The “‘trade-related” conundrum of the EU–Korea FTA Expert Panel: Are FTAs a novel forum to enforce sustainable development goals?

On January 20, 2021, a Panel of Experts established under the EU–South Korea Free Trade Agreement (FTA) found that South Korea was in breach of the FTA’s sustainable development chapter. Under Article 13.4.3 of the agreement, the EU and South Korea “commit to respecting, promoting and realising” fundamental labour rights, including the freedom of association, “in accordance with the obligations deriving from membership of the [International Labour Organization] ILO.”[1] The EU–Korea agreement is a new-generation FTA that includes a unique dispute settlement mechanism: following a 90-day consultation period, the parties may file a complaint to an ad hoc panel determining a potential breach of the FTA’s sustainability chapter. In line with the EU’s novel approach to promoting its sustainable development agenda with trading partners, the EU filed a complaint that Korean labour laws were inconsistent with Article 13.4.3 of the FTA.[2] In the recent Panel of Experts’ report, the three panellists adjudicated two sets of EU claims: firstly, that Korean legislation does not adhere to the minimum standards of freedom of association as expressed in the ILO Constitution, and secondly, that Korea has not made continued and sustained efforts to ratify the ILO Conventions on the freedom of association (Conventions 87 and 98), as specified in the agreement.

The decision created waves among practitioners and academics alike as it amounted to the EU’s first victory in challenging the Trade and Sustainable Development (TSD) obligations of a contracting party under the FTA dispute settlement mechanism.[3] The lack of freedom of association rights under Korean legislation has been on the EU Members’ radar for quite some time, as similar concerns surfaced during Korea’s accession process to the OECD.[4] The EU–Korea FTA provided a forum through which the EU could voice these concerns and subsequently challenge Korean labour laws by subjecting them to international review. The panel held that Korea was in breach of Article 13.4.3, as its domestic labour legislation fails to grant certain collective bargaining rights and the freedom of association in accordance with ILO standards as reflected in the core conventions. Strikingly, the panel held that the EU’s claims regarding Korean domestic labour laws were well-founded despite having no connection to trade under the FTA.

This article unpacks the panellists’ decision and draws parallels to the only other decision concluded concerning labour commitments under an FTA: Guatemala – Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA–DR. This article examines the Panel of Experts’ procedures and the issues arising with respect to FTAs as a source of future litigation to enforce sustainability objectives. These considerations are also relevant with respect to international investment agreements and FTAs including investment chapters. Increasingly, labour issues are addressed not only in FTAs but also in international investment agreements.

A summary of the Panel of Experts’ report

The panellists firstly uphold their jurisdiction over the EU’s claims

The scope of the sustainable development chapter reads as follows: “Except as otherwise provided in this Chapter, this Chapter applies to measures adopted or maintained by the Parties affecting trade-related aspects of labour.”[5]

The panel rejected Korea’s position that the claims brought by the EU have no connection to trade under the EU–Korea FTA (i.e., they are not “trade-related”) and fall outside the scope of the agreement. The panel read that the commitments of the parties to respect, promote, and realize fundamental labour rights assumed under Article 13.4.3 represented an exception to the “trade-related” requirement, as determined by the phrase “except as otherwise provided in this Chapter.” According to the panel, obliging a contracting party to adhere to fundamental ILO labour standards only for some sectors that are related to trade with the EU “is clearly antithetical to the unambiguous meaning” of the labour rights embedded in Article 13.4.3.[6] For example, Article 13.4.3(c) refers to the obligation to eliminate all forms of forced labour and not simply within particular sectors.[7] The interpretation was justified through an a contrario comparison of Articles 13.4.1 and 13.4.2 and through a broader reading of the object and purpose of the agreement.[8] The object and purpose of the EU–Korea FTA was interpreted as not simply to facilitate the free flow of trade under equally competitive conditions (as was interpreted to be the object of the CAFTA–DR by the panel in Guatemala), but rather the parties’ national labour laws adhere to the standards enshrined in the parties membership obligations to the ILO.[9] The panel emphasizes that the FTA was constructed so as to provide a strong connection between trade and the promotion of fundamental labour rights, and concludes: “national measures implementing such rights are therefore inherently related to trade as it is conceived in the EU–Korea FTA.”[10]

The panel’s approach differs from the arbitral panel’s decision of Guatemala in a dispute between the United States and Guatemala.[11] Here, the phrase “in a manner affecting trade” of the CAFTA-DR was interpreted as a narrow requirement that must confer a competitive advantage on the employer or enterprise engaged in trade with the parties to the FTA.[12]

The EU’s first set of claims that the Korean Trade Union and Labor Relations Act (TULRAA) fails to adequately ensure the freedom of association

The panel firstly determined whether Article 13.4.3, in which the contracting parties “commit to respecting, promoting and realising, in their laws and practices, the principles concerning the fundamental rights, namely: (a) freedom of association and the effective recognition of the right to collective bargaining” amounted to a legally binding obligation to implement the principles of freedom of association as expressed in the ILO core conventions (87 and 98). Despite Korea’s lack of ratification of these conventions, “the principles concerning the fundamental rights” was understood in the context of the labour obligations expressed in the ILO Constitution (arising from ILO membership obligations).[13] According to the panel, the parties’ membership of the ILO creates an obligation to adhere to the principles of the freedom of association as explained by the ILO supervisory bodies and the ILO Committee on Freedom of Association (CFA).[14] Furthermore, the panel held that the term “commit” provides for the legally binding link with these fundamental principles, rather than being a purely aspirational term.[15]

In examining the freedoms of association granted under Korean national employment legislation, the TULRAA, the panel upheld three of the EU’s four claims. The following provisions of the TULRAA were found to be inconsistent with the fundamental principles concerning freedom of association as embedded in Article 13.4.3:

  1. The legal definition of “workers” under Article 2(1) of the TULRAA fails to encompass self-employed, dismissed, and unemployed persons, who are therefore not permitted to enjoy freedom of association rights.
  2. Article 2(4)(d) of the TULRAA disallows non-workers (dismissed, unemployed, and self-employed persons) to join a trade union.
  3. Article 23(1) of the TULRAA only permits members of the trade union to be elected as trade union officials, ex officio excluding non-members and prohibiting full freedoms in electing trade union officials.

However, the EU failed to demonstrate that the discretionary certification procedure for the establishment of a trade union under the TULRAA results in “an impermissible constraint on the free formation of trade unions.”[16]

The EU’s second claim concerning Korea’s ratification of the ILO Conventions

The EU also contended that Korea failed to “make continued and sustained efforts towards ratifying the fundamental ILO Conventions” in compliance with the last sentence of Article 13.4.3. Despite the panel’s remarks that the proposed bills to ratify only three of the ILO core conventions in Korean Parliament in 2019 was “less-than-optimal,” they concluded that these endeavours did not fall below the legal standard of making “continued and sustained efforts.”[17]

The institutional mechanism of the Panel of Experts

The establishment of an Expert Panel under an FTA is an innovative institutional mechanism to enforce TSD provisions.[18]  Both parties to the dispute select one expert panellist, while the two appointed co-experts select a chairperson.[19] Laurence Boisson de Chazournes was appointed by the EU, Jaemin Lee was appointed by Korea, and these experts selected Jill Murray as the chairperson. A key task of the panel is to “seek the advice of the Domestic Advisory Groups [DAGs] and competent international organisations.”[20] DAGs are set up under the EU–Korea FTA. They “comprise independent representative organisations of civil society in a balanced representation of environment, labour and business organisations,” and provide advice concerning the implementation of TSD provisions.[21] The panel also refers to the general principles of the ILO Committee on Freedom of Association’s Compilation of Decisions in its interpretation of the fundamental principle of the freedom of association.[22]

The decision rendered by the panel adopts the form of recommendations, and the parties must “make their best efforts to accommodate advice or recommendations of the panel of experts.”[23] The decision rendered by the panel is not legally binding, nor can the EU suspend their tariff concessions if the recommendations are not implemented.[24] In this respect, this mechanism differs from the U.S. approach to enforcing TSD obligations within its FTAs. For example, parties to the KORUS (the South Korea–U.S. FTA) can impose trade sanctions or fines when TSD obligations are breached.[25]

Despite the non-legally binding nature of the decision, a Committee on Trade and Sustainable Development, which is established under Article 15.2(1)(e), monitors the implementation of these recommendations.[26] It is therefore too soon to say whether the non-legally binding Trade and Sustainability Chapter of the EU–Korea FTA can succeed despite lacking teeth, as the decision exerts pressure on the parties to comply with the recommendations. On February 26, 2021, the South Korean government proposed bills to ratify the ILO conventions pertaining to the freedom of association.[27] Recent panel decisions such as the one established under the EU–Korea Panel FTA signal the development of a new practice in which policing sustainable development objectives is outsourced to ad hoc panellists under “a special sui generis arbitration system.”[28]

Looking Ahead: What does the decision mean for FTAs with trade and sustainability obligations?

The panel’s report represents a landmark in its suggestion that trade and fundamental labour rights are intrinsically linked: unlike the Guatemala decision, no competitive advantage for the parties or impact on trade is examined. A new practice is thereby created in which the review of Korean labour legislation is outsourced to three panellists by virtue of an FTA regardless of its relationship with trade. Some commentators have suggested that “the panel has mistaken its role as arbiters under trade agreements as ILO enforcers.”[29] In contrast, the narrow approach taken in the Guatemala decision was criticized by senior politicians and trade unions representatives for making such labour provisions “unworkable.”[30] For example, the Guatemala decision has shown that the evidence required to prove the competitive advantage conferred upon the employer engaged in trade under the FTA is a significant hurdle for claimants.[31]

The Korea panel decision shows this ongoing tension between upholding sustainable development goals in exchange for market access via FTAs on one hand, and the resulting convergence of employment standards on the other. The panel had, however, rejected Korea’s concerns that its reading results in a harmonization of labour standards, but rather that the parties intended to set a common “floor” of universal labour rights inherent in the FTA’s obligations to be members of the ILO.[32]

The panel report feeds into a larger discussion on the role of FTAs in enforcing labour provisions. While TSD obligations in trade agreements are a significant step in promoting sustainable development goals, including the legislative freedoms of association, the lingering question is whether or not dispute settlement processes under FTAs or investment agreements are the way forward as opposed to strengthening other multilateral processes and institutions, such as the ILO. As long as such developments do not materialize, the political constituencies in major powers such as the United States and the EU will continue to push for including these types of mechanisms in trade and investment agreements.

From a policy perspective, the panel seems to have found itself caught between a rock and a hard place: the rock being encroachment on domestic legislation by large Western trading partners; the hard place resembling the pressing need to promote sustainable development goals that are not impeded by the “trade-related” constraint.

The decision is a precedent that has opened a gateway for states to invoke TSD obligations in future disputes. What is emerging from this dispute is the linkage of sustainable development goals in FTAs to improvements in legal protections for workers towards international norms whether or not there is a trade advantage. As trade plus provisions become more frequently included in FTAs, it is likely that litigation involving ad hoc panellists adjudicating on compliance with minimum international standards to further sustainable development will continue to grow.


Author

Rebecca Walker is an intern at the World Trade Organization. She holds an LL.M. in International Law from the Graduate Institute of International and Development Studies.


Notes

[1] EU–South Korea Free Trade Agreement, Article 13.4.3.

[2] The EU requested three other consultations under FTAs. Bondy, C., & Shin, K. (2021). The EU–Korea FTA labor dispute: Comparing labor provisions under the EU–Korea FTA and the KORUS FTA (Steptoe & Johnson LLP Global Trade Policy Blog). https://www.lexology.com/library/detail.aspx?g=cb3811a2-1f3d-45a1-9517-b53b5ef37106

[3]  Melin, Y. & Kim, J. W. (2021). EU–Korea FTA panel ruling and a challenge for its effective implementation (EU Law Live 2021). https://eulawlive.com/op-ed-eu-korea-fta-panel-ruling-and-a-challenge-for-its-effective-implementation-by-yves-melin-and-jin-woo-kim/

[4] The Nordic countries and Austria were particularly active in pressing Korean labour reform during Korea’s accession process. OECD Members further “tended to coalesce informally around Korea ratifying ILO Conventions 87 and 98” as a prerequisite to Korea’s accession to the OECD. Salzman, J. (2000). Labor Rights, globalization and institutions: The role and influence of the Organization for Economic Cooperation and Development. Michigan Journal of International Law, 21(4), 769-848.

[5] Supra note 1, article 13.2.1.

[6] Panel of Experts Proceeding Constituted under Article 13.15 of the EU–Korea Free Trade Agreement, para 66.

[7] Supra note 6, para. 65.

[8] Peers, S. (2021). Free trade v freedom of association? The EU/South Korea free trade agreement and the panel report on the EU challenge to South Korean labour law (EU Law Analysis). http://eulawanalysis.blogspot.com/2021/01/free-trade-v-freedom-of-association.html

[9] Ibid.

[10] Supra note 6, para. 95..

[11] As the Panel suggested, the context of the EU’s claims differ to those previously raised by the United States in Guatemala, as they were concerned with the failure to enforce collective bargaining rights and not with national laws meeting such minimum labour standards as prescribed in international agreements, as was the issue in the EU–Korea Panel report. See Peers, supra note 8.

[12] Guatemala – Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR (2017), para 190.

[13] Supra note 6, para. 107.

[14] Supra note 6, para. 108 et 110

[15] Supra note 6, para. 125 et 127.

[16] Supra note 6, para. 234.

[17] Supra note 6, para. 292.

[18] Brown, C. M. (2011). The European Union and regional trade agreements: A case study of the EU–Korea FTA. In C. Herrmann and J. P. Terhechte (Eds.), European Yearbook of International Economic Law, 305.

[19] Supra note 1, article 13.15.2.

[20] European Commission. (2009). EU-South Korea Free Trade Agreement: A quick reading guide [Report]. https://trade.ec.europa.eu/doclib/docs/2009/october/tradoc_145203.pdf

[21] European Economic and Social Committee. (n.d.). The EU-Republic of Korea Domestic Advisory Group. https://www.eesc.europa.eu/en/sections-other-bodies/other/eu-republic-korea-domestic-advisory-group

[22] Supra note 6, para. 116 à 118.

[23] Supra note 1, article 13.15.2

[24] Melin & Kim, supra note 3.

[25] Bondy & Shin, supra note 2.

[26] Croquet, N. A. J. (2015). The climate change norms under the EU–Korea Free Trade Agreement: Between soft and hard law. In J. Wouters, A. Marx et al. (Eds.), Global governance through trade: EU policies and approaches. Edward Elgar Publishing. 124-157.

[27] Korea: Unions welcome government’s move to ratify ILO core conventions after thirty years. (2021). Uni Global Union. https://www.uniglobalunion.org/news/korea-unions-welcome-governments-move-ratify-ilo-core-conventions-after-thirty-years

[28] Brown, supra note 18, p. 305.

[29] LeClercq, D. (2021). The Panel Report under the EU–Korea trade agreement concerning labor practices: What are the purposes of trade agreements as they relate to the ILO’s fundamental labor rights? [International Economic Law and Policy Blog]. https://ielp.worldtradelaw.net/2021/02/guest-post-the-panel-report-under-the-eu-korea-trade-agreement-concerning-labor-practices-what-are-t.html

[30] Harrison, J. (2019). The labour rights agenda in free trade agreements. The Journal of World Investment & Trade 20(5), 705–725.

[31] Claussen, K. (2020). Reimagining trade-plus compliance: The labor story. Journal of International Economic Law 23(1) 25–43.

[32]Supra note 6, para. 82 et 85.