The main provisions of the SNZCEP relating directly to investment are as follows. Some investment provisions are substantially identical to the IPPA. However, if others become part of an agreement with Hong Kong, they will reinforce the already dangerous IPPA, and add new problems for New Zealand's economic development. The SNZCEP services provisions relate directly back to GATS.
Investment
The very wide definition of investment (SNZCEP Article 27(1)) is reminiscent, though not identical to that in the ill-fated Multilateral Agreement on Investment.
The SNZCEP definition includes intellectual property. When combined with the disputes procedure (SNZCEP Article 34), National Treatment (SNZCEP Article 29) and the Repatriation and Convertibility provision (SNZCEP Article 31), this could have significant results that are difficult to predict. Under some circumstances it could act as a back door means of giving investors the right to directly enforce the WTO's TRIPs (Trade-related Intellectual Property Rights) agreement, which forms the intellectual property provision of this Agreement.
For example, suppose measures were put in place to encourage local manufacture and use of generic pharmaceuticals, as occurs in Canada and other countries. A transnational pharmaceutical manufacturer of a brand-name equivalent could take action claiming it as a breach of National Treatment because it is put at a disadvantage in the operation of its investment in New Zealand (even if it was free to manufacture locally itself). It could even claim it was a form of expropriation because it reduces its profitability, which then could be enforced under the IPPA.
As with the IPPA, the investment definition also includes “business concessions conferred by law or under contract, including any concession to search for, cultivate, extract or exploit natural resources”, which has major implications in association with the IPPA's expropriation provision, as discussed in the previous section.
The SNZCEP definition extends that used in the IPPA by adding “derivative instruments” which are frequently used for speculation or to facilitate speculation and rapid international movements of money. The effect of the definition is to include short term financial instruments, meaning that “hot money” has the same protection as productive and more stable direct investment. We will return to this shortly.
Similarly the definition of “proceeds from investment” (SNZCEP Article 27(2)) is very wide, including some capital such as capital gains, the proceeds of the liquidation of an investment, and loan payments. That means that there is little real distinction, in terms of controlling capital flows, between investment and its proceeds. It is somewhat wider than the IPPA's definition of “returns”, but more significant are the provisions guaranteeing treatment of those proceeds, which we will come to shortly.
As with the IPPA, the definition of “investor” (SNZCEP Article 27(3)) does not capture what would commonly be thought of as a “Singapore” or “Hong Kong” investor. It includes “any company, firm, association or body, with or without legal personality, whether or not incorporated, established or registered under the applicable laws in force in a Party, making or having made an investment in the other Party's territory”. That means that the company (etc) need not be owned in Singapore: all it needs is some form of presence there. Unlike a service provider, which must (SNZCEP Article 25) “engage in substantive business operations in the territory of one or both Parties” to be covered by the SNZCEP, an investor can be covered if it is merely “established or registered” under the laws of one or other country. It widens the IPPA to cover unincorporated entities. As discussed above, this would allow any transnational company to take advantage of the provisions of the agreement by the simple arrangement of passing ownership of its New Zealand subsidiaries to its Singapore subsidiary.
For example, if Deutsche Bank (which took over the notorious speculator, Bankers Trust, in 1999) decided it wanted a guarantee it could get its money out of New Zealand quickly whatever the circumstances, using SNZCEP Article 31, it could simply transfer the ownership of its New Zealand subsidiaries to its Singapore or Hong Kong subsidiary.
Or suppose the threshold for investments requiring the oversight of the Overseas Investment Commission were returned to $10 million from the current $50 million which is bound into the SNZCEP and a less formal agreement (an exchange of letters) with Australia. That could be done unilaterally for all but Singapore, and Hong Kong (if the same provisions are negotiated). Then a company controlled by individuals who were not of “good character” (under the Overseas Investment Act) could, if taking over a company of between $10 and $50m, simply use a Singapore or Hong Kong subsidiary to quite legally avoid having their investment refused entry.
Of course there is no need to avoid oversight at present, because the current criteria are so weak. But if New Zealand wanted to pull back from its cowboy reputation for the investors it attracts, and the lack of greenfield investment (most overseas investments are takeovers), it would be frustrated in doing so by these provisions.
SNZCEP Article 29 introduces “National Treatment” for investment. That is the principle that overseas investors must be treated at least as well as local investors. It covers the “establishment, acquisition, expansion, management, conduct, operation, liquidation, sale, transfer (or other disposition), protection and expropriation (including any compensation) of investments”. That is considerably wider than the IPPA, covering establishment, acquisition and expansion of investments (rather than just existing investments), and liquidation, sale, transfer, protection and expropriation (including any compensation).
By including “establishment” of investments, the agreement opens the possibility of investor disputes if they can claim they were treated less favourably than investors from New Zealand or other countries during the process of financing and acquiring permits etc for an investment project. Again, that has implications for local as well as central government.
National treatment has very important implications for the “incubation” of new industries and ensuring their longer term survival, which is part of the more active economic development policy of the Labour/Alliance government. To nurture such industries, preferential treatment in the way of grants, and potentially other incentives and concessions, may be given. Under this provision, those can only be given if equivalent benefits are made available to Singapore investors. That may mean nurturing competitors who will knock out their local equivalents, negating the purpose of the measures. Significantly, under the IPPA national treatment is subject to New Zealand laws and regulations, unlike the SNZCEP. If the SNZCEP provision is applied to the IPPA in a renegotiated FTIA, it will even further weaken the government's ability to nurture economic development.
SNZCEP Article 31, on Repatriation and Convertibility, in most circumstances prevents New Zealand from placing controls on capital transfers, or the proceeds from investments (see the definition above). That prevents New Zealand from instituting capital controls in any form on transfers to and from Singapore, with a limited number of exceptions which would be of little use to stabilize capital flows. It very significantly extends the comparable provisions in the IPPA, which provide only the “right to transfer their investments and returns abroad, in accordance with [each country's] laws and regulations, and on a non-discriminatory basis”. This still allows for changes in our laws on capital and exchange controls as long as they are non-discriminatory between Hong Kong and other countries.
The relevance and importance of these controls in the Hong Kong context is emphasized by the $8 billion moved in and out of New Zealand around December 1998 by Hong Kong based investors, described previously.
The most useful exception to this mandating of unrestrained capital flows is in SNZCEP Article 73, which provides for “Measures to Safeguard the Balance of Payments”. This provision allows controls on capital and income flows “in the event of serious balance of payments and external financial difficulties or threat thereof”. That is obviously aimed at a problem which is imminent or existing. It does not allow for preventive measures, when such controls might be most useful. The measures taken must be temporary, and “consistent with the Articles of Agreement of the International Monetary Fund”.
It is essential if New Zealand wishes to regain any substantial degree of economic sovereignty, and if we wish to maintain our own currency.
These provisions rule out a potent economic instrument that has been used in Malaysia, Chile, China, and other countries, particularly in dealing with the problems caused by flows of hot money. As at 31 March 2000, half (49.6%) of New Zealand's total overseas debt was due in less than one year, making the country susceptible to rapid withdrawal of capital. Rapid reversals of capital flows were the immediate cause of the 1997 financial crisis that began in Asia. They are the main reason for the volatility in our currency, leading to recent suggestions that we abandon it altogether.
Malaysia made a successful response to the financial crisis by freezing capital movements. Chile until recently had controls on capital that require deposits to remain for at least 12 months. Even mainstream economists are again looking at capital controls seriously (e.g. Paul Krugman, “Crises: The Price of Globalization?”, August 2000, unpublished).
It is therefore essential that New Zealand maintains the ability to control international capital movements and the proceeds from investments. The SNZCEP rules this out. A precedent exists in the IPPA signed with Chile (but awaiting Chilean ratification to come into effect). This does allow such controls to be maintained, probably at Chile's insistence.
SNZCEP Article 34 parallels the IPPA Article 9 provision for investor enforcement of alleged breaches of the investment provisions, and has been discussed in the section on the IPPA. The exceptional dangers of such provisions would be exacerbated by the SNZCEP's enforcement procedure.
Finally, under SNZCEP Article 32, an investment limitation may be changed only if it “does not decrease the conformity of the limitation” to National Treatment and Most Favoured Nation Treatment (treating the other country at least as well as any third country is treated), and if it “does not affect the overall level of commitments” of the country under the investment provisions. Further there will be reviews of the limitations at least every two years “with a view to reducing the limitations or removing them”. In essence, our investment controls can only be further liberalized (i.e. weakened), from the date of signing of the Agreement.
The effect of this must be interpreted in the light of the Annexes to the SNZCEP on New Zealand, and includes the following.
- The $50 million threshold, below which most investment does not require the approval of the Overseas Investment Commission (OIC), is locked in. Until November 1999 it was a tighter $10 million, but raised after an agreement between Australian and New Zealand ministers. New Zealand could still change the threshold back to $10 million for all but signatories to the SNZCEP. It could not take it any lower because a commitment at that level was made by a previous government in the GATS. However, as noted above, the SNZCEP provides loopholes for investors from any country.
- The threshold at which a company is regarded as an “overseas company” is set at 25% overseas ownership. That is also locked in by GATS. It is higher than many other countries, which have values ranging from anything above zero. Australia requires approval for any direct investment and for 5% portfolio investments in media companies, and in general regards a 15% holding by a single overseas investor as a “substantial foreign interest”. The authoritative United Nations “World Investment Report 1999” describes a 10% stake as being “normally considered as a threshold for the control of assets” (p.465). Again, we are prevented from tightening our exceptionally permissive standards: we can only loosen them further.
- Similarly, a 25% ownership of fishing quota, or of a company owning fishing quota, is locked in.
- With regard to land sales, a threshold of $10 million is preserved for OIC scrutiny of land sales wherever the land is situated, and for the sale of any land outside urban areas exceeding five hectares, scenic reserve land (including historic or heritage areas, the foreshore and lakes), land over 0.4 hectares on specified off-shore islands, and any land on all other islands. Notably, the exception for urban land worth less than $10 million is not part of the Overseas Investment Act criteria, but was put in regulations by the previous government and cannot be reversed for Singapore.
- The “screening regime”, which presumably includes the criteria used to judge whether an investment should be allowed, may still be changed. However, this may be an empty power. The criteria – which have been shown to be inadequate to prevent substantial sales of land and major strategic assets – have probably been substantially locked in by the GATS agreement, although this is a matter of interpretation which would require further investigation.
The effect therefore is to immediately freeze or weaken the status quo, making it more difficult even than under GATS to put in place more stringent controls on overseas investment. However, there is a commitment to progressively weaken even those controls that remain. It places a further block in the way of reversing the extreme deregulatory policies instituted by governments of the last two decades.
Services
In Services, the SNZCEP, while taking the same approach as the GATS agreement (see above), increases the pace of liberalization. SNZCEP Article 14 commits to “progressive liberalization through successive reviews”. Though it gives a nod towards “recognizing the rights of both Parties to regulate, and to introduce new regulations, giving due respect to national policy objectives including where these reflect local circumstances”, that must be seen in the wider context of the agreement.
That is seen most directly in SNZCEP Article 20 which provides that (at least) two-year reviews under its Article 68 will “progressively expand these initial commitments … in accordance with the APEC objective of free and open trade in services by 2010”. That is, the aim is complete removal of any limitations on overseas suppliers to provide our services within nine years. Though they recognize this might be unrealistic (“trade in a particular number of services sectors and measures affecting trade in services may not be fully liberalized by 1 January 2010”) and so agree to meet before 2008 to identify a list of the remaining exceptions, the aim is to travel in one direction only: towards greater liberalization.
What that would mean for social services such as education and health is left to the mercies of the governments in power in 2007.
Commitments in the Services area, like the GATS, are listed by sectors the country is prepared to open up, in Annex 2 of the SNZCEP . Amendments can be made to the list, but they must expand the list or at least ensure that the “overall balance of benefits under the Agreement is maintained”. Again, there is no going back.
There is also a commitment towards greater mutual recognition of qualifications. While there is much of merit in this, care must be taken that local culture elements (such as New Zealand history and Treaty of Waitangi content in courses) is not “harmonized” out. Indeed, the provision that “measures relating to professional qualification and registration requirements and procedures do not constitute unnecessary barriers to trade in services” does not bode well. Neither do provisions imported from the GATS Article IV.4 that the qualifications should be “based on objective and transparent criteria, such as competence and the ability to supply the service” and be “not more burdensome than necessary to ensure the quality of the service”. Trade, “competence”, and provision of services come before general educational values and breadth of knowledge.
New Zealand added a significant number of Service sectors to its commitments in SNZCEP compared to GATS. These additions included urban planning and landscape architecture, dental services, research and development services on social sciences and humanities, except those undertaken by tertiary institutions, market research, management consulting, technical testing and analysis, placement and supply of personnel, investigation and security services, equipment maintenance and repair, photography, packaging, printing, conventions, interior design, couriers, environmental services, ambulances, residential health facilities other than hospitals, archiving, sports and recreation, maritime agency, maritime brokerage, international towage, and certain port services.
Of concern was the addition of environmental and ambulance services. The inclusion of environmental services will be very significant for local government, which carries responsibility for important environmental services such as sewerage, and rubbish collections. Ambulance services may be similarly forced into commercialization.
Whether the same services would be liberalized for a Hong Kong agreement is yet to be seen, but the above gives some indication of the dangers involved. Because New Zealand has a more liberalized services sector than Hong Kong, it has left itself with considerably less bargaining power in negotiations, even if further liberalization were desirable.
The effect is to lock the growing services sector into rapidly increasing commercialization and overseas ownership. We have seen the effects of this on social services, rural areas and on small users of services, in telecommunications, electricity, rail, banks, local government services and many other sectors.
Jobs created in service industries are of very mixed quality. Those created in the sectors favoured by Hong Kong-based investors are likely to be largely in hotels - jobs which are notoriously low paid, insecure, casualised and deunionised. Its investment in property and business services is unlikely to provide many jobs - if it is productive investment at all.