The Korea FTA: Putting Corporations Before the Public Interest

We’re continuing our series of facts in response to the Korean Embassy’s misleading claims on the Korea Free Trade Agreement (FTA). Our full response can be viewed here. This time, the focus is on the Korea FTA’s investor-state dispute resolution mechanism that threatens public interest laws.

Lori Wallach’s Huffington Post piece: The Korea FTA’s investor-state dispute resolution mechanism “empowers foreign investors to skirt domestic courts and seek cash compensation for regulatory costs before foreign tribunals…”

Korean Embassy’s claim: “The investor-state dispute resolution mechanism in the KORUS FTA is a common feature of free trade agreements and bilateral investment treaties, of which there are more than 3,000 worldwide. NAFTA has an identical investor-state dispute resolution chapter. Since it took effect in 1994, Mexican and Canadian companies have filed 18 requests for arbitration against the U.S. government. They have won none of them.” Elsewhere, the Embassy adds that, “Some opponents of the FTA have alleged that this section will provide Korean companies with rights greater than those afforded to U.S. companies. Not only is that not true, it is directly rebutted in the text of the agreement which says, ‘foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investor rights under domestic law equal or exceed those set forth in this Agreement.’”[i]

Facts: Opposition to the investor-state system is at an all time high, in part because of such callous attitudes from governments. In July of last year, 110 members of Congress sent a letter to President Obama opposing the investor-state mechanism in the Korea FTA, among other provisions.[ii] A bipartisan group of 146 legislators (including the majority of House Democrats) cosponsored the TRADE Act, which called for elimination of the investor-state system. And in September 2010, over 550 faith, family farm, environmental, labor, and consumer protection organizations signed a letter to President Obama urging that he remove the investor-state mechanism from the Korea FTA.[iii]

The Embassy would like to portray the investor-state dispute settlement mechanism as mundane and uncontroversial. Nothing could be farther from the truth. In October 2010, Korean legislators and members of the U.S. Congress sent a joint letter to President Obama and President Lee that called on them to change the text of the FTA to eliminate the threat of investor-state lawsuits.[iv] The recent joint statement of Korean lawmakers, labor unions, farmers and civil society groups highlighted in Lori Wallach’s Huffington Post piece reiterates the deep concern of Koreans that the investor-state mechanism would allow multinational corporations “to bring our government to the foreign arbitration tribunals to demand compensation over public policy standards, even those that apply to domestic and foreign corporations alike.”[v]

Language cited by Embassy is non-binding. To counter the fact that the FTA’s clear language in Chapter 10 does provide Korea firms operating here better rights than domestic firms, the Embassy quotes a provision of the FTA (e.g. “foreign investors are not hereby…) that is in the preamble of the agreement and thus non-binding. The non-binding nature of the preamble was noted most recently by the U.S. State Department in the Grand Rivers et. al. vs. United States investor-state arbitration under NAFTA, which stated: “the key to interpreting the provisions of the NAFTA must be the text itself, as informed by the treaty’s context, object, and purpose, only to the extent those additional sources are relevant to, and consonant with, the substantive provision at issue. This approach is grounded in the well-accepted principle that general objectives can shed light on treaty provisions, but cannot impose independent obligations on treaty signatories.”[vi]

The State Department quote above references concepts from the Vienna Convention on the Interpretation of Treaties, which also states that “A party may not invoke the provisions of its own internal law as justification for its failure to perform a treaty.” In other words, even if the preamble was non-hortatory, the United States could not invoke its own internal laws as a reason not to provide greater rights to Korean investors than that provided U.S. investors under the U.S. Constitution.

This conclusion is borne out by the empirical track record of FTAs. Over 90 percent of panels that granted awards under investor-state cases under U.S. trade and investment agreements ignored the preamble, selectively paid attention only to pro-investor clauses, or found that preambular provisions were purely hortatory. The panels in the remaining cases found that pro-investor provisions had to be given as much or more weight as pro-public interest provisions.

Members of Congress and civil society are so concerned about the investor-state provisions in the Korea FTA because laws protecting the environment and consumers’ safety have repeatedly come under attack through the investor-state mechanisms in trade agreements. In fact, there are nearly $9.1 billion in claims in the 14 known investor-state cases outstanding under NAFTA-style deals. None of them relate to traditional trade concerns; all of them relate to environmental, public health and transportation policy. Members of Congress and the public have raised some of the following concerns:

NAFTA: Thirty eight NAFTA investor-state cases targeted laws protecting the environment, natural resources, and food and drug safety.[vii] The Embassy claims that the U.S. is not in danger from the investor-state provisions of the Korea FTA. In fact, the United States lost a $725 million case on the merits of the claim, but a tribunal dismissed the case on a technicality voiding the U.S. liability, so the danger of these cases is very real. Furthermore, the government has had to shell out millions of dollars in taxpayer-funded attorney fees and arbitration costs to defend these claims even when they ‘win’. With Canada and Mexico having paid out $326.9 million to nine foreign investors, it may be only a matter of time before a tribunal rules against the United States.[viii] At this point in time, there are five active NAFTA foreign investor claims against the U.S. working their way through the arbitration process.[ix]

CAFTA: Two multinational mining corporations have already taken aim at El Salvador’s mining regulations through investor-state claims filed under CAFTA. Pacific Rim Mining Corporation ran afoul of El Salvador’s mining regulations by never completing a feasibility study necessary to obtain an exploitation permit for its mine.[x] Pacific Rim has demanded hundreds of millions of dollars in compensation under CAFTA’s investor-state mechanism, alleging that El Salvador’s environmental regulations and processes constitute an “expropriation” of their “investment.”[xi]

The Wisconsin-based Commerce Group Corporation filed a $100 million CAFTA lawsuit when its environmental permits for its gold mining and milling operations in Northeastern El Salvador were revoked after the company failed its environmental audit.[xii] This case was recently dismissed, although the tribunal made clear that Commerce Group had the right under CAFTA to challenge El Salvador’s mining policy. The case was dismissed on a technicality: If Commerce Group had simply written a letter to the Salvadoran judiciary informing it that it was waiving its right to challenge revocation of its environmental permits in Salvadoran courts, then Commerce Group’s attack on Salvadoran mining policy would likely be going forward under CAFTA. Indeed, when El Salvador attempted to recoup its legal costs, the tribunal sided with Commerce Group that its case was not frivolous. The fact that a corporate attack on a sovereign country’s domestic environmental policy before a foreign tribunal would even be possible – much less cost a country almost a million dollars when they win the case – highlights what is wrong with our current trade agreement model. These latest lawsuits under CAFTA demonstrate the persistent threat that the Korea FTA would present to both U.S. and Korean environmental laws.

U.S.-Argentina BIT: These harmful investor-state provisions have been replicated under other deals. Argentina has been the subject of 43 corporate attacks from the likes of Enron and BP. These corporations attacked the Argentine government’s emergency measures from the 2001-02 financial crisis – measures which successfully put the economy back on track. Argentina has been ordered to pay out about $430 million.[xiii]

Chilling effect: Corporations want these rules in order to make an example of regulators that interfere with corporate profits, even when they’re protecting the public interest. They have a potent chilling effect. For instance, in 2004 the provincial government of New Brunswick, Canada sought to significantly reduce the cost of auto insurance by establishing a public auto insurance program. The effort was abandoned when critics noted that the program could be challenged as an “expropriation” under the NAFTA investor-state mechanism.[xiv]

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[i] http://www.koreauspartnership.org/pdf/foreign-investor-protection.pdf

[ii] Letter on the Korea Free Trade Agreement to President Obama from 110 members of Congress, July 22 2010, Available at: http://www.citizen.org/documents/KORUSLetterJuly2010.pdf

[iii] Letter on the Korea Free Trade Agreement to President Obama from 550 organizations, September 22 2010, Available at: http://www.citizenstrade.org/pdf/Korea_Opposition_Final.pdf

[iv] Joint letter of Korean legislators and members of the U.S. Congress to President Obama and President Lee regarding the U.S.-Korea Free Trade Agreement, October 18, 2010, Available at: http://www.michaud.house.gov/images/stories/koreauslegislatorsletter.oct.18.2010.pdf

[v] Joint Statement of Korean lawmakers, labor unions, farmers and civil society groups on the proposed Korea - U.S. FTA, January 27, 2011, Available at: http://viacampesina.org/en/index.php?option=com_content&view=article&id=1021:joint-statement-of-korean-lawmakers-labor-unions-farmers-and-civil-society-groups-on-the-proposed-korea-us-fta&catid=24:10-years-of-wto-is-enough&Itemid=35

[vi] http://www.naftaclaims.com/Disputes/USA/GrandRiver/GRE-USA-Merits-Counter-Memorial-R.pdf

[vii] Scott Sinclair, “NAFTA Chapter 11 Investor-State Disputes,” Canadian Centre for Policy Alternatives, November 2010, Available at: http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2010/11/NAFTA%20Chapter%2011%20Investor%20State%20Disputes.pdf

Cases tallied on page 22 of the report were summed if the type of measure challenged was “natural resources”, “environmental protection”, “health or drug”, or “health, food safety, or drug”.

[viii] Public Citizen, “Table of NAFTA Chapter 11 Foreign Investor-State Cases and Claims,” November 2010, Available at: http://www.citizen.org/documents/NAFTA_Investor_State_Chart_Nov_2010.pdf

[ix] These cases are the Cemex case notified in September 2009, the Apotex case notified in June 2009, the CANACAR case notified in April 2009, the Apotex case notified in December 2008, and the Domtar case notified in April 2007.

See Public Citizen, “Table of NAFTA Chapter 11 Foreign Investor-State Cases and Claims,” November 2010, Available at: http://www.citizen.org/documents/NAFTA_Investor_State_Chart_Nov_2010.pdf

[x] Pacific Rim Mining Corp, “El Dorado, El Salvador.” Accessed May 25, 2010. Available at: http://www.pacrimmining.com/s/ES_Eldorado.asp.

[xi] Pac Rim Cayman LLC, “Notice of Arbitration Under the Rules of Arbitration of the International Centre for Settlement of Investment Disputes, the Central America – United States – Dominican Republic Free Trade Agreement and the Foreign Investment Law of El Salvador,” Pac Rim Cayman LLC v. Republic of El Salvador, April 30, 2009.

[xii] Administrative Litigation Chamber of the Supreme Court of Justice of El Salvador, Case Number 308-2006, April 29, 2010, English translation at page at page 5, paragraph 2. (note that the English translation follows the Spanish). Available at: http://www.commercegroupcorp.com/images/cafta/R-5._Decision_Case_308-2006%5B1%5D.pdf

[xiii] Luke Eric Peterson, “Argentina by the numbers: where things stand with investment treaty claims arising out of the Argentine financial crisis,” Investment Arbitration Reporter, Vol. 4, No. 2, February 1, 2011. Available at: http://www.iareporter.com/articles/20110201_9?

[xiv] Mary Bottari and Lori Wallach, “NAFTA’s Threat to Sovereignty and Democracy: The Record of NAFTA Chapter 11 Investor-State Cases 1994-2005,” Public Citizen, February 2005, at xvii, Available at: http://www.citizen.org/documents/Chapter%2011%20Report%20Final.pdf