Companies Based in Third Countries Could Use Korea FTA Investor-State Enforcement

 

From the Wall Street Journal comes news that German-based engineering conglomerate Siemens is seeking a bigger slice of the government contracts pie:

The new top U.S executive at Siemens AG is taking aim at business with the federal government, hoping he can take advantage of the German industrial conglomerate's scale to win a bigger share of that steady customer's order flow.

Eric Spiegel, chief executive of Siemens Corp., the U.S. division of Siemens, says his operations currently bring in about $1 billion a year from the U.S. government, a figure he hopes to double by 2015. The effort puts the company up against tough competitors like General Electric Co. and Honeywell International Inc., but Mr. Spiegel believes new spending will come in areas like energy efficiency and health care, where Siemens has products such as offshore wind turbines, MRI scanners and high-speed trains.

If you stroll over to our Korea-U.S. corporate investment maps, you’ll find that Siemens is invested all over the United States and Korea.  Siemens has 147 establishments in 39 states. 

With its investments in the United States and Korea, Siemens could stand to benefit from a loophole in the Korea FTA’s investor-state enforcement mechanism.  The United States or Korea could only deny the benefits of the investor-state enforcement to a foreign investor under two circumstances (see Article 11.11 here for the text. The first circumstance deals with situations in which the U.S. or Korea has sanctions or “not normal economic relations” with the third country where the investor is based, which would apply mostly to firms based in Iran, North Korea, Burma, Cuba, etc.  The FTA outlines a second possible way to deny the benefits of the investor-state arbitration:

A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a non-Party, or of the denying Party, own or control the enterprise. [emphasis added]

Given that Siemens has 1,800 employees and annual sales of 1.2 billion Euros in Korea, it could merely change its country of incorporation with the stroke of a pen and argue that it has substantial business activities in Korea in order to sue the U.S. government under the Korea FTA. It could also do the same to Korea.  This re-incorporation issue arose very recently in the Pacific Rim CAFTA case. Just a year before Canada-based Pacific Rim filed its CAFTA suit against El Salvador for denying it permission to mine gold, Pacific Rim re-incorporated in the United States, which gave it access to the CAFTA investor-state enforcement rights.
 

Since the government contracts that Siemens is pursuing would be classified as an “investment agreement” under the Korea FTA, it would be free to bring cases.  In fact, this is not hypothetical possibility: Siemens has already successfully brought a case under the Germany-Argentina Bilateral Investment Treaty.  The case involved a contract between Siemens and Argentina to establish a system of migration control and personal identification.

The possibility of Siemens or a similar corporation using the Korea FTA to challenge the handling of U.S. government contracts is yet another reason why the investment chapter of the Korea FTA must be fixed.