Title : Study on the possible application of MFN treatment under the Korea-US FTA : Focused on investment provisions

Author : KONG Sujin (HK Research Professors)

Publication : Korea Journal of International Law, Vol. 59, No.1 (Series No. 132) pp.11-45

Abstract :

 

MFN treatment was one of the controversies during the ratification procedure of the Korea-US FTA (hereinafter "KORUS"). In particular, the MFN treatment as stipulated was harshly criticized because it is allegedly

known tto exploit market access commitments of future FTAs automatically. The criticism was based on misunderstanding in part. However, it has not been studied that the criticism is real or is to be realized when Korea's subsequent FTAs or BITs are concluded. Thus, this article is aimed at assessing the possible application of MFN treatment under the KORUS through reviewing the Korea-Colombia FTA(hereinafter "KC-FTA") and the trilateral investment agreement among China, Japan and Korea(hereinafter "CJK-IT"), which are concluded after the entry into force of the KORUS. The review is limited to investment provisions because investment is a common area of three agreements.

The MFN clause of the KORUS clearly specifies the scope of application of MFN treatment as investment and investor with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. The scope is identical with that of the KC-FTA and the CJK-IT has less coverage as it is limited to post-establishment phase. Thus, it is unlikely that MFN treatment is applied to the KC-FTA or the CJK-IT. Generally, FTAs covers the pre-establishment phase of investments with specific country reservations. Given that the KC-FTA includes

more reservations than the KORUS, the KC-FTA has less coverage of market access and it seems unlikely that there is room for application of MFN treatment. Unlike in the KORUS, the reservations in the KC-FTA do not include measures relating to public orders or exercise of government authority such as law enforcement. It seems unnecessary to include them because the KC-FTA incorporates mutatis mutandis GATS Article XIV (General

Exceptions). Meanwhile, the CJK-IT was excluded in the comparison of reservations because its scope is limited to post-establishment phase.

Substantive provisons of the KC-FTA and the CJK-IT are (i) identical or similar to, (ii) different from or (iii) absent in the KORUS. Main provisions of the KORUS are identical or very similar to those of the KC-FTA and it seems that there is no need to import substantive provisons of the KC-FTA through MFN clause. A few provisions of the KC-FTA and main provisions of the CJK-IT are similar but different from those of the KORUS. Although the differences should be reviewed and analyzed more closely to estimate whether it is more favorable or not, it is unlikely to import the different provisions of the KC-FTA or the CJK-IT to the KORUS. While the KORUS is more restrictive toward the exercise of the government authority, it is more protective toward investments than the other two agreements. The CJK-IT includes articles such as Entry of personnel, Transparency and Intellectual property rights, and all of them are absent in the KORUS' investment chapter. As the CJK-IT is limited to post-establishment phase, it is doubtful that more favorable treatment is conferred by the CJK-IT than the KORUS. Furthermore, the KORUS stipulates the absent provisions in the separate Chapters with more details. Therefore, it is less likely that MFN treatment is applied to the absent provisions of the CJK-IT. It should be noted that this result is based only on simple comparison of the provisions and thus, leaves more thorough analysis and subsequent research to be desired.

Despite concerns over the KORUS, it seems unlikely that MFN treatment can be extended to the subsequent agreements. However, given the previous arbitration awards, it may not be excluded that MFN treatment of the KORUS

can be extended to different or absent provisions of subsequent agreements. Thus,it is advisable that new FTAs orBITs should be negotiated with more caution. It is required that MFN treatment effects from the KORUS

and the KC-FTA be considered in advance due to the so-called future MFN treatment. At the same time, new BITs should be carefully reviewed. Although most Korea's BITs are limited to investments in post establishment phase, some of their provisions are inclusive or absent in

the FTAs. Although it seems less likely, absent provisions can be included in the investor's claim for the investor-state dispute settlement. At the same time, inclusive language of BITs is often short and vague, which may lead to broad interpretation in the investor-state arbitration.