One of the common misunderstandings about treaties (i.e., international agreements) is to believe that they bind all people and corporations of the contracting states. That is just wrong. Treaties only bind “governments” of the contracting states and do not reach private entities. 

So, individuals like you and me or corporations, big or small, are not bound by treaties that our governments sign. What bind us are the domestic laws that our governments adopt as a result of their obligations under the treaties.

Now, this simple cardinal rule is not simple any more. Increasingly, it is becoming more difficult to say which is which. In quite a few countries, the governmental sector and the private sector are sometimes closely intertwined to undertake joint tasks or achieve common policy objectives.

This phenomenon is more observable in the economic sector where governmental entities and private players are more closely working together to ride out financial storms.

This explains why states frequently collide, in the course of treaty interpretation or implementation, on the “scope” of a government.

Treating an entity as a governmental organ or as a non-governmental player makes a night-and-day difference in terms of treaty application because if it is deemed to be a non-governmental one the whole set of treaty obligations simply becomes moot: again, treaties are supposed to create binding force only for the governmental agencies. This has become an acutely touchy issue in trade agreements and investment agreements. This has been a headache for many governments, and Korea has had its own share of agony for this issue in a series of disputes during the past decade.

This topic has recently flared up in the context of China. China has traditionally maintained a hoard of state-owned enterprises in key economic sectors, which account for almost half of gross domestic product according to some recent statistics. The question then is how these unique enterprises should be treated in terms of treaty application and implementation. Stated differently, are they some sort of governmental apparatus or not?

Particularly vigilant here is the United States who puts this issue as one of the priorities in its negotiations of various agreements including the Trans-Pacific Partnership that may have relevance to China. During the WTO’s Trade Policy Review of China conducted this past August, questions concerning the SOEs took the center stage.

This sensitive “hot potato” is now about to be dumped on the lap of Korea as its negotiation with China to conclude a free trade agreement intensifies.

Depending on whether and how the SOEs are covered by the prospective FTA, we are virtually talking about two different agreements ― this is a threshold question which determines the whole universe of treaty obligations. If a big chunk of government-related players are left out for whatever reason, the landscape of treaty implementation might be quite different.

This doesn’t mean that the Korea-China FTA will have to find a definitive answer to this sensitive question. Perhaps there isn’t any magic formula here. As the entirety of the problem is so massive and complex, an easy answer is not probable.

What the agreement can do, however, is to spell out what the criteria of the SOEs are for purposes of the FTA and how they are (or not) subject to the norms of the agreement. This value-neutral clarification would help crystallize otherwise opaque parameters of the scope of the agreement and avoid unnecessary bickering in the future. An agreement whose clear contours are not known to the parties at the time of signing would only invite unexpected surprises at best and deep frustration at worst.

The success of this particular FTA would hinge upon finding a workable middle ground, reflecting the interest of the two countries, to address the issue of SOEs. 

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.