(Un)stable BITs

Abstract

Over half of all foreign direct investments (FDI) in 2020, representing $800 billion, flowed between countries with either a bilateral investment treaty (BIT) or a free trade agreement (FTA) containing an investment chapter. Countries’ preferences for the protections offered by these agreements have undergone a major change during the last two decades. This change has been fueled in part by the growing incidence of investor-state dispute settlement (ISDS) cases under these treaties, which has exposed countries hosting protected investments to more than $76 billion in damages. Recent and unprecedented shifts in the investment treaty network include mass treaty terminations by India (the fifth-largest recipient of FDI in 2020) and the partial removal of ISDS in the United States-Mexico-Canada Agreement.

This Article explores how initial and evolving preferences over BIT provisions of each signatory to a BIT may have influenced terminations and renegotiations in the investment treaty network. One of the primary challenges of studying negotiated instruments, like contracts or treaties, is that the observed outcome is a convoluted reflection of each country’s preferences, filtered through negotiation. A primary contribution of this Article is the method we develop to disentangle each country’s preferences from its respective negotiating history, using a handcoded database with provision-level information of BITs. This method allows us to measure negotiation input and document evolving preferences for each signatory in the investment treaty network. We find some evidence that a signatory’s input at the negotiation stage, evolving bargaining position, and changes in preferences over BIT provisions following treaty ratification have contributed to BIT renegotiations and terminations. Our findings help explain the wide variation among and within countries with respect to BIT outcomes that the existing literature fails to explain. The findings suggest that as countries become more sophisticated and preferences are updated, we can expect to see more turnover in the investment treaty network. However, developed countries will benefit from more balanced negotiations and more assistance to developing countries in treaty drafting and preference formation, which can increase the longevity of investment protections and overall stability of the investment treaty network.

Keywords: Bilateral investment treaties, treaty negotiation, preference evolution, termination, renegotiation