US Investment Treaties and Labor Standards

• Main Author: Kwan-Ho Kim
• Format: Article
• Language: English
• Published: Korea Institute for International Economic Policy 2006-06-01
• Series: East Asian Economic Review
• Subjects: Bilateral Investment Treaty; FTA; Race to the bottom; Labor Standards; Free Economic Zones
• Online Access: http://dx.doi.org/10.11644/KIEP.JEAI.2006.10.1.150

Korea and the United States declared the start of negotiations for the establishment of a free trade agreement. The FTA will include investment chapter. That means the Korea-US BIT (Bilateral Investment Treaty) talk, which has been deadlocked since 1998, resumes as a part of FTA negotiations. The FTA investment chapter will be based on the US model BIT, which has been updated in 2004. The updated BIT version includes labor clause which provides that parties should not weaken labor standards in an effort to attract foreign investment. This clause is grounded on the criticism raised by labor groups which asserts that competition among countries to attract foreign investment leads to bidding wars in labor standards. No solid evidence is found in support of the hypothesis that foreign investors favor countries with lower labor standards. Nonetheless, some countries have offered special incentives to investors that limit labor rights in the belief that doing so would help attract foreign investment, especially in export processing or special economic zones. In this regard, the Korea's Act on free economic zones which provides exceptional labor standards to foreign invested enterprise in those zones may become an issue in reaching the FTA. This article contemplates the "not lowering labor standards" provision in the US BIT model and its implications on the FTA talks with the US.