The opposition’s claim that the Investor-State Dispute Settlement system poses a danger to Korea’s sovereignty is unfounded, and the free trade agreement with the U.S. should instead be approached constructively to maximize its economic effect, said Rep. Kim Jong-hoon of the Saenuri Party.

The former trade minister, who led the FTA negotiations with Washington during both the former and current governments, underscored that the ISD was the minimal safeguard to protect Korean investors and a universal system included in most investment treaties worldwide.

“The ISD regulations in the Korea-U.S. FTA reflect improvements to the substantial and procedural aspects and also contain the legal principles of our laws and system, thereby balancing out the protection of investors and the authority of the state,” Kim said in a written interview with The Korea Herald.

“The opposition party still talks about renegotiating the ISD, but in that case, unless such opposition only derives from (the fact that the counterpart is) the U.S., we should be intently discussing whether to retain the ISD (as a whole) first,” he said.

Korea has been signing ISD-inclusive treaties since it joined the International Centre for Settlement of Investment Disputes in 1967.

Kim served as a chief FTA negotiator during the Roh Moo-hyun administration and as trade minister under the current Lee Myung-bak government before stepping down last December to become a first-term lawmaker.

“I believe that eventually, the basis of ISD in the KORUS FTA should be maintained, while supplementing what needs to be supplemented or improved in terms of procedure,” he added.

He cited the Annex 11-D of the pact titled “Possibility of a Bilateral Appellate Mechanism” as an example. It would be possible to consider introducing a retrial system by discussing the clause that says “Within three years after the date this Agreement enters into force, the Parties shall consider whether to establish a bilateral appellate body or similar mechanism to review awards.”

With regard to the case of a looming ISD process involving Lone Star Funds, Kim said it would have been harder for the private equity fund to raise the ISD if the Korea-Belgium Bilateral Investment Treaty, the basis of Lone Star’s charge, signed in 1976 had included a clause to rule out paper companies.

“Therefore, what is needed is to upgrade, improve or supplement relevant clauses in the past investment protection agreements to a level as high as the KORUS FTA.”

On the citation of Australia, which has sworn off ISD in future FTAs based on a report by the Australian Productivity Commission, Kim said it overlooked how the same report had also commented, “If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries.”

He added that in exchange for the ISD, Australia is said to have paid significant costs, such as giving up on the opening of the U.S. market to its major agricultural products.

“As the movement of investment across the border activated, the ISD that was introduced in international society in the 1960s also underwent changes and developments,” he said.

To opponents’ claim that the scope of a state’s “indirect expropriation” stated in the ISD clause with the U.S. was not exclusive enough, Kim countered that public policies’ autonomy was secured in the annexes by confirming that non-discriminatory policies for the purpose of public welfare such as the environment, health and real estate were exceptions from indirect expropriation.

Opponents have also claimed that “rare circumstances” to acknowledge a state’s indirect expropriation was ambiguous, Kim retorted that the full context specifies that indirect expropriation will have occurred only if a government action is “extremely severe” or “disproportionate in light of its purpose or effect.” which is far more detailed than the original U.S. version for better clarification.

“Domestic experts in the field of ISD assess that the expropriation annex of the KORUS FTA is the most appropriately constructed one out of all the investment treaties that Korea has signed so far.

“It is a common fact that the entire economic activities cannot be regulated with a certain country’s domestic laws … as long as the ISD system is introduced, it is more realistic and appropriate to remedy any problems in running the system rather than demanding unconditional abolishment or deletion,” Kim added.

By Lee Joo-hee (jhl@heraldcorp.com)