U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

Section C of the chapter contains definitions of terms and relevant conventions for use in the
resolution of investment disputes. Annex 11-A defines “customary international law” for
purposes of the chapter, while Annex 11-B deals with expropriation (direct and indirect) in
some detail. To be considered expropriation, a party’s action or series of actions would be
required to interfere “with a tangible or intangible property right or property interest in an
investment.” Under a side letter to the FTA, the parties would agree that such property rights
would include rights under contract and all other property rights in an investment, as defined
in Article 11.28. Other annexes deal with the service of documents in such matters and the
establishment of a possible future appellate body.
Annex 11-E —known as the “fork in the road provision”—would require a U.S. investor to
choose to pursue an investment claim either in the Korean court system or under the FTA’s
investor-state dispute settlement process. Annex 11-F deals with taxation and expropriation.
Specifically, the annex lists factors to be considered in determining whether a taxation
measure can be considered an expropriation, clarifying that most tax measures are not
instances of expropriation. Annex 11-G lays out the conditions under which Korea could
restrict capital transfers through its Foreign Exchange Transactions Act, so that those
restrictions will not be subject to dispute settlement through arbitration.
Nonconforming Measures Related to Investment
Provisions for the treatment of existing or future measures that are inconsistent with the
agreement’s investment disciplines are included in each party’s Annexes I, II, and III of the
FTA. Annex I lists exemptions for existing laws or regulations, maintained at the central or
regional government level, that might violate the provisions of the agreement. NCMs at the
local government level would be exempted without requiring any notation in an annex. 45
Annex II lists reservations to ensure that a party maintains flexibility to adopt or maintain
measures that would be inconsistent with FTA disciplines. The actual content of the
reservations in Annexes I and II varies widely. Some reservations are horizontal in nature,
meaning that they address general policy provisions that affect all investment, whereas others
only apply to investment in specific industries. Annex III lists NCMs specific to financial
services relating to both existing and potential laws and regulations. 46
Korea has not included any investment-related horizontal reservations under Annex I. Five
horizontal reservations (reservations that pertain to investment in any sector) are listed by
Korea under Annex II. Under the first, Korea would reserve the right to adopt any measure
deemed necessary for the maintenance of public order, provided that such measures are
applied in accordance with Korean law, and not applied in an arbitrary manner or as a
disguised restriction on investment. The second reservation states that Korea would be able
to impose any measure related to the transfer or disposition of equity interests or assets held
by state-owned enterprises or governmental authorities. The third reservation specifies the
conditions under which foreign persons would be permitted to purchase land. In particular,
Korea would reserve the right to adopt any measure related to the acquisition of farmland
by foreign persons. The fourth reservation would accord differential treatment to countries
that have signed any other bilateral or multilateral international agreements with Korea, prior
to the entry into force of the U.S.-Korea FTA, and specifically those agreements involving
45 USTR, “Final - United States - Korea FTA Texts,” 2007, Article 11.12(1)(a)(iii).
46 Annex III is discussed in app. I, in the discussion of financial services.
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