Laissez-faire international investor-state dispute resolution mechanism: the inadequacy of adopting U.S. legal standards for the KORUS FTA.(Free Trade Agreement, 2003, United States-South Korea)

 I.    INTRODUCTION                                     500  II.   The Korea-United States FRee Trade Agreement     501        A. Overview of the KORUS FTA                     501       B. Economic Analysis of the Agreement            502         1. The Goals of the Agreement                  502         2. Shifting Trade and Investment Landscapes    503         3. Non-Tariff Trade Barriers--Antidumping and  505       C. Non-Economic Issues                           507         1. Political Hurdles                           507         2. Adopting the U.S. Legal Framework           508         3. Applying the U.S. Based Legal System        509         D. Basic Legal Structures of the Final Text    511  III.  Investor-State Dispute Resolution                512          A. Traditional Dispute Resolution Paradigm     512         B. The KORUS FTA Dispute Resolution Mechanism  513           1. Dispute Resolution Claim Procedures       513           2. Fair and Equitable?                       514             a. Civil vs. Common Law                    515               i. Lessons from the NAFTA                516               ii. Binational Panel System              517             b. National Policy Implementation Defects  518             c. Unilateral Determination                518             d. Culture and Sovereignty                 519  IV.   New Paradigm: Laissez-Faire Mechanism            520          A. Present Alternatives                        520         B. A Call for a New Paradigm                   521  V.    CONCLUSION                                       523 

I. Introduction

After eight formal rounds of negotiation, the United States and the Republic of Korea finally composed a historic free trade agreement on April 1, 2007. (1) The shared goal of this trade agreement is to promote economic growth and strengthen ties between the United States and Korea. (2)

It remains uncertain how the recently concluded Korea-United States Free Trade Agreement (KORUS FTA) will mold the post-KORUS FTA legal framework for U.S. investors operating in Korea. Furthermore, it continues to remain uncertain how much due process protection the framework actually would provide during legal disputes between Korean and U.S. investors. At a more basic level, the core issue becomes whether the KORUS FTA truly will provide neutral, non-biased dispute resolution mechanisms to both the United States and Korea.

The core of the uncertainty revolves around the inherent unfairness that comes from adopting a unified legal system for two fundamentally different, nations. Adopting a unified legal system in dispute resolution mechanisms is inherently unfair because even when both parties agree on the substantive law, procedural, historical, ethical, cultural, and public policy concerns still work against one party while benefiting the other. While one can argue that selecting a certain form of dispute resolution mechanism is a product of compromises on behalf of both parties, the reality is often that it is a product of power-imbalance.

This Note will first describe the background of the KORUS FTA and the basics of its investor-state dispute resolution mechanism. After laying out the basics, the Note will list the inadequacies of the mechanism from legal, cultural, and political standpoints. After explaining these inadequacies, the Note will then present possible mechanisms that could lead to the much-needed new paradigm in international dispute resolution mechanisms. Finally, the Note will explain how taking a laissez-faire approach in shaping a new paradigm in a dispute resolution mechanism is a preferable choice.

II. THE KOREA-UNITED STATES FREE TRADE AGREEMENT

A. Overview of the KORUS FTA

After half a century of alliance, the United States and Korea signed a free trade agreement, "a milestone in the enduring economic and security alliance between the United States and Korea." (3) U.S. Trade Representative Susan C. Schwab and Korea's Trade Minister Kim Hyun-Chong signed the Agreement in the Cannon House Office Building on Capital Hill. (4)

The United States expects the Agreement to bring trade advantages by lowering Korea's high tariff measures, while strengthening its security alliance with the military hub of East Asia. (5) Korea has two main reasons for entering into the Agreement. (6) First, after the formation of the European Union (EU) and the North American Free Trade Agreement (NAFTA), Korea felt the need to participate in global trade networking in order to secure its current export market. (7) Second, as regionalism (8) becomes the dominant trend in the global economy, Korea strategically is liberalizing its trade by forming various trade alliances. (9) So far, Korea has signed free trade agreements (FTA) with Chile (April 2004), Singapore (March 2006), the European Free Trade Association (EFTA) (September 2006), and nine of the ten members of the Association of Southeast Asian Nations (ASEAN) (June 2007). (10) Judging by both the political and economic impact, the Agreement with the United States is by far the biggest task in Korea's Global FTA Network project. (11)

B. Economic Analysis of the Agreement

1. The Goals of the Agreement

One of the main free trade agreement goals of both the United States and Korea is promoting bilateral trade flows. (12) To achieve this goal, the KORUS FTA will eliminate tariffs and other barriers in the trade of goods and services between the two countries. (13) Once ratified by the Congress of both countries, the trade agreement is designed to make nearly 95 percent of bilateral trade of consumer and industrial products duty-free within three years. (14) In ten years, the Agreements will eliminate virtually all tariffs on goods and services traded between the United States and Korea. (15)

Theoretically, the Agreement would yield great benefits to both consumers and the economy as a whole. According to the Korea Institute for International Economic Policy (KIEP). the Agreement is expected to boost Korea's economic growth by 0.6 percent annually over the next ten years. (16) KIEP also expects that the KORUS FTA will boost consumer benefits by two trillion won (US$1 - W1117.80 (17) ). (18) Furthermore, "the absolute welfare gains are expected to be evenly allocated across both economies, in the range of $1.5 billion to $8.9 billion for the United States and $1.7 billion to $10.8 billion for Korea." (19)

Although many are skeptical about the accuracy of the potential monetary benefits, the Agreement's overall economic benefits are not widely disputed. At the micro-level, however, both nations are carefully watching the new balance in their post-FTA trade positions and its effects on individual industry groups. (20) The effects on individual industries, such as agriculture and poultry, are the key issues that the United States and Korea need to resolve in order for the Agreement to be ratified. (21) Once ratified, the FTA significantly will change trade and investment landscapes and, at that point, the potential harm to the above problematic industries will not outweigh the security and economic importance of this trade pact. (22) However, due to their highly political nature, the leaders of both countries are constantly requesting modification of the Agreement's terms. (23)

2. Shifting Trade and Investment Landscapes

The KORUS FTA signifies a huge shift in the trade and investment landscape between Korea and the United States. Korea is the world's tenth largest economy, generating nearly $1 trillion and importing $248 billion worth of goods every year. (24) It is also the seventh largest goods trading partner and the seventh largest export market for the United States. (25) On the other hand, the United States is Korea's second largest trading partner. (26) It supplies 13 percent of Korea's imported goods and accounts for 17 percent of Korea's exported goods. (27)

The KOEUS FTA may induce a large gain on the overall size of the bilateral trade volume between the two countries, but the Agreement would require harsh adjustments for individual industry groups. (28) For example, by eliminating tariffs, the Korean government practically is abandoning its agricultural and fisheries industries and replacing them with those from the United States. (29) Over the next fifteen years, Korea's agricultural production will decrease by ten trillion won due to the massive influx of cheap U.S. agricultural products. (30) Similarly, "the production of the Korean fisheries industry will decrease by 420 billion won during the same period." (31)

This shift in trade became the center of debate in Korea because abandoning the farming and fishery industries signifies more than a simple reduction in capital gains. (32) Many economists and social scientists have pointed out that hidden costs exist when a nation loses self-reliance in core industries. (33) As a part of those hidden costs, Koreans fear that losing its food autonomy will harm the nation's sovereignty. (34) Despite the fear of potential harm to national sovereignty, agricultural trade is a key component of the Agreement, which Korea cannot waive in order for KORUS FTA to have any meaningful welfare gains. (35) According to the first joint Korea-U.S. study of a potential FTA by Choi and Schott, "potential gains of KORUS FTA would be more than halved for both economies" if the Agreement excluded agricultural trade. (36) The study found that:

   [T]he net welfare gains from an FTA would range from 0.02 to 0.13   percent of GDP for the United States and from 0.4 to 2.4 percent of   GDP for Korea. For the United States, most of the gains derive from   export expansion into the Korean market. For Korea, the largest gams   come from using Korean resources more efficiently and replacing   inefficient domestic production with imports. (37) 

In sum, at least theoretically, the initial pain of opening …