Legal 500). 

Fangda Partners, Hong Kong

Ms. Boltenko is a registered foreign lawyer with Fangda Partners in Hong Kong. She specialises in investment arbitration. She has acted as legal counsel in investor-state disputes under the auspices of the Permanent Court of Arbitration, and as tribunal secretary in dozens of commercial disputes, both ad hoc and institutional (including SIAC, ICC, HKIAC, SCC), in a wide array of industries including oil and gas, infrastructure, construction, telecommunications and pharmaceuticals. She is an adjunct lecturer at the University of Hong Kong. She chairs the ICC Hong Kong Commercial Law and Practice Committee. She is listed as arbitrator on the HKIAC list of arbitrators, and on the AIAC, SIAC, and CIETAC panels of arbitrators.