Bilateral Investment Treaties

BITS, BATs and Buts - Reflections on International Arbitration

https://www.youtube.com/watch?v=kFHN1ulJlMk

What is BILATERAL INVESTMENT TREATY? What does BILATERAL

INVESTMENT TREATY mean?
https://www.youtube.com/watch?v=6bDwIB_jdxw

 Rules and conditions to conduct investment between two states (FDI)

 Alternative dispute resolution mechanism
o International arbitrage
o The case of Pakistan and Germany (1959)
o More than 3,000 TIP enforces worldwide
o The critics to BIT
 Designed to protect investors and not countries’ interest
 Not environment friendly
 The risk of unnecessary sues


What is the Bilateral Investment Treaty? | Made in Germany

https://www.youtube.com/watch?v=Uk-QARKZy5Q

 TTIP: Transatlantic Trade and Investment Partnership

 A super-Wedding
o More product at lower prices
o Standardization

Bilateral Investment Treaties: History, Policy and Interpretation (Kenneth

Vandevelde)
(SEGUIR BUSCANDO EL LIBRO)

Tratados bilaterales de inversión e integración internacional

Deborah Swenson
University of California, Davis

General
 GATT (W)
 WTO (W)
 How bilateral investment treaties (BITs) affect the trade integration between partner
countries.
 BITs and WTO membership
 BITs effects are found to be especially strong for low income countries, who are the most
likely to benefit from the strengthening of investment protections.
 Bilateral investment treaties are capable of providing a commitment mechanism that helps to
reduce the amount of uncertainty foreign investors
Introduction
 Trade liberalization vs investment liberalization
 BIT provide an alternative mechanism which allows host countries to provide protections to
firms undertaking foreign investment
 First BIT: 1959 (Germany and Pakistan)
o Accelerated in recent years: two thirds of current ones have been signed since 1995
 Research: mixed conclusion over BIT impact
 The link between BIT and FDI
o Look countries that have adopted BIT and asses FDI’s performance ex-ante and ex-
post treaties signature
 Why do we sign these treaties? To please incumbents (who probably pushed for it), or to
help new ones to come in?
 To asses BIT is too much of a narrow view to solely focus on FDI
o BIT may facilitate international integration on another dimension
o The flow of intangible assets (W: intangible assets)
 Usually undermeasured
o To intensify international connections
 The expansion of international trade
 The impacts of BIT and International Trade  if we focus on the latter, the it is possible to:
o To include a much wider range of countries
 Asses multilateral activity after the BIT is signed
o In estimating the response of foreign investment to policy, it is well-known that
bilateral foreign investment is characterized by many zeros.
o Look at bilateral import with other countries different with the one the BIT has been
signed with
o BITs have the strongest effects on trade mediated by multinational firms
o BIT presence has a stronger effect on capital goods imports and on trade in
differentiated goods is stronger than their effect on foreign direct investment
o BIT foster international integration more than has been thought
o Technology transfer  the fostering of capital import flows
o BIT, technology transfer, protection and multinational firms’ activity
o The gains in institutional quality

Data & background

 Surges in foreign investment in the late 1990’s and recent years provide an apparent
motivation for countries to use bilateral treaties
o FDI (1993-2003) contributed 10.9 % of gross capital formation in developing
countries
 Empirical evidence provides a rather pessimistic scenario
o Little effect only after 5 years from signing the BIT
o The variability of results leaves the questions if BITS are good for developing
countries
 BIT require that countries relinquish property rights to foreign investors
 BITS are a form of investment liberalization
 Multilateral efforts to liberalize international investment environment have not born fruit
 A host of concessions and imposing no new responsibilities on the beneficiary firms
  Trade Related Investment Measures (TRIMS) & General Agreement on Trade in Services
(GATS) [W]  a more limited set of WTO’s measures to protect some forms of investments

Data
 List of signed BIT
o From 1959 to 1999 (UNCTAD, 2000)
o Fromm 1999 onwards (UNCTAD’s website
 Bilateral investment treaties generally contain provisions that touch on a common set
of investment issues
o The definition of investment
o The application of national and most-favored nation treatment to foreign
investments
o Transparency of national laws
o Performance requirements
o Movement of foreign personnel
o Disputes resolution
 Some national reforms might be designed to solve controversies, but foreign
investors are unlikely to believe them
 BITS: each has its own caveats
o Signed BIT between countries
o Ratified by the two countries

Examination Framework and Results

 BIT signature affects host country’s trade integration?
 The indicator for bilateral investment treaties shows that BIT signing is associated with an
increase in imports, though the magnitude of the effect is smaller than is the effect of WTO
membership
 BIT foster the activity of Multilateral firms in the host country
 The effect is not the same for all countries
o May differ by income
o May be especially stronger for those countries with weaker protections for investor,
ex-ante the BIT signature

Conclusions
 The impact over trade and the activity of Multinational Companies
 The effect is bigger for low income countries

Do Bilateral Investment Treaties Attract FDI? Only a bit… and they could bite
Mary Hallward-Driemer (2003) World Bank

 BIT as commitment devices that attract foreign investors

 The number of ratifies BIT by developing countries has increased dramatically
 FDI gains by alternative agreements different to BIT
 BIT as complement to institutional quality enhancers
 BIT: foreigners’ rights exceed those of local investors
o Large scale liabilities
 o Curtail the feasibility of different reform options
 Competition to host multinational companies
 In addition to negotiating firm specific deals through
o tax incentives,
o subsidies etc.,
 Countries have increasingly turned to signing bilateral investment treaties (BITs) as a
way to entice foreign investors to their shores.
 A BIT could help attract investment by serving as a commitment device.
o Countries with weak domestic property
o the nature of the commitment can vary enormously depending on the terms of
the BIT
o BIT could be a commitment device to overcome dynamic inconsistency
problems
 To avoid capture problems
 That’s why they provide conflict resolution clauses
 Swedish Court of Appeal
 Each BIT is regarding the specifics of each one

What is a BIT?
 BITs vary across countries
 But they generally share similar features of:
o Defining foreign investment and
o Laying out various principles regarding:
 Treatment,
 Transfer of funds,
 Expropriation and
 Mechanisms for dispute settlements.
 Property rights are the corner stone of BITS
 More rights to foreign investors, and stronger than anticipated
 One common clause included in many BITs gives the investor the right to sue the host
government if
o Actions undertaken by the government are deemed to
 Substantially expropriate the business of the firm
 A grain of salt regarding property rights
o (1) Sue rights are an expansion of investor’s current rights
 Local Government can dismiss the case claiming sovereign immunity
 MNC own government can come to the rescue, but the case can
become political: low odds to offer some help anyway
 With the investment treaty, the host government consents to a standing
offer to arbitrate disputes covered by the treaty.
o (2) Expropriation definition
 Legal expropriation: BITs outline those terms under which
expropriation could be deemed lawful and compensation would be due.
 Property can only be legally expropriated if:
 It is for a public purpose;
 Is done in a non-discriminatory way;
 Compensation is paid; and the expropriation is done in
accordance with due process of law.
 Compensation clause (the one with largest consequences)
 
Controversy over the terms of the compensation:
o Standards include “prompt, adequate and effective” or
o “payment of full value” or
o “just compensation”
 The nationalizations that peaked in the 1970s provided many clear-cut
cases of expropriation
 Of greater concern more recently are
 “indirect expropriations,”
 “creeping” expropriation or
 “regulatory takings”
 Dispute resolution mechanisms:
 One of the more popular options is to submit to binding
arbitration through the ICSID
o (International Centre for Settlement of Investment
Disputes),
o An affiliate agency of the World Bank
 Two others for are the International Chamber of Commerce and
 UNICTRAL (United Nations Commission on International
Trade Law)
 In these arbitration proceedings:
 three arbiters are selected:
 Generally with each party selecting one and
 The forum selecting the third.
 These proceedings are:
 Not bound by precedents
 Not necessarily obliged to be open to the public
 Or to publish final decisions
 The decisions:
 Have only limited avenues for appeal and
 Cannot be amended by the domestic legal system or supreme
court.
 BIT and moral hazard:
o To claim what I have not earned
o To fight when I don’t have a point
o To pour less effort
 The Azinian case:
o The decision explicitly warns against the treaty being seen as a recourse
against any poor outcome
o On the other hand, given the facts of the case (some claims are dismissed as
“preposterous”, (contrary to reason or common sense; utterly absurd or
ridiculous.)
 The rights secured in a BIT are reciprocal:
o Investors from country A investing in B are the same as
o Those given to investors from country B investing in country A
o However, in practice there is usually tremendous asymmetry
 Almost all the FDI flows covered by BITs are in fact in one direction
 Rich OECD countries do participate in BITs, but almost exclusively
with developing countries
Trends in BIT
 The first BIT was ratified in 1959
 In 1990 there were 470
 by 2000 there were close to 2000
 BIT are not a requirement for FDI
o The cases of: Japan, Brazil, Cuba & USA-CHINA

Other studies
 There is a growing literature on the importance of institutions and property rights
o Most has been focused on the effects on long run growth rather than on FDI
 These studies use broad measures of property rights, using either
 ICRG rankings or
 the Kaufmann, Kraay, Zoido-Lobaton (KKZ) indicator.
 The role of BITs has received some discussion in law journals. There the focus has
again been on the issue of providing a commitment device to overcome the dynamic
inconsistency problem (Vandevelde 1998)
 Within the economic literature, BITs have generated very little attention

Data
 This paper focuses on the importance of BITs for FDI outflows from OECD countries
to developing country hosts
 In 1980, the share of FDI under a treaty was less than 5%, while by 2000, it had
grown to about 50%.
 However, this increase in FDI by countries with a BIT is largely explained by
compositional shifts;
o As more country pairs ratify treaties, the amount of FDI flows covered
increases.
o What remains to be seen is if the flow between host-source pairs changes
significantly with the ratifying of a treaty.
Hypotheses
 To test the change in property rights introduced with the BIT.

[SALTÉ LA PARTE DE ECONOMETRIC CONCERNS]

Conclusion
 Recent and pending cases of international investment disputes covered by investment
treaties have raised concerns of the potential costs to host governments
 Both in terms of the size of potential awards and in the possible reduction of viable
choices open to policy makers due to their adverse effects on foreign investors

Bilateral Investment Treaties, Political Risks and Foreign Direct Investment

 The study constructs a linear model to evaluate
o The significant impacts of bilateral investment treaties (BITs) on foreign direct
investment (FDI) and
o The possible consequences of BITs.
Introduction
 Designing a favorable policy to attract foreign investors has become one of the hottest
topics among developing countries.
 Several national and international policies that are being pursued include the removal of
investment restrictions:
o the establishment of investment law,
o the establishment of commercial zones,
o the provision of tax holidays,
o bilateral agreements and
o economic integration
 According to the United Nations Conference on Trade and Development (UNCTAD) database
on BITs (UNCTAD 2005),
o The number of BITs increased from 385 in 1989 to 2,392 by 2004, including 176
countries.
 A bilateral investment treaty (BIT) is generally known as an agreement between two
signatory countries providing investors with fair and equitable treatment and legal
protection.
 Theoretically, BITs play the role as a substitute for the quality of institutions or the political
risk in a developing country;

Bilateral Investment Treaties

 According to Salacuse (1990), the basic structure of any BIT encompasses
 eight topics:
o 1) scope of application
o 2) conditions for the entry of foreign investment
o 3) general standards of treatment of foreign investments
o 4) monetary transfers
o 5) operational conditions of the investment
o 6) protection against expropriation and dispossession
o 7) compensation for losses
o 8) investment dispute settlement