Korea As a Service Delivery Center After US-Korea Free Trade Agreement (KORUS FTA)

December 5, 2011 by

President Barack Obama signed the Korean-U.S. Foreign Trade Agreement (KORUS FTA) on October 21, 2011 and it was ratified by Korea’s National Assembly on November 22, 2011.  It is now in force.

Separate from the generally applicable multilateral obligations of the two countries under WTO trade agreements, the KORUS FTA opens new doors for service providers in Korea to compete with India, Latin America, Canada and other locations for contracts to deliver data processing and BPO services to U.S. customers.   While Korea’s wage levels are comparatively high relative to other destinations, Korea can be expected to compete effectively in niche areas such as banking, finance, insurance and manufacturing support services.

What’s new, beyond the multilateral free-trade framework under the WTO, NAFTA and the EU, compared to other U.S. bilateral free-trade agreements?  The KORUS FTA offers a few embellishments on the concept of admitting individuals for specific FTA-qualified visa categories (as under NAFTA).  The KORUS FTA adds specific protections for conducting services businesses generally, including professional services licensure (lawyers, doctors, engineers, like NAFTA’s list).  The agreement covers the “electronic supply of services,” “digital products,” electronic authentication, e-signatures and e-documents as instruments of bilateral e-commerce.  Most significantly, the KORUS FTA hints at a new paradigm for bilateral FTA’s since it includes the principle that privacy laws will not be used for protectionism.

The United States and the Republic of Korea signed the United States-Korea Free Trade Agreement (KORUS FTA) on June 30, 2007. On December 3, 2010, the United States and Korea concluded new agreements, reflected in letters signed on February 10, 2011, that provide new market access and level the playing field for U.S. auto manufacturers and workers. Once it enters into force, the Agreement will be the United States’ most commercially significant free trade agreement in more than 16 years.   SOURCE: US Trade Representative.

New Model of FTA: Privacy Issues Are Within Scope of Bilateral Agreements. The KORUS FTA adopts a novel attitude towards the scope of bilateral FTA’s.   It recognizes that privacy laws can be an impediment to trade, and it opens markets in offshore data processing on the basis that a privacy law of a sovereign can, by agreement, be modified to enable cross-border data flows. While this conclusion is not expressly stated in such bald terms, the documents advert to it.

I.  Cross-Border Services.

Scope of “Cross-Border Trade in Services.” The KORUS FTA applies to “measures” (laws and regulations) adopted or maintained by either party affecting cross-border trade in services by service suppliers of the other party.

  • “Measures.” Any “measure” that “affects” the “production, distribution, marketing, sale” or “delivery” of a service is covered.   The parties clearly contemplated remote transaction processing (BPO) by including “measures” affecting “the access to and use of distribution, transport or telecommunications networks and services in connection with the supply of a service.”   KORUS, Art. 12.1(1).
  • “Cross-Border Supply of Services.” The KORUS FTA covers the supply of services based on the location of the provisioning (from the territory of one of the parties), the location of receipt (in the territory of one of the parties), or the nationality of a service provider while operating within the territory of a party.  Art. 12(13).

Outsourcing of Financial Services to Non-Bank Service Providers. Financial services are not covered by the KORUS FTA.   Exceptionally, the FTA does cover “financial service” supplied by a “covered investment” (FDI) that is not an investment in a “financial institution.”   Art. 12(4).  In short, financial transaction processing is covered if the processing is done by a service provider not engaged in the business of banking or insurance.   Hence, ITO and BPO services to financial institutions are within the scope, so that each party will provide market access to the other party’s service providers.

Core Freedoms. Subject to a list of non-conforming “measures” identified on “Annex I” and specific sectors and activities in “Annex II,” the parties granted each other national treatment, MFN treatment, open market access and the right to perform all services remotely.  Art. 12.

  • National Treatment. Under the KORUS FTA, “each party shall accord to services suppliers of the other Party treatment no less favorable than it accords, in like circumstances, to its own service suppliers.”  Art. 12.2(2).
  • Most-Favored-Nation Treatment. “Each Party shall accord to service suppliers of the other party treatment no less favorable than it accords, in like circumstances, to service suppliers of a non-Party.”  Art. 12.3.
  • Market Access. “Neither Party may adopt or maintain, either on the basis of a regional subdivision or on the basis of its entire territory, measures that impose limitations on” the number of service suppliers, the total value of service transactions or assets or the requirements of an economic needs test, the total number of service operations, or the number of natural persons performing such services.  Art. 12.4.  Of course, this does not grant any business visa rights, which are specifically excluded from the scope of the FTA.  Art. 12(4).
  • No Local Presence. The KORUS FTA prohibits each party from requiring any service supplier of the other party to maintain a representative office or any form of enterprise, or to be resident, as a condition of furnishing “the cross-border supply of service.”   Art. 12(5).

Conditions to Grant of Authorizations to Perform a Service. The KORUS FTA does not prevent either country from requiring foreign service providers to obtain licenses to peform the services, or to escape local regulation.   Any such domestic regulation must be based on “objective and transparent criteria, such as competence and the ability to supply the service.”  The licensing procedures themselves cannot be, in themselves, a restriction on the supply of the service.  Art. 12(7).

  • Transparency. In the United States, the concept of “transparency” in government regulation flows from the Constitutional notion of “due process” and from the framework for administrative rulemaking under the federal Administrative Procedures Act.   The KORUS FTA adopts similar assurances for public openness, or at least accountability in the absence of public openness, relating to the regulation of services providers.  Art. 12(8).
  • No Third-Party Controlled Service Providers. As with most U.S. income tax treaties, the KORUS FTA treaty denies the benefits of the bilateral agreement to service suppliers of a party that are “owned or controlled by persons of a non-Party.”  However, this exclusion only applies where the government denying such benefits to that service provider (i) “does not maintain normal economic relations with the non-Party” (such as North Korea) or (ii) has economic sanctions against that non-Party.  Art. 12(11).

II.    Regulation of Privacy in Cross-Border Information Flows.

A “Wish List.” The e-commerce provisions of the KORUS FTA do not establish guarantees of free cross-border flows of information.  However, the agreement does recognize “the importance of the free flow of information in facilitating trade” and “the importance of protecting personal information.”  So the parties agreed to “endeavor to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.”  Art. 15.8.  This is scant legal assurance but offers hope that purely protectionist prohibitions on certain data flows will not be enacted by either party.

Korean Privacy Laws. South Korea has enacted several laws on the collection, use and disclosure of personal information in the private sector.  These include:

  • the Medical Service Act(1973);
  • the Telecommunications Business Act(1991);
  • the Protection of Communications Secrets Act (1993);
  • the Use and Protection of Credit Information Act (1995);
  • the Real Name Financial Trade and Secrecy Act (initially 1997);
  • the Framework Act on Electronic Commerce(1999); and
  • the Digital Signatures Act (1999).

Although South Korea has privacy protection laws which in the past have hindered exportation of personal information, the KORUS FTA will open cross-border trade in financial data processing and related software.

III.    E-Commerce, Digital Products and E-Signatures.

Chapter 15 of the KORUS FTA adds a new framework for avoiding barriers to trade in e-commerce.

Access and Use of the Internet for E-Commerce. The KORUS FTA does not set up a legal framework for protecting consumer choice in accessing and using services and digital products, or to run applications and services of their choice.   The parties agree to “acknowledge” that consumers in their respective territories “should be able” to have such choices of services and digital products (unless prohibited by law) and choices of applications and services (subject to “the needs of law enforcement”).  Art. 15.7.

ITO, BPO and other Remotely Performed or Remotel Provided Services. The KORUS FTA clarifies that “the supply of a service delivered or performed electronically” is subject to the other market-opening requirements governing investment, cross-border trade in services and financial services.   However, any exceptions to open market access that apply to such other requirements will also apply to e-commerce and such electronically-delivered services.  Art. 15.2.

Digital Products (not Services).

  • Definition and Context. Digital products are treated separately from electronically performed or electronically delivered services.  ‘Digital products” are “computer programs, text, video, images, sound recordins, and other products that are digitally encoded and produced for commercial sale or distribution, regardless of whether they are fixed on a ‘carrier medium’ or transmitted electronically.  Art. 15.9.
  • Market Opening. The KORUS FTA prohibits each party from imposing customs duties, fees or other charges on, or in connection with the importation or exportation of digital products, whether or not “fixed” on a “carrier medium” or transmitted electronically.    Art. 15.3(1).    However, this general prohibition does not apply to internal taxes or other internal charges on digital products, if “imposed in a manner consistent with this agreement.”  In short, sales and use taxes by states and localities remain permitted.

    This enables buyers, sellers, licensors and licensees of software to decide on physical delivery (on a CD-ROM, for example) instead of electronic delivery as a tool for avoiding customs duties.  It supersedes current practices where sophisticated licensees often require an electronic delivery to avoid customs duties and sales taxes on the CD-ROM’s, but do so at the risk of an incomplete e-transmission.  The KORUS FTA thus allows businesses to get both delivery and peace of mind.  Further, e-delivery exposes the parties to the risk of deep-packet inspection of the software and thus governmental inspection and potential unauthorized examination and duplication.
  • MFN: Equal Treatment of Different Digital Products. The “most-favored” nation provisions not only prevent discrimination on trade in digital products from the standpoint of rights and procedures for third-country “digital products.”   Art. 15.3(3).  The KORUS FTA also prevents discrimination between different types of digital products.   This new approach thus requires equal treatment of software, video, audio recordings, visual arts (“images”) and other digitally recorded “products, “ and thus treats e-transmissions (such as via cable, VOIP or satellite) equally with television and radio.  Art. 15.3(2) and 15.3(3).
  • Exceptions. Exceptions are listed in other articles.  Art. 15.4, citing Articles 11.12 (investment measures), 12.6 (cross-border trade in services) and 13. 9 (financial services) (collectively, “non-conforming measures”).  Also, equal treatment between different digital products is not required where a Party subsidizes a service or service provider, such as by government-supported loans, guarantees or insurance, or services supplied in the exercise of governmental authority.  Art. 15.5.  Finally, a government can treat digital products with special rules if the e-content (digital product) is “scheduled by a content provider for aural and/or visual reception” and where the consumer cannot access such content on any other schedule.  Art. 15.6.
  • MFN: Jurisdictional Nexus for Avoidance of Free-Riders. The MFN treatment of digial products requires one of two jurisdictional connections.   First, the digital products must be “created, produced, stored, transmitted, contracted for, commissioned, or first made available on commercial terms” by anyone (whether or not the persons doing so are Korean or American) in either South Korea or the United States.  Second, as a alternative, the individuals involved in the chain of conception and distribution of digital products must be “a person of the other Party.”  To enjoy non-discriminatory treatment, such individuals must include one of the following: authors, performers, developers, distributors and owners of digital products must be treated.   Art. 15.3(2).

E-Signatures. The KORUS FTA promotes e-authentication and e-signatures.

  • Definitions. “Electronic authentication” means “the process or act of establishing the identity of a party to an electronic communication or transaction or ensuring the integrity of an electronic communication.”  E-signatures on documents cannot be valid without assurance that the parties intended to link the e-signature to the “e-communication” or “transaction.”
  • E-Authentication Legislation. The KORUS FTA prohibits each government from denying commercial parties the right to mutually determine an agreed appropriate authentication method for a transaction.  Also, private parties will be assured access to judicial and administrative review for determination, in disputes, whether “their electronic transaction complies with any [such mutually contracted] requirements with respect to authentication.”   Most importantly, neither government may deny the legal validity of a signature “solely” on the basis that it is in electronic form.  Art. 15.4(1).
  • Exceptions. Each country’s government may still regulate by imposing performance standards or governmental certification requirements in respect of e-authentication for “a legitimate governmental objective” where the performance requirements are “substantially related to that objective.”  Art. 15.4(2).  Obviously, such regulations will apply to the exercise of a government’s regulation of a regulated industry, such as financial services, shipping, insurance, legal process outsourcing, finance and accounting, filing of tax returns and other official records.

Consumer Protection Online. The agreement preserves the right of each party to enact laws and regulations to protect consumers from fraudulent and deceptive commercial practices when consumers engage in e-commerce.   The parties agree to cooperate in enforcement of their respective local laws “in appropriate cases of mutual concern.”   Art. 15.5.

Paperless Trading. The two governments agreed to put online their “trade administration documents” to allow transparency in regulations under the KORUS FTA agreement.  This is not a general e-government mandate.  Art. 15.6.

IV.  Conclusion. As intergovenmental agreements, FTAs paint the rules with a broad brush.  Aside from opening the Korean markets to American automobiles and professional services forms, this FTA opens Korea’s ITO and BPO sector to foreign completition from the U.S.

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