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  • The China-Australia Free Trade Agreement (ChAFTA), signed 17 June, represents a historic milestone, giving Australian businesses the ability to operate in China and trade with Chinese firms in a significantly more favourable business climate with few restrictions and greater investment opportunities.
  • The Investor-State Dispute Settlement (ISDS) mechanism in ChAFTA provides Australian investors with the ability to enforce investment protection obligations contained in the agreement, and to partly mitigate any sovereign and political risk of investing in China.
  • Australia however continues to grapple with concerns about ISDS provisions in general. With the Trans-Pacific Partnership (TPP) also on the horizon, now is a good time to address some common misperceptions.

Globally, there are currently over 3,000 investment treaties in force, providing crucial legal protections for foreign investors in increasingly interdependent domestic markets. The Investor-State Dispute Settlement (ISDS) provisions contained within many of these treaties are a crucial means of redress for aggrieved investors. With roots dating back to the mid-twentieth century, the ISDS system is not new.

Where a treaty between two or more states contains ISDS provisions, investors in one state have the ability to commence arbitration against another state party where that state has breached investment protection obligations.

The ability of investors to bring proceedings against a state is somewhat unique in international law, where rights are typically enforced between states and not private actors.

ISDS mechanisms are predominantly embedded in Bilateral Investment Treaties (BITs), which are designed to encourage foreign investment in one contracting state from investors in the other. Australia’s first BIT was entered into with China in 1988.

Today, Australia has BITs with over 20 countries, all of which contain ISDS mechanisms.

In addition to BITs, ISDS provisions are becoming increasingly commonplace in free trade agreements (FTAs). Australia’s FTAs with Singapore, Thailand, Chile, ASEAN and, more recently, Korea and China each contain ISDS provisions. Collectively, Australia has BITs and FTAs containing ISDS provisions with over 29 economies. However, this pales in comparison to other countries such as China and the US, with over 120 and 50 investment treaties respectively.

Australia continues to grapple with concerns about ISDS provisions, particularly in the context of the Trans-Pacific Partnership (TPP) negotiations.

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