The changing landscape of BITs

Foreign direct investment (FDI) is a major driver of growth and of knowledge transfer, and with the proliferation of global value chains it has become inseparable from trade. Yet, much more than in trade, where multilateral disciplines are better established, the current patchwork of disciplines governing FDI – predominantly taking the form of regional agreements and bilateral investment treaties (BITs) – is uneven, incomplete, distortionary, and prone to generate uncertainty and confusion.

Uncertainty over which rules apply in a given case is a particularly acute problem. Existing FDI disciplines do little to mediate the diverse fiscal and financial incentives that communities, states and countries offer to attract investment. These incentives often distort investment decisions, are costly, can exacerbate regional disparities, and they distract from hard decisions needed to improve a community or country’s business climate.

The number of new BITs signed has declined recently, perhaps because so many have already been concluded or because of the inclusion of investment chapters in proliferating regional and bilateral free trade agreements. In 2011, a total of 47 new international investment agreements (IIAs) were signed (33 BITs and 14 other IIAs), compared with 69 in 2010. Nearly every country in the world has signed a BIT; often several dozen of them. UNCTAD puts the number of BITs at the end of 2011 at 2,833.

The US and the EU have developed model BITs with the aim to compel partners to adopt features attractive to the two economic giants, and also to make agreements compatible across investment partners. In practice, the compatibility is elusive since the EU and US models differ with respect to key aspects of investment and investor treatment. Moreover, BITs rarely, if ever, address the disciplining of investment incentives as their primary purpose is to protect foreign direct investors rather than place limits on the benefits they might receive from host governments.

Developing governments, for their part, have been actively seeking to negotiate BITs as a way to promote trade and economic relations and to make their economies more attractive as destinations for FDI. As of mid-2012, for example, China had BITs with 128 countries, of which 101 are in force. India had signed BITs with 83 countries as of the same date, of which 67 are in force. Only a few countries have resisted participation in the BIT race, most notably Brazil, where authorities have eschewed the strong investor protection clauses and investor-state dispute resolution mechanisms in BITs, in an effort to preserve their policy space.

In the future, the rising importance of developing countries as foreign investors, including as South-South investors, may cause a big change in their policy mindset. As capital importers, developing countries may still have an interest in including elaborate safeguards in their BITs to preserve their prerogatives in guiding the domestic development process. As newly minted capital exporters, on the other hand, these countries will discover that they have a strong interest in BITs that allow their investors freedom of maneuver and also protect them from arbitrary action.

Read the Foreign Direct Investment as a Key Driver for Trade, Growth and Prosperity: The Case for a Multilateral Agreement on Investment report.

Author: Uri Dadush is Senior Associate and Director of the International Economics Program at the Carnegie Endowment for International Peace and is also a member of the Global Agenda Council on Global Trade and FDI.

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