Preparing to make a competent caseU.S. private equity fund Lone Star filed for arbitration with the International Center for Settlement of Investment in Washington against the Korean government for “unlawful interference” in its act as major shareholder of Korean companies. It claimed that it lost around 2 trillion won ($1.84 billion) because the government blocked and stalled its sales of stake in the Korea Exchange Bank and slapped discriminative taxes on the sales.
In a statement, the Dallas-based fund said it formally filed for damages to the Korean government in May 2012 but that it decided to seek international arbitration for its claims because it could not reach “an amicable resolution to the dispute.” An investor-state dispute (ISD) settlement allows foreign company to seek international arbitration against a state in case of losses from violation of international investment treaty obligations. The cause had been the center of controversy and cause for strong opposition to the Korea-U.S. Free Trade Agreement that took effect in March.
Critics of Korea-U.S. FTA may jump on the chance to renew negative campaign against the free trade deal because Lone Star largely regarded here as a predatory fund invoked the contentious clause. But it is not the case. The critics that opposed the Korea-U.S. FTA and the main opposition Democratic United Party that vowed to kill the free trade pact if it gains ruling power still remain silent on the Lone Star’s move. That’s because the American equity firm’s motion in fact undermines their reasoning to oppose the free trade arrangement. Lone Star which bought the KEB stake through a Belgium vehicle filed arbitration treaty between Korea and Belgium instead of one between Korea and the U.S. The investment arbitration settlement clause is included in most free trade and investment treaties, and foreign investors can file lawsuits against Korea or any other state for any investment losses. It is not a unique clause in the Korea-U.S. treaty, but a common practice and term in global trade to protect investors.
Most of around 2,800 bilateral investment treaties describing terms and conditions for private investments by nationals and companies of one state in another require international arbitration in case of violation of the terms. All of the seven free trade pacts and 81 bilateral investment treaties Korea signed include the ISD clause. It proves how poor the logic by the opponents of the Korea-U.S. FTA has been to oppose to the bilateral treaty largely because of the dispute clause.
The opposition parties and critics should stop dragging the ISD clause to oppose to the FTA. Instead, they should contribute wisdom in ways to capitalize on the benefits from the free trade agreement. The government which faces its first investment dispute trial should prepare well to make a competent case. The ISD serves to protect investors and prevent abuse of investment treaties and we will likely to see its service much more due to reciprocal investments in globalized world.