Investor-state dispute settlement rewritten to favor US

The Hankyoreh, Seoul

Investor-state dispute settlement rewritten to favor U.S.

Foreign ministry official says Korean gov’t had no choice but to accept the change

4 July 2007

With Seoul and Washington concluding their renegotiation of the Korea-U.S. free trade agreement (FTA), it has been confirmed there were some ‘‘unfair parts’’ added to the economic deal under which investors of both sides are not treated equally in their respective countries.

According to the FTA text disclosed on June 2, both countries have agreed to make a change to its introduction in which the rights of foreign investors in the United States cannot be protected as equally as those of their American counterparts here in South Korea.

The FTA text stipulates in its preamble that ‘‘foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investor rights under domestic law equal or exceed those set forth in this Agreement.’’

This means that Korean investors doing business in the United States cannot be treated better than domestic investors, while U.S. investors doing business in South Korea can be. This stipulation was not in the text of the original FTA agreement as it was signed on April 2, but was added to the text that was signed on June 30 following rengotiations at the request of the United States.

The change seems to have been designed as a mechanism for the U.S. to avoid the investor-state dispute settlement (ISD), under which foreign investors can file a suit with an international arbitration organization against the countries which they invest into. The ISD has been a controversial part of the FTA, and has caused an uproar in Washington as well as in Seoul for its possible violation of its citizens’ sovereignty rights.

Under the ISD, South Korea can now be the target of law suits by individual U.S. investors doing business in South Korea, if it lifts the rules that would give greater advantage to U.S. investors than their domestic counterparts. The U.S., however, is saved from law suits by individual South Korean investors doing buisness in the U.S. under the added stipulation, when the U.S. nullifies the rules that would give greater advantage to South Korean investors than their domestic counterparts.

A high-ranking foreign ministry official said that ‘‘South Korea opposed the U.S. proposal during the renegotiation process, saying that the terms would only give an unfair advantage to the U.S.’’ He added that ‘‘the Korean government, however, had no choice but to agree upon it as Washington said it needed the modification to build a stronger case with which to persuade the U.S. Congress to approve the deal. As the protection of foreign investors was specifically stipulated in the main body of the FTA text, the regulation in the preamble is not so substantive that it can be invoked only when there is vagueness in investment-related disputes,’’ he explained.

However, Song Gi-ho, a trade expert and lawyer, countered, ‘‘National treatment, as stipulated in the FTA, means foreign investors should be treated equally or even better than their local counterparts. But the new section in the FTA preamble prohibit South Korean investors in the U.S. from being treated better (than their U.S. counterparts).’’

‘‘Under the change, U.S. investors will be subject to less regulations or better treatment in Korea than Korean investors, while South Korean investors could be relatively restricted in their economic activities, in the U.S.’’ he said. He added that the preamble to the deal is similar to the preface of the constitution and the change to the FTA could have more than a ‘‘not-so-substantive’’ meaning.

After the North American Free Trade Agreement (NAFTA) between Canada and Mexico in 1994, Canadian investors would file suits against the U.S. government under NAFTA. Against this backdrop, some Democratic lawmakers in the U.S. Congress, including John Kerry, pushed in 2002 for a change to the trade law by which foreign investors could not be treated better than their own citizens. The move came as the ISD in the economic deal was criticized by many for threatening to hurt U.S. sovereignty and even the legal system. This time, the Democratic-led Congress has made the U.S. government take a similar move on the international trade deal to provide favorable treatment solely for its own citizens.

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