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North Korea: Witness to Transformation

China, Japan, Korea: Will History and Politics Trump Economics?

by | September 6th, 2012 | 07:00 am
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While in Korea and Japan several weeks ago, sparks flared not only over the  Senkakus/Diaoyu/Diaoyutai Islands and Dokdo/Takeshima but the highly emotional issue of comfort women. As a result, we are about to have one of those quasi-natural experiments that social scientists love. Will history and politics trump economics? Or will growing interdependence pull the parties back to their senses, as South Korea’s thoughtful finance minister, Bahk Jae-wan has recently argued they should?

To date, the political ups and downs have operated on a separate track from a quite significant—but largely unremarked–trilateral economic diplomacy. The parties have signed a trilateral investment treaty and are now talking seriously about a free trade agreement. Can it last?

The Trilateral Summit was set in train by the first “CJK” joint leaders meeting on the sidelines of the ASEAN + 3 meeting in November 1999. But it soon became apparent that the three major Northeast Asian powers were not going to be bound by the lowest-common-denominator politics of the ASEAN political structures.

The CJK leaders started by endorsing a joint investment framework. The first set of consultations around the Trilateral Investment Agreement took place in May 2005; formal negotiations were launched in January 2007. In December 2008, the CJK held their first leaders’ summit in Fukuoka in the wake of the financial crisis. Further summits followed in October 2009 (Beijing) and May 2010 (Jeju), where an MOU was signed on the establishment of a Trilateral Cooperation Secretariat as well as the launch of a study group on a CJK FTA. At the fourth summit in September 2011, the three countries actually launched the Secretariat in Seoul.

To be sure, some commentators have made a mockery of the diplomatic jockeying at the May summit.  And the risk of the politics undercutting the economics is real; according to the Wall Street Journal,  the Noda government was at least thinking about pulling back on a bilateral central bank swap agreement with South Korea in the wake of the Dokdo flare-up. But if you have a serious interest in the political economy of Northeast Asia, the 28-page Trilateral Investment Agreement is worth scanning. The agreement is not the TPP, but that is the point; the US is not the only game in town. The agreement is a serious effort, and the fact that it took a while to negotiate reflects that fact.

Some highlights:

Articles 1-4 and 22. The agreement does not conform with Ippei Yamazawa’s “Open Regionalism,” under which concessions are extended to outsiders. The only investments in the region that receive the protections of the agreement are those emanating from one of the three parties; an American firm with an operation in Japan is not covered, nor is that subsidiary’s investment in a branch in Korea or China. Article 22 (Denial of Benefits) goes so far as to specifically underscore the point. For these investments, the treaty aspires to national treatment (Article 3) and also MFN status (Article 4): investments from the three parties shall not receive explicit preference but neither shall they receive treatment any less favorable than those extended to either a contracting party or a non-contracting party.

Article 6. Investors will have access to the courts on standing no different than that accorded to domestic investors, a commitment that is far from uniform among the parties.

Article 7 prohibits performance requirements; this could affect Chinese policy in particular.

Article 9. Intellectual property rights commitments are limited; the agreement simply calls on each party to protect intellectual property in line with its own laws. Good luck with that.

Article 10. The transparency provision could matter; it calls on the parties to “promptly publish, or otherwise make publicly available, its laws, regulations, administrative procedures and administrative rulings and judicial decisions of general application.”

Article 11. The expropriation provisions appear weak to a Western eye but they do make reference to due process; again, good luck with that, but the normative commitment to principle is nonetheless of interest.

Article 12. The agreement appears to liberalize the capital account on all investment-related transactions, but with a major loophole with respect to “issuing, trading or dealing in securities, futures, options or other derivatives.” Article 19 also outlines the conditions under which countries can undertake “temporary safeguard measures” with respect to the capital account.

Article 15 outlines a complicated dispute-settlement process that begins with consultations but then allows the disputing party to choose from a menu of legal options that includes:

  • a competent court of the disputing Contracting Party;
  • arbitration in accordance with the ICSID Convention, if the ICSID Convention is available;
  •  arbitration under the ICSID Additional Facility Rules, if the ICSID Additional Facility Rules are available;
  • arbitration under the UNCITRAL Arbitration Rules or;
  • if agreed with the disputing Contracting Party, any arbitration in accordance with other arbitration rules.

The agreement does not create a unique CJK dispute settlement mechanism, but that is not necessarily bad if these organizational outsourcing options are available. Article 17 creates a similar arbitration process for disputes among the states parties.

It is wrong-headed to pooh-pooh the agreement as “shallow”; the point is that not everyone buys the US definition of a “high-quality agreement” and something far short of the TPP might still encourage investment and provide assurances. If CJK can reach agreement on an investment framework, is there any reason to think that they cannot produce their own kind of FTA? Or will history and politics get in the way?