Earlier this month, more than 2,000 demonstrators in Seoul were so determined to disrupt the Korean parliament that riot police had to use water cannon to drive them back.

The cause of such passion? Austerity measures? A political scandal? Not quite. If you ask the protesters, it’s all about the international arbitration clause in their country’s free trade agreement with the U.S.

The investor-state dispute (ISD) mechanism proposed in the FTA–which the U.S. Congress has already ratified but on which Korea’s National Assembly has yet to vote–provides investors a means to seek arbitration at the International Centre for the Settlement of Investment Disputes (ICSID), United Nations Commission on International Trade Law (UNCITRAL), or similar body, in instances where they feel they’ve been treated unfairly by one of the governments under the treaty.

It’s a fairly standard provision, present in 81 of the 85 trade agreements Korea currently has in force around the world, and President Lee Myung-Bak and his ruling Grand National Party have vowed to pass the treaty, ISD and all. But Korea’s main opposition party, the Democratic Party, claims the ISD clause will allow U.S. companies to strip away Korean environmental and public health protections, and lead to the wholesale destruction of the Korean agricultural sector.

“Foreign investors will, I would say, rule the country,” Kang Ki-Kab, a farmer and opposition member of parliament, told The Wall Street Journal. “We might have a future where we might have to bow our heads to foreign investors who are only focusing on the return on their investment.”

But such apocalyptic talk dumbfounds Korean trade lawyers. Doo-Sik Kim, an international trade lawyer and the managing partner of Korean firm Shin & Kim, says the ISD clause protects Korean investors in the U.S as much as the other way around. “In short, the logic of the opponents is nothing but a claim that you must not sign an investment treaty,” he says.

Other critics say they are worried U.S. investors are abusing the system. Korean left-leaning daily The Hankyoreh points out that 108 out of 390 known ISD cases were brought by U.S. investors.

These figures only reflect the fact that the U.S. has invested in a lot of politically unstable countries, argues Kim. “However, ISD is a neutral system, and if Korean companies were in the same situation, they would have loved to invoke ISD arbitrations,” he adds.

Kevin Kim, the head of arbitration and litigation at Bae, Kim & Lee, says he has twice encountered situations where these clauses have been useful. “We sent the governments a letter saying we had been instructed to commence arbitration. In those two cases the foreign government immediately changed their position,” he says, adding: “That is a very effective way to protect Korean companies abroad.”

Kevin Kim also thinks the ISD in the Korea-U.S. FTA is unlikely to get much use. Many trade disputes involving U.S. investors have sprung up in countries where court systems are less developed. In contrast, Korea’s courts are generally regarded as efficient and neutral.

“If U.S. investors consult a Korean lawyer, they would usually recommend them to file litigation in Korea,” says Kevin Kim. Civil disputes in Korea are usually decided at first instance within a year, compared with an average of over three years at ICSID.

A Korea practice partner at a U.S. firm says the opposition to the ISD makes no sense as a legal issue but could be a shrewd political move by the opposition. “The feeling that I get is the opposition party are just pointing to [the ISD issue] so they can point to something,” says the partner, who asked to remain unnamed because of the political sensitivities. “The real reason is that next year is an election year.”

He notes that the Democratic Party’s stance will play well with groups such as farmers, who have consistently opposed the FTA.

For international law firms, the kerfuffle is mildly worrying, as the U.S. FTA was to be the treaty that finally opened the Korean legal market to foreign players. Still, a deal is widely expected, as the ruling party has the votes to push the FTA through but is nervous of doing so with an eye on the upcoming election.

Kevin Kim sees a bright side to all the hype: “This is a wonderful opportunity to educate Korean people about arbitration,” he says. “Even to lawyers, ISD was quite unknown. Now, even elementary school students know the term.”

Email: blewis@alm.com