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

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