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The Effect of Treaties on Foreign Direct InvestmentBilateral Investment Treaties, Double Taxation Treaties, and Investment Flows$

Karl P. Sauvant and Lisa E. Sachs

Print publication date: 2009

Print ISBN-13: 9780195388534

Published to Oxford Scholarship Online: May 2009

DOI: 10.1093/acprof:oso/9780195388534.001.0001

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(p.xxi) FOREWORD

(p.xxi) FOREWORD

The Effect of Treaties on Foreign Direct Investment
Oxford University Press

It would be tactless in a foreword to propose answers to the puzzle of bilateral investment treaties (BITs) and double taxation treaties (DTTs). Perhaps, though, it is not inappropriate to pose some questions that may whet the appetite of the reader. Although many questions about the diffusion and implications of these bilateral treaties are relevant to both BITs and DTTs, I focus on BITs, a topic on which many academic and policy discussions have centered.

BITs (and investment dispute provisions in trade agreements, such as NAFTA) keep sprouting up—more than 2,500 as of the publication of this book. Nevertheless, all efforts to reach agreement on a multilateral investment treaty (in the United Nations, in the Organisation for Economic Co-operation and Development, in the World Trade Organization, and elsewhere) have failed, even though the substantive provisions in the proposals read just like BITs. How can this be explained?

A number of observers, including this writer, have reached for the conclusion that the common provisions of BITs—non-discrimination, open access for investors, fair and equitable treatment, expropriation only for a public purpose and subject to full compensation, arbitration of investor-state disputes—now comprise or reflect the customary international law of foreign investment. Is this persuasive? Or is there no such law, as shown by the failure to achieve a multilateral agreement? Note that the answer to this question is not just for the scholar, but becomes critical in dispute settlement. A customary law of foreign investment, or even of interpretation of similar BITs, would mean that arbitrators hearing a dispute between a Xandian investor and the state of Patria could (and should?) rely on (or at least be guided by) decisions involving treaties of Tertia, Quarta, Quinta, etc. An opposite answer would make resolution of each dispute into a journey from square one.

Why do developing countries in huge numbers enter into BITs and DTTs anyway? In some instances, the answer is clear. When, in the early 1990s, President Carlos Menem saw the way out of Argentina’s doldrums to be privatization of state-run utilities and other monopolies, he needed foreign capital. Foreign private capital, however, would come in only on the basis of a stable currency linked to the dollar and a bilateral investment treaty with each potential investor’s home state. When Mexico wanted to take part in the free trade arrangements between the United States and Canada, the anticipation of increased investment in Mexico to produce goods for the United States market depended on a secure investment protection regime as a necessary component of the North American Free Trade Agreement. But in other cases the answer is not so clear. Do BITs and DTTs actually attract foreign investment? Or is it true that absence (p.xxii) of an applicable BIT or DTT discourages potential investors? And how can one really tell? More broadly, is the presence or absence of a BIT really an indicator of a good or bad investment climate, as stated, for instance, in the Convention Establishing MIGA, the Multilateral Investment Guarantee Agency sponsored by the World Bank?

Many critics (not only in Latin America, but also in the United States and Canada) have pointed out that under a BIT and its analogues in free trade agreements, a foreign investor may enjoy greater legal protection than a domestic investor would. U.S. jurisprudence under the “just compensation” clause of the Fifth Amendment has a long and sometimes confusing tradition distinguishing between a “taking” (entitled to compensation) and an exercise of regulatory powers (generally not entitled to compensation). The Canadian constitution does not contain a property clause at all. Most Latin American constitutions contain variations on the concept of the “social function of property.” Typically BITs contain a stricter form of protection for investors in case of expropriation or deprivation of operating rights than is available under the law or in the courts of the host state. The answer of the proponents of BITs is that the criticism may be true, but the object of the exercise is precisely to give additional protection in order to encourage cross-border investment. If, then, BITs are not supposed to be neutral (as between domestic and foreign investment) can they nevertheless be fair?

Finally, for this menu of appetizers, why do the industrial countries advocate for these treaties? To illustrate this trend, consider the fact that there are currently 103 treaties for France, 83 for Italy, 147 for the Germany, 102 for the United Kingdom, and 48 for the United States.1

Policies are rarely one-dimensional, and my impression is that BITs have rarely been subject to serious debate in the developed countries. Foreign investment was accepted as a natural feature of major corporations, nearly all of which became multinational well before globalization swept across the planet. If the business community wanted BITs and they did not cost much, why not employ them? But does not foreign direct investment encourage outsourcing, loss of domestic jobs, and a drain on the balance of payments? Can one justify BITs and DTTs on the basis that public sector foreign assistance (whether bilateral or through the World Bank and regional development banks) does not work? Private investment, by contrast, is designed to bring what the public sector cannot bring: technology, management skills, and access to global markets. Maybe foreign direct investment can act as a catalyst, contributing to a culture of incentives and innovation that will lift a country out of poverty. If so, by (p.xxiii) encouraging their corporations to invest in developing countries, can the industrial countries justify their minimal commitment—0.47% of GDP for France and the United Kingdom, 0.36% for Germany, 0.28% for Japan, 0.22% for the United States—to public sector aid?2

My task was to raise a few preliminary questions. For answers—though not necessarily the answers—I invite the reader to proceed to the main text.

Andreas F. Lowenfeld (p.xxiv)