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June 27, 2010

Obama Administration’s Renegotiation of Bush’s Korea FTA Must Also Fix Investment, Financial Services Terms

Statement of Lori Wallach, Director, Public Citizen’s Global Trade Watch Division 

If the administration wants to obtain broad support on what may well be its first trade vote, it will need to fix more than beef and auto trade problems. That’s because it has inherited a leftover Bush Korea trade pact text that includes the same outrageous foreign investor rights as North American Free Trade Agreement (NAFTA) plus the strongest dose of financial deregulation ever contained in a U.S. trade pact. Fixing the NAFTA-style investment chapter is critical because Korea is a capital exporter, the Bush text provides foreign firms operating here with greater rights than are provided under U.S. law and there are nearly 200 Korean firms already in the U.S. that would be empowered to attack our environmental, health, financial reregulation and other laws in foreign tribunals and demand taxpayer compensation. Fixing past U.S. trade pacts' overreaching foreign investor rights and their private corporate enforcement was among President Barack Obama's leading campaign trade reform commitments.

Background: The Bush-negotiated U.S.-Korea free trade agreement (FTA), more than other bilateral agreements, has been justified for its explicit role in pushing financial services liberalization (read: deregulation). As well, the agreement's investment chapter includes the private investor-state enforcement of an array of property rights that would provide Korea firms operating in the United States greater rights than provided to domestic firms and investors under U.S. law as interpreted by the U.S. Supreme Court. This is an especially critical problem given that Korea is a capital exporter and these extraordinary rights would apply to the nearly 200 Korea firms already established here. To date, Canada under NAFTA has been the only other developed, capital exporting country with which the United States has had such an investment agreement, and it has resulted in an array of challenges to U.S. environmental, health and other policies in foreign tribunals.

According to the Bush administration’s U.S. Trade Representative's office, "The Financial Services Chapter of the United States- South Korea Free Trade Agreement ("KORUS FTA") is a groundbreaking achievement, providing more extensive provisions related to financial services than ever before included in a U.S. FTA."  Citigroup's Laura Lane, corporate co-chair of the U.S.-Korea FTA Business Coalition, stated that "it is the best financial services chapter negotiated in a free trade agreement to date."

Indeed, the deal includes everything that's not to like about other Bush-negotiated FTAs, and then some. Like the World Trade Organization, Central America Free Trade Agreement and the Peru FTA, the Korea FTA commits its signatory countries to refrain from limiting the size of financial institutions, banning toxic derivatives, or controlling destabilizing capital flights and floods. It also includes similar "prudential measures" language that fails to protect financial stability measures.
But the Korea FTA doesn't stop there. In March 2006, prior to the formal U.S.-Korea negotiations, the Coalition of Service Industries (CSI) stated that one of its primary objectives in the negotiation related to data processing services: "Korean laws make it difficult for foreign companies to outsource and offshore activities. These laws often relate to privacy (private data protection law and real name law). These regulations should be modified to permit companies to follow their global operating models for outsourcing and offshoring provided they have existing practices to protect consumer information."
This gripe was echoed in the USTR's 2009 National Trade Estimate report: "Korea's strict data privacy rules require financial services providers to locate their servers physically in Korea, thus hampering foreign providers' ability to take advantage of economies of scale in the region to perform data processing in their daily business activity."

Corporations demanded, and corporations got. A provision unique to the Korea FTA reads: "Transfer of Information: Each Party shall allow a financial institution of the other Party to transfer information in electronic or other form, into and out of its territory, for data processing where such processing is required in the institution's ordinary course of business."

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