Author: Pasha Hsieh, (Associate Professor of Law & Lee Kong Chian Fellow, Singapore Management University)

My research focuses on the legal issues that arise from free trade agreements (FTAs), as these proliferating agreements are critical to growth and development in Singapore and other Asia-Pacific countries.  Alongside the ongoing trade war between the US and China, the world is entering a new era of trade regionalism.  Against this backdrop, I am particularly interested in exploring the emergence of mega-FTAs, which will change the politics and norms of the global trading system.

The ‘Fragmentation Problem’ Resolved

Conventionally, international lawyers have focused the ‘fragmentation problem’ on jurisdictional clashes between the World Trade Organization (WTO) and FTAs.

In a cardinal WTO case, Mexico based its defense on the ‘forum exclusion clause’ of the North American Free Trade Agreement (NAFTA) when the United States brought a WTO complaint against Mexico’s tax measures.  Mexico argued that, as the case constituted part of “a broader dispute” that it had previously brought against Washington in NAFTA proceedings, the ‘forum exclusion clause’ mandated that the NAFTA be the only forum for the case.  The WTO Appellate Body disagreed.  It held that a panel declining its own jurisdiction would “diminish” a complaining party’s rights under the Dispute Settlement Understanding (DSU).  Consequently, based on WTO jurisprudence, it will be difficult for FTA forum exclusion clauses to bar the WTO’s jurisdiction.

Rise of the Mega-FTA

Following U.S. President Donald Trump’s withdrawal from the Trans-Pacific Partnership, the remaining 11 countries concluded a revised deal known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).  After Australia became the sixth nation to ratify the pact recently, the CPTPP will enter into force in December 2018.  Additionally, the 16-party Regional Comprehensive Economic Partnership (RCEP), consisting of ASEAN and many of its regional economic partners, is also expected to be substantially concluded this year.

Fragmentation Returns?

While these mega-FTAs push for further trade liberalization, their co-existence with bilateral and regional trade and investment agreements will aggravate the fragmentation problem in dispute settlement due to overlapping dispute settlement provisions.

First, as multiple FTAs exist between the same countries, different dispute settlement mechanisms will lead to forum shopping.  To illustrate, Singapore may bring a claim against China under a bilateral FTA, the Association of Southeast Asian Nation (ASEAN)-China FTA and, prospectively, the RCEP. Currently, ASEAN+1 FTAs such as the ASEAN-Japan FTA and the ASEAN-Australia-New Zealand FTA do not offer clear guidance in their “relations to other agreements” provisions.  These FTAs follow what I call the ‘three-phase approach’.  Substantively, “[e]ach Party reaffirms its rights and obligations under” existing agreements to which they are parties in the text of ASEAN+1 FTAs.  These ASEAN+1 FTAs should not “be construed to derogate from” existing obligations arising from other agreements.  Procedurally, a party “shall immediately consult with” another party should any inconsistency between ASEAN+1 FTAs and other agreements materialize.

Second, contemporary FTAs that incorporate investment chapters may conflict with co-existing BITs.  Investor-state dispute settlement (ISDS) mechanisms in FTAs and BITs have inconsistent scopes and carve-outs.  Notably, the China-Singapore FTA (CSFTA) provides a distinct model.  Without its own investment provisions, the CSFTA makes the ASEAN-China Investment Agreement “an integral part of” the CSFTA.  Because the Investment Agreement alone provides the ISDS mechanism, no jurisdiction conflict exists with the CSFTA.  However, legal issues may arise from the 1985 China-Singapore BIT, which continues to co-exist with the FTA.  This BIT limits ISDS to “the amount of compensation” and confines the forum to “arbitral tribunals established by both parties.”  A party may well resort to the CSFTA for additional procedural guarantees.  In this regard, more detailed provisions under the CSFTA may facilitate de facto FTA-BIT consolidation.

As these examples illustrate, the potential jurisdictional challenges that arise from FTA and BIT conflicts will likely increase in the new era of regionalism.  Without a politically feasible legal approach, consultations and negotiations between governments are essential to minimize the litigation cost.  Moreover, the fragmentation issues remind us that reinvigorating multilateral trade and investment talks in the WTO and UNCITRAL will be essential and any attempts to paralyze the dispute settlement functions at the WTO can be detrimental to a rule-based system.