Scoop Election 08: edited by Gordon Campbell

On comparing the Crafar Farms court ruling with the China/NZ Free Trade Agreement

February 21st, 2012

At yesterday’s post-Cabinet press conference, Prime Minister John Key indicated that the government is waiting for a Crown law office opinion on Justice Forrest Miller’s High Court ruling on the approval process for the Crafar Farms deal with the Chinese, before deciding on its next step. Like most observers, Key expressed surprise at the Overseas Investment Office’s initial confidence that the matter could be sorted out in ‘only a few days’. On current indications, the Crown Law Office opinion and any public sign of what law change, if any, the government might pursue could be a week away, or more.

The motive for a law change could simply be diplomatic considerations around foreign investment by China, and other countries. As Justice Miller readily pointed out (at para 93) of his judgement, such “high level” issues are for the government to decide, not the courts.

More difficult issues surround the test that the OIO should apply. While the laissez-faire approach taken by the OIO towards foreign investment under successive governments has been a rubber stamp – foreign investment has always been seen as an economic benefit by the OIO, so case closed, application approved – it is hard to see how any stricter test that Justice Miller might appear to be advocating could possibly square with the “national treatment” and “most favoured nation” foreign investment provisions in the China/NZ Free Trade Agreement.

Before dealing with the FTA provisions in more detail, consider how the High Court decision has been interpreted thus far.

Justice Forrie Miller ruled in the Wellington High Court that the OIO set aside its initial decision and apply a different interpretation of the law to it.
Rather than using a ‘before and after’ test relating to the current level of investment in the farms versus the investment promised by Pengxin, the OIO must now apply a ‘with or without’ test, with which it must compare the proposed economic benefits stemming from Pengxin’s bid to those which may be brought by a hypothetical local investor if they were to purchase the farms. The economic benefits stemming from Pengxin’s purchase must then be identifiably and substantially greater than those of the hypothetical New Zealand investor.

What this means is that the OIO now has to do more than simply say whether there will be benefits to New Zealand after the foreign investment has occurred. That’s the ‘before and after’ test, and it has always been a pretty thin one because the OIO isn’t required to consider any of the disadvantages of this or any other examples of foreign investment, merely to to inquire whether they could be an upside – and if so, end of story. The stricter “with or without” test would require some consideration of what might happen – and whether New Zealand could still achieve similar benefits – with or without this particular application being approved.

Yesterday at the press conference Key said he had read the judgement twice and while wary of offering a ‘bush lawyer’s’ opinion, he did single out para 39 of Justice Miller’s decision for special mention. Certainly, this is where Justice Miller does advocate a “with or without” test, and claim that his version of it would be workable. The OIO’s protestations in that same paragraph are pretty amusing:

[OIO lawyer] Mr Hancock characterised the ‘with or without test as unworkable, saying that it would force the OIO to commission complex analysis of alternative scenarios, even to evaluate competing offers in a case such as this…”

Zounds! That sounds like work. In other words, it would require the OIO to do more than wield a rubber stamp. Justice Miller then mentions that the Commerce Commission operates a ‘with or without’ test when it comes to business acquisitions, and one that even considers the detriments alongside the benefits. But Justice Miller then goes on to make it clear that, in his view, the determining factors when it comes to Overseas Investment Act decisions may not, and need not, be susceptible to being precisely measured.

The Act does not require that benefits be quantified, however, only that Ministers be satisfied, for farm land, that substantial and identifiable benefits are likely to flow from the overseas investment. It is a matter of enquiring for each claimed economic benefit, whether it is likely to happen absent the foreign investment and is substantial and identifiable. The weighing of economic benefits among themselves and against non-economic benefits requires not calculation, but Ministerial judgement. I observe that the OIO already assesses future benefits against a counterfactual, the status quo. I am not persuaded that a “with or without’ counterfactual is unworkable.

Now comes the crunch – does the test that Justice Miller appears to be advocating really impose a requirement that the foreign investor must deliver to New Zealand a higher benefit than one that any domestic investor – real or imaginary – might deliver ? Hopefully, the Crown Law Office decision will be made public. But reading Justice Miller’s decision alongside the “national treatment” and “most favoured nation” clauses in chapter 11 of the China/NZ Free Trade Agreement makes it very difficult to see how the Chinese bidder for Crafar farms could possibly face a higher test than the one that
(a) bidders from other countries have successfully passed when seeking to buy other farms in New Zealand or
(b) that any domestic bidder might face when trying to buy Crafar Farms.
The whole point of national treatment/most favoured nation international trade laws are that foreign investors must face no higher hurdles than domestic investors.

Even it wanted to – and it clearly doesn’t – the OIO couldn’t use a ‘with or without’ test to impose a requirement for foreign investors to deliver higher benefits to New Zealand than a local bidder. Its not like applying for a job and being disqualified because some other New Zealander could fill it. When it comes to the laws on foreign investment, if there’s an opening here, foreign investors must be treated as if they were New Zealanders. And if that involves crowding out a genuine New Zealand bidder, then tough luck.

Look at the wording of article 138 of the China/FTA on ‘ national treatment” –

Each Party shall accord to investments and activities associated with such investments, with respect to management, conduct, operation, maintenance, use, enjoyment or disposal, by the investors of the other Party treatment no less favourable than that accorded, in like circumstances, to the investments and associated activities by its own investors.

That sets the level playing field between New Zealand and foreign investors. The most favoured nation wording at article 139 then creates a similar level playing field between the investors of various nations, though it does go on to exempt China and New Zealand from being tied to any other international agreements signed by either country before the China/NZ FTA, or after it, such as the looming Trans Pacific Partnership:

Each Party shall accord to investors, investments and activities associated with such investments by investors of the other Party treatment no less favourable than that accorded, in like circumstances, to the investments and associated activities by the investors of any third country with respect to admission, expansion, management, conduct, operation, maintenance, use, enjoyment and disposal.

So what does this all mean? Mainly, that the difference between the OIO’s old ‘before and after’ test and Justice Miller’s preferred ‘with or without’ test will turn out to have been largely semantic. That’s because the ‘with or without’ test can’t impose a higher requirement on the Chinese bidder. Moreover, such a test would not require that all the economic benefits be strictly quantifiable and comparable, but merely be identifiable – and the final word on that will be left, as Justice Miller concedes, to Ministerial judgement.

Even if, miraculously, all the economic benefits were identified as being exactly equal between local and foreign bidders in the Crafar Farms case, one can safely assume that the Cabinet would then decide that ‘high level’ diplomatic considerations (referred to in para 93 of the judgement) or some imagined quid pro quo in the Chinese market will trump anything that a local New Zealand-led consortium could bring to the table.

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    1. 7 Responses to “On comparing the Crafar Farms court ruling with the China/NZ Free Trade Agreement”

    2. By Margaret on Feb 21, 2012 | Reply

      If the Chinese want to come to NZ and lease large tracts of land to supply China with dairy products then it would begin to sound like a good deal.

      But selling our land is stupid.

      John Key is so intent on propping up a failing America by selling our land and signing a TPPA agreement which allows American corporations who are in trouble in America to gain new market share here in NZ.

      I think I would rather see the financial system change sooner rather than later.

    3. By pclarebu on Feb 21, 2012 | Reply

      So what you are saying in summary – is by and large the government ministers made the correct decision based on law and the OIO’s recommendation, and that more or less the OIO can make the same recommendation, again, maybe with additional supporting information because they have to take other act’s into consideration – something the Judge it seems didn’t do??; And it is the fault of the Labour government for signing the free trade deal!!!

      I think the real focus needs to be (if we are seeing a groundswell of opinion change or perhaps just interest instead of apathy) on what happens in the future.

      The National government gets blasted enough with making seemingly ad-hoc decisions and so the same should be with the general public. If changes are desired then we should be lobbying for changes to be made in law and then applied to future purchases.

      We do need to be able to put forward a level of consistency, to people, countries and organisations we deal with.

      I am personally happy if we want to toughen up the law on this, but it needs to go through a process.

    4. By john on Feb 21, 2012 | Reply

      But Justice Miller’s judgment says (paragraph 59): “I observe that the OIO advised the Ministers that the (Overseas Investment) Act is an agreed exception to a principle in the Free Trade Agreement that overseas and domestic investors will be treated alike.”
      Doesn’t that mean that the “level playing field” can be set aside under the Act?

    5. By Joe Blow on Feb 21, 2012 | Reply

      I think that the short comings of the ‘before and after’ test haven’t been so obvious until now because the Crafar farms are rundown and in receivership. If the investment was solvent and running well there wouldn’t be such an issue about how the ‘before and after’ test has overstated the economic benefits of the foreign investor when compared to a local one. Miller’s obviously right.

      You might be right Gordon and the OIO might apply the ‘with or without’ test and come to the same conclusion, but we don’t know that yet.

      It will be interesting to see what the OIO will make of Miller’s judgment. They won’t want to get it wrong or the Consortium will have another go… Stating that there are only 4 out of 21 factors shows that the OIO is only concentrating on regulation 28. They are not getting off to a good start if they are not considering the factors under section 17 as well. The OIO’s statement that they could get another recommendation out within days was very optimistic… If they succeed in this it will make it look like they haven’t given Miller’s judgment the necessary consideration it deserves.

      I think you’re reading too much into article 139 of the FTA. The fact that the Chinese only lease land is specified in Annex 8A of the FTA as a limitation on market access and in Annex 8B it is noted that OIC consent is required, regardless of the dollar value of the investment, for acquisition of rural land under the heading “Limitations on National Treatment”. It looks like the FTA contemplates exceptions to the principle of free investment when land is concerned.

    6. By Joe Blow on Feb 21, 2012 | Reply

      Annex 8 relates to article 109 of the FTA titled “Specific Commitments”. It states:

      With respect to sectors where such commitments are undertaken, each Schedule of Specific Commitments shall specify:
      (a) terms, limitations and conditions on market access;
      (b) conditions and qualifications on national treatment;

      So the FTA specifically specifies the different treatment of land by New Zealand and China as a limitation on market access for the Chinese and a qualification on national treatment for New Zealand.

      I hope the Chinese have read the small print…

    7. By Hamish on Feb 23, 2012 | Reply

      With or without seems crazy when trying to compare a real bid to an imaginary local bid, how could some one be relied on to come to some type of sensible conclusion using such a flawed formula. What about the fact the bid has been accepted after market forces have decided that it is the highest monetary bid, how can other the implications of other bidders who have lost be compared, which loosing bidder would be first? it could take forever?

    8. By Uilleam on Feb 24, 2012 | Reply

      More shonKey decisions. Is this the same party that is concerned about Chinese Government sanctioned economic expansion of influence in the South Pacific, as the one that is determined to sell off parcels of the main economic base of New Zealand – land? What’s next – a US Military base at Whangarei? Maybe his Merril Lynch mates could broker the deal.

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