(Un)stable BITs

Abstract

Over forty percent of all foreign direct investments (FDI) in 2020, representing $640 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 for its BITs. We do this by leveraging the entire treaty history of each country to identify consistent drafting patterns. We then use these patterns to infer a set of preferences for each country. This method allows us to measure negotiation input, bargaining position, and 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, which existing literature fails to do. The findings suggest that as countries become more sophisticated and update their preferences, we can expect to see more turnover in the investment treaty network. More assistance from developed countries for developing countries will aid the latter in treaty drafting and preference formation and may increase the longevity of investment protections and the overall stability of the investment treaty network.