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If the proposed investor-state dispute (ISD) system is introduced through the South Korea-U.S. free trade agreement (FTA), the government policies aimed at rooting out real estate speculation, balanced development, and efficient use of land will be ineffective, experts warned.

Under the ISD terms, in the case of a suspected unfair advantage, individuals or private companies would be able to file for international arbitration against the government, legislature, or judiciary of the other nation. The proposed FTA between the two countries has been in negotiations since June last year.

Civic organizations, such as the Citizens Coalition for Economic Justice (CCEJ), the People’s Solidarity for Participatory Democracy, and Rep. Choi Jae-cheon of the ruling Uri Party announced the results of a joint study on effects of the FTA on domestic real estate policies at a press conference on February 1.

According to the study’s findings, the two nations possess significantly different policies when it comes to compensation during forcible land expropriation. This situation arises when development plans call for existing landowners to leave the area in question, and the government steps in to facilitate the move. South Korea decides the amount of compensation granted to these relocated landowners based on the land price shortly before the announcement of the development plan, while the U.S. bases its compensation on the land price from between six months to three years after the announcement. Furthermore, the disparity of the compensation between the two countries may be huge because in Korea, unlike in the U.S., the compansation is estimated at 60-80 percent of the market price, due to it being calculated using the land’s tax-appraised value as calculated by the government.

In South Korea, soaring real-estate prices have continually fueled controversy, with nearly all presidential candidates in every race placing priority on policies to curb the phenomenon. As a result, in the early 1990s, the government stressed the public use of real estate, and put into place various policies limiting development and multiple real estate holdings by the private sector. During last year alone, the government announced complementary measures to control the soaring real estate prices, with many types of short-term development investment being designated as illegal land speculation.

According to the study, under South Korea’s system, compensation for cases of expropriation can be delivered in the form of bonds or cash, while Washington only offers compensation via cash. Therefore, if Seoul wishes to compensate using bonds, it can be subject to international arbitration suits brought forth by U.S. investors, the study said.

In South Korea, if land is designated by the government as being restricted from development, compensation is not required for potential losses due to the lack of the landowner’s ability to develop the land. This will incur lawsuits from the U.S. as a type of indirect expropriation, the study said.

In addition, the South Korean system, which applies surcharges and heavy transfer taxes to profits earned from land development - in an attempt to curb South Korea’s fierce land speculation problem - will amount to ‘indirect expropriation’ under the currently proposed terms of the FTA. According to the civic groups, if South Korea accepts the ISD system as part of the FTA, South Koreans would likely file lawsuits against the government’s current real estate policies in place for curbing land speculation, as they would then be discrimatory against South Korean investors because foreign investors would be exempt from the regulations, protected by the ISD system.

The study also said that "the forces of real estate speculation in South Korea may be able to neutralize the government’s anti-speculative policies by jumping into the speculation game in the South Korean real estate market through investing in U.S. property funds," referring to the fact that unlike Korean investors, U.S. property funds, as foreign investors, can avoid the government’s anti-speculative policies through being protected by the ISD system.

In all, the study said that 21 South Korean laws would clash with the terms of the ISD.

The South Korean government says that it has been pushing ahead with a plan to make domestic real-estate price stabilization policies exempt from the FTA negotiations on indirect expropriation rules. But even if Washington accepts Seoul’s propositions, it would mean that South Korea would have to give up all of its other real estate policies.

An official from the Ministry of Foreign Affairs and Trade, asking not to be named, admitted that restrictions on land use and designation of districts as slated for development will be excluded from the policies to stabilize real estate prices, which the negotiation team is trying to exempt from the SDI scheme under the FTA.

But, he added that that those kind of policies in turn could be regarded as related to the environment and public health, categories also slated for exemption from the SDI system.

But Seo Sun-tak from the CCEJ said that this interpretation "only represents ‘hoping’ on the part of the South Korean side. Restrictions on land use and designation of districts to be developed for specific purposes have nothing to do with environmental or health policies," adding that the designation of zones to be restricted from development will indeed be subject to legal proceedings under the FTA, as they are policies aimed at preventing reckless land development, an area slated to fall under the SDI plan.

In connection with the ISD plan, Seo said that the FTA negotiations surrounding the system have been handled by a small number of market professionals living in a sheltered environment in which domestic anti-speculation policies have nothing to do with their reality.

"If the negotiation finishes in the current manner, laws or policies regarding real estate will be neutralized and there will be no means to control the real estate speculation that is threatening to ruin the nation."

Please direct questions or comments to [englishhani@hani.co.kr]