ISDS Provisions in Korea’s FTAs: Guidance for the TPP

June 29, 2015 5:00 PM

Korea, with 11 free trade agreements (FTAs) already implemented and another five signed, is now seriously considering participation in the Trans-Pacific Partnership (TPP)—although with the talks significantly advanced, Korea will not be one of the 12 original signatories. This blog post summarizes key Investor-State Dispute Settlement (ISDS) provisions found in Korea’s FTAs with the United States, Australia, Canada, and Vietnam.1 One purpose of this summary is to highlight similarities and differences, but the primary reason is to offer informed speculation on likely ISDS provisions in the forthcoming TPP text, in particular because these four countries are current members of the TPP, but also because the Korea-US FTA, or KORUS (the most comprehensive US trade pact to date), is widely considered to be among the baseline templates for the TPP.

Put simply, ISDS provisions allow a foreign investor to seek money damages from a host government, through an arbitration proceeding, when the investor’s property is expropriated without adequate compensation, or when the investor is the object of discrimination and does not receive “fair and equitable treatment” from the host government. Countries enter into ISDS provisions in hopes that greater legal certainty will attract more foreign investment, thereby creating jobs, raising productivity, and accelerating growth. Like any other international agreement, ISDS curtails, to some extent, national sovereignty—in this instance, the exclusive jurisdiction of national courts over investment disputes.

Recent criticism2 of the investor-state arbitration system has focused on five issues: special treatment for foreign corporations via the ISDS framework; the occupational background of arbitrators; the possibility that damage awards will curb a country’s ability to enforce appropriate health, safety, and environmental regulations; the secrecy surrounding ISDS proceedings; and the absence of an appeals mechanism to correct erroneous decisions by arbitration panels.

The first two criticisms—special treatment for foreign corporations and the occupational background of arbitrators—are common to all ISDS provisions. Nothing in Korea’s FTA experience throws new light on these complaints. It can be said that foreign investors come as strangers to the host country’s political system and thus require extra assurance of judicial impartiality. It can also be said that ISDS arbitrators are frequently corporate lawyers, selected for their expertise, not permanent judges (as in the World Trade Organization Appellate Body system). If these aspects of the ISDS system are regarded as serious flaws—a view we reject—then it must be acknowledged they are not addressed in Korea’s ISDS provisions. However, Korea’s experience sheds useful light on the remaining three criticisms: (1) appropriate regulations; (2) secrecy; and (3) appeals.

First, directly addressing the regulatory criticism, Annex 11-B to the investment chapter in KORUS declares:

3. (b) Except in rare circumstances, such as, for example, when an action or a series of actions is extremely severe or disproportionate in light of its purpose or effect, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, the environment, and real estate price stabilization (through, for example, measures to improve the housing conditions for low-income households), do not constitute indirect expropriations.(1)

Note (1): For greater certainty, the list of “legitimate public welfare objectives” in subparagraph (b) is not exhaustive.

The Korea-Australia and Korea-Canada FTAs have identical ISDS provisions to the KORUS, but both additionally state that government decisions to refuse investments under Australia’s Foreign Investment Policy and the Investment Canada Act are also exempt from ISDS provisions.3 The Korea-Vietnam FTA has the same ISDS provisions as KORUS FTA. Thus Korea and its four FTA partners preserve their sovereign right to enact and enforce appropriate regulations. Only when, in rare circumstances, regulations discriminate in a severe or disproportionate way against foreign investors can they be challenged.

Second, three of the four Korean FTAs also address the secrecy criticism. ISDS provisions under KORUS state that hearings and documents must be open to the public. Further, non-disputing third parties can request admission to hearings. However, ISDS provisions also allow disputing parties to hold closed hearings and to preserve confidential information when circumstances require—the same as for court proceedings in many countries. The Korea-Canada FTA adopts identical transparency text. The Korea-Australia FTA goes further and requires that both parties consider application of the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in future cases.4 However, the Korea-Vietnam FTA does not ensure transparency of arbitral proceedings. Evidently advanced countries share the goal of promoting transparency in the ISDS system, even if Vietnam has doubts.

Lastly, both opponents and supporters of ISDS are concerned about the absence of appellate review in ISDS cases. Recognizing this concern, KORUS attached Annex 11-D, “Possibility of a Bilateral Appellate Mechanism,” which states that Korea and the United States will consider the establishment of a bilateral appellate body to review decisions made in arbitrations within three years after the agreement was enacted.5 The Korea-Australia and Korea-Canada FTAs share this same understanding, but not the Korea-Vietnam FTA.

Comparison of the four FTAs reveals that the United States, Australia and Canada adopted highly similar provisions to answer current criticisms of the ISDS system, while Vietnam did not. The TPP investment chapter will probably follow the approaches already adopted by the advanced countries. And quite possibly the TPP will establish, for the first time, an appellate body to review arbitration decisions in ISDS cases.

Notes

1. The Korea-US FTA entered into force on March 15, 2012, the Korea-Australia FTA on December 12, 2014, and the Korea-Canada FTA on January 1, 2015. Korea and Vietnam signed their FTA on December 10, 2014, but it has not yet entered into force. So far, Korea is the defendant in two ISDS cases, but neither one has been decided.

2. For example, Senator Elizabeth Warren’s (D-MA) op-ed on ISDS in the Washington Post. See rebuttal by Gary Hufbauer.

3Australia’s Foreign Investment Policy requires the government to review every foreign investment proposal against a national interest test. The Investment Canada Act also requires the government to review foreign investments that could threaten national security.

4. The UNICITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration came into effect on April 1, 2014.

5. As of June 2015, the KORUS Implementation Committee has not released its discussion report.

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