Swiss foreign investor claims it suffered US$264 million in damages caused by South Korean government
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The first round of negotiations to revisions of the KORUS FTA agreement on Jan. 5 in Washington, DC. (provided by the Ministry of Trade, Industry and Energy)

The Hankyoreh : Aug.2,2018

Swiss foreign investor claims it suffered US$264 million in damages caused by South Korean government

International community pushes to reform or abolish ISDS system

On July 11, Swiss-based foreign investor Schindler Holding AG sent South Korea’s Justice Ministry a notice of intent for arbitration under the investor-state dispute settlement (ISDS) system. The company claims that it suffered at least US$264 million in damages after the South Korean government illegally authorized a paid-in capital increase for Hyundai Elevator.

Along with two cases concerning the merger of Samsung C&T and Cheil Industries and one case about the expropriation of a housing lot in Seoul’s Mapo District from a Korean-American, this is the fourth ISDS dispute this year in which the South Korean government is embroiled.

Amid all this litigation, however, the status of ISDS is being compromised by a political push from the international community to reform or abolish the system. Though the US had been a leading advocate of ISDS for over 30 years, it’s now in the vanguard of the movement to abolish the system, which suggests that dramatic change is in store for the international trade and investment system of which ISDS is a part.

“ISDS was first introduced in the early 1990s in NAFTA [the North American Free Trade Agreement], but during its renegotiation of NAFTA, the US has been pushing to delete the ISDS passage. That’s part of a surprising campaign to reform or scrap ISDS that’s sweeping the world,” said Melisa St. Louis, director of international campaigns for Public Citizen’s Global Trade Watch.

St. Louis was speaking during the International Seminar for Improving the ISDS System, which was organized by MINBYUN-Lawyers for a Democratic Society and held in a hall at the National Assembly on July 25.

Growing US opposition to ISDS

In the US, opposition to ISDS is emerging along a diverse political spectrum that bridges the conservative-liberal divide and is centered in Congress, the judiciary, organizations of lawyers and coalitions of state governments. Even the Trump administration’s own trade representative Robert Lighthizer has publicly criticized ISDS for infringing on states’ judicial sovereignty and for sending American jobs overseas.

One of the reasons the US Trade Representative has defied opposition from the Department of Commerce and some segments of the Republican Party to raise the shocking idea of ditching ISDS is with the hope of bringing home American capital that is currently overseas, but this also reflects the assumption that any new trade agreement containing ISDS is unlikely to make it through Congress.

According to St. Louis, the countries of India, South Africa and Indonesia are also attempting to withdraw from current investment agreements that contain ISDS clauses or to improve the ISDS system by guaranteeing the execution of domestic public policy. The political tide is also turning against ISDS in the European Union.

“The EU is also reviewing the legitimacy of ISDS and proposing the alternative of establishing multilateral investment courts. But such courts would only fix some of the procedural issues without tackling ISDS’s fundamental problems,” said Layla Hughes, a senior attorney for the Center for International Environmental Law. The EU is basically seeking to institute partial reforms while maintaining the framework of protecting international capital investments.

With trouble looming for ISDS, which appears in the majority of the world’s trade and investment agreements, the UN Commission on International Trade Law (UNCITRAL, with 60 member states) has also set up a special working group to host official deliberations about ISDS reform. The working group held a technical meeting in New York in April and is planning to hold another one in South Korea this coming September. Some analysts think that the number of ISDS complaints filed against the South Korean government is increasing as international investors rush to board the “last train” for ISDS, given growing doubt about its future.

ISDS tends to favor foreign investment capital

Not only does ISDS endow foreign investment capital with special privileges and force governments to hand over vast sums of taxpayer money in damages, but it is facing procedural criticism as well. The three civilian arbitration judges who are temporary appointed to the International Centre for Settlement of Investment Disputes (ICSID) have been repeatedly criticized for making judgments that are biased toward foreign investment capital to increase their earnings.

The economic boon of investment promotion – the original rationale given in support of ISDS – is also being called into question. A recent survey by Public Citizen turned up absolutely no evidence that the ISDS clauses included in bilateral investment agreements had boosted foreign direct investment. The implication is that while ISDS has few benefits, it has clear and real costs, including the retrenchment of public policy by governments unwilling to properly exercise legitimate public policy for fear that they will be summoned to international arbitration.

South Korea has ISDS clauses in over 80 of its bilateral investment treaties (BIT) and free trade agreements (FTA). Despite the international momentum behind neutralizing IDSD, South Korean and American officials negotiating revisions to the KORUS FTA agreed to partially revise the ISDS clause to prevent its abuse. The American negotiators reportedly accepted the South Korean request to revise the ISDS section without raising any serious objections. That means that ISDS was not a “matter of concern” that the US was committed to defending.

“While ISDS is under attack around the world, the Justice Ministry, Foreign Ministry and Trade Ministry have been unable to adopt a definite stance for the South Korean government. Given that circumstances have shifted in our favor — ISDS’s international status is in serious jeopardy and not even the US is trying to preserve the system – it’s a mystery why our negotiators didn’t exploit this opportunity to successfully push for the abolition of ISDS,” said Nam Hui-seop, a patent attorney.

By Cho Kye-wan, staff reporter

Please direct comments or questions to [english@hani.co.kr]

source: Hankyoreh