March 2012 | International Trade and International Arbitration Alert

Korea-U.S. Free Trade Agreement Enters Into Force

5 min

The Korea-U.S. Free Trade Agreement (KORUS) between the United States and the Republic of Korea entered into force on March 15, 2012.  The Office of the United States Trade Representative (USTR) has described KORUS as “the United States’ most commercially significant free-trade agreement in almost two decades.”  The text of KORUS is available here.

As discussed in more detail below, KORUS contains important chapters on the free trade of goods, services and investments.  Clients should be aware of these and other provisions of KORUS, which expands business opportunities and investor rights in the United States and the Republic of Korea.

Trade Provisions

KORUS contains important provisions intended to increase the free trade in goods and services between the United States and Korea, the world’s 12th largest economy.  To that end, pursuant to the treaty, on March 15, 2012 approximately 80% of consumer and industrial exports from the United States to South Korea became duty-free.  Further, the treaty eliminates tariffs on 95% of bilateral trade in consumer and industrial products within five years.  In addition to tariff reductions, KORUS eliminates or restricts many non-tariff barriers for both goods and services.  KORUS commits to broad market access for services in many economic sectors, including, but not limited to: energy, entertainment, audio-visual, healthcare, financial services, insurance, professional services (e.g., legal, accounting), distribution, express shipment and telecommunications.  Given Korea’s $580-billion services market, broad market access thereto is especially important for U.S. service providers. 

KORUS provides many benefits to U.S. manufacturers, service providers and exporters to further trade in goods and services between the two countries.  These include, but are not limited to:

  • Granting exported goods from one State national treatment in the other State;
  • Restricting non-tariff barriers to trade;
  • Granting national treatment and most-favored-nation treatment to many service providers from the other State;
  • Adjusting Korean automotive-safety and environmental standards to allow U.S. auto companies more access to the Korean market;
  • Eliminating tariffs, or duties, on goods in the aerospace, automotive, consumer, electronic, metals, scientific equipment, shipping and transportation equipment, and other industries;
  • Opening the cross-border trade in services in sectors like energy, environmental services, financial services, distribution, telecommunications and electronic commerce;
  • Reducing or eliminating tariffs on agricultural products and addressing non-tariff barriers to trade in agricultural products;
  • Establishing strict protections of intellectual property rights and creating a transparent, rules-based dispute settlement regime to encourage U.S. exports; and
  • Reducing barriers to bidding on government contracts.

Investment Provisions

KORUS contains an entire chapter (Chapter 11) guaranteeing basic protections to investments of U.S. nationals in the Republic of Korea and vice versa.  It also grants investors a right to commence arbitration against the host State in the event of a dispute arising out of an investment. 

Standards of Treatment Guaranteed to Investments

KORUS broadly defines the types of investments that are protected as “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk,” and includes a series of examples. 

KORUS protects not only the investors of the other country, but also a business entity incorporated in the host State whose shareholders or members are nationals of the other country.  With this clarification, Korea and the United States have chosen to avoid a prominent debate seen in investment-arbitration jurisprudence, which has vacillated in permitting companies incorporated in the host State from being claimants in investment arbitrations against the host State.

The standards of treatment of investors in KORUS are similar to those provided in NAFTA, but KORUS expands and clarifies certain substantive rights.  Here are some of the substantive protections that covered investments have:

  • Minimum standard of treatment, defined as the same standard of treatment as required under customary international law, including fair and equitable treatment of investments; 
  • Most-favored nation treatment, which requires the host State to grant to nationals of the other party treatment not less favorable than it grants to investors of other countries;
  • Protection against expropriation and compensation based on fair market value;
  • Prohibition against imposition of barriers to repatriating capital, dividends, and other types of payments;
  • Prohibition against performance requirements, such as commitments to export certain percentages of goods or services, to achieve a certain level or percentage of local content, or to transfer a particular technology or process, among others; and
  • Prohibition against requirements that the board of directors or senior management of an enterprise in the host State be nationals of the host State.

Article 11.12 provides for a system of non-conforming measures that are grandfathered and therefore not subject to challenge under KORUS.  In Annexes I, II and III, each country provides a list of the non-conforming measures for services, investments and financial services that are not covered by some or all of the investment protections created by KORUS.

Right to Arbitrate

Like NAFTA, DR-CAFTA, and many bilateral investment treaties, KORUS grants U.S. and Korean investors in the territory of the other State the right to arbitrate investment claims against the host State.  Thus, a U.S. party whose investment has been harmed by the Korean government’s breach of the treaty can commence an arbitration against Korea.  Korean investors in the United States have the same right to arbitrate against the United States.

After a waiting period of six months from the time that the dispute arises, an investor can file a claim against the host State for violating the standards of treatment discussed above.  The claim can be filed with the International Centre for Settlement of Investment Disputes (ICSID), established by the ICSID Convention of 1965, to which both the United States and the Republic of Korea are parties.  An investor can also choose to commence an ad hoc arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL) or, if the State agrees, can file a claim with any other arbitration institution or under any other arbitration rules.

Additional Information

For more information on how KORUS might affect your business in the cross-border trade of goods or services, please contact a member of Venable’s International Trade and Customs Group.  For more information on the investment protections in the treaty, including the right to arbitrate against a host State, please contact a member of Venable’s International Dispute Resolution Group.