Bilateral Investment Treaties: A Cost-Benefit Analysis
The proliferation of bilateral investment treaties (BITs) represents one of the most significant developments in international economic law. Yet the cost-benefit calculus underlying these agreements deserves more rigorous examination than it typically receives.
The Theoretical Case for BITs
Credible Commitment
Developing nations face a time-inconsistency problem: they benefit from promising favorable treatment to attract investment, but once investment is sunk, they benefit from expropriating returns. BITs solve this problem by providing credible commitment through international arbitration.
Signaling
BIT ratification signals a nation's commitment to rule of law and property rights protection. This signal may attract investment even beyond the treaty's direct protections.
Empirical Evidence
Investment Flows
Studies examining whether BITs actually increase investment flows yield mixed results. Some find positive effects; others find no significant relationship. This ambiguity suggests that BITs may be neither necessary nor sufficient for attracting investment.
Selection Effects
Nations that sign BITs may differ systematically from those that do not. Observed correlations between BITs and investment may reflect these underlying differences rather than treaty effects.
The Costs
Regulatory Chill
Fear of investor-state claims may deter legitimate regulation. The magnitude of this effect is debated, but several high-profile cases have raised concerns about constraints on environmental and public health regulation.
Arbitration Costs
Defending investor-state claims imposes substantial costs on host nations. Even successful defenses consume resources that developing nations can ill afford.
Asymmetric Outcomes
Capital-exporting nations rarely face claims under BITs, while capital-importing nations bear the costs. This asymmetry raises fairness concerns that have political salience.
Reform Proposals
Appellate Mechanisms
Proposals for appellate review address concerns about inconsistent awards but add cost and delay.
Investment Courts
The EU's investment court proposal represents a more fundamental restructuring, replacing ad hoc arbitration with a standing tribunal.
Conclusion
The case for BITs is weaker than commonly assumed. Nations should carefully evaluate whether the benefits of treaty protection justify the costs, rather than assuming that more treaties are always better.