Regulatory Chill and Investment Treaty Exits

• In Event: International Institutions and Foreign Investment

Abstract

Bilateral investment treaties (BITs) have been increasingly replaced and terminated by signatory governments after experiencing an enthusiasm of states worldwide in the 1990s. What explains this shift? Over the last three decades, the investor-state dispute settlement system has led governments to refrain from implementing bona fide regulations out of fear of legal disputes. This paper highlights how such dynamics incentivize governments to change their policies toward the investment agreements they joined. The paper examines nearly 400 BITs and over 800 investor-state disputes. The treaty-level empirical analysis provides evidence that state reform initiatives to regain autonomy in BITs are positively associated with (potential) regulatory concessions pressured by investor claimants. This suggests that as more investor claimants seek to push back or “chill” states’ regulatory efforts via investment arbitrations, governments become increasingly likely to replace or terminate BITs. The paper speaks to the emerging literature on state exits from international institutions, emphasizing that transnational market actors can play an influential role in eroding state autonomy and shaping states’ decisions.
The theoretical implications are three-fold. First, the results contribute to the scholarly debate over the relationship between BITs and foreign direct investment. If being sued does not necessarily mean that the respondent oppressed foreign investors, one may not be able to tell from dispute rulings whether the respondent is a “good” or “bad” host for investors. This jeopardizes the informational function of the investor-state dispute settlement system, which once helped capital markets screen host destinations and identify optimal investment climates. Second, the paper speaks to the emerging literature on states’ exit from international organizations, emphasizing that transnational non-state actors such as investors can play an influential role in raising sovereignty costs and driving such decisions. Third, the argument extends the scholarly discussion on the triangular relations between sovereign states, multinational corporations, and international institutions. While institutions serve as a focal point for cooperation and facilitate bargains between multinationals and states, states can opt to leave the table when expectations are not met, thereby triggering institutional reforms in recent decades and likely also in the foreseeable future.

Author

• Shiyang Wu, University of California Santa Barbara