[Lee Jae-min] Trade disputes and domestic policies

Antigua and Barbuda is the seventh-smallest country in the world with a population of 70,000. This country, as its name connotes, is composed of two main islands and located in the middle of the Caribbean. It is a former British colony where a British naval fortress was located in the 1700s (this fortress was featured in the movie “Pirates of the Caribbean”).

In 2003, this small country waged a David-and-Goliath battle against the United States by bringing a claim against Washington at the WTO dispute settlement panel. The country took issue with U.S. domestic policies relating to online gambling regulation, and it prevailed. With the authorization of the WTO, the island country further cornered the United States by imposing a trade sanction against U.S. intellectual property rights. This case is frequently referred to as an example showing that a norms-based system also benefits smaller countries.

Similarly, in 1997 Costa Rica prevailed over the U.S. in a dispute over a U.S. import restriction against its textile products. In 2001, Pakistan successfully challenged a U.S. measure against its cotton yarn products.

The European Union has not fared any better. Thailand prevailed over the EU at the WTO in 2005 when it challenged Brussels’ classification of its frozen chicken cuts. In 1999, it was Ecuador that successfully brought a challenge against the EU’s preferential trade relationship with the so-called ACP countries.

The list of trade disputes at the WTO over the past 16 years (427 in total) is replete with cases where developing countries prevailed over developed ones and where small states cornered big ones. The United States and the EU are the two strongest and most influential members of the world trade body.

This reality brings us back to the never-ending controversy over the investor-state dispute (ISD) settlement clause contained in the Korea-U.S. FTA, because the formation of the dispute settlement panels and application of treaty provisions are quite similar between the WTO and the ISD.

Criticism has been raised that the ISD clause is problematic because its decision-making process will be somehow controlled by stronger countries. Not only does this assertion turn a blind eye to the detailed procedural checks contained in these agreements, but also it fails to explain the reality of similar international litigations at the WTO where claims of small countries have been arguably equally vindicated, and where big countries’ domestic policies are also extensively reviewed by the international tribunal.

As noted in a previous article of Oct. 18, Korea has been quite active in the trade dispute settlement process at the WTO, ranking fifth in terms of the number of disputes, with 29. Of these, 12 concern instances where Korea’s national policies were extensively examined ― including tax policies, financial policies and exercises of governmental regulatory authority. Korea sometimes won and sometimes lost.

Nonetheless, few people call this an infringement of Korea’s national sovereignty. This is not unique to Korea and all WTO members are subject to the same norms and regulation. In fact, recent high-profile disputes between the U.S. and EU, and the U.S. and China have been all about their respective domestic policies.

If the main cause of concern for the ISD clause contained in the FTAs (including the Korea-U.S. FTA) lies in the fact that Korea’s national policies can be subject to review by an international tribunal, it is forgetting the reality that Korea has already been living in such an environment, at least for the past 16 years. Portraying the ISD as a mechanism that puts the Korean national policy under the review of an international tribunal for the first time, therefore, seems disingenuous.

Since the ISD procedure was first introduced in 1966, almost 70 countries have participated in this process. Moreover, 81 investment agreements and many FTAs that Korea has signed have this proceeding already in place. Under these circumstances, setting the Korea-U.S. FTA aside, it would be a matter of time for Korea to encounter its first investment dispute. It would require tremendous luck for Korea to avoid this hassle forever.

Vanuatu is on the verge of joining the WTO as its 154th member. Japan also declared its participation in the Trans-Pacific Partnership. Following the logic of the ISD criticism, one would wonder why these countries, both big and small, and developed and developing, are so desperate to join the network of evil that encroaches upon their national sovereignty. 

By Lee Jae-min

Lee Jae-min is a professor of law at the School of Law, Hanyang University, in Seoul. Formerly he practiced law as an associate attorney with Willkie Farr & Gallagher LLP. ― Ed.