Wayne Swan does not usually go out of his way to help Joe Hockey. It is understood, however, that the former Labor treasurer agreed to appear before a secret tribunal in Singapore earlier this year in an effort to protect Hockey's budget. The prospect that the tribunal could make seriously costly findings against Australia highlights the risks of signing the US-led Trans-Pacific Partnership agreement on trade and investment without strict safeguards.

Given that the soon-to-be finalised TPP offers few traditional trade advantages for Australia, avoiding big losses under its investment provisions is crucial. Otherwise, it could be better to focus on the big gains from expanding trade with China and India, which are excluded from the negotiations.

The Singapore tribunal is hearing a case Philip Morris Asia is bringing against Australia under the 1993 investment agreement. After the company lost a case about Australia's tobacco plain-packaging legislation in the High Court, it is now using the tribunal to argue it should be compensated for the "expropriation" of its Australian investments. In evidence contested by a British QC for Philip Morris, Swan argued that Philip Morris Asia only took over the Australian operations after the announcement to introduce the legislation. An adverse finding could hit the budget with a compensation bill for hundreds of millions of dollars, or even billions.



The case is proceeding under a version of the Investor State Dispute Settlement (ISDS) procedures that the US insists must be embedded in the TPP. ISDS tribunals are not courts, don't follow court rules, nor publish transcripts. They allow investors to seek compensation for the loss of future profits due to policy and administrative changes, or even judicial decisions, in host countries.



The Howard government rejected an ISDS clause in the Australia-US Free Trade Agreement because it infringed Australian sovereignty. Nevertheless, the Abbott government will accept an ISDS section in the TPP. Australia sometimes signs international agreements that limit its sovereignty to achieve common global goals. But ISDS tribunals can impose hefty penalties on Australian governments pursuing public policy goals that have international support, such as trying to reduce the cost of smoking to health budgets. Critics generally accept that governments breaking individual commercial contracts should pay compensation. There is much less agreement on whether they should compensate firms for the loss of future profits due to normal policy changes responding to changing circumstances, such as banning lead in petrol or increasing a consumption tax.



Trade Minister Andrew Robb says he will ensure the final text includes "carve-out" to protect Australian interests. He may succeed, but there is no way of assessing this, as the text will remain secret until after the government approves it. But leaked versions show that Australia will be hurt by anti-free-trade measures such as unjustified increases in protection for US intellectual property and pharmaceutical patents.

Wayne Swan appeared at a court hearing in Singapore to help Joe Hockey's budget. Andrew Meares

Australia already has free trade agreements with eight of the 11 other prospective members of the TPP. James Laurenceson, a China specialist at Sydney's University of Technology, says the remaining three account for less than 3 per cent of our total exports to TPP countries. In contrast, he recently noted on an ABC online site that Australia exports more to China than to the total TPP group. Laurenceson said OECD forecasts show that China and India's share of global GDP will grow from 25 per cent to 34 per cent by 2030 compared to a decline in the five largest TPP countries (the US, Japan, Mexico, Canada and Australia) from 36 per cent to 30 per cent.

The forecasts may be imprecise, but they help explain the puzzlement the former World Bank president, James Wolfensohn, earlier expressed to this newspaper about the wisdom of joining an agreement that excludes the two biggest countries in the region.