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House buying ban blocked by China FTA?

  • July 29th, 2013

The Labour Party’s new policy to prevent non-residents from buying existing houses seemed inconsistent with the equal treatment Article of the NZ China FTA. That FTA was a proudly claimed achievement of the last Labour PM – Helen Clark.

The FTA's definition of "investor" refers to a person "who seeks to make, is making, or has made an investment….". So it clearly looks at prospective investments.

But a technical reading of the equal treatment Article suggests that it may demand equal treatment once an investment has been made, but does not protect intending investors.

Under Article 138 of the NZ China FTA (National Treatment)  all investments and activities associated with such investments made by investors of both parties must be treated, "with respect to management, conduct, operation, maintenance, use, enjoyment or disposal"  no less favourably than investments of its own investors. The list does not include "acquisition" or similar words.

So under that provision a Chinese house buyer must be treated the same as a New Zealander after acquiring residential property, but the protection does not extend to prospective buyers. Whew for Labour!

But wait – another Article (the most favoured nation clause) commits New Zealand not to pass law that discriminates against Chinese investors in comparison with other overseas investors (such as Australians).

Article 139 requires that investors of [China] be treated no less favourably than investors of any third country [Australia] "with respect to admission, expansion, management, conduct, operation, maintenance, use, enjoyment and disposal" of investments.

So Chinese would-be  investors do not get direct rights to insist on investor equality but they can't be treated worse than Australians.

Labour has said Australians would still be allowed to buy residential property under their policy. This would breach Article 139.

And each FTA is different. The prospective investor exclusion does not apply, for example, to Malaysians. They can insist on equal rights to be there at Auckland auctions, whatever Labour wants.

 There are exceptions to Article 138, such as existing non-conforming measures or not being within the scope of a bilateral investment treaty. But these do not apply to Article 139.

What would happen if Labour got the numbers to legislate such a policy irrespective of the FTA? Parliament can, after all, legislate contrary to international law.

There would be serious legal, economic and political ramifications. The Chinese government could invoke the dispute settlement procedures in the agreement.  NZ exporters may lose their benefits under the NZ China FTA. NZ’s international standing as a good treaty partner would suffer.

It is natural to be hostile to overseas investors who own properties but keep them empty when there is a housing shortage.  But is there a housing shortage? The comparatively lower increases in rentals (than in house prices) suggest that the scarcity producing higher prices may be in property for speculation, more than for occupation. If that is true, eliminating marginal speculators could affect prices disproportionately. The proposed ban could work.

Even if the Australian approach could be sensible, we have traded away our sovereignty. We probably will not be able to risk adopting it. I discussed this sovereignty issue in my recent opinion for the Green Party, linked in a post in June.

I would prefer that Labour was not handicapped in this way. I rather hope that I've missed something, and the new policy can be defended better than the man-ban fizzer .  Unfortunately it may be just as much an own goal.

Comments

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  • Michael
  • July 29th, 2013
  • 12:49 pm

Hi this is what you have missed the part that says
“in like circumstances”

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Michael – What circumstances do you think would be ‘unlike’ enough to allow the ban? The usual reading of that phrase applies it to compare the circumstances of the overseas investor in his/her New Zealand involvement, With the circumstances of other people in New Zealand involvements.
In other words it does not allow us to say we’ll treat you as you treat us. Instead it says, we’ll treat you as we treat ourselves.

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  • Michael
  • July 29th, 2013
  • 1:17 pm

Stephen well for starters the capital gains tax plan could be applied then, the other point you mention “usual” is moot and i will therefore give it some thought

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  • Michael
  • July 29th, 2013
  • 1:27 pm

Stephen, as a side note Hongkong and Singapore both bought in rules against foreigners lately, we have ftas with both, i dont know if we were excluded from their new rules, perhaps it is reasonable that you can exclude on a “in like” basis

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  • Michael
  • July 29th, 2013
  • 1:32 pm

Begga your pardon it was a CER with HongKong, now Hong Kong is part of China perhaps HongKong was encompassed by this China FTA

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How deeply ironic that the Labour party should be the one to promote a policy that is both discriminatory and xenophobic. Did they not run this past their exquisitely gender balanced policy committee for review?

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  • Michael
  • July 29th, 2013
  • 1:40 pm

Stephen this line from Chapter 11 of the FTA is an important one:
“For greater certainty, the provisions of this Chapter do not bind either Party in relation to any act or fact that took place or any situation that ceased to exist before the date of entry into force of this Agreement.”
Therefore if in the CER with Australia it said they could be excluded from this then Labour would be in the clear?
Apparently we have equal treatment in Australia so so it indicates it might be

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  • Michael
  • July 29th, 2013
  • 2:03 pm

Article 203 also says it does not cover anything which the party brought in “to ensure the integrity and stability of the financial system”

Protecting Nz from a housing bubble by implementing this could therefore be a defense under this Article

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Michael
You are properly casting wide. With enough ingenuity there is often a way round inconvenient law, but I doubt that you’ve alighted on any yet. The CER arguement does not get there. If protecting from a housing bubble is to do the trick, I doubt that the Aussie exemption could survive. Aussie money is presumably just as inflationary as other money.
To me the bigger issue is not this instance of the FTA biting. It is how they are likely to have other unintended consequences that are worse for a country which refuses to earn as much as it spends, and wants to keep borrowing the difference from peoples who are largely still poorer.

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  • GCSB Spy
  • July 29th, 2013
  • 3:06 pm

You failed to read the Objectives part

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  • Michael
  • July 29th, 2013
  • 3:13 pm

GCSB
Whats the objectives parts? I cant see it

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  • Michael
  • July 29th, 2013
  • 3:21 pm

Stephen I think i will focus myself for a while with how the CER might allow this exception as it was signed prior and therefore the principles in this FTA “may” not be bound on the (Australians)by this FTA- as mentioned above due to the non binding clause the Fta contains.

Any hoot, thanks for your time and for answering my questions, ive really enjoyed this FTA angle. I look forward to hearing more on Duncan Garners program from you.

Ps i agree about borrowings- people will sometime want their money back or more interest.

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  • Drake
  • July 29th, 2013
  • 5:47 pm

Michael
I had a read of article 139 and at first I had the same reaction as you regarding that wording. However, I do not think it applies in this case. The reservation in article 139(3) only applies to the extent that a party “accords differential treatment” under any historical FTA. However, under ANZCERTA (the Australian / NZ FTA) New Zealand did not accord any differential treatment to Australia prior to the signing of the China / NZ FTA. Rather, the differential treatment was one that Australia afforded to NZ. In this case the relevant act or event would be the passing of this new law, which of course takes place in the future. Further, the ban on foreign ownership and the exemption for Australia would not itself be part of ANZCERTA – so the “under any free trade agreement” requirement would not be met.

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  • Michael
  • July 29th, 2013
  • 6:20 pm

Drake thanks for your response.
You wrote this
“However, under ANZCERTA (the Australian / NZ FTA) New Zealand did not accord any differential treatment to Australia prior to the signing of the China / NZ FTA.”
Nzers are exempt from rules on foreigners in Australia so i think it would be safe to assume Australia does and did get differential treatment here prior to the China FTA.
I suppose reading of the ANZCERTA would confirm that but i cant see it being unilateral ie we get treated better in Aus than Aus do here

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  • Michael
  • July 29th, 2013
  • 6:28 pm

Drake ive read some of the ANZCERTA and it did give differential treatment to Australians.

“Article 5
National Treatment

“Each Party shall accord to investors of the other Party and covered investments treatment no less favourable than that it accords, in like circumstances, to its own investors and their investments with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.

What do you think?

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  • Michael
  • July 29th, 2013
  • 6:51 pm

I would argue that the China FTA can not seek redress for how me treat Australians compared to Chinese as the ANZCERTA was in place before the FTA with China.

The China FTA says it doesnt “bind’ to any Acts before the China FTA was signed, therefore the ANZCERTA must be free to supercede any conflict between the China FTA and ANZCERTA into the future.

The FTA with China can only address how we treat foreigners after the signing of the FTA with China. At the signing of the FTA differential treatment was accorded to Australians so therefore that right to differentiate with Australians can be carried through any new legislation without compromising the China FTA.

Theres my submission!

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  • Michael
  • July 29th, 2013
  • 7:39 pm

Drake this from the article 139- the Parties reserve the right to adopt or maintain any measure that accords differential treatment to third countries under any free trade agreement or multilateral international agreement in force or signed prior to the date of entry into force of this Agreement.
With the fact Australians were previously given differential treatment under ANZCERTA and the other article saying the Chapters scope doesnt extend to Acts prior to the FTA being signed i think this Labour policy is fine……
Any thoughts?

[…] Stephen Franks blogs: […]

[…] Shortly after that Stephen Franks pointed out the policy almost certainly breached the Free Trade Agreement with China: […]

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CW

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  • Drake
  • July 31st, 2013
  • 3:26 pm

Michael

Thanks for your thoughts. I havent had much time to look at this but I dont think that language in ANZCERTA helps. That clause you refer to doesnt give Australia *differential* treatment but rather it says that you cannot treat Australia worse than any other country. Because that clause is present in most FTAs, it is basically saying that you must treat all FTA partners the same. The position would be different if we had restrictions on foreigners prior to ANZCERTA and there was a clause that said Australia is exempt from any rules affecting the purchase of property in NZ of course there is no such clause because when ANZCERTA was signed New Zealand didnt have any such restrictions (at least in relation to ordinary residential properties, our OIA rules are another story). It doesnt matter that Australia allowed New Zealanders to buy Australian property because that is differential treatment granted by Australia to us, not by New Zealand to Australia.

Drake

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  • Kava
  • July 31st, 2013
  • 7:41 pm

I look forward to read next post !

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  • michael
  • August 1st, 2013
  • 11:49 am

Drake I appreciated your response. I too cant envisage how Australia having such rules would in itself allow NZ an avenue to now bring in a similar Act without breaching the China FTA. However i do still think that there may just be an opening through which NZ could do it through that article 139 of the China FTA which allows NZ to bring in any measure that affords differential treatment (National Treatment?) to a third party which NZ already has an agreement with (Australia CER).

No breach would occur as due to this Article 139, the China FTA does not grant Chinese Nationals NT equality with National Treatment of Australians by NZ granted by ANZCERTA. Ie it would be differential NT of Australians but since the ANZCERTA was signed earlier that means the NT of Australians being different to those investors in other countries (China) could not be used as cause of a breach by those claiming a breach under the China FTA.
I will try and read the ANZCERTA for any much more clearer routes but i cant at present-picking a laptop up by the screens corner can apparently terminate them.
If this musing was correct…, it would be interesting because as you say it is in many FTAs so would thus limit many National Treatment rights of redress, which is why i find it very interesting that this clause is included in the Malaysian FTA but from my reading it has not being included in the Asean Agreement

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  • JOSEPH
  • October 19th, 2013
  • 2:08 pm

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Great discussions. I am learning a lot from this article and looking forward to reading more posts from you!

[…] But assuming he has told the truth to Harman, he has killedhis own policy. Stephen Franks explained why in 2013: […]

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  • Michael
  • July 29th, 2015
  • 6:15 am

Two years on it looks as though my comments above were exactly right as shown in parliament by the ministery answer
http://www.inthehouse.co.nz/video/38528

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  • Michael
  • August 17th, 2015
  • 6:43 am

And recent changes to the OIO that favour Australia over China show that too

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