S.K. to accept U.S. demands on investor-gov’t suits: sources

Posted on : 2007-01-12 14:39 KST Modified on : 2019-10-19 20:29 KST
Korea rapidly losing ground on free trade deal, observers say

Under a proposed free trade agreement with the United States, South Korea has requested specific requirements for an investor to file a lawsuit against the other country’s goverment. Namely, Korea wants an investor to be able to file such a suit only with the other country’s judiciary, rather than with an international mediation organization.

Such an international lawsuit would arise when one government’s policy undermines an investor’s private interest under a free trade agreement between the two nations.

However, a senior official at the Ministry of Foreign Affairs and Trade said the U.S. refused to accept the South Korean request, saying that an international mediation body would handle such cases. The U.S. has a history of winning such cases when they are handled by mediation organizations.

And, sources say, South Korea will most likely accept the U.S.’s stance.

South Korea also wanted the sector of real-estate policy to be excluded from a list of potential lawsuit areas, in addition to policies regarding public health, environment and security, which were excluded in previous bilateral treaties between the two countries. However, the U.S. has refused to do so. Seoul’s trade negotiators then proposed that "real-estate policy" be limited only to price stablility policy, but Washington again rejected the offer, the senior ministry official said.

With South Korea allegedly willing to accept all of these U.S. stipulations, observers say Seoul is largely losing at the bargaining table with Washington in this area. Given this situation, concerns abound that South Korea’s legislative and judicial rights may be crippled if a free trade deal with the U.S. is signed.

The investor-government lawsuit system allows an investor to file a complaint against a government with an international arbitration body such as the International Centre for Settlement of Investment Disputes (ICSID) of the World Bank. If an international arbitration body rules against a government, the government should compensate the investor with taxpayers’ money and withdraw its related policy deemed unfair for trade.

For example, when a local government in Canada tried to introduce a new car insurance system in 2004 to help ease the burden from surging insurance payments, U.S. insurance companies moved to file a complaint, saying the new system could hurt their market shares. As a result, the local government abandoned the new car insurance system because the U.S. and Canada are under the North America Free Trade Agreement (NAFTA).

Another case in point is the Metalclad Co. vs. Mexico case. It started when a local government in Mexico rejected plans by U.S.-based Metalclad Co. to build a hazardous waste disposal facility in its jurisdiction. The local government designated the field surrounding the factory site as an environment protection area. Metalclad Co. brought the case to an international mediation court by suing the local government for violating NAFTA terms. The court ruled in favor of the U.S. firm, and said that the local Mexican governemnt had to pay Metalclad Co. US$16 million.

Related to this, the South Korean government emphasized that Korean investors could also be protected by the lawsuit system. "The benefits are reciprocal," one South Korean government official said.

However, other trade experts said the investor-government lawsuit system would only benefit U.S. investors. Trade lawyer Song Ki-ho said, "Though South Korea’s investment in the U.S. may bear less risk of causing a dispute, U.S. investment in South Korea is expected to stir disputes because American investors have an interest in the public service sector, such as education, electricity, and the postal service, while most Korean investment in the U.S. is direct and aimed at producing materials and building factories,"

"And we cannot ignore the gap of economic power between the two nations," Song said. "Actually, Mexico-based firms sued the U.S. very few times, while lawsuits by U.S.-based firms resulted in [a lot of damages] paid by the Mexico government."

On this issue, in the ongoing free trade agreement negotiations the U.S. so far seems to agree only on proposals that mirror a 2004 revision of a bilateral investment treaty between the two countries, which dealt with so-called investor-state claims. Whenever South Korea has presented any new proposals, the U.S. has nearly consistently rejected them.

Hanshin University professor Lee Hae-young accused the South Korean government of losing effectiveness in the free trade talks. Washington’s trade officials have rejected several key South Korean demands, including antidumping rules and the classification of goods made at the joint Korean industrial complex in the North Korean border city of Kaesong as South Korea-made.

"Under these circumstances," Professor Lee said, "if an investor can file a lawsuit against a government’s public policies, as required by the U.S. side, what on earth do we stand to gain in this FTA?"

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