Global Treaties and Domestic Politics: Do BITs Constrain Fiscal Policy in Developing Countries?

37 Pages Posted: 20 Dec 2018 Last revised: 4 Sep 2019

See all articles by Cristina Bodea

Cristina Bodea

Michigan State University

Fangjin Ye

Shanghai University of Finance and Economics

Andrew Kerner

Michigan State University

Date Written: November 16, 2018

Abstract

Bilateral Investment Treaties (BITs) allow developing countries to trade some policy autonomy for improved access to internationally mobile capital. While the impact on capital flows is widely written about, BITs’ impact on policymaking is typically studied more narrowly in the context of regulatory policy and “regulatory chill”. We argue that the restraints that BITs place on governments also have important fiscal costs that should be accounted for. We locate those costs in two areas. First, many BITs have umbrella clauses that allow protected firms to challenge violations of side agreements that are typically more constraining than the BITs themselves and more likely to contain tax-specific constraints. Second, BITs undermine revenue generation by channeling economic activity into multinational corporations, which are among the least easily taxed part of the economy. Evidence from 105 developing countries from 1981 to 2009 supports our hypotheses, particularly as they relate to BITs with umbrella clauses.

Keywords: bilateral investment treaties, taxation, umbrella clauses, foreign direct investment

Suggested Citation

Bodea, Cristina and Ye, Fangjin and Kerner, Andrew, Global Treaties and Domestic Politics: Do BITs Constrain Fiscal Policy in Developing Countries? (November 16, 2018). Available at SSRN: https://ssrn.com/abstract=3288100 or http://dx.doi.org/10.2139/ssrn.3288100

Cristina Bodea

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Fangjin Ye

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Andrew Kerner (Contact Author)

Michigan State University ( email )

East Lansing, MI 48824
United States

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