Putting it to Work in Developing Countries - Nathan Associates

BILATERAL INVESTMENT TREATIES
Consisting of specific and binding rules, bilateral
investment treaties (BIT) address investment
issues between pairs of countries. 2 After the first
BIT was adopted in 1959 the number grew
steadily to 385 by the end of 1985. Once developing
countries began concluding treaties with
each other the number of BITs in force skyrocketed,
and by the end of 2005 nearly 2,500 BITs
had been signed. 3 Most BITs are concluded
between developed and developing countries,
but an increasing share (27 percent) is between
developing countries. At least 176 countries and
territories have concluded such treaties. 4
Initially BITs were signed between developed
and developing countries so the former could
secure high standards of legal protection for
their firms’ overseas investments. The United
States, for example, negotiates BITs to secure
investor protection, to encourage adoption of
market-oriented policies that treat private
investment evenhandedly and transparently, and
to promote a stable and predictable framework
to lower perceived risk for investors. 5 Developing
countries negotiate BITs to help provide a favorable
climate for foreign investment.
These treaties contain very few specific commitments
to development. Their value to development
lies primarily in their presumed ability to
promote investment by providing a welcoming
and stable environment for foreign investment.
BITs afford developing countries considerable
latitude in applying national law and policy,
especially with respect to admission of foreign
investment, the imposition of operational conditions,
and the granting of incentives. BITs often
contain exceptions to general principles (e.g., for
balance-of-payments considerations) that address
development concerns. In general, however, they
do not provide measures for such matters as
technology transfer, technical cooperation, or
specific home-country commitments.
Provisions of the U.S. Model BIT
Each party must treat investments of the other as favorably as it treats domestic
and third-country investment, from pre-establishment, to operation and final
disposition (“national treatment” and “most favored nation”).
Limited exceptions are as stipulated in treaty annexes.
Expropriation has clear limits; investors are entitled to fair compensation and have
the right to transfer funds out of the country.
Trade-distorting practices, such as performance requirements, including the use of
local content or a requirement to export a certain share of production, are prohibited.
In a dispute with a foreign government investors have the right to international
arbitration, and are not obliged to use the government’s domestic courts.
Firms may hire top managers regardless of nationality.
States are prohibited from lowering environmental and labor protections to
promote investment.
To become effective on the U.S. side, the treaty requires approval by two-thirds of
the U.S. Senate.
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