[Daniel Fiedler] Why the ISD clause is necessary

These days the Democratic Party of South Korea is again engaged in obstructing the halls, conference rooms and podiums of the National Assembly. These politicians and their Internet bloggers are whipping the Korean public into a frenzy against the KORUS Free Trade Agreement. This time the issues revolve around the impact of the investor-state dispute (ISD) settlement clause. And again politicians and the Internet demagogues are spreading fear and panic, hyping the alleged imminent takeover of South 

Korea by U.S. multinational corporations. The rumors cover everything from next year’s electricity bills to U.S. control of the rice supply. While a simple perusal of the KORUS free trade agreement reveals that these rumors are specious, this does not seem to matter. Thus we are left with merely trying to explain why the ISD clause is included in so many free trade agreements and why it should remain in the KORUS FTA.

The purpose of an ISD clause is to give foreign investors the ability to directly access the international arbitration system. This system is designed to prevent government expropriation of a foreign direct investment without just compensation. The ISD clause is primarily used when dealing with a developing country where the rule of law is weak and the court system biased towards the government. Since the clause is usually applied to developing countries, the KORUS FTA arguably does not need the provision. Unfortunately despite Korea’s developed status, there exists both a perception that Korea has a government biased judiciary and that respect for the rule of law in South Korea is weak.

The perception of a weak government biased judiciary is primarily attributable to the ongoing saga of the Lone Star investment case. Regardless of the underlying facts, the case has irrevocably created the impression that the Korean government has an issue with foreign investments. This impression exists despite the view among executives involved in the Lone Star deal that what is driving the government is not an anti-foreigner bias but rather a bias against bank ownership by profit oriented investment funds. These executives point to the government’s reliance on the banks in supporting unprofitable social safety nets and think the government would view any investment by a profit focused fund, domestic or foreign, as a threat. However, other foreign direct investment executives opine that the Korean government is driven by an anti-foreign sentiment. Regardless of which view is correct, the repeated trials of Paul Yoo, the former head of Lone Star’s South Korean unit, confuse and alarm U.S. investors. Although prosecutorial appeals of acquittals are permitted in the U.S., the decision of the Korean Supreme Court requiring the lower courts to engage in further resolution of factual issues after the Seoul High Court’s acquittal of Mr. Yoo violates the U.S. concept of double jeopardy as set forth in the U.S. Constitution. Thus U.S. investors view the recent conviction as both a miscarriage of justice and a violation of basic constitutional rights. The appearance of court bias in favor of the Korean government is strong.

The second reason for the ISD clause in free trade agreements is to address issues that may arise in countries where there is a weak rule of law. However many people may rightly argue that this should not apply because the rule of law is growing stronger in South Korea every day. Thus it is ironic that the actions of the Democratic Party in attempting to prevent the passage of the KORUS FTA undermine that argument. When images of party members blocking the conference room or engaging in physical confrontations in the National Assembly are broadcast internationally, it increases the perception that the rule of law is weak in South Korea. As a point of fact, the actions of the Democratic Party, in their attempt to frustrate the will of the majority, violate the rule of law that governs democratic societies. Thus their actions belie their argument against the ISD clause.

Whether the KORUS free trade agreement passes this week, next week or not at all; the Democratic Party’s actions in this matter have only strengthened the arguments for keeping the ISD clause in the agreement. Should the Korean government attempt to renegotiate this provision with the U.S. they will find their own actions as the strongest argument against any renegotiation. Perhaps the next time a contentious issue comes before the members of the National Assembly they should consider the impact their actions have on the democratic reputation of South Korea. Unfortunately, and regardless of the outcome of the dispute over the KORUS free trade agreement, it is more probable that these politicians will continue to engage in such behavior until they are voted out of office.

By  Daniel Fiedler

Daniel Fiedler is a professor of law at Wonkwang University since 2007. He has been the lawyer representative for international marriages in Namwon since 2010. ― Ed.