By Prof James Claxton, Prof Luke Nottage & Dr Brett Williams*
The following guest blog derives from a project on Asia-Pacific international business dispute resolution funded jointly over 2019 by the University of Hong Kong and the University of Sydney. It will be tabled at a second symposium on 15 November. Versions are also published by Kluwer Arbitration Blog.
- Introduction: complex multi-faceted tensions
- A media and geopolitical storm recently erupted after Japan introduced measures affecting exports to the Republic of Korea (Korea). Thunder sounded with Japan’s imposition of certification requirements on three chemicals needed by South Korean companies to make semiconductors, memory chips and displays for consumer electronics (the 4 July Measure). This was followed by lightning and rain when Japan removed Korea from its “white list” of trusted trading partners (the 2 August Measure), then threats by Seoul to retaliate by reducing military-intelligence cooperation and imposing countermeasures on trade. The growing geopolitical tempest has brought about the worst breakdown in cross-border bilateral relations in five decades, generating both regional and global ramifications.[1]
- Differing rationales for the geopolitical storm have been given. The Japanese government[2] and media[3] tend to emphasise security concerns, namely on-shipments of such chemicals with potential military applications to North Korea, violating multilateral sanctions. The South Korean government[4] and media,[5] as well as some international news outlets,[6] have often placed more emphasis on the possibility of Japan “retaliating” for an October 2018 judgment of the Supreme Court of Korea. That decision upheld lower court judgments from 2014 finding major Japanese companies, such as Nippon Steel, liable to compensate claimants alleging that they were forced labourers for the Japanese companies during World War 2. The companies, and the Japanese government, have argued that such claims were precluded by a bilateral treaty signed in 1965 to restore diplomatic relations.[7] (Interestingly, similar claims and defences under a different bilateral instruments have been raised before Japanese courts by Chinese war-time labourers, generating a settlement with Nishimatsu group companies.[8]) A few media reports also speculated that Japan introduced export restrictions affecting Korea to bolster the appeal of the Abe Administration in upper House of Councillor elections,[9] but it secured another solid victory anyway.[10] Some media sources also suggest that populist Korean President Moon Jae-in may be “playing to the base” too in domestic politics.[11]
- Introducing trade-restrictive measures, however, raises the potential for Korea to complain before the World Trade Organization (WTO). It brings to mind the claim successfully brought by the Obama Administration against China over 2012-14, resulting in China removing export duties and quotas imposed on rare earths, for which it similarly controlled almost all world trade. However, the general exceptions China failed to establish in that case, under Article XX of the General Agreement on Tariffs and Trade (GATT), dealt with health and conservation of natural resources.[12] By contrast, Japan here could be expected to raise national security exceptions under Article XXI. There are even greater differences from a procedural perspective, which we focus on below. If indeed Korea files a formal complaint and an ad hoc panel rules against Japan, this would only come by next year at the earliest. By then the Appellate Body will lack sufficient members (full-time “judges”), due to the Trump Administration blocking new appointments until its concerns about dispute resolution and other aspects of the WTO system are adequately addressed.[13] Accordingly, Japan could appeal any panel decision allowing retaliation for any GATT violations found, and then never come under pressure to remove or adjust its measures against Korea.
- The situation becomes even messier when we consider below [[in Part 3]] other potential inter-state dispute resolution processes. Japan could seek arbitration under the 1965 treaty, but that effectively requires the counterparty to provide further consent, which Korea does not seem to want to do. Japan might also consider litigating the treaty before the International Court of Justice (ICJ). Another option is to invoke inter-state arbitration under the Japan-Korea bilateral investment treaty (BIT) in force since 2003, and/or a trilateral investment treaty in force from 2014.[14] However, it may be difficult to prove that the Korean court judgments involved a procedural defect or discrimination towards the Japanese companies creating a denial of justice, contrary to the relevant treaty.
- A further possibility, mentioned so far only in a very few media reports but also sketched below [[in Part 4]], is that the companies directly initiate investor-state dispute settlement (ISDS) claims, as provided by both investment treaties in lieu of inter-state arbitration. This could theoretically include an application to the ad hoc arbitration tribunal to issue interim measures preventing enforcement of the Korean Supreme Court ruling, until the tribunal had finally determined claims such as denial of justice.
- A major problem for the Japanese companies is that this means they would have to fork out tribunal, lawyer and expert witness fees – often hefty, even if the claim ultimately succeeds.[15] A major problem for the Japanese government, in turn, is that ISDS claims brought by the companies would likely further incense not only the current Korean government, but also some groups within Korean society (including an association of judges).[16] They and the then opposition party became critical of ISDS especially as it was negotiated into the Korea-US Free Trade Agreement (KORUS), brought into effect from March 2012, and as the first-ever treaty-based claim was brought against Korea from late 2012 by a Belgian subsidiary of US-based Lone Star.[17] One Australian NGO even interprets a recent Korean newspaper report of current Prime Minister Lee Nak-Yeon as suggesting that Korea may “abolish” ISDS.[18] More likely he was signalling the need for further rethinking of Korea’s investment treaty policy and practice, which has anyway been evolving (eg regarding ISDS transparency).[19] But an ISDS claim by Japanese companies and/or an award favouring Lone Star would further inflame simmering political tensions, especially as this year another US investor (Gale) has filed a notice to initiate ISDS regarding a development in Incheon,[20] while Chinese and now Malaysian investors have filed notices regarding projects on Jeju Island.[21]
- As we conclude [[in Part 5]], given this complex set of potential claims across multiple forums, the best way forward seems to be a negotiated overall settlement, perhaps facilitated by formal mediation.
