International substitutes for domestic institutions: Bilateral investment treaties and governance

International Review of Law and Economics

Volumn 25, Issue 1, 2005, Pages 107-123

  Ginsburg, Tom ^a,b  

^a UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN   (United States)

^b UNIVERSITY OF ILLINOIS AT CHICAGO   (United States)

Author keywords

Domestic institution; Foreign investment; Governance; International law

Indexed keywords

EID: 20644443497     PISSN: 01448188     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.irle.2004.06.002     Document Type: Article

References (50)

1. The most well-known institution that provides this arbitration is the World Bank's International Centre for the Settlement of International Disputes, which as of this writing has a docket of 48 cases brought by foreign investors against regulatory and policy changes that allegedly violated agreements. In one case, a tribunal ordered the Czech Republic to pay one company $350 million for depriving it of a stake in a television station. Several similar cases have been successfully resolved under Chapter 11 of the North American Free Trade Agreement (NAFTA).
2. Zachary Elkins, Andrew Guzman and Beth Simmons, Competing for Capital: The Diffusion of Bilateral Investment Treaties 1960-2000, draft on file with author.
3. Andrew Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int'l L. 639, 654 (1998).
4. U.S. Model BIT Art. II(5). BITs do not, however, typically contain clauses limiting positive investment incentives such as tax breaks, nor do they include provisions on competition law and other market enhancing factors. Kenneth Vandevelde, The Economics of Bilateral Investment Treaties, 41 Harv. Int'l L. J. 470, 490 (2000).
5. Treaty of Amity, Commerce and Navigation, Nov. 19, 1794, U.S.-U.K., 8 Stat. 116, T.S. No. 105. Similarly, the Iran-United States Claims Tribunal in the Hague resolved several billion dollars of expropriation claims after the Iranian Revolution in 1979. See generally The Iran-United States Claims Tribunal and The Process of International Claims Resolution (David Caron and John Crook, eds., 2002).
6. See generally Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (1955)
7. Denise Manning-Cabrol, The Imminent Death of the Calvo Clause and the Rebirth of the Calvo Principle: Equality of Foreign and National Investors, 26 Law & Pol'y Int'l Bus. 1169 (1995).
8. Abraham H. Feller, The Mexican Claims Commissions: 1923-1934, at 1 (1935).
9. 3 Green H. Hackworth, Digest of International Law Sec. 228, 655-65 (1942). ("The Government of the United States merely adverts to a self-evident fact when it notes that the applicable precedents and recognized authorities on international law support its declaration that, under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate, and effective payment therefore.") See also Guzman supra note 3, at 641
10. Oscar Schachter, Compensation for Expropriation, 78 Am. J. Int'l L. 121 (1984).
11. Guzman, supra note 3, at 639 n. 25.
12. G.A. Res. 1803, U.N. GAOR, 17th Sess, Spp. No. 17, at 15, U.N. Doc. A/5217 (1962), reprinted in 2 ILM 223 (1963).
13. G.A Res. 3171, U.N. GAOR, 28th Sess, Supp. No. 30, at 52, U.N. Doc. A/9030 (1974), reprinted in 13 ILM 238 (1974) ("each State is entitled to determine the amount of possible compensation and the mode of payment"); G.A. Res. 3201, U.N. GAOR, U.N. Doc. A/9559 (1974), reprinted in 13 ILM 715 (1974) (an "inalienable right" to nationalization); G.A. Res. 3281, U.N. GAOR, 29th Spec. Sess. Sup. No. 31, at 50-55, U.N. Doc. A/9631 (1974), reprinted in 14 ILM 251 (1975) (appropriate compensation "taking into account its relevant laws and regulations and all circumstances that the State considers pertinent").
14. Convention on the Settlement of Disputes Between States and Nationals of Other States, March 18, 1965.
15. The ICSID scheme is still primarily inter-state in character because it requires the consent of the expropriating state to hear a case.
16. There is some dispute as to the precise number of BITs. Compare UNCTAD (2001) (1800 treaties) with ICSID, Investment Promotion and Protection Treaties (2003 edition) (listing 883 treaties). For other counts see Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (1995)
17. U.N. Centre on Transnational Corporations, International Chamber of Commerce, Bilateral Investment Treaties 1959-1999, available at http://www.unctad.org/en/docs//poiteiiad2.en.pdf (1857 treaties)
18. Remarks by Antonio R. Parra, ICSID and the Rise of Bilateral Investment Treaties: Will ICSID Be the Leading Arbitration Institution in the Early 21st Century? 94 ASIL Proc. 41, 42 (2000) (1400-1800 treaties).
19. See generally Robert Cooter and Thomas Ulen, Law and Economics 174-179 (4th ed., 2003).
20. Id. at 176.
21. See NAFTA Article 1106 (NAFTA party may not limit sales in the domestic market by conditioning sales on exports or foreign exchange earnings; may not require local content requirements or preference for domestic products; limit imports to a percentage of exports; transfer technology; export targets; or supply designated markets solely from local production).
22. See in particular the case of Barcelona Traction Light and Power Company, Limited (Belg. v. Spain), 1970 I.C.J. 3, 32 (Feb. 5), in which the Court took 8 years and two phases to reject a claim on jurisdictional grounds.
23. For purposes of this analysis we treat developing countries as any country with a 2002 GDP of less than $15,000 in constant 1998 dollars.
24. Daniel Kaufmann, Aart Kray and Pablo Zoid-Lobaton, Aggregating Governance Indicators, World Bank Policy Research Working Paper 2195 (2000); also available on World Bank website at .
25. I b i d.
26. Note that when we include all countries (n = 177), the difference in means for the democracy indicator is significant at the 0.005 confidence level. This may be because richer countries tend to be democratic and to sign BITs at a higher rate of frequency.
27. Elkins, et al, supra note 2, have a similar finding.
28. Mary Hallward-Driemeier, Do Bilateral Investment Treaties Attract FDI? Only a bit ... and they could bite, World Bank, DECRG, June 2003, available at http://econ.worldbank.org/files/29143_wps3121.pdf, at 12.
29. Note for all countries, coefficients on the governance indicators increase if the year 2000 scores are used, and rule of law becomes statistically significant. The developing countries sample coefficients also increase for year 2000 scores.
30. Empirical research on trade concerns whether these are substitutes for home country exports, or complements. Most believe they are complementary.
31. Kevin Kennedy, A WTO Agreement on Investment: A Solution in Search of a Problem? 24 U. Pa. J. Int'l Econ. L. 77, 145 n. 271 (2003).
32. I recognize that no single model is likely to account for all BITs. Motivations vary over time and across countries.
33. Vandevelde, supra note 4, at 470
34. Kenneth J. Vandevelde, Sustainable Liberalism and the International Investment Regime, 19 Mich. J. Int'l L. 373 (1998).
35. Kevin Kennedy, A WTO Agreement on Investment: A Solution in Search of a Problem? 24 U. Pa. J. Int'l Econ. L. 77, 77 n. 3 (2003). Uruguay Round attempts to bring investment into the WTO framework were not wholly successful, although the Agreement on Trade-Related Investment Measures (TRIMS) was indeed adopted. TRIMS covers measures imposed as a condition for investing, and prohibits those with trade-distorting effects, such as local content requirements or import substitution requirements. But TRIMs does not address issues such as the right to establishment, the right to repatriate profits or regulation of technology transfer. Id. at 138. Nor does it address potentially trade-distorting positive investment incentives. Attempts to develop more precise investment rules in the WTO context came to an end in the failed Cancun Ministerial meeting of the Doha Development Round. See Doha Ministerial Declaration paras. 20-22. It should be noted that it was not contemplated that any WTO agreement would provide for deviations from the interstate character of dispute resolution, unlike NAFTA which allows investors to sue a state directly.
36. Especially at the United Nations Commission on Trade and Development (UNCTAD). See Report of the Expert Meeting on Existing Agreements on Investment and their Development Dimensions (1997), cited in Kennedy, supranote 30, at 83 n. 13.
37. The most notable effort was the controversial a failure to develop the Multilateral Investment Treaty (MAI) in the late 1990s. Labor and environmental groups mobilized against the proposed agreement, and the MAI proposal died in 1998.
38. Kennedy, supra note 30.
39. Guzman, supra note 3.
40. United Nations Conference On Trade And Development (UNCTAD), Bilateral Investment Treaties In The Mid-1990s, annex I at 159-217, U.N. Doc. UNCTAD/ITE/IIT/7, U.N. Sales No. E98.II.D.8 (1998).
41. Guzman, supra note 3, at 680
42. but see Vandevelde, supra note 4, who says that perhaps they were mere "symbolic instruments" to signal assent to the foreign investment regime.
43. UNCTAD, World Investment Report 2002 (during 2001, 208 regulatory changes related to investment were made by 71 countries, only 14 of which were less favorable to foreign investors.)
44. Guzman acknowledges the outstanding empirical problem. Guzman, supra note 3, at 674-676.
45. This may seem implausible, for an investor at the margin should choose between sending capital abroad and keeping it for some domestic use. The aggregate level of protection offered abroad is likely to be part of the risk calculus.
46. Kobayashi, Bruce H. and Ribstein, Larry Edward, "Class Action Lawyers as Lawmakers" (February 2004). George Mason Law & Economics Research Paper No. 04-08; U Illinois Public Law Research Paper No. 04-03. http://ssrn.com/abstract=501548.
47. J. Mark Ramseyer, The Puzzling (In)dependence of Courts: A Comparative Approach, 23 J. Leg. Stud. 721 (1994).
48. See Joel S. Hellman, et al., Far from Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies? Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=386900
49. Philip J. McConnaughay and Tom Ginsburg, eds., Arbitration in Asia (2002).
50. If we consider results at the 80% confidence level, we also note that New BITs adopted in 1997 or 1998 were associated with declines in levels of regulatory quality and corruption control in the year 2000. This means that half the regressions had negative signs.