ISD clause essential part of FTA
As usual, the United Nations Conference on Trade and Development (UNCTAD) XIII and its World Investment Forum in Doha, Qatar two weeks ago provided new insights and directional guidelines for cross-border investment in a rapidly changing global investment landscape.
The conference addressed how to promote investment, trade, entrepreneurship, and development policies to foster sustainable and inclusive economic development.
The conventional pattern of major investment flows from the North to the North has declined substantially due to uncertainties in advanced economies and the sovereign debt crisis in southern Europe.
For the first time, emerging and transition economies together attracted more than half the global FDI flows and also shared nearly 30 percent in global outbound flows in 2010, indicating that emerging economies have been leading not only global economic recovery but also global investment flows.
The first important message from the UNCTAD XIII meeting was that multinational investors are strongly urged to generate balanced and inclusive development to embrace the need for less developed nations.
The sovereign wealth funds of Gulf States are encouraged to contribute to inclusive and sustainable development as well. Also many multinational companies from emerging markets are investing in other emerging markets where economic recovery is strong and the economic outlook is better.
Large state-owned enterprises from the BRIC countries have become especially important investors due to their rapid economic growth, abundant financial resources and strong motivation to acquire resources and strategic assets abroad.
The growing importance of global value chains and the emergence of non-equity modalities of international production such as contract manufacturing and service outsourcing have also been acknowledged as raising more complicated policy challenges.
Another key issue was about growing investor-state disputes (ISD) arising from rapidly proliferating bilateral and international investment/taxation treaties. Currently, there are about 6,000 bilateral investment-related treaties worldwide and they have produced an increasing number of treaty-based investor-state disputes.
In fact, the highest number of new treaty-based ISD cases — 46 — were filed under International Investment Agreements (IIA) in 2011, with all known cases by year end totaling 450.
How to handle ISDs remains a critical challenge in promoting cross-border investment. Arbitral tribunals often disagree on clauses in core bilateral investment agreements.
As a result, investors increasingly use IIAs to challenge host states’ regulations on key public policies. ISDs largely occur with differing interpretations of treaty clauses defining covered investments, the fair and equitable treatments standard or treaty-based emergency exceptions.
A number of UNCTAD member countries expressed keen interest in the ombudsman system. And 12 of the member countries had actually sent high-ranking government officials to Korea a couple years prior to that to see how our Ombudsman’s office and aftercare service work.
The recent Doha Ministerial Roundtable confirmed once again that the world is interested in our system. Russia announced it introduced an ombudsman system to attract FDI.
The Brazilian panelist expressed his country’s intention to emulate the system. And the UNCTAD seminar report pointed out that Korea has 95 bilateral treaties but not a single ISD case due largely to Korea’s foreign investment ombudsman system.
Korea’s opposition parties have made the ISD clause of the KORUS FTA a major political issue by claiming that multinational companies may jeopardize the country’s sovereign judicial right.
But we must remember that an ISD clause is a standard part of bilateral agreements and even necessary to protect Korea’s outbound FDI.
Ahn is also foreign investment ombudsman at Korea Trade-Investment Promotion Agency (KOTRA).