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Tuesday, September 6, 2011

Dispute Settlement in the Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)

Jeanne J. Grimmett
Legislative Attorney

The proposed U.S.-South Korea Free Trade Agreement (KORUS FTA) follows current U.S. free trade agreement (FTA) practice in containing two types of formal dispute settlement: (1) State- State, applicable to disputes between the KORUS FTA Parties, and (2) investor-State, applicable to claims by an investor of one KORUS FTA Party against the other Party for breach of an agreement investment obligation. An unsuccessful defendant in a State-State dispute would generally be expected to remove the complained-of measure; remedies for non-compliance include compensation and the suspension of KORUS FTA obligations (e.g., the imposition of a tariff surcharge on the defending Party’s products) and, as an alternative, payment of a fine to the prevailing Party or, in some cases, into a fund that may be used to assist the defending Party in complying with its obligations in the case. The KORUS FTA also contains special procedures for State-State disputes relating to motor vehicles that would grant the prevailing complainant an automatic right to increase tariffs on motor vehicles of the other Party to most-favored-nation (MFN) rates. If a Party were found to have violated an investment obligation in an investor-State dispute, the tribunal would be authorized only to make a monetary award to the claimant and thus could not direct the State defendant to withdraw the violative measure. If the defending Party did not comply with the award, the investor might seek to enforce it under one of the international arbitral conventions to which the United States and South Korea are party.

The KORUS FTA State-State dispute settlement mechanism differs from most earlier U.S. FTAs in that it applies to all obligations contained in the labor and environmental chapters of the KORUS FTA instead of only domestic labor or environmental law enforcement obligations. In addition, in the event a Party is found to be in breach of one of these obligations and has not complied, the prevailing Party may impose trade sanctions instead of, as under earlier agreements, being limited to requesting that a fine be imposed on the non-complying Party with the funds to be expended for labor or environmental initiatives in that Party’s territory. The changes stem from a bipartisan understanding on trade policy between congressional leaders and the George W. Bush Administration finalized on May 10, 2007, setting out provisions that were to be added to completed or substantially completed FTAs pending at the time. Among the aims of the understanding was to expand and further integrate labor and environmental obligations into the U.S. FTA structure. The same approach to labor and environmental disputes is found in FTAs entered into with Colombia and Panama, each of which continue to await congressional approval, and in the U.S.-Peru Trade Promotion Agreement, which entered into force in 2009.

Resort to panels under FTA State-State dispute settlement has been uncommon, and thus there has been relatively little experience with the operation of this mechanism over a range of agreements and issues. FTA investor-State claims have been filed under the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America-U.S. Free Trade Agreement, and the U.S.-Peru Trade Promotion Agreement. As is the case with its NAFTA partners – particularly Canada – the United States imports capital from South Korea to a greater degree than it does from parties to other U.S. investment agreements, and South Korean investment in the United States may indeed grow over time. While this situation may create a greater potential for investor-State disputes than exists under most other U.S. investment agreements, the extent to which disputes involving South Korean investors will in fact arise would seemingly depend upon a variety of factors and interests unique to an investor’s individual situation and thus for now remains only a matter for conjecture. To date, the United States has prevailed in all investor-State cases brought against it. Implementing legislation to approve the KORUS FTA and to provide legislative authorities needed to carry it out has not yet been introduced.

Date of Report: August 16, 2011
Number of Pages: 2
Order Number: R417
Price: $29.95

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