The Future of Bilateral Investment Treaties

Associate Professor Rich ChenBy Associate Professor Richard Chen

My main field of research has been international investment law, a rapidly growing area of law that is relatively unknown to the general public. International investment law applies when a company from one country establishes business operations in another country. It consists primarily of bilateral investment treaties (BITs), but investment provisions also exist as part of multilateral trade agreements like NAFTA and the Trans-Pacific Partnership (TPP).

It was in the context of debates over the TPP that red flags were raised by American politicians about a particular feature of international investment law known as investor-state dispute settlement (ISDS). ISDS gives investors the ability to sue foreign governments for treaty violations before a panel of private arbitrators. Critics say that ISDS infringes on state sovereignty because it allows unelected and unaccountable arbitrators to review democratically enacted legislation and award damages to investors, thereby chilling the regulatory process. In one particularly controversial example, Philip Morris sued the Australian government for public health regulations aimed at curbing cigarette use because they purportedly reduced the value of the company’s trademarks in violation of the applicable BIT. The suit was dismissed on jurisdictional grounds.

The ISDS provisions in the TPP will not go into effect, at least for the United States, now that President Trump has withdrawn from the deal. But ISDS provisions already exist in the roughly 3,000 BITs currently in force, including about 40 to which the United States is a party. Most BITs are between a developed state on the one hand and a developing state on the other, and claims tend to be brought by investors from the former against governments of the latter. But the trends are shifting, and the United States itself has now been on the receiving end of such claims. Although none has yet succeeded, the prospect of the United States and other developed countries being held liable to foreign investors has raised alarm bells. For their part, developing states have felt the same concerns for a longer period, and at the same time have questioned whether BITs are actually contributing to increased foreign investment as they were intended to do. The upshot is a growing sense among all participants in the international investment law regime that fresh ideas are needed.

My research in the area seeks to offer new ways forward. In a 2015 article published in the Yale Journal of International Law, I argued that the arbitral tribunals adjudicating investment disputes were exacerbating the problem of intrusion on state sovereignty by reviewing the validity of legislation – and exercising policymaking discretion – the way a domestic Supreme Court would. I proposed, as an alternative, that tribunals adapt tools from contract law to effectuate the intent of the treaty parties. Such an approach, I argued, would lead to more principled decision making and, by focusing on the intent of the states themselves, reduce concerns about intrusion on their sovereignty.

In my most recent article, which is forthcoming in the Columbia Journal of Transnational Law, I propose a more fundamental reexamination of the premises underlying BIT design. The basic model has remained largely unchanged since the 1980s, and the empirical evidence suggests it is creating the costs of potential liability without the benefits of increasing investment from developed to developing states. Drawing on research by political scientists showing that the quality of domestic institutions is an important determinant of foreign investment, I suggest that BITs be redesigned to promote the reform of such institutions in developing states. A focus on domestic institutional reform would foster more immediate, concrete improvements in developing states that have failed to materialize in the current system, while also serving the long-term goal of increasing the flow of investment that is in the interest of both sides.

Global PartnershipsIt is unclear what interest, if any, the Trump administration will have in pursuing investment treaties. Although leaked draft executive orders indicated an intent to scale back participation in global affairs, international trade was exempted along with national security and extradition. President Trump has indicated that he plans to pursue new international trade agreements and renegotiate others so that they better serve American interests. It seems likely that he will take the same view of investment treaties. But as my forthcoming article argues, serving American interests in this particular context should include assisting in the process of reforming the institutions of developing countries, because that will open up opportunities for our companies to succeed abroad. International investment, like international trade, need not be a zero-sum game, and the shift I propose holds the potential to make BITs more valuable to both sides.