Chapter 4

Key issues

Introduction

4.1        This chapter will consider four specific issues with KAFTA which were raised during the inquiry:

• the investor state dispute settlement provisions;
• the intellectual property provisions;
• the certificate of origin processes; and
• labour issues.

Investor state dispute settlement provisions

4.2        Investor state dispute settlement (ISDS) provisions grant foreign investors the right to access an international arbitration tribunal if they believe actions taken by a host government are in breach of certain investment related commitments made in a trade agreement or an investment treaty.[1] For example, in KAFTA, the investment chapter (Article 11.7) includes that neither party 'shall expropriate or nationalise a covered investment' except for a public purpose, in a non-discriminatory manner and on payment of prompt adequate and effective compensation.

4.3        Most ISDS mechanisms refer to arbitration rules developed by the UN Commission on International Trade Law (UNCITRAL) and the International Centre for the Settlement of Investment Disputes (ICSID). Under KAFTA, Chapter 11, Section B outlines the agreed ISDS arbitration tribunal processes and selection of applicable rules.

4.4        Currently, Australia has agreed to ISDS provisions in four of its seven free trade agreements, being FTAs with Chile, Singapore, Thailand and ASEAN-New Zealand. It has also agreed to ISDS provisions in 21 bilateral investment treaties with Argentina, China, Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Vietnam.[2] Notably, an ISDS mechanism was not included in the US-Australia Free Trade Agreement 'in recognition of the Parties' open economic environments and shared legal traditions, and the confidence of investors in the fairness and integrity of their respective legal systems'.[3] Similarly, the recently concluded Japan-Australia Economic Partnership Agreement also does not include ISDS provisions.

4.5        While the policy of the previous Labor Government was not to include ISDS provisions in trade agreements, the Coalition government's position is that it will consider ISDS mechanisms in trade agreements on a 'case-by-case' basis. In relation to KAFTA, Ms Adams from DFAT stated:

The inclusion of an ISDS mechanism in KAFTA was essential for the conclusion of negotiations with Korea, and we negotiated a modern, balanced mechanism that includes a range of explicit ISDS safeguards which protect the government's ability to regulate in the public interest, including for public health and the environment.[4]

4.6        The submission from Dr Jeffrey Wilson provided a useful summary of common positions in relation to the inclusion of ISDS mechanisms in trade agreements:

Advocates of ISDS provisions argue they augment the strength of investment policy commitments made in FTAs. By providing investors an independent legal route to seek redress against expropriation by host governments, they increase certainty that investment protections will be adhered to. This is argued to increase investor confidence, and ultimately flows of foreign direct investment, resulting from FTAs containing ISDS.

Critics of ISDS provisions contend they impose unnecessary and asymmetric restrictions on the regulatory capacity of governments. Some argue that ISDS protections, which are only extended to investors from a partner country, asymmetrically create legal rights for foreign (but not local) companies. Others go further to suggest that as ISDS tribunals are not subject to the laws created by a democratically-elected legislature they are inherently illegitimate. Others have also contended that ISDS restricts the ability to enact various public welfare provisions – including environmental, cultural, and public health policies – and will produce a 'chilling-effect' on governments' willingness to regulate in these areas in future.[5]

4.7        At the public hearing, Dr Wilson stressed that 'these agreements do not prohibit Australian governments engaging in regulations even that are found to be adverse by ISDS':

What the ISDS process would do is enforce the payment of compensation for indirect expropriation as a result of these regulations. So it does not say that you cannot regulate in protection of the environment; it simply says that if you do and that results in indirect expropriation you have to compensate affected companies in timely and fair manner.[6]

4.8        A large number of submissions to the inquiry from individuals opposed the inclusion of ISDS processes within KAFTA and other Australian trade agreements. These submissions pointed to a number cases in which investors have taken action against overseas governments under ISDS provisions for enacting health, environmental or other public interest legislation. In particular, Dr Matthew Rimmer, highlighted United Nations Conference on Trade and Development research which indicated a 'staggering' increase in ISDS cases being brought against national governments in recent years.[7] Repeatedly mentioned cases included:

• the Eli Lilly pharmaceutical company suing the Canadian national government over a court decision to refuse a medicine patent;
• the US Lone Pine mining company suing the Québec provincial government of Canada over environmental regulation of shale gas mining; and
• the Swedish energy company, Vattenfall, suing the German government over its decision to phase out nuclear energy.

4.9        Many also argued that the ISDS system privileges foreign investors, usually large multinational corporations over Australian investors and pointed to the lack of evidence that ISDS mechanisms have any effect on levels of direct foreign investment.[8] Several submissions also emphasised that, in 2010, the Productivity Commission had recommended that Australian Governments should seek to avoid including ISDS provisions in subsequent international agreements 'that confer additional substantive or procedural rights on foreign investors over and above those already provided by the Australian legal system'.

4.10      Those opposed to ISDS processes argued that the cost of litigation and compensation awarded to foreign investors can also act to discourage governments from proceeding with legitimate domestic legislation in the national interest.[9] Dr Kyla Tienhaara described this as 'regulatory chill':

The concept of regulatory chill reflects the fact that policy makers will be wary of introducing measures that could be challenged in arbitration because of the immense costs associated with the arbitration system and the uncertainty surrounding how investment provisions will be interpreted in any given case.[10]

4.11      Serious concerns with the procedural aspects of ISDS arbitration were also raised during the inquiry. For example, Dr Tienhaara stated:

Arbitrators lack the independence of judges because they are chosen by the parties to the dispute and are paid by the hour. Additionally, individuals may act as an arbitrator in one case and as a legal representative for a claimant in another, which creates serious issues of conflict of interest. Arbitrators are also generally experts in the field of commercial arbitration and may have little knowledge of domestic environmental and health legislation.

There is also no system of precedents or any process for appeals, which makes the outcomes of ISDS cases difficult to predict, creating uncertainty for regulators. ISDS is also very expensive. Governments can spend millions of dollars defending themselves in arbitration and may not recoup these costs even if they eventually win a case. The committee should consider whether it believes that panels of international arbitrators who have no accountability to the Australian public should be put in the position of reviewing the decisions of the state and federal governments as well as those made by our domestic courts.[11]

4.12      A frequently mentioned illustrative example was the action taken by Philip Morris Asia against Australia for the Tobacco Plain Packaging Act 2001 under the 1993 Australia-Hong Kong bilateral investment treaty.[12] Philip Morris claimed that Australia's plain packaging tobacco policy constitutes an 'indirect expropriation' of its Australian investments (in particular in relation to the use of trademarks) and was an 'unreasonable and discriminatory' measure.[13]

4.13      One aspect of this case identified by Dr Wilson was the potential for 'forum shopping' by companies in order to mount claims under ISDS mechanisms:

There have been a complex set of changes in the ownership of Philip Morris Australia and Asia within the group of companies that were made by the company around the time that this legislation was being enacted, and some have suggested that these were a form of forum shopping—in effect, an attempt to get Philip Morris's Australian operations owned in Hong Kong so then a case could be brought under the Hong Kong BIT, effectively a forum-shopping exercise in restructuring ownership to allow a case under the most favourable BIT that they could find.[14]

4.14      The plain packaging arbitration is one of the first ISDS cases to be brought against Australia. However, several witnesses and submitters pointed to an increased use of ISDS mechanisms against other national governments.

4.15      Several witnesses and submitters highlighted that there appeared to be a growing international trend against the inclusion of ISDS mechanisms in trade treaties.[15] For example, AFTINET stated that '[g]overnments in significant economies in Europe, South America, Africa, the Indian sub-continent and Asia have reviewed and/or renounced ISDS on the grounds that it undermines legitimate democratic legislation'.[16] Dr Jeffrey Wilson told the committee:

The German government has expressed deep reservations about ISDS provisions being included in the TTIP agreement that the EU is currently negotiating with the United States, which is very similar to a kind of European version of the Trans-Pacific Partnership, for those familiar with that agreement. We have also seen the Indonesian government effectively repudiate all, from my understanding, of its bilateral investment treaties, which include these ISDS provisions, in effect, because they have decided they no longer want to be bound by this legal remedy.[17]

4.16      A controversial aspect of the ISDS provisions in KAFTA, and ISDS provisions in other trade agreements, was the broad coverage of potential liability for 'indirect expropriation...where an action or a series of actions by a Party has an effect equivalent to direct expropriation...'. Dr Jeffrey Wilson commented:

On one hand, indirect expropriation is a real and genuine concern for investors, and has a legitimate place in ISDS clauses. However, because an extremely broad set of regulatory behaviour might potentially qualify as indirect expropriation, concerns exist that it widens the scope of expropriation to be dangerously broad.[18]

4.17      The suggestion was made during the inquiry that the definition of 'expropriation' in KAFTA is broader than in other FTAs. For example, Dr Tienhaara pointed to the narrower definition of expropriation in the Canada Korea free trade agreement. 

[T]he Canada Korea treaty has slightly stricter wording, because it requires a complete, or almost complete, destruction of the investment. So the investment has to be completely destroyed in order for it to be considered potentially an indirect expropriation.[19]

4.18      Associate Professor Weatherall also argued that 'expropriation should only be treated as arising in cases where the interference with a tangible or intangible property right in an investment eliminates all or nearly all of its value and/or substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment'.[20] She suggested this matter could be resolved through a side letter with Korea

Table 1. Comparison of expropriation definitions[21]

4.19      Recent commentary regarding ISDS mechanisms made by Chief Justice French was also highlighted during the inquiry. This commentary noted that ISDS arbitral tribunal decisions could effectively override decisions made by senior Australian courts and noted the lack of consultation with the Australian judiciary about the 'possible effects upon the authority and finality of decisions of Australian domestic courts'.[22] In his commentary, Chief Justice French recommended that the issues be promptly and fully considered, potentially by referral to the Council of Chief Justices, and suggested the following requirements in ISDS provisions be considered:

• prior exhaustion of remedies in domestic courts of the Contracting State;
• preclusion of any challenge to the decision of a domestic court as constituting a breach of the relevant BIT or FTA provisions; and
• preclusion of any arbitral decision based upon a rejection of a decision on a question of law of a domestic appellate court binding on lower courts.[23]

4.20      Requested by the committee to consider these suggestions, DFAT responded:

Requiring investors to exhaust remedies before resorting to ISDS has been identified as an option by various commentators, including in academic literature and intergovernmental organisations such as UNCTAD. In practice, such a requirement has not been adopted in the majority of treaties. One concern is that a requirement to exhaust domestic remedies could frustrate an investor's ability to seek recourse for an alleged breach, in particular when the resort to domestic remedies would be futile. In some jurisdictions there can be significant delays in the conduct of judicial proceedings and requiring investors to exhaust domestic remedies before submitting a claim to ISDS is likely to prolong a dispute. An alternative approach, adopted in KAFTA, does not require an investor to exhaust domestic remedies but does require that an investor waives its right to initiate or continue proceedings before a domestic court or other dispute settlement procedures before submitting a claim to ISDS. This ensures that the Government could not face multiple simultaneous claims in different fora...

Under KAFTA an award would not be based on a rejection of a decision on a question of law of a domestic court. It must be based on a breach of an investment commitment. It is possible that an ISDS tribunal could examine the same facts and circumstances as a domestic court, however this does not mean that the ISDS tribunal is accepting or rejecting a domestic court's decision on a question of domestic law.[24]

4.21      The lack of transparency and public accountability of tribunal arbitrations, in comparison to normal legal processes, was also emphasised by those opposed to ISDS mechanisms. For example, AFTINET stated:

The proceedings are not public, and even the results of proceedings can remain secret. Until the time of writing, there has been little public information about UNICITRAL disputes...If it is instructive to note that a side letter to KAFTA refers to the forthcoming UNCITRAL transparency arrangements. However, the side letter states that both parties will not be bound by requirements for increased transparency. This may be an indicator of the extent to which not only governments, but future investor parties in disputes may be unwilling to agree to the transparency provisions.[25]

4.22      On this issue, DFAT stated:

The ISDS mechanism in KAFTA contains a very high degree of transparency which in broad terms is similar to that provided under the UNCITRAL Transparency Rules. The time period for consultations will give the Parties the opportunity to consider how the recently concluded UNCITRAL Transparency Rules could interact with the existing KAFTA ISDS procedures, including the detailed transparency provisions. By this time there may have been some practical application of the Rules which could inform the Parties' consideration.

Australia was actively involved in the development of the UNCITRAL Transparency Rules. Australia supports a transparent approach in ISDS disputes, including through application of the UNCITRAL Transparency Rules where appropriate. Australia's policy approach and representation in these consultations will be determined after considering the interaction of the UNCITRAL Transparency Rules with the existing KAFTA ISDS provisions.[26]

4.23      A range of other issues were raised in relation to ISDS provisions. For example, the ACTU noted that ISDS mechanisms could provide foreign corporations with legal avenues which were not accessible to domestic corporations, putting domestic corporations at a competitive legal disadvantage.[27] AFTINET considered that the ISDS provisions highlighted a double standard in KAFTA whereby 'foreign investors [have] additional rights to sue governments', but the treaty contains 'no provisions to enforce environmental laws based on agreed UN multilateral agreements through a government-to-government dispute process'.[28]

4.24      An absence of evidence for the benefits of ISDS mechanisms was stressed during the inquiry. For example, Dr Tienhaara argued there was 'no evidence to suggest that including ISDS in KAFTA will lead to an increase in Korean investment in Australia'.[29] AFTINET provided the committee with a recent September 2014 report by the United Nations Conference on Trade and Development. The report concluded that 'policymakers should not assume that signing up to [bilateral investment treaties] will boost FDI...[i]ndeed, they should remain cautious about any kind of recommendation to actively pursue [bilateral investment treaties]'.[30]

4.25      Another specific concern regarding ISDS mechanisms was that the provisions in KAFTA could serve as a precedent for further ISDS mechanisms in a number of other upcoming trade agreements including the Trans-Pacific Partnership Agreement or a bilateral agreement with China.[31]

4.26      However, some submissions indicated broad support for the inclusion of an ISDS mechanism in KAFTA. The ACCI highlighted that the ISDS provisions were an important component in reaching a trade agreement with Korea. It noted that negotiations had stalled until 'the incoming Abbott Government signalled that it was willing to contemplate inclusion of such provisions to accommodate the political requirements of the Korean Government who had a mandate for inclusion of such provisions'.[32]

4.27      The AFGC considered that the inclusion of ISDS provisions in KAFTA 'provides a high level of confidence for investors in both parties, and the inclusion of such provisions promotes the good-faith objectives of the trade agreement'.[33] Similarly, the Export Council of Australia believed that the adoption of the limited ISDS in the KAFTA was warranted. It considered it was 'in the interests of all exporters that they have access to an independent body to mediate and if needs be, resolve disputes in overseas markets'.[34] The Winemaker's Federation of Australia also considered that the 'inclusion of investor state provisions in FTAs give some protection against sovereign risk due to the introduction of social engineering policies and legislation'.[35]

4.28      The ACCI supported the inclusion of ISDS provisions in Australia's bilateral and regional trade investment agreements on a 'case by case' basis. It noted that 'Australia has included such provisions in almost 30 agreements over the past 30 years' and that this 'long history has not resulted in any significant deleterious effects on the Australian economy, but has provided a large amount of security for Australian investors internationally'.[36] Mr Bryan Clark from ACCI commented:

We are relaxed in developed markets about whether [ISDS provisions are] included or excluded...There are much higher priority countries where you would want it, such as China, India and a lot of developing countries.[37]

Exceptions and safeguards

4.29      In response to some of the criticisms of ISDS provisions in trade agreements, some of the supporters of the treaty highlighted the exceptions and safeguards in relation to these processes. For example, the AFGC argued the 'carve outs for public interest matters...should adequately address some of the concerns around the recent use of ISDS provisions'.[38] The Winemaker's Federation of Australia stated:

A significant number of investor-state cases taken under NAFTA have involved environmental regulation. However, tighter drafting of provisions in more recent FTAs have largely overcome the issues that concern our government, and we have no concerns with these provisions.[39]

4.30      Dr Jeffrey Wilson outlined that:

[T]he KAFTA ISDS safeguards: (a) define a set of public welfare measures explicitly protected from expropriation claims by investors; and (b) set guidelines for how all other indirect expropriation claims shall be assessed by the tribunal. These provisions broadly conform to – and in some cases directly reproduce text from – the ISDS safeguards included in the United States' Model Bilateral Investment Treaty (2012).[40]

4.31      However, a large number of submissions questioned the effectiveness of the 'safeguard' provisions as part of their criticisms of ISDS processes. For example, Dr Tienhaara characterised them as 'untested and likely insufficient'.[41] Similarly, Dr Rimmer stated that the 'framework for exceptions, defences, and safeguards seems partial, limited, and rickety'.[42] He noted that the Productivity Commission's assessment of trade agreements in 2010 included that 'although some of the risks and problems associated with ISDS can be ameliorated through the design of relevant provisions, significant risks would remain'.[43] The Australian Services Union also stated:

The supposed 'safeguards' included in the KAFTA are not sufficiently adequate to prevent foreign investors from suing governments over health, environment or other public interest policy and legislation. These same 'safeguards' have proved to be ineffective in other agreements with potentially devastating impacts on the capacity of governments to work in the interests of its own people.[44]

4.32      In particular, one safeguard of the ISDS provisions of KAFTA was the 'shared understanding' of the meaning of expropriation in Annex 11-B of the agreement. This included:

Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

4.33      The phrase 'except in rare circumstances' was perceived by some submitters as opening 'a very big loophole' to this safeguard provision.[45] Dr Tienhaara noted that it had been suggested 'that the use of the ambiguous terminology "rare circumstances" will only encourage lawyers to develop creative arguments to test the boundaries of the exception'.[46] In relation to this part of KAFTA, Mr Richard Braddock from DFAT commented:

The policy basis is that there could be exceptional circumstances where this may be appropriate...One example could be where a government has made specific written commitments to a particular investor to refrain from taking a certain action and the investor makes an investment based on that commitment, and then the state proceeds to break their commitment in a way which amounts to an expropriation.[47]

4.34      Another problem with this safeguard identified by Dr Wilson was that the KAFTA text fails to precisely define the concept of 'legitimate public welfare objectives'. He argued that this 'leaves the scope of the safeguards up to the interpretation of international arbitral tribunals and therefore poses uncertainty about precisely what qualifies as a public welfare regulation in the first place'.[48] He suggested that an explicit definition of 'legitimate public welfare objectives' could be resolved by an exchange of side letters between Australia and Korea. Dr Wilson commented:

One of the big difficulties here of course is the lack of binding precedent in international trade law means the risk that different tribunals will rule differently...Were this a matter of domestic law where you could look to past precedent as interpretation it might be less of an issue, but the lack of binding precedents in these tribunals really compounds the definitional problem because things can be redefined from case to case.[49]

4.35      In terms of drafting the safeguards provisions of the ISDS mechanism in KAFTA, Ms Adams from DFAT commented:

One of the dilemmas, as many would know, of legal drafting is that contrary to what you might first think, sometimes the more that you define something the narrower you make it because saying what is in it can raise more questions. If it is not explicitly mentioned, is it therefore excluded? So there were a lot of debates in the negotiation of this text about whether more definition of particular terms was going to be productive or counterproductive towards the objective. In this case, our considered view was that more explicitly defining legitimate welfare objectives raised a very high risk of being counterproductive and effectively narrowing the definition, whereas we thought we were better to let the words speak for themselves.[50]

Intellectual property

4.36      Chapter 13, the intellectual property (IP) chapter of the agreement, was the focus of some submitters and witnesses, in particular where they considered that KAFTA introduced further obligations to extend IP protection in Australia and Korea.

4.37      For example, Associate Professor Kim Weatherall highlighted a number of areas where 'chapter 13 imposes new international IP obligations in Australia: obligations not found in any other multilateral or bilateral agreement, including AUSFTA'. She argued that KAFTA 'locks in' existing Australia IP law which will constrain domestic flexibility to make IP and innovation policy. She noted that Chapter 13 included 'provisions which reflect bad policy and are contrary to the trends in IP law reform internationally', provisions which were 'extremely difficult to interpret...of uncertain scope' and lacked any 'balancing provisions to protect the rights of the public, users, and defendants in enforcement actions'.[51]

4.38      Associate Professor Weatherall also criticised the approach of DFAT to negotiating the IP sections of trade agreements:

The basic problem is that Australian trade negotiators seem to think that good domestic policy is the same as good trade policy in IP. That is simply incorrect. What works well in local legislation is not always great in a treaty, especially in an area like intellectual property, which is all about innovation and the latest technologies and where we amend the law all the time. We might want to change our IP laws in the future. It is much harder to change things once you have written them in detail into a trade agreement.[52]

4.39      She highlighted that the Productivity Commission had concluded that 'the Australian Government should not seek to include intellectual property provisions in Australia's [bilateral and regional trade agreements] as an ordinary matter of course, and should only include such provisions after an economic assessment of the impacts, including on consumers, in Australia and partner countries'. She highlighted that such an assessment had not be undertaken and that the proposed changes are 'unsupported by any economic or other evidence suggesting a need for extensive or new IP provisions in this particular trade agreement'.[53]

4.40      Dr Matthew Rimmer also described the intellectual property chapter of KAFTA as controversial, 'onesided and unbalanced':

The intellectual property chapter is focused upon providing longer and stronger intellectual property rights for intellectual property owners. There is a failure to properly consider other public interest objectives – such as access to knowledge, the progress of science and the useful arts, and the promotion of innovation and competition.[54]

4.41      The Electronic Frontiers Australia (EFA) pointed to several extensions of intellectual property protection in KAFTA in relation to trademarks, patents and copyright and related rights. The EFA was concerned that KAFTA contained requirements substantially at odds with Australian legislation and case law and that the intellectual property rights of consumers have not been addressed. A particularly 'problematic' change 'may require recognition of software patents'. It highlighted that software patents 'pose significant problems for the IT industry and if they are to be recognised in Australia this should be a carefully considered process'.[55]

4.42      The Australian Digital Alliance noted that previously parliamentary committees, the Productivity Commission, a report commissioned by IP Australia and others have made recommendations about the importance of evidence and cost/benefit analysis if Intellectual Property chapters are to be included in trade deals. It highlighted there was 'no evidence of economic analysis, or indeed any analysis of the impact of the IP Chapter in KAFTA'.[56]

4.43      DFAT noted that the international IP system was defined by a large number of multilateral treaties such as the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). Australian IP policy is bound by these multilateral treaties and also 'a small number of obligations contained in bilateral trade agreements that are not covered by the multilateral system, most notably in AUSFTA'.[57] However, DFAT pointed out that parties to these treaties are 'largely free as to how they meet these obligations within their own legal systems and practices'.

4.44      As part of its responses, DFAT noted that bilateral trade agreements 'such as KAFTA often reaffirm commitments to the multilateral agreements [on IP], but in particular circumstances, may differ from those commitments as part of a negotiated outcome'. However it stated:

[A]ny extension of obligations (e.g. to provide an additional term of protection for a particular right) is examined during the negotiation process and considered against Australia's overall interests. The result reflects a negotiated outcome considered by Government to be in Australia's interests, weighing up all factors across the entire agreement, not just on copyright.

4.45      During the hearing, Ms Adams from DFAT commented:

The basic reason that we have international agreements covering intellectual property issues or laws is that it is part of international trade, so we have all sorts of international agreements on IP, including in trade agreements. That has been the case since the Uruguay Round because of the importance of IP protection as part of the modern trading system. So it is not really just a question of binding domestic law in international agreements; it is a question of striking international agreements that are going to facilitate trade and protection of intellectual property and making sure domestic legislation implements those international commitments.[58]

4.46      DFAT acknowledged in responses to questions on notice that some of the IP provisions in KAFTA 'do have a different scope to previously agreed international obligations, or deal with the subject matter in a different way'. However, it considered that '[o]n balance the text represents a negotiated outcome that is consistent with current Australian law, and outcomes negotiated in other FTAs'.[59]

4.47      However, Associate Professor Weatherall commented:

The Department has acknowledged that some aspects of KAFTA 'have a different scope' from previously agreed obligations. In reality, where there is a difference, and with a couple of notable exceptions, most of the provisions of KAFTA expand Australia's international obligations.

The Department offers no justification for the expansion of Australia’s international obligations, other than to say that the obligations are consistent with current Australian law.[60]

4.48      In particular, DFAT asserted that the obligations in KAFTA 'do not limit the ability of the Government to consider appropriate domestic copyright reform'. It characterised the KAFTA obligations as 'high level and flexible', and stated they 'would not prevent Australia from modernising and updating the Copyright Act 1968 where required'. However, Associate Professor Weatherall disputed this description of the copyright obligations under KAFTA which she argued were 'detailed and prescriptive'. She noted 'KAFTA precludes change to many aspects of our current copyright system: the lack of formalities, the length of rights, who gets rights, many aspects relating to how litigation occurs (including presumptions that must be applied), and others'.[61]

4.49      Ms Adams defended the qualifications of the personnel involved in treaty negotiations in relation to intellectual property:

DFAT works with not only the Attorney-General's on some parts of the IP agenda but also with IP Australia. When we were negotiating this text, there were a large number of extremely expert people from those three agencies involved in that process. The DFAT trade lawyers have particular areas with responsibility for trade law in the department. They include qualified legal people. Those people come to work in the public sector with a variety of backgrounds including often a private sector background—not always—with academic qualifications and often with commercial private sector experience. In all cases they are very well versed in the interlocking sets of international obligations be they in the trade sphere or in the broader IP sphere so they are completely experienced and qualified to do the work that they are entrusted to do.[62]

4.50      However, DFAT did concede that the intellectual property chapter, except for 'a few outstanding issues', was negotiated 'a few years ago' and that the personnel involved had since left those positions.[63]

Online copyright liability

4.51      Article 13.9.28 Enforcement of Intellectual Property Rights, provides that each country will 'provide measures to curtail repeated copyright and related right infringement on the internet'. Further, Article 13.9.29, includes that each country will provide 'legal incentives for online service providers to cooperate with copyright owners in deterring the unauthorised storage and transmission of copyrighted materials'.

4.52      The National Interest Analysis (NIA) for KAFTA states that, consistent with Australia's existing obligations under the FTA's with the US and Singapore, to fully implement the obligations under KAFTA, 'the Copyright Act 1968 will require amendment in due course to provide a legal incentive for online service providers to cooperate with copyright owners in preventing infringement due to the High Court's decision in Roadshow Films Pty Ltd v iiNet Ltd, which found that ISPs are not liable for authorising the infringements of subscribers'.[64]

4.53      At the public hearing, Mr Andrew Walter, an officer from the Attorney-General's Department, characterised the need for legislative reform in this area as 'a risk assessment':

In our view, the difficulty that arises with the iiNet decision is that the decision is likely to be applied in almost any case that came before a court in relation to these authorisation liability provisions...[I]f we were relying on section 101 [of the Copyright Act 1968] to be an incentive provision—and the [iiNet] decision means that section 101 does not operate in the way we thought it would—then we find ourselves in a situation where we are applying in good faith our obligations at international law, we think there is a risk that we would not be compliant.[65]

4.54      However, Mr Walter conceded that no formal approaches from Australia's trading partners have been made on this matter.[66] He also noted that the government was currently considering submissions from a public consultation process regarding reforms to address online copyright infringement.[67]

4.55      Several submissions and witnesses objected to this statement in the NIA. The Electronic Frontiers Australia (EFA) characterised the description of the iiNet case in the NIA as 'overly broad and misleading arguing that the High Court found that 'iiNet did not authorise copyright infringement'. The EFA was 'concerned that the government may have misinterpreted our obligations under the KAFTA and will seek unnecessarily significant changes to Australian law as a result'. Also in relation to this issue, the Australian Digital Alliance suggested that KAFTA was being used as a justification for contentious domestic policy proposals. It described proposals to extend authorisation liability raised by the Attorney-General's Department as 'likely to cause unforeseen consequences for other intermediaries, such as libraries, schools and universities'.[68]

4.56      Associate Professor Weatherall described the NIA as 'plain wrong in its assertions about online copyright infringement' and stated that 'nothing in our current trade agreements requires legislative change'.[69] Similarly, Dr Matthew Rimmer characterised the statement in the NIA as 'inaccurate and misleading, both in terms of domestic and international law' and argued that '[t]here is no pretext for overturning the ruling of the High Court of Australia under the guise of international law'.[70] In relation to this issue, AFTINET stated:

The introduction of legislation to nullify a High Court decision which would have the effect of greatly strengthening copyright law in favour of copyright holders is an issue of great public interest, not only to Internet service providers as an industry sector, but also to consumers. Such a proposal should be fully debated and rigorously scrutinised by the democratic parliamentary process, not presented as a done deal in legislation to implement a trade agreement.[71]

4.57      However, other submissions supported the proposed changes in relation to online infringement. News Corp Australia expressed its support for the inclusion of paragraphs 28 and 29 of Article 13.9 of the KAFTA regarding the enforcement of intellectual property rights. It considered these parts of the agreement 'acknowledge the importance of creators and rights holders having workable and technology-neutral provisions to protect their rights online'.[72] It noted:

[W]e are concerned that the amendments made to the Copyright Act 1968 (the Act) in 2004 regarding secondary liability of ISPs do not operate as intended. Specifically, the provisions of the Act – although intended to do so – do not provide rights holders with means to protect rights online as the provisions are technology specific and ineffective in dealing with online copyright infringement as it manifests today, nor as it may manifest in the future.[73]

4.58      Similarly, Music Rights Australia also expressed support for sections 28 and 29 in Article 13(9). It argued that online services offered by 'the Australian music industry must compete with persistent and unchecked use of unlicensed music online and the damaging impact which illegal streaming and downloading services have on it'. It argued:

There are currently no legal incentives in place to encourage online service providers to cooperate with copyright owners to address infringement on their networks. The section of the Act, which was intended to put in place the mechanisms which would facilitate this, does not function as it was intended to function. The section needs to be amended to address these inadequacies so that the relationship between section 101 and the 'safe harbour scheme' is realigned.[74]

4.59      Commenting on the general nature of the copyright provisions in KAFTA, DFAT stated that the 'KAFTA obligations are high-level and flexible, and do not prevent Australia from modernising and updating the Copyright Act 1968 where required'. In particular, it noted that KAFTA provides a more flexible provision on ISP liability compared to the AUSFTA'.[75]

Certificates of origin

4.60      Several technical issues with the provisions of KAFTA were raised during the inquiry, particularly in relation to certificates of origin. Certificates of origin are documents which contain a certification by a government authority, or another body, that exported goods originated in a specific country. Ms Adams from DFAT told the committee:

KAFTA establishes transparent and effective rules of origin and clear origin procedures that promote compliance without creating red tape or unnecessary obstacles to trade. Exporters have the choice to certify the origin of their own products or pay a service provider to certify on their behalf.[76]

4.61      The ACCI identified a large number of specific technical issues and potential problems with KAFTA, particularly in relation to the practicalities of the rules of origin procedures. It stated:

Preferential trade agreements are specifically designed to benefit the signature parties and exclude all others. They do this through establishing barriers to trade known as the Rules of Origin. That is, only goods that meet the origin conferring criteria of an agreement are eligible to be offered the preferential treatment of the agreement...

The administrative processes described in KAFTA fail in some aspects to provide for the requisite levels of 'trust' needed by importing Customs to have confidence to grant tariff concessions.[77]

4.62      The recommendations of the ACCI focused on the importance of developing clear and consistent rules of origin procedures and the availability of commercially responsive dispute resolution procedures for exporters and importers. Mr Bryan Clark from the ACCI told the committee:

The origin of goods is the single most important aspect of any preferential trade agreement. It is the process by which goods from the party countries are differentiated from non-party goods and hence to which the preferential terms are applied. If the system lacks integrity than the entire agreement is jeopardised. If the documentary protocols are too hard then commercial use will be limited....[78]

The integrity of these systems has been undermined in the outcomes for origin determination contained in the KAFTA text. If the system of determining the origin of goods lacks integrity then the entire preferential agreement is jeopardised. If traders experience any levels of delay or difficulties in acceptance of their documents in the destination market then they will avoid the agreement and utilisation will be low.[79]

[W]e continue to highlight the poorly drafted and constantly variable approaches and that the rules of origin and the documentary protocols that continue to ignore international norms will lead to continued low utilisation of our agreements, which in turn will reduce the net benefits being captured.[80]

4.63      In particular, the ACCI urged that government negotiators embed the established system of third party certification into Australia's trade agreements:

If they do not then they continue the current path of novel approaches in each agreement, which reduces our ability to deliver timely and efficient services to exporters and increases the risk of rejection of the claim for preference in the counterparty market.[81]

4.64      While it supported the outcomes of KAFTA, the AFGC observed that each new trade agreement 'invariably produces a new set of arrangements given the nature of a negotiated outcome between two parties'. It stated:

A number of exporters have highlighted the time consumed or wasted in meeting the different and specific requirements of individual trade agreements in order to receive the preferential treatment under particular agreements. KAFTA will add to this task and while food and beverage exporters will welcome the implementation of KAFTA, there is a growing concern about the administrative burden across agreements.[82]

4.65      AFGC stressed the need for the Australian Government to take approaches in negotiating trade agreements to encourage 'more opportunity for commonality among agreements'.

4.66      The Export Council of Australia considered that the KAFTA 'should not be seen as a static or "settled" FTA' and noted that 'its terms and benefits will continue to develop over time through the Committees established pursuant to KAFTA'. It had the view that 'further work will be necessary on a number of fronts, including advancing the agenda for our exporters, assisting with trade facilitation and assisting with work to further streamline the Rules of Origin (ROO) under KAFTA' and encouraged the Australian Government 'to appoint members of relevant agencies to immediately establish full engagement with industry to further improve those ROO'.[83]

4.67      DFAT stated that the Australian Government's preferred approach to origin is self-declaration undertaken by the exporter or producer, rather than a certificate of origin issued by a government body or other authorised bodies such as the ACCI:

However, KAFTA does provide two origin documentation options for Australian exporters. A claim for preferential tariff treatment for Australian goods exported to Korea can be made on the basis of either: a certificate of origin completed by the exporter or the producer; or a certificate of origin issued by an authorised body. This approach provides flexibility for traders, particularly small and medium-sized enterprises.[84]

4.68      Mr Karl Brennan from the Department of Industry noted most of Australia's FTAs facilitated industry flexibility in terms of rules of origin by including both third-party certification and self-declaration. He noted that certain exporters, particularly agricultural industries, prefer to use self-declaration.[85] The preference of some industries for self-declaration could exist for a number of reasons, including avoiding the cost and time involved in third party certification.[86]

4.69      As part of its responses to the ACCI recommendations, DFAT also commented:

The Government places a high priority on the reduction of red tape and it is envisaged that a simple, business-friendly system of declarations by the exporter or producer continues to be our strongly preferred model in preferential trade agreements.

There are a variety of documentation requirements in Australia's FTAs. It is the Government’s intention to achieve greater consistency in these arrangements over time, as this will reduce the burden for business and advance the Government’s agenda to reduce red tape. But the focus for these efforts must be on convincing trading partners that still have bureaucratic systems, with a focus on documentary controls, to move to a more business friendly risk management system. Declaration systems, which clearly put the onus on the individual companies to ensure their compliance with FTA requirements, are the origin documentation system most consistent with risk management.[87]

4.70      Ms Adams from DFAT described the differing views within the exporting industry on this issue as 'a bit of a domestic issue'. She stated that '[f]rom a Korean point of view, they have confidence that Australia will have a proper process for certifying, be that through certifying bodies, or through proper self-certification'.[88]

Labour rights and labour market testing

4.71      Chapter 17 of KAFTA concerns labour issues. In particular, Article 17.1 General Principles provides 'Each Party shall endeavour to adopt or maintain in its laws, regulations, policies and practices the following fundamental principles and rights as stated in the ILO Declaration'. Several submissions argued that labour rights areas were insufficiently protected within KAFTA. For example, the ACTU noted that 'the labour chapter in KAFTA does not require Australia or South Korea to meet the ILO standards'. The Committee to Protect Vietnamese Workers (CPVW) argued that the use of the phrase 'shall endeavour to' in Article 17.1 'implies it is best-effort only, that is, not enforceable'.[89] Similarly, AFTINET stated that the KAFTA labour chapter had relatively low standards and weak commitments, and noted it was not enforceable through the government-to-government dispute process which applies to some other chapters in the agreement.[90]

4.72      In Australia, employers seeking to access the Subclass 457 visa program to engage workers from outside of Australia, in prescribed occupations, must first test the local labour market to ensure that there is no suitably qualified and experienced Australian citizen or permanent resident to fill the position. As at 31 August 2014, there were 2495 primary 457 visa holders and 2575 secondary (dependent) visa holders from Korea in Australia out of approximately 109,000 in total.[91]

4.73      The RIS notes that:

Australia has made a commitment [under KAFTA] not to apply labour market testing. The Migration Act 1958 provides that labour market testing may only be applied if not inconsistent with Australia's international trade obligations. In order to implement Australia's undertaking not to impose labour market testing on Korean nationals, a determination needs to be made by the Immigration Minister under regulatory arrangements. As this chapter locks in existing arrangements, no significant change is expected in the number of skilled workers entering Australia.[92]

4.74      In response to a question on notice, the Department of Immigration and Border Protection commented:

The subclass 457 visa programme is demand driven so it is not possible to predict how many contractual service suppliers will come to Australia under the KAFTA. There are no numerical limitations placed on the programme or identified in KAFTA commitments; a South Korean visa applicant will only be able to be granted a 457 visa if there is however an eligible employer sponsor nominating them for a skilled position and all other criteria are met.[93]

4.75      Korea has retained the right to apply labour market testing to the category of Australian contractual service suppliers.[94] AFTINET outlined its concerns in relation to labour market testing:

The Australian government has not required in KAFTA that there will be labour market testing for any categories of temporary workers from Korea in Australia. This means that Korean temporary contractors will be able to work in Australia without local labour market testing to see if there are available local employees. This could contribute to local unemployment. In contrast, Korea's commitments on temporary movement of people retain the right for labour market testing for entry of some categories of temporary workers.[95]

4.76      Similarly, the CPVW argued:

Because Australia's part of Annex 10-A, which stipulates conditions for allowing such entry and temporary stay, does not require labour market testing, Korean enterprises may freely bring in Korean workers without first giving Australian workers the chance to apply for jobs. This denies employment opportunities for Australian workers. And, even if Korean companies employ some local Australians, the workers' bargaining position is weakened because Korean employers can readily replace them with Korean workers. Further, the Agreement is silent on wages, working conditions, and individual contracts, thus leaving open the possibility of Australians working in Australia but on Korean pay and conditions.[96]

4.77      At the hearing, Mr Greg McLean from the Australian Services Union also raised general concerns related to ensuring workers coming to Australia have appropriate recognised qualifications and occupational health and safety training and equipment. However, he also acknowledged that there can be 'a need for skills to be brought to [Australia] for specific targets'.[97]

4.78      In contrast, the ACCI indicated its support for all efforts to improve and streamline the movement of people for economic purposes. It considered this was a particularly important issue for increasing services trade and allowing people with skills and a commercial need to travel between economies.[98]

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