American Society of International Law

The Political Economy of a Bilateral Investment Treaty
Author(s): Kenneth J. Vandevelde

Source: The American Journal of International Law, Vol. 92, No. 4 (Oct., 1998), pp. 621-641
Published by: American Society of International Law
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THE POLITICAL ECONOMY OF A BILATERAL
INVESTMENT TREATY
ByKennethJ.
Vandevelde*
One of the more remarkabledevelopmentsin internationallaw in the mid-1990sis

notwhatit appears to be. The massiveand sudden' proliferation of bilateralinvestment
a networkof more thanthirteenhundredagreements
treaties(BITs),2 now constituting
involvingsome 160 states,3appears to reflectthe triumphof liberal economics in the
sphere of internationalinvestment.In fact,however,it constitutesonly a momentary
convergenceofnationalistinterests.4IftheBITs are to constructtheliberalinternational
investment regimetheyseem to promise,then theymustbe modifiedin importantand
substantialways.
I. THE POLITIcAL ECONOMYOF INVESTMENTPOLICY
In this century,international political economy has been dominated by three theories

about the relationship between the state and economic activity:economic liberalism,
economic nationalism and Marxist economics.5 Economic liberalism has been associated
with a fundamentally differentinternational investment policy than economic national-
ism and Marxist economics. This section brieflydescribes each of these three theories
* Professor of Law and Dean, Thomasjefferson School of Law. The author wishes to thank Marybeth Herald
for her comments on an earlier draft of this article.
' Although the firstbilateral investment treatywas concluded in 1959, more than two-thirdsof the agreements
have been signed since 1990. For a listing, see UNITED NATIONS CENTRE ON TRANSNATIONAL CORPORATIONS
[UNCTC], BILATERAL INVESTMENT TREATIES IN THE MID 1990s (forthcoming). The International Centre for
Settlement of Investment Disputes separately compiled a list of more than 1100 treaties involving 155 countries
through the end of 1996. See INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES [ICSID],
BILATERAL INVESTMENT TREATIES 1959-1996 (1997).
2On the BITs, see generally RUDOLF DOLZER & MARGRETE STEVENS, BILATERAL INVESTMENT TREATIES (1995);
KENNETH J. VANDEVELDE, UNITED STATES INVESTMENT TREATIES: POLICY AND PRACTICE (1992) [hereinafter
U.S. INVESTMENT TREATIES]; Kenneth J. Vandevelde, U.S. BilateralInvestmentTreaties:The Second Wave, 14 MICH.
J. INT'L L. 621 (1993); Mohamed I. Khalil, Treatment ofForeign Investmentin BilateralInvestmentTreaties,8 ICSID
REv. 339 (1992); RobertK Patersonl, CanadianInvestment Promotion and ProtectionTreaties,29 CAN. YB. INT'L
L. 373 (1991); JeswaldSalacuse, BIT byBIT. TheGrowth ofBilateralInvestment and TheirImpactonForeign
Treaties
Investment in Developing
Countries,24 INT'L L. 655 (1990); KennethJ.Vandevelde,TheBilateralInvestment Treaty
Programof theUnitedStates,21 CORNELL INT'L L.J. 201 (1988); Adeoye Akinsanya, International Protection
of
ForeignDirectInvestmentin theThirdWorld, 36 INT'L & COMP. L.Q. 58 (1987); Eileen Denza & Shelagh Brooks,
Investment Protection
Treaties:
UnitedKingdom Experience,
36 INT'L & COMP.L.Q. 908 (1987); PalithaT. B. Kohona,
Investment Protection
Agreements:
An AustralianPerspective, 21 J. WORLD TRADE L. 79 (1987); T. Modibo Ocran,
BilateralInvestmentProtection
Treaties:A Comparative Study,8 N.YL. SCH.J. INT'L & COMP.L.Q. 401 (1987); M.
Sornarajah,StateResponsibilityand BilateralInvestment 20 J. WORLD TRADE L. 79 (1986); Pamela B.
Treaties,
Gann, The U.S. BilateralInvestmentTreaty Program, 21 STAN. J. INT'L L. 373 (1985).
'The UN Centre on Transnational Corporations counted 1306 BITs as of the end of 1996. UNCTC, supra
note 1.
4On the circumstances given rise to the current flurry of BIT negotiations,
that have see Kenneth J.
Vandevelde,SustainableLiberalism
and theInternational
InvestmentRegime, 19 MICH. J. INT'L L. 373 (1998).
5 SeeGEORGE T. CRANE & ABLA AMAWI, THE THEORETICAL EVOLUTION OF INTERNATIONAL POLITICAL ECONOMY
(1997); INTERNATIONAL POLITICAL ECONOMY (C. Roe Goddard, John Passe-Smith &John Conklin eds., 1996)
[hereinafter Goddard et al.]; THE INTERNATIONAL POLITICAL ECONOMY: PERSPECTIVES ON GLOBAL POWER AND
WEALTH (Jeffrey A. Frieden & David A. Lake eds., 1995) [hereinafter PERSPECTIVES]; INTERNATIONAL RELATIONS
THEORY: REALISM, PLURALISM, GLOBALISM (Paul R. Viotti & Mark V. Kauppi eds., 1993); TORBJORN L. KNUTSEN,
A HISTORYOF INTERNATIONAL RELATIONS THEORY 237-39 (1992); and ROBERT GILPIN, THE POLITICAL ECONOMY
OF INTERNATIONAL RELATIONS (1987).
621
622 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 92:621
of political economy and then identifiesthe essentialdistinctionbetween liberal and

illiberalinvestmentpolicies.
Economic
Nationalism
Economic nationalism,whichfindsits originsin the seventeenth-century doctrineof

mercantilism, appeared contemporaneously withtheriseof the nation-state as the domi-
nantformof European politicalorganization.6 Theoristssuch as Nicol6 Machiavelliand
Thomas Hobbes laid the theoreticalgroundworkfor the absolutiststate,in which all
considerationswere subordinateto raison d'etat.7Economic nationalismholds,accord-
ingly,thata state'seconomic policyshould serveitspoliticalpolicy.8Economic national-
istsgenerallyseek to enhance or preservetheirstate'spositionwithinthe international
communityby protectingor increasingthe economic resourcesavailable to the state.9
Economic nationaliststhusare willingto regulateeconomic activity to the extentneces-
saryto furthernationalpoliticalpolicy.
Postwarnational policyin the Third World statesof Africa,Asia and Latin America
has generallyemphasizedpoliticalindependenceand economicdevelopment.Economic
prescribeda policyofimportsubstitution
nationalistsin thesestatestraditionally industri-
alization,underwhichdevelopingstatessoughtto promoteenterprisesthatwould manu-
facturegoods to displace importsfromdeveloped states.'0
Similarly,economic nationalistdevelopingstateshave soughtto controlinwardand
outwardinvestment flows.Theyhave employedinterventionist measures,such as protec-
tivetariffs,"tax incentives,12investmentscreening,13and performancerequirements,14
to attractthose foreigninvestmentsthat would furthertheir developmentpolicy,to
preventestablishment ofthoseinvestments thatwouldnot,and to ensurethatinvestment,
once established,would continue to operate in accord withnational policy.15At the
6
SeeCRANE & AMAWI, supranote 5, at 5.
7Id.; GILPIN, supranote 5, at 31-32.
8
SeeCRANE & AMAWI, supranote 5, at 5;Jeffrey A. Frieden& David Lake, International Politicsand International
Economics, in Goddard et al., supranote 5, at 25, 31-32; GILPIN, supranote 5, at 31. Of course,those interests
are definedby those who, at any givenmoment,hold powerwithinthe state.Id. at 48.
' SeeGILPIN, supranote 5, at 32.
10 SeeJOHN RAPLEY, UNDERSTANDING DEVELOPMENT: THEORY AND PRACTICE IN THE THIRD WORLD 27-44
(1996).
" Protectivetariffsencourage foreigninvestment because theymake it expensivefora foreignproducerto
export to the protectedeconomy,thus creatingan incentiveto establisha productionfacilityinside the
territory of the targeteconomyand therebyavoid the tariff.SeeRICHARD CAVES, MULTINATIONAL ENTERPRISE
AND ECONOMIC ANALYSIS 27, 31-34 (2d ed. 1996); Bo SODERSTEN & GEOFFREY REED, INTERNATIONAL ECONOM-
ics 474 (3d ed. 1994); UNCTC,THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT: A SURVEY OF THE EVIDENCE
33-34, 42, UN Doc. ST/CTC/121, UN Sales No. E.92.II.A.2 (1992).
12 Out of 103 statessurveyed in the early1990s,only4 did not offersome kind of tax incentiveto foreign
investment.Seegenerally UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT [UNCTAD],INCENTIVES
AND FOREIGN DIRECT INVESTMENT 46, UN Doc. UNCTAD/DTCI/28,UN Sales No. E.96.II.A.6 (1996); UNITED
NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, DIVISION ON TRANSNATIONAL CORPORATIONS AND INVEST-
MENT [UNDTCI], WORLD INVESTMENT REPORT 1995 at 291, UN Doc. UNCTAD/DTCI/26,UN Sales No.
E.95.II.A.9 (1995).
13 Investmentscreeningrefersto mechanismsthat require prior approval for, or prohibitentirely,the
establishmentof foreigninvestment. Such mechanismstypically are embodied in a foreigninvestmentcode.
14 There is no widelyaccepted definition
ofa performancerequirement,butgenerallythe termis considered
to referto regulationson the use of inputsand outputsby the investment. Performancerequirementsmay
stipulate,for example, that the investmentuse local content,employ local workers,or export a certain
percentageof the production.A 1985 studyfound thathalfof the foreigninvestments surveyedwere subject
to some typeofperformancerequirementinvolvingeitherexporttargetsor domesticcontent.SeeCAVES,supra
note 11, at 222.
15 SeeRhysJenkins,Theoretical and theTransnational
Perspectives in Goddard et al., supranote 5,
Corporation,
at 439, 445-46.
1998] POLITICAL ECONOMY OF A BILATERAL INVESTMENT TREATY 623
same time,theyhave imposed restrictions on outwardinvestment16to preventa loss of

capital,'7although in recent years some developing states have begun to encourage
outwardinvestmentso as to gain access to foreignmarketsor needed assets such as
naturalresources,less expensivelabor and technology.18
Economic nationalismfordeveloped stateshas typically called foradoptinginterven-
tionistmeasuresto promoteand protectinvestments in foreignterritory.19
Promotional
measureshave included theprovisionofinformation, technicalassistance,financingand
investment insurance,20
whileprotectivemeasureshave encompassedthe use of military
force,economic sanctionsand diplomacy.21 Economic nationalismin developed states
mayalso take the formof restrictions on outwardinvestment.22
As thisoverviewsuggests,economic nationalistsdo not in all cases favoror oppose
foreigninvestment. Economic nationalistsin developed and developingstatesmayper-
ceiveinternationalinvestment flowsas beneficialin one case and detrimentalin another.
The common theme,however,is thatinternationalinvestmentshould be regulatedto
ensure thatit promotesnationalpoliticalpolicy.
Economic
Liberalism
Economic liberalismemerged as a critiqueof mercantilism. As a growingmerchant
class challengedthe powerof the European monarchsin the eighteenthcentury,liberal
politicaltheorists,notablyJohnLocke, rejectedthe Hobbesian concept of an absolutist
state and argued that the state existed solely to promote individualliberty.Liberal
economic theorists, particularlyAdam Smithand David Ricardo,soughtto demonstrate
thatfreemarkets,unfetteredbystateregulation,would resultin the greatestprosperity
forall.23
Liberal economicshas thusbeen concernedmorewiththe productionof newwealth
thanwiththe distribution of existingwealth.24
And, in conformity withthe classicliberal
regardfor individualliberty,economic liberalsprescribeminimalinterventionby the
statein the market.25In theirview,thestate'srole should be limitedto protectingprivate
16
See WORLD BANK, THE EAST ASLkN MIRACLE: ECONOMIC GROWTH AND PUBLIC POLICY 235-37 (1993).
Controlson outwardinvestment are imposed bythe greatmajorityof developingstates,includingthose with
transitionaleconomies. SeeUNDTCI, supranote 12, at 308, 321-31.
17 Of course,outwardforeigninvestment does not necessarilylead to a loss of capital.In fact,one economic
nationalistcriticismof inwardforeigninvestmentis thatit leads to a net loss of foreignexchange through
repatriationof the returnson the investment.Seetextinfraat note 54. Indeed, the establishmentof foreign
investment maynot entail the loss of any capitaleven initiallyby the home statebecause the investment may
be financedthroughfundsborrowedin the hoststate.SeeUNDTCI, supranote 12, at 346-49. In otherwords,
in a particularcase, the effectof a prohibitionon outwardinvestment maysimplybe to preventa home state
investorfromacquiringcontrolover foreignassets.
18 SeeUNDTCI, supranote 12, at 322-23, 331-39.
9 SeeGILPIN, supranote 5, at 241-45.

20
SeeUNDTCI, supranote 12, at 313-21.
21 See Shah M. Tarzi, ThirdWorldGovernments and MultinationalCorporations: DynamicsofHost'sBargaining
Power,inPERSPECTIVES,supranote 5, at 154, 163; KennethJ.Vandevelde,Reassessing theHickenlooperAmendment,
29 VA. J. INT'L L. 117 (1988).
however,have largelydisappearedin developed states.For example,as of the end of 1994,
22 Such controls,
onlythreemembersof the OrganisationforEconomic Co-operationand Developmentretainedcontrolson
outwardforeigndirectinvestment: Japan,Portugaland Turkey.SeeUNDTCI,supranote 12, at 310. Restrictions
on outwardinvestmentmay not necessarilyinvolverestrictions on capital movements.They also may be in
the formof limitationson technologytransfer, which could have the effectof impeding certain outward
investment flows.Loss of technologicallead is one potentialcost to a home stateof outwardinvestment.See
DOMINICK SALVATORE,INTERNATIONALECONOMICS 379 (5th ed. 1995).
23
CRANE & AMAWI,supranote 5, at 6-7, 55-58; Frieden & Lake, supranote 8, at 26.
24 SeeGILPIN, supranote 5, at 27, 43-45; RAPLEY,supranote 10, at 8.
25 SeeCRANE & AMAWI,supranote 5, at 55; MICHAEL P. TODARO, ECONOMIC DEVELOPMENT 85-86 (5th ed.
1994); Frieden & Lake, supranote 8, at 27; Jenkins,supranote 15, at 442-43.
624 THE AMERICAN JOURNAL OF INTERNATIONAL IAW [Vol. 92:621
rightsof propertyand contract26 and correctingmarketfailures.27 Liberalismseeks to

insulate the marketfrompolitics28and favorsan autonomous legal systemto protect
privatepropertyagainststateinterferenceand to enforcebargained-for exchanges in
the market.
Liberaleconomicsas developed bySmithand Ricardoadvocateda policyoffreetrade
thatpermitseach stateto specialize in the productionof goods and servicesin whichit
has a comparativeadvantage,and then trade its productsfor othersthatit wantsbut
Through economics of specializationand scale, a state
cannot produce as efficiently.29
maximizesits productivity. As a result,liberalismhas been associatedwitha policyof
export-ledgrowth.30
Liberalismalso has advocated the free movementof capital across borders.31 Free
movementof capitalcomplementsfreetradein threedifferent ways.First,to the extent
thatbarriersto trade exist,theycan be circumventedby capital movements.32 Second,
a state'sabilityto produce goods fortradedepends on its endowmentof the factorsof
production-capital, labor, land and technology.33 Foreign investmentaugmentsthe
supplyof the factorsof productionand therebyfacilitatesa state'sproductionof goods
forexport.34Third,foreignsubsidiariescan tradewiththeirparentcompaniesat lower
transactioncoststhanwithunaffiliated companies,facilitatinginternationaltrade.35
Economic liberals,however,do not in all cases favorforeigninvestment. Stateaction
to promotethe establishment of foreigninvestment in a sectorof the economyin which
the statedoes not enjoya comparativeadvantage,forexample,is antitheticalto liberal
principles.The liberaldoctrinein essence is thatthe stateshould permitthe marketto
determinethe directionof internationalinvestment flows.
MarxistEconomics
Marxisteconomics emerged in the nineteenthcenturyas a critiqueof liberalism.36
The Marxistcontentionwas thatincreasingefficiencywould lead to a surplusof capital,
causingthereturnto investors
to diminishovertime.37To maintainprofitability,
investors
would be forced to investabroad in developing states,where the relativescarcityof
capital would permitthem to earn a higherreturnon theirinvestment.38 The result
26 SeegenerallyPaul H. Rubin, Growing a Legal Systemin thePost-Communist Economies,27 CORNELL INT'L L.J.
1 (1994); Tamar Frankel,TheLegal Infrastructure ofMarkets:TheRole ofContract and PrapertyLaw, 73 B.U. L.
REv. 389 (1993).
27
SeeFrieden & Lake, supranote 8, at 27-28; GILPIN, supranote 5, at 29; RAPLEY,supranote 10, at 7.
28
GILPIN, supranote 5, at 29.
29Astatehas a comparativeadvantagein a good ifitsopportunity coststo produce the good are lowerthan
those of anotherstate.For a discussionof the theoryof comparativeadvantage,see SODERSTEN & REED, supra
note 11, at 3-71; PETER B. KENEN, THE INTERNATIONALECONOMY 46-85 (3d ed. 1994).
30 SeeRAPLEY,supranote 10, at 59-76.
31 SeeE. WAYNENAFZIGER,THE ECONOMICS OF DEVELOPING COUNTRIES 110-13 (3d ed. 1997); TODARO, supra
note 25, at 531-33.
32 For example,ifa stateenacts a protective tariff,
a foreignproducer can establisha productionfacility in
the protectedmarketand therebysell in thatmarketwhileavoidingthe tariff. Seenote 11 supra.
" The traditionalviewis thatproductivity at any givenlevel of technologydepends on the endowmentsof
land, labor and capital. Because technologywas assumed to be a constant,it was not treatedas a factorof
production.Modern economics,however,treatstechnologyas a variable determiningproductivity, whether
classifiedas a factorof productionor not. SeeKENEN, supranote 29, at 46-48.
34The most obvious effectof a foreigninvestment is to increase the capital supply,but it mayhave other
effectson productivity. The investment, for example, maybringin foreigncurrency,whichcan be used to
purchase scarce resources,thus augmentingthe "land" endowment;or it may provide employeetraining,
thusimprovingthe qualityof the labor pool; or it mayintroducenew technology.
" SeeSALVATORE,supranote 22, at 379; GILPIN, supranote 5, at 270.
36 SeeIntroduction: Politicsand International
International Economics,in PERSPECTIVES,supranote 5, at 1, 11.
37 SeeGILPIN, supranote 5, at 36-37.
38
SeeFrieden & Lake, supranote 8, at 29-30; CRANE & AMAwI,supranote 5, at 10, 83-85.
would be the industrialization of the developing world, which was a necessary step in the
transitionfromfeudalism to capitalism and then ultimatelyto socialism.39The benefits to
developed states, however, would be uneven, leading to international conflict over con-
trol of markets in developing states.40
Marxists in recent years have focused on the potentially detrimental effectsof foreign
investment on developing states. Twentieth-centuryneo-Marxists have developed the
dependency theory of foreign investment,4'which regards foreign investmentas a form
of neocolonialism that subjects the local economy to foreign control and promotes
underdevelopment.42 Dependency theorists have called for reducing the economic ties
between developed and developing states,43including the screening out of foreign invest-
ment from developed states, particularly if it does not demonstrably contribute to the
host state's developmental objectives, and in some cases expropriating those foreign
investmentsthat are already in existence.44Contemporary Marxists are concerned about
the distributional consequences of a liberal investment regime45 and thus favor state
intervention in the economy to ensure a more equal distribution of wealth.46
TheCritique
ofLiberalInvestment
Policy
As the foregoing suggests, economic liberals espouse an outward-looking philosophy
that regards integration into the global economy as the key to economic development.47
They favor the removal of barriers to transfrontierinvestment flows that inhibit global
integration and diminish the production of wealth. Further, liberals contend that the
negative effectsascribed to foreign investment are often in fact attributable to flawed
host state regulatory effortsand thus the proper response is less, rather than more,
regulation.48
Particularly within developing states, economic nationalists, with their emphasis on
nation building and economic development, have found common cause with Marxist
economists, who advocate a more equal distribution of wealth within the international
community.49These theorists share an inward-looking philosophy50 and are generally
suspicious of unregulated foreign investment.They support interventionin the economy
when necessary to ensure that foreign investment conforms to their political goals of
promoting the national independence and economic development of Third World states.
39 Early Marxist theory thus saw foreign investment as beneficial to developing states.
" SeeGILPIN, supranote 5, at 38-40, 270-73; Jenkins, supranote 15, at 450-52; CRANE & AMAWI, supranote
5, at 85.
41 See generally
RAPLEY, supranote 10, at 18-20; NAFZIGER, supranote 31, at 106-08. For a summary of
dependency theory, see Theotonio dos Santos, The StructureofDependence,in Goddard et al., supra note 5, at
165; ImmanuelWallerstein,Dependence
in an Interdependent
World,in id. at 176.
42 See INTERNATIONAL RELATIONS THEORY, supra
note 5, at 455-58; SUBRATA GHATAK, INTRODUCTION TO
DEVELOPMENT ECONOMICS 65 (3d ed. 1995); M. SORNARAJAH, THE INTERNATIONAL LAW ON FOREIGN INVESTMENT
43-45 (1994); TODARO, supra note 25, at 81-82; NAFZIGER, supra note 31, at 106-07; Jenkins, supra note 15,
at 448-50; RAPLEY, supra note 10, at 18-20.
43 See NAFZIGER, supranote 31, at 107-08; GILPIN, supranote 5, at 291-94; RAPLEY, supranote 10, at 20;
SORNARAJAH, supranote 42, at 43-45; CRANE & AMAWI,supranote 5, at 15; RICHARD GRABOWSKI & MICHAEL
P. SHIELDS, DEVELOPMENT ECONOMICS 10 (1996).
44 SeeCRAN E & AMAWI,supranote 5, at 14- 15; GRABOWSKI & SHIELDS, supra note 43, at 4-10; TODARO, supra
note 25, at 81-84; GHATAK, supra note 42, at 66-67.
45 SeeGILPIN, supranote 5, at 56.
41 See Frieden & Lake, supra note 8, at 30.
47 SeeGILPIN, supranote 5, at 265-70; TODARO, supra note 25, at 85-86, 484-86.
48 See TODARO, supra note 25, at 85-86; Jenkins, supra note 15, at 442-43.
49 SeeCRANE & AMAWI,supranote 5, at 21. Gilpin, for example, sees dependency theory as drawing equally
on Marxist economics and economic nationalism. GILPIN, supra note 5, at 282-88.
50 The philosophy is inward looking in that it favors greater reliance on domestic resources by using local
producers to supply goods and local markets to consume them.
Their concern about a liberal foreigninvestmentregime is twofold.5'First,foreign

investment maynotproduce thepromisedincreasein efficiency. Dependencytheory,for
example,assertsthatforeigninvestment fostersunderdevelopment ratherthaneconomic
growthin developingstates.52 The essence of the argumentis thatthe subsidiaryin the
developingstatewill be operated forthe benefitof the parent companyand thuswill
transferresourcesfromthe developingto the developed stateratherthan in the other
direction.53It is alleged, forexample,thatforeigninvestment mayreduce both foreign
currencyreserves54 and employment.55 Even where theyaccept the liberal economic
analysisas essentiallycorrectin theory,criticsof liberalismpoint to extensivemarket
failuresin developingstatesthattheybelievewill preventan unregulatedmarketfrom
deliveringthe promisedgrowth.56
The second concern is that,even where the promisedproductivity materializes,in-
creased productivity and economic developmentare not the same thing.57Economic
developmenttheory, sincethe 1970s,has emphasizedthateconomicdevelop-
particularly
mentrequiresboth increasedproductivity and a more equitabledistributionofwealth.58
From thisperspective,the real goal is development,not simplyincreasedproductivity,
and liberalismpromisesonlythelatter.The second concernthusfocuseson thedistribu-
tional consequences of foreigninvestment.These consequences are both internaland
external.
Foreigninvestment redistributeswealthand powerinternally in thatnot all members
of the societywillbenefitequallyor at all and some maybe disadvantagedbyit.59The
benefitsmay be most likelyto accrue to bettereducated urban populations60or to
politicallydominantethnicgroups,6'whichservesonly to reinforceor extend existing
gaps betweenthe wealthyand the poor.62Alternatively, the creationof new centersof
wealth,powerand opportunity mayweaken the positionof traditionalelites.63
Foreigninvestment redistributeswealthand powerexternallyby transferring control
over local assetsto personswho are outside the nationalpoliticalsystem.64 This maybe
5" TODARO, supranote 25, at 533-35.

52
SeeGILPIN, supranote 5, at 247, 285-88; CRANE & AMAwI, supranote 5, at 14; RAPLEY, supra note 10, at
18-20.
51 SeeSORNARAJAH, supranote 42, at 43-45.
5' The concernis thatthe foreigninvestment maydeplete foreigncurrencyreservesthroughthe purchase
of importedinputsfromthe home stateor anotherstate,the paymentof royalty or managementfees to the
parent company,and the repatriationof profits.SALVATORE, supranote 22, at 178; TODARO,supranote 25,
at 532.
55 The foreigninvestment maysubstitutecapital-intensive means of productionforlabor intensive,reducing
employmentwhile raisingproductivity. Seenote 126 infra.
56 SeeTODARO,supranote 25, at 87, 588-91; GRABOWSKI& SHIELDS, supranote 43, at 268-73.
57 SeeNAFZIGER,supranote 31, at 38, 163-64.
58 SeeGHATAK, supranote 42, at 34, 242-43; TODARO,supranote 25, at 132.

5' Thus,foreigndirectinvestment maybe opposed bypotentiallocal competitors who are unable to compete
withmuchlargertransnational enterprises.SeeGHATAK, supranote 42, at 169. In Mexico,forexample,liberaliza-
tion of foreigninvestmentregimesfavoredthe exportsector,while disfavoring firmsthatmanufacturedfor
the local market.SeeAlexE. FernandezJilberto & BarbaraHogenboom,Mexico'sIntegration in NAFJ'A:Neoliberal
Restructuringand ChangingPoliticalAlliances,in LIBERALIZATION IN THE DEVELOPING WORLD 138, 150 (Alex E.
FernandezJilberto& AndreMommen eds., 1996).
60 SeeTODARO, supranote 25, at 534.
SeeAmy L. Chua, ThePrivatization-NationalizationCycle:TheLinkBetween Marketsand Ethnicity
in Developing
Countries,95 COLUM. L. REv. 223 (1995).
62 See TODARO, supra note 25, at 533. The fact that foreign investments generally pay relatively high wages
has been cited as an indicationthatforeigninvestmentexacerbatesinequality,particularly
betweenurban
and ruralsectorsof the economy.GHATAK, supranote 42, at 169.
63 See UNITED NATIONS TRANSNATIONAL CORPORATIONS AND MANAGEMENT DISION [UNTCMD], FoRMuLA-
TION AND IMPLEMENTATION OF FOREIGN INVESTMENTPOLICIES 25-26, UN Sales No. E.92.II.A.21 (1992).
64 See EDWARD M. GRAHAM & PAUL R. KRUGMAN, FOREIGN DIRECT INVESTMENT IN THE UNITED STATES 86-
93 (1995).
particularlyobjectionablewhere the enterprisesubject to foreigncontrolis important

to the hoststate'smilitary
defense,culturalidentityor othervitalinterests.65
Indeed, the
Marxistcritiqueof foreigninvestmentcharacterizesit as a recolonializationof the host
state.66
The apprehensionabout foreigncontrolrangesfromfearsof intervention in the
politicalprocessto concernsabout culturalimperialism.67
The critiqueof liberalismis not limitedto developingstates.Economic nationalists
in developed statesmay fear inwardforeigninvestment,particularlythat fromother
developed states,formanyof the same reasonsthateconomic nationalistsin developing
statesfearit.68Economic nationalistsalso mayfearoutwardinvestment because of con-
cerns thatit willtransferproductivecapacity,hence employment, abroad.69
II. THE LIBERAL IDEOLOGY OF THE BITs

BITs presentthemselvesas quintessentially liberal documents.The typicalBIT cites
twogoals in itspreamble:thecreationoffavorableconditionsforinvestment bynationals
and companies of one partyin the territory of the other,and increasedprosperityin
both states.70In short,the avowed purpose of a BIT may be distilledinto fivewords:
increasedprosperitythroughforeigninvestment. The preamble thusaffirmsthe basic
liberaldoctrinethatfreemovementof capitalwillyieldgreaterproductivity.
Further,the historyof the BITs indicatesthat a principalinducementfor statesto
enter into a BIT has been preciselythat it affirmsliberalism.Althoughthe firstBIT
programwasinauguratedin 1959 byGermany,71BIT negotiationsproceeded throughout
the 1960s at a largelydesultorypace. In the ten yearsfrom1959 through1968, only
seventy-four BITs were concluded, that is, fewerthan eight per year worldwide.72Of
these seventy-four,halfwere concluded by Germany.
The pace ofnegotiationsdid notnoticeablychangeuntilthemid-1970s, whenideologi-
cal debatesconcerningthestandardofcompensationforexpropriationthatwasrequired
bycustomary internationallawemergedas thecentralissuein discussionsofinternational
investmentlaw.73Developed states proposed the negotiation of BITs providingfor
prompt,adequate and effectivecompensationforexpropriationas an antidoteto eco-
nomic nationalistassertionsthatexpropriatedinvestorswere entitledto no more than
national treatmentand Marxistclaims thatno compensationat all was owed.74Thus,
the BITs acquired a distinctideologicalpurpose.Indeed, theUnitedStateswas unwilling
65 SeeCAvEs,supranote 11, at 252.

' SeeDEAN HANINK, THE INTERNATIONAL ECONOMY:A GEOGRAPHICAL PERSPECTIVE 234 (1994). The coloniali-
zation is not seen as merelyeconomic. There is concern thatmultinationalcompanieswill seek to exercise
politicalcontrolover the state in order to protectinvestment, seeTODARO, supranote 25, at 534, although
direct political interventionby foreigninvestmentsseems a "thing of the past." UNTCMD,supranote 63,
at 26.
67 SeeTODARO, supranote 25, at 534; GILPIN, supranote 5, at 247-48.
68 For a discussionof economic nationalistconcernsabout foreigndirectinvestment in the United States,

see Jose E. Alvarez,PoliticalProtectionism and UnitedStatesInternationalInvestment
Obligationsin Conflict:
The
HazardsofExon-Florio, 30 VA. J. INT'L L. 1 (1989); GRAHAM & KRUGMAN, supranote 64, at 59-67, 79-90.
"9 Economic nationalistsdo not inevitablyoppose outwardinvestmentflows.As noted in textat note 19
supra,economic nationalistsin developed statesoftenfavorthe promotionand protectionof outwardinvest-
ment.Althougheconomic nationalistsagree thatinvestment activity
should furthernationalpolicy,theymay
disagreeover nationalpolicyitselfand thusabout the desirability of capital movements.
70 BIT preamblessometimesreciteother goals as well, such as improvedeconomic relationsbetweenthe
twoparties.
71 The firstBIT was that between Germanyand Pakistan,whichwas signed on November25, 1959, and
entered into forceon November28, 1962. The firstBIT to enterinto force,thatbetweenGermanyand the
Dominican Republic,was signed on December 16, 1959, and enteredinto forceon June 3, 1960.
72 For chronologicallistingsof the BITs, see UNCTC,supranote 1, and ICSID, supranote 1.
73 SeegenerallySoRNARAJAH, supranote 42.
74 SeeVANDEVELDE,U.S. INVESTMENTTREATIES, supranote 2, at 21.
628 THE AMERICANJOURNALOF INTERNATIONALLAW [Vol. 92:621
to negotiateanyBIT thatdid not embracethe prompt,adequate and effective standard,

despitethe factthatthe treatymighthave offeredreal protectionin otherrespectsfor
foreigninvestors,because any such protectionwould have been insufficient to justify
the ideological consequences of agreeingto a weakercompensationstandard.75
In directresponse to United Nations General Assemblydebates on the measure of
compensation,the United States launched its BIT programin 1977.76 Several other
developed statesalso inauguratedtheirprogramsin the 1970s.77France concluded its
firstBIT in 1972,78theUnitedKingdomin 1975,79Austriain 1976,80andJapan in 1977.81
During the ten yearsfrom1977 to 1986, some 153 BITs were negotiated,meaningthat
the pace of negotiationsin the decade startingin the mid-1970swas about double that
of the firstdecade of the program.
The pace ofnegotiationsquickeneda second timein the early1990s,withthe collapse
of theSovietUnion and the transformation oftheCentraland EastEuropean economies
fromsocialismto freemarkets.82 Conclusion of a BIT representeda relativelyeasyway
forthese statesto demonstratetheirrenunciationof Marxisteconomicsand theircom-
mitmentto a liberaleconomic regime.For example,some 196 BITs weresignedin 1996
83 8
alone, an astonishingcontrastto the fewerthan 8 per yearsigned in the 1960s.84
BITs have thereforebeen concluded in manycases because theysymbolizea commit-
mentto economic liberalism.The sincerity of thatcommitment, however,can be mea-
sured by examiningthe provisionsof the BIT.
III. THE SUBSTANCE OF THE BITs

Liberaleconomictheoryrestson a seemingcontradiction. On theone hand,liberalism
abhorsstateintervention in privateeconomicarrangements.85 On theotherhand,liberal-
ism demands a state that is willingand able to protectprivatecontractand property
rightsand to correctmarketfailures.86 Liberalismthusfavorslimitedstateintervention
in privateaffairs,but intervention nonetheless.87
As thismightsuggest,a liberal internationalinvestmentregimewould reston three
principles:investmentneutrality, the principlethatthe stateshould not interferewith
transfrontier investmentflows;investmentsecurity,the principlethatthe state should
protectprivateinvestment;and marketfacilitation, the principlethatthe stateshould
facilitatethe operationof the marketby correctingmarketfailures.
75See id. at 25-26.

7"The United States began to prepare for treatynegotiationsin 1977, but did not sign its firstBIT, that
withEgypt,until 1982. Id. at 29, 35.
77 The claim here is not thatthe affirmation of liberalismis the onlyor even the dominantpurpose of the
BITs. Indeed, as willbe argued below,BITs are primarily economic nationalistdocuments.The claim is only
thata purposeof BIT negotiationsin the 1970s and early1980swas to counteractilliberalideological hostility
to foreigninvestmentand that the BITs were held out as liberal instruments.In other words,BITs were
intendedto affirmliberalism,even if theywere not primarily liberaldocuments.
78 France signedits first BIT, withTunisia, on June 30, 1972. France and Tunisia also had exchanged notes
relatingto investmentin 1963. UNCTC,supranote 1.
79The United Kingdomsigned its firstBIT, withEgypt,on June 11, 1975. Id.
80Austriasignedits firstBIT, withRomania, on September30, 1976. Id.
81
Japan signed its firstBIT, withEgypt,on January28, 1977. Id.
82 See Michael Mandelbaum, Coup de Grace:TheEnd of theSovietUnion,FOREIGN AFF., Winter1991-92, at
164; Michael Mandelbaum, TheBushForeignPolicy,FOREIGN AFF.,Winter1990-91, at 5; Coit D. Blacker,The

CollapseofSovietPowerin Europe,id. at 88.
83 SeeUNCTC, supranote 1.
84
Seetextsupraat note 72.
85
86
Seetextsupraat notes 26-27.
87 See UNCTAD & WORLD BANK, LIBERALIZING INTERNATIONAL TRANSACTIONS IN SERVICES: A HANDBOOK
50 (1994).
An economic nationalistinvestmentregime,by contrast,would retainfor the state

the prerogativeto intervenein the economywhen necessaryto servedistributionalor
other goals and thus would reject the principle of investmentneutrality.88 Capital-
exportingstatesadheringto an economic nationalistideology,in accordance withthe
goal of preservingexistingwealth,would favorinvestmentsecurity;89 while capital-im-
portingstates,in accordance withthe protectioniststance characteristicof economic
nationalism,90 would wishto preservetheirrightto exclude or regulatecapitaland thus
would be skepticalof investmentsecurityto the extentthatthe principleundermined
thatprerogative.Marketfacilitation is not inherentlyinconsistentwitheconomic nation-
alism,but neitheris it a core principleof thatideology,since economic nationaliststake
a regulatory,ratherthan a facilitative, stance towardthe operation of the market.9'
Economic nationalists, in otherwords,can favora properlyfunctioningmarket,but only
ifit is consistentwiththeirpoliticalgoals.
Marxisteconomics,particularly as practicedin thesocialiststatesof theSecond World,
essentiallyrejected all three principles.The stateexercised complete controlover the
economy,whichmade both investment neutralityand investmentsecurityimpossible.92
Further,theplanned economiesoperatedbythesestatesabolishedthemarket,93 render-
ing marketfacilitationsuperfluous.
If the BITs are in factliberal instruments, theyshould contain provisionsintended
to advance all three principles:investmentneutrality, investmentsecurityand market
facilitation.If theyare Marxistinstruments, theyshould reject all three principles.If
economicnationalistdocuments,theyshouldbe expectedto buttressinvestment security
(because theyhave been draftedby capital-exporting states),while generallyavoiding
investment neutralityand perhapsshowinglittleinterestin marketfacilitation. This part
considersthe extent to which the provisionsof a typicalBIT advance each of these
principles.
Investment
Neutrality
Investmentneutrality provisionsshould ensure thatthe host and home stateswillnot

discriminate among investments on politicalgrounds.This entailspermittinginvestment
to crossbordersfreely(access) and avoidingactionthatdiscriminates amonginvestments
on the basis of nationalityof ownership(nondiscrimination).
Withrespectto access,the typicalBIT providesthateach partyshalladmitinvestment
In effect,local
byinvestorsof the otherparty,but subjectto the lawsof the firstparty.94
law ratherthan the BIT determineswhethera particularforeigninvestmentmay be
established.95Nor do the BITs require the host stateto permitthe entryof technicalor
88
Seetextsupraat notes 11-2'2.
89
90 Seetextsupraat notes 11-15.
9' Seetextsupraat notes 11-22.
92
SeeRAPLEY, supranote 10, at 44-45.
93Id. at 44.
94 Typicalis Article2 (1) of the BIT betweenGermanyand Dominica. Treatyconcerningthe Encouragement
and Reciprocal Protectionof Investments,Oct. 1, 1984, Dominica-Ger.,reprinted in 2 ICSID, INVESTMENT
PROMOTION ANDPROTECTION TREATIES(loose-leaf).
9 The United StatesBITs representan exception.They guaranteeto coveredinvestorsnational and most-
favored-nation treatment withrespectto the establishment in the hoststate.Each party,however,
ofinvestment
is allowed to specifyin an annex to the treatysectorsof the economywithinwhichit reservesthe rightto
deny national treatment,MFN treatmentor both. See, for example, Article11(1) of the Mongolia-United
States BIT. TreatyConcerningthe Encouragementand Reciprocal Protectionof Investment,Oct. 6, 1994,
U.S.-Mong.,S. TREAvyDoc. No. 104-10 (1995). Thus, the United Statesexceptionis a qualifiedone.
managerialpersonnel needed in connectionwith the operation of the investment.96

Further,where the host state does permitestablishmentof an investment, most BITs
allowtheimpositionofperformancerequirementsas a conditionoftherightofestablish-
ment.97The typicalBIT also imposesno requirementon home statesto permitoutward
investmentflows.
BITs typicallyprovide two importantguaranteesof nondiscriminatory treatmentof
investment,98 once established:a guarantee of national treatmentand a guarantee of
most-favored-nation treatment.99 MostBITs, however,exceptfromtheseprovisionscon-
cessions involvingtaxes'00and those made to other states as part of an agreement
establishinga regional economic integrationorganization(REIO), such as a customs
union or freetrade area.'0'
Given the contentof these provisions,the BITs do not farewell as instrumentsof
investmentneutrality. They guaranteeno rightof access for capital or persons to the
host state,theyleave the home statewithunlimiteddiscretionto prohibitor regulate
outwardinvestmentflows,the obligationof the host statenot to discriminateapplies
onlyafterinvestment is established,and thepostestablishmentobligationofnondiscrimi-
nation on the partof the host stateis subjectto importantqualifications.
Further,because BIT protectionsapplyonlyto foreigninvestment, theBIT investment
protectionprovisionsactuallyserveto underminethe principleof investmentneutral-
ity.'02For example, the nondiscrimination provisionsof the BIT do not prohibitthe
96 The U.S. BiTs are veryunusual in thattheydo have such a provision, but are subjectto the host state's
immigration laws.The purposeof theprovisionin thecase of theU.S. BiTs is to trigger
theapphcability of a U.S.
statutethatauthorizesissuanceofa visato a personwho is entitledto it underthe treaty.
Thus,theBIT provision
entitlescoveredinvestors to an entryvisafortheUnitedStates,but onlyas long as the U.S. statuteso authorizes.
SeeVANDEVELDE,U.S. INVESTMENTTREATIES, supranote 2, at 95-98; TreatyConcerningthe Encouragementand
ReciprocalProtectionof Investment, Jan. 19, 1993,U.S.-Kyrg.,
Art.11(3),S. TREATYDoc. No. 103-13(1993).
97 The BITs concluded by the United Statesagain representan exception.Most U.S. BITs, especiallythose
concluded in recentyears,containa prohibitionon performancerequirements.The Moldova-United States
BIT, forexample,states:"NeitherPartyshallimposeperformancerequirementsas a conditionof theestablish-
ment,expansion or maintenanceof investments, which require or enforcecommitmentsto export goods
produced,or whichspecifythatgoods or servicesmustbe purchasedlocally,or whichimpose anyothersimilar
requirements."TreatyConcerningthe Encouragementand Reciprocal Protectionof Investment,Apr. 21,
1993, U.S.-Mold.,Art.11(6), S. TREATYDoc. No. 103-14 (1993). This language,whichwas typicalof U.S. BIT
practiceuntilthe mid-1990s,was replaced by a more detailed provisionquoted at note 147 infra.
98 In additionto the guaranteesof nationaltreatment and MFN treatmentdiscussedin the text,manyBITs
separatelyprohibittheimpairmentofinvestment byunreasonableor discriminatory action.See,e.g.,Agreement
concerningthe Promotionand Reciprocal Protectionof Investments,Chile-Den.,May 28, 1993, Art. 3(1),
reprintedin 5 ICSID, supranote 94. In the U.S. BITs, this provisionprohibitsimpairmentby arbitraryand
discriminatory action. See,e.g.,the U.S.-MoldovaBIT, supranote 97, Art.11(2)(b).
'3 The BIT betweenEstonia and the United States,forexample,providesthat
[e] ach Partyshall . . . treatinvestment. . . on a basis no less favorablethan that accorded in like
situationsto investment. . . of itsown nationalsor companies,or of nationalsor companiesof anythird
country, whicheveris the mostfavorable,subjectto therightof each Partyto makeor maintainexceptions
fallingwithinone of the sectorsor matterslistedin the Annex to thisTreaty.
Treatyfor the Encouragementand ReciprocalProtectionof Investment, Apr. 19, 1994, Est.-U.S.,Art.11(1),
S. TREATY Doc. No. 103-38 (1996).
100
For example, the Estonia-U.S.BIT, id., Art.X(2), statesthat "the provisionsof thisTreaty. . . shall
applyto mattersof taxationonlywithrespectto the following:(a) expropriation. . .; (b) transfers . .; or
(c) the observanceand enforcementof termsof an investmentagreementor authorization."
"' See, forexample,the Estonia-U.S.BIT, id.,Art.11(10).
A customsunion is an arrangementamong statesunder which theyeliminatebarriersto trade among
themselves, whilemaintaininga commontradepolicytowardnonmemberstates.The REIO exceptionusually
also applies to freetrade areas, whichare arrangementsunder whichstateseliminatetrade barriersamong
themselvesbut maintainseparate tradepolicies withrespectto nonmemberstates.
102 The preferenceforforeigninvestorscreatedbyBITs willbe of practicalsignificancein onlyverylimited
circumstances.Host stateinvestorshave naturaladvantagesthat,all else being equal, willusuallygive thema
competitiveadvantagethatforeigninvestorsmustoffsetthroughgreaterefficiency.
host statefromofferingspecial concessionsto foreigninvestorsand, in the eventthat

the investmentclimatein the host statedeteriorates,onlyforeigninvestorswillbe pro-
tectedby a BIT.'03
InvestmentSecurity
Most of a typicalBIT is directedat protectingthe securityof the investmentafterit
is established.First,thereusuallyis a broad provisionguaranteeingthatcoveredinvest-
mentwillreceivefairand equitable treatment, fullprotectionand securityand, in some
cases, treatmentno less favorablethan thatrequired by internationallaw.'04Second,
BITs virtuallyalwayscontain a provisionrestricting the host state'srightof direct or
indirectexpropriationto situationswhere the expropriationis for a public purpose,
nondiscriminatory, in accordance with due process, and accompanied by compensa-
tion,105 most often,prompt,adequate and effective compensationor some equivalent
formulation.106Third,mostBITs requirenationaland MFN treatment withrespectto the
paymentofcompensationfordamage to investment caused bywaror civildisturbance.107
Fourth,manyBITs have a provisionguaranteeingthe rightof investorsto transferthe
investment and the returnson theinvestment intoa freelyconvertiblecurrency.'08Fifth,
The preference,however,is not withoutsignificance.In Colombia,forexample,successfullegal actionwas

taken to invalidatea portionof the Colombia-United KingdomBIT on the ground thatthe treatygranted
special treatmentto foreigninvestors.Courtrejects treaty clause,FIN.TIMES, Aug. 16, 1996, at 5 (U.S. ed.).
103 Developingstates,forexample,oftenofferspecialincentivesto foreigninvestorsnot availableto domestic
competitors.SeeWORLD BANK, supranote 16, at 228-31.
104 For example,theJamaica-UnitedStatesBIT providesthat" [i]nvestments shall at all timesbe accorded
fairand equitabletreatment, shallenjoyfullprotectionand securityand shallin no case be accorded treatment
less thanthatrequiredbyinternationallaw." TreatyConcerningtheReciprocalEncouragementand Protection
of Investment, Feb. 4, 1994, U.S.-Jam.,Art.11(2)(a), S. TREATYDoc. No. 103-35 (1994).
This provisiongenerallyis understoodnot to require thatforeigninvestmentbe protectedabsolutely,but
only thatthe host statetake reasonable measuresto protectit. See VANDEVELDE,U.S. INVESTMENTTREATIES,
supranote 2, at 77. Note, however,that the provisionrequires protectionagainstprivateas well as public
actors.Id.
105
See, forexample,ArticleIII (1) of theJamaica-U.S.BIT, supranote 104.
106
SeeDOLZER& STEVENS, supranote 2, at 108-17. On the equivalencyof some of theseotherformulations
in U.S. BITs, see VANDEVELDE,U.S. INVESTMENTTREATIES, supra note 2, at 120-37.
107
For example, the Latvia-United StatesBIT provides,in Article111(3):
Nationalsor companies of eitherPartywhose investments sufferlosses in the territory
of the otherParty
owing to war or other armed conflict,revolution,stateof national emergency,insurrection, civildistur-
bance or othersimilareventsshall be accorded treatmentbysuch otherPartyno less favorablethan that
accorded to itsown nationalsor companiesor to nationalsor companiesof anythirdcountry,whichever
is the mostfavorabletreatment, as regardsany measuresit adopts in relationto such losses.
Treatyfor the Encouragementand ReciprocalProtectionof Investment, Jan. 13, 1995, U.S.-Lat.,S. TREATY
Doc. No. 104-12 (1995).
A numberof BITs specifically requirepaymentof prompt,adequate and effective compensationforat least
certainwar and civil disturbancelosses. See, e.g., TreatyConcerning the Reciprocal Encouragementand
Protectionof Investment, Feb. 26, 1986, U.S.-Cameroon,Art.IV.2-3, S. TREATYDoc. No. 99-22 (1986). Such
provisionsare unusual, however,because the compensationtheycover forwar and civildisturbancelosses is
often required in any event by the general provision on expropriation. See VANDEVELDE,U.S. INVESTMENT
TREATIES, supra note 2, at 214.
108 The United States-UzbekistanBIT, forexample, provides,in ArticleV(1):
Each Partyshall permitall transfers to be made freelyand withoutdelay
relatingto a coveredinvestment
into and out of its territory.
Such transfers
include:
(a) contributionsto capital;
(b) profits,dividends,capitalgains,and proceeds fromthe sale of all or anypartof the investmentor
fromthe partialor completeliquidationof the investment;
payments,managementfees,and technicalassistanceand otherfees;
(c) interest,royalty
(d) paymentsmade under a contract,includinga loan agreement;and
(e) compensationpursuantto ArticlesIII [relatingto expropriation]and IV [relatingto losses due to
armed conflict],and paymentsarisingout of an investmentdispute.
632 THE AMERICANJOURNALOF INTERNATIONALLAW [Vol. 92:621
some BITs require the host stateto observeany commitmentsinto whichit mayhave
enteredwithrespectto investments,109 whichmayinclude,in particular,the investment
agreementsthathost statesoftensign withinvestorsto induce them to invest.Finally,
the BITs provideforbindingthird-party of disputesbetweentheinvestorand
arbitration
the host statell' or betweenthe home and host states.11'
The protectionprovided by the BITs is principallyagainst state interferences with
investment,ratherthan privateinterferences.BITs, for example, do littleto protect
intellectualproperty rightsagainstprivateinfringement or to provideforeffective
resolu-
tion of disputesbetweenthe investorand otherprivateparties.
The investmentprotectionprovisionsof the BIT neverthelessare quite strong.In
particular,theyprovideprotectionagainstthe mostimportantsourcesof noneconomic
riskfacingforeigninvestment, specificallyexpropriation,currencyexchange controls,
and war and civildisturbances,and theyestablishlegal mechanismsto enforcethose
112
protections.'
TreatyConcerningthe Encouragementand ReciprocalProtectionof Investment, Dec. 16, 1994, U.S.-Uzb.,S.

TREATYDoc. No. 104-25 (1996).
Exchange controlsprotectthe foreigncurrencyreservesof a stateagainstdepletion,but also preventthe
investorfromenjoyingthe returnon its investment.The investorearns profitsin the currencyof the host
state,but if the currencycannot be exchanged for another and if the investordoes not want to use the
currencyforreinvestment or consumptionin the host state,then the value of the returnis lost.
At the same time,since statesneed to husband foreigncurrencyto purchaseessentialsavailableonlyfrom
foreignsources,some stateshave insistedon the rightto impose exchange controlsin some circumstances.
Some BITs, for example, have exceptions permittingexchange controlsfor a limitedtime when foreign
currencyreservesreach verylow levels.These exceptionstypically requireboth thatthe investorbe permitted
to transfer a certainpercentageoftheinvestment each yearwhilethecontrolsare in place and thatthecontrols
be imposed on an MFN basis. See,e.g.,TreatyConcerningthe ReciprocalEncouragementand Protectionof
Investment, Mar. 12, 1986, U.S.-Bangladesh,Protocol,para. 4, S. TREATYDoc. No. 99-23 (1986).
In viewof theseconflicting considerations,the freetransfersprovisionis oftencontroversial
in negotiations.
SeeVANDEVELDE,U.S. INVESTMENTTREATIES, supranote 2, at 143.
1'9 See, forexample,theJamaica-U.S.BIT, supranote 104, statesin Article11(2) (c) that" [e] ach Partyshall
observeany obligationit mayhave enteredinto withregardto investments."
"" See, forexample,theAlbania-United StatesBIT, ArticleIX. TreatyConcerningthe Encouragementand
ReciprocalProtectionof Investment, Jan. 11, 1995, U.S.-Alb.,S. TREATY Doc. No. 104-19 (1995).
"' The Ecuador-United StatesBIT, forexample, providesin ArticleVII:
1. Anydisputebetweenthe Partiesconcerningthe interpretation or applicationof the Treatywhich
is not resolvedthroughconsultationsor otherdiplomaticchannels,shall be submitted,upon the request
of eitherParty,to an arbitraltribunalfor binding decision in accordance withthe applicable rules of
internationallaw. In the absence of an agreementby the Partiesto the contrary,the arbitrationrules of
the United NationsCommissionon InternationalTrade Law (UNCITRAL),except to the extentmodified
by the Partiesor by the arbitrators,
shall govern.
2. Withintwomonthsof receiptof a request,each Partyshallappointan arbitrator. The twoarbitrators
shall select a thirdarbitratoras Chairman,who is a national of a thirdState.The UNCITRALRules for
appointingmembersof three member panels shall apply mutatismutandisto the appointmentof the
arbitralpanel exceptthattheappointingauthority referencedin thoserulesshallbe theSecretaryGeneral
of the Centre.
3. Unlessotherwiseagreed,all submissionsshallbe made and all hearingsshallbe completedwithinsix
monthsof thedate of selectionof the thirdarbitrator,
and theTribunalshallrenderitsdecisionswithintwo
monthsof the date of the finalsubmissionsor the date of the closingof the hearing,whicheveris later.
TreatyConcerningthe Encouragementand ReciprocalProtectionof Investment, Aug. 27, 1993,U.S.-Ecuador,S.
TREATYDoc. No. 103-15(1993).
112
Some measureof the importanceof thesethreetypesofriskis suggestedbythefactthattheyare the risks
typically coveredbyinvestment insuranceprograms,such as thoseofferedbythe OverseasPrivateInvestment
Corporationand the MultilateralInvestment GuaranteeAgency.SeeMaura B. Perry,A Modelfor Foreign
Efficient
Aid: The CaseforthePoliticalRiskInsuranceActivity oftheOverseasPrivateInvestment
Corporation,36 VA. J. INT'L
L. 511 (1996); George T. Ellinidu,ForeignDirectInvestment in Developing Nations,4 DET.
and NewlyLiberalized
C.L. J. INT'L L. & PRAc. 299 (1995); IBRAHIM I. F. SHIHATA, MIGA AND FOREIGN INVESTMENT: ORIGINS, OPERA-
TIONS, POLICIES AND BASIC DOCUMENTS OF THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (1988).
MarketFacilitation
Marketfacilitationprovisionsare those directedat curingmarketfailures.A fewBITs

have transparency provisionsthatrequire the host stateto make public lawsrelatingto
investment, thusaddressingin a smallwayone typeof marketfailure:lack of informa-
tion.'13 The typicalBIT, however,has no provisionsaimed at curingmarketfailures.'14
IV. REASSESSING THE IDEOLOGY OF THE BITs
In theirstrongpromotionof investmentsecurity,the BITs clearlyrejectMarxisteco-

nomics,withits redistributionist impulse115and its disregardof privatepropertyrights.
Indeed, as noted above,116an importantimpetusforthe negotiationof BITs forthe past
two decades has been to affirmliberal principleswhile also signalinga rejection of
Marxisteconomics, whetherin the formof calls for a sovereignrightto engage in
uncompensatedexpropriationsor in the formof planned economies.
The alternativeto Marxismofferedby the BIT, however,is not economic liberalism
buteconomicnationalism.Byprovidingstrongprotectionagainstuncompensatedexpro-
priation,exchange controlsand otherhost stateinterferences withforeigninvestment,
the BITs promoteimportanteconomic nationalistgoals of capital-exporting states.
The protectionof foreigninvestment, of course, is also fullyconsistentwithliberal
economic theory.Liberalismis distinguishedfromthe typicalhome state'sversionof
economic nationalismbyitsinsistenceupon investment neutrality,thatis, itsseparation
of the marketfrompolitics,117and to a lesserextentby its concern formarketfacilita-
tion.118As has been seen, however,the commitment of the BITs to investment neutrality
is weakand heavilyqualified119 and theyvirtuallyignoremarketfacilitation.120Byexalting
investment securityoverinvestment neutralityand marketfacilitation, home statesmake
clearthattheirdominantinterestin concludingBITs is in theeconomicnationalistpolicy
of promotingtheirinvestments, ratherthan in creatinga liberal investmentregime.
The BITs also leave hoststatesfreeto pursuea varietyof economicnationalistpolicies.
They universallyallow investmentscreening121and local participationrequirements122
and most permitperformancerequirements.123The BITs impose no obligationon a
hoststateto reduce tariffs and throughtheirREIO exceptionfacilitatethe maintenance
"1 See,e.g.,the Albania-U.S.BIT, supranote 110,Art.11(5). On the general problemof lack of information
in developingstates,see GRABowsKI & SHIELDS, supranote 43, at 270-71.

114 Enterprises,particularlythosethatare vertically
integrated,oftendeal withvariousmarketimperfections,
such as lack of information, by acquiringforeignsubsidiariesand therebycreatingan internalmarket.See
SODERSTEN & REED, supranote 11, at 472; SALVATORE, supranote 22, at 379. In thissense, merelyfacilitating
foreigndirectinvestmentcan reduce the effectof marketimperfections. At the same time,foreigndirect
investment, especiallythatinvolvinghorizontalintegration,can reduce competition,therebycreatinga market
failure.Seenote 182 infra.
115 Of course,all law maybe consideredredistributive, in the sense thatit promotesa different
resultthan
would have occurredin itsabsence and thusredistributes burdensand benefitswithina society.To the extent
that BITs are redistributive, however,theytend to reinforcethe position of wealthyforeigninvestorsat
the expense of theireconomicallyweaker domesticcompetitors,makingtheirredistributive consequences
inconsistentwithMarxisteconomics.
117
118
119Seetextsupraat notes 94-103.
121
122
BITs generallyhave no specificprohibitionon local participationrequirementsas a conditionof the
establishment of the investment. The nationaltreatmentprovisionof the U.S. BITs, however,would prohibit
treatmentof foreigninvestments thatdifferedfromtreatmentof local investments.
123
634 THE AMERICAN OF INTERNATIONAL
JOURNAL LAW [Vol.92:621
of trade-divertingeconomic integration agreements.124 Host states also enjoy the right

to offertax incentives to investorson a selective basis withoutviolating the nondiscrimina-
tion provisions of the BITs.125
The interventionistmeasures permitted by the BITs are antithetical to economic liber-
alism. For example, in their failure to create a right of establishment for investors,the
BITs acquiesce in government screening that may result in inefficient allocations of
resources. Consequently, host states may screen out investments that would introduce
efficiency-enhancingtechnology in order to protect a labor-intensive, but inefficient,
domestic industrythat employs more people.126 Much the same can be said of the BITs'
tolerance of other interventionist tactics, such as local participation requirements,127
trade-divertingcustoms unions,128 protective tariffs129 and tax incentives.130 In each case,
the BIT permits the host state to choose economically inefficientbehavior in furtherance
of its political goals.
The subordination of economic considerations to political considerations is a defining
feature of economic nationalism.131 The BITs place a great deal more importance on
protecting the interestsof home state investors and preserving the political prerogatives
of the host state than on promoting economic efficiency.
It is important to note nevertheless that BITs are in fact liberalizing documents. They
prohibit much postestablishment discrimination among investors, thus liberalizing the
regime in which foreign investment operates. The securitythey provide for investment
is as important to a liberal investment regime as the investment neutralityand market
facilitation that they are less successful in fostering.And the investor-to-statearbitration
provisions are a criticallyimportant step in transferringprotection of private investment
from the political to the legal realm, a key tenet of liberalism. The conclusion and
implementation of a BIT almost certainly results in a more liberal investment regime
than would otherwise exist.
In creating a more liberal investment regime, however, the home state appears to be
seeking to protect its own investment,rather than enhancing global productivity.Indeed,
124
Seetextsupraat note 101. Customsunions are referredto as tradedivertingwhen theydiverttradefrom
a nonmemberstatethathas a comparativeadvantagein a good to a memberstate thatdoes not, withthe
resultthat the welfareof member statesis diminished.See SODERSTEN& REED, supranote 11, at 323-43;
SALVATORE, supranote 22, at 302-05; TODARO, supranote 25, at 511. Manyeconomic integrationagreements
among developingstatesin particularare tradediverting.SeeSALVATORE, supranote 22, at 315.
125
126 Capital-intensive,
high-technology foreigninvestmentmay have the effectof reducingemploymentby
displacinglocal enterprisesthatare more labor intensive.SeeSALVATORE, supranote 22, at 40; HANINK,supra
note 66, at 84; TODARO, supranote 25, at 235-36; CAVES,supranote 11, at 228; GHATAK, supranote 42,
at 169.
127 Because high-technology companies (forreasonsofsecurityor qualitycontrol)preferto operatethrough
subsidiariesthattheycontrolratherthanthroughlicensees,seeCAVES,supranote 11, at 77, hoststatesrequiring
local participationare likelyto steer investorstowardlicensingratherthan directinvestmentand thus lose
the opportunity to obtain the newesttechnology,seeid. at 170. Or theymaysimplyencourage the investorto
utilizeold technology.SeeSALVATORE, sup-anote 22, at 37.
128 See supranote 124.
129
Tariffssometimeshave been used to attractforeigndirectinvestment.
The problemis thatthe investment
is not competitiveonce the tariffbarriershave been removedbecause the investmentwas establishedin a
sectorof the economyin whichthe hoststatedoes not enjoya comparativeadvantage.SeeUNCTC, supranote
11, at 3-4, 64, 67; GRAHAM& KRUGMAN,supra note 64, at 50.
130 Tax incentivesoftenhave been found to be ineffective in attractingnew investmentbecause of their
temporarynature and because theymay be matchedby other states.SeeCAVES,supranote 11, at 205, 220;
UNCTAD,supranote 12, at 46-51; UNTCMD, supranote 63, at 54; UNCTC, supranote 11, at 37. Thus, their
principaleffectmaybe simplyto reduce the amount of tax revenuereceivedby the host state.SeeUNTCMD,
supranote 63, at 54; UNCTC, supranote 11, at 60; CAVES,supranote 11, at 203. Indeed, thereis evidence that
overlygenerous incentivesmaydiscourageinvestmentbecause theyare perceivedas a danger sign. UNCTC,
supranote 11, at 50.
131
1998] POLITICAL ECONOMY OF A BILATERALINVESTMENTTREATY 635
it is not clear thathome statespromoteliberalismfor its own sake in any aspect of a

typicalBIT. Rather,the BITs generallyare liberalin characteronlywhenit is incidental
to providingsecurityor preferentialtreatmentforhome stateinvestors.132
The U.S. BITs are the most successfulin establishinga liberal investmentregime
because theyhave more extensiveinvestment neutrality
provisionsthanmostotherBITs.
More specifically, theygrantto coveredinvestorslimitedrightsto establishinvestmentl33
and theyprohibitcertain performancerequirements.'34 Because these requirements
limitonlythe host state,however,the U.S. BITs actuallyreflecta greatercommitment
to liberalismby the capital-importingstatethan by the capital-exportingstate.
V. CONCLUSION
Nationalism
BehindtheLiberalFacade
In summary,BITs affirmliberaleconomic theoryand are liberalizingto some extent
in theirimpact.The agreements,however,are drivenprincipallybyeconomic national-
ism. Both partiesproceed forlargelynationalistreasons but findin a limitedembrace
of liberalisma wayto advance theirgreaterinterestin acquiringor protectingwealth.
For the developingstates,a symbolicembrace of liberalismis one wayto create the
kind of political and economic climate that may lure foreigninvestmentneeded for
economic growth.'35 Further,thereis some empiricalevidencethateconomic growthin
developingstatesis correlatedwithreductionsin inequality,136suggestingthatliberaliza-
tion maywell be the best path foreconomic development,even wheredevelopmentis
definedin termsof both increasedproductionand a more equal distribution ofwealth.
At the same time,behind the facade of liberalization,developing host stateshave
retainedin the BITs considerablediscretionto employinterventionist tacticsassociated
withnationalistand Marxisteconomics.137 The problemforthe developingstate,how-
ever, is that it may not exercise its discretionwell. Political pressure,corruptionor
administrative ineptitude138maycause the host stateto takeilliberalactionin the name
of economic developmentthat diminishesthe welfareof the state as a whole or that
only aggravatesexistinginequalities.139 Thus, the goal of economic developmentmay
be best servedif the commitmentto liberalismis genuine.
The public embrace of liberalismservesthe nationalistinterestsof the home stateas
well. The investmentsecurityprovisionsof the BIT are effective waysof protectingthe
home state's existing(and future)investments. At the same time,the BIT's qualified
commitment to investmentneutralitypermitsthehome stateto dictatethecircumstances
under whichits investorswill be permittedto investabroad, while leavingits investors
'32Amost all of the typicalBIT's provisionsare intended to provideinvestment security.Seetext supraat

notes 104-12. The investmentneutralityprovisionsgenerallyare limitedto MFN and national treatment
requirementsthatdo no more thanprotectexistinghome stateinvestment againstdiscrimination,whilethere
typicallyare no marketfacilitationprovisions.Seetextsupraat notes 94-103, 113-14.
33Seenote 95 supra.
34Seenote 97 supra.
135
Generally,a favorableattitudetowardforeigninvestment is highlyvalued byinvestorsin decidingwhere
to investabroad. SeeUNCTC,supranote 11, at 43.
36 SeeKennethJ.Vandevelde,Investment andEconomic
Liberalization Development:TheRoleofBilateral
Investment
Treaties,36 COLUM. J. TRANSNAT'L L. 501, 516 (1998).
137 Seetextsupraat notes 11-22, 46.
138 Even the most well-intentioned and competentdeveloping state governmentmay operate withsuch
limitedinformationabout its economythateconomic planningcan be extremelydifficult. SeeRAPLEY, supra
note 10, at 61.
139 SeeGHATAK, supranote 42, at 364; RAPLEY, supranote 10, at 47, 64-67; TODARO, supranote 25, at 584-
86; GRABOWSKI & SHIELDS, supranote 43, at 273-76.
who do investabroad in a legallypreferredpositionwithinthe host state,140the perfect

outcome fromthe perspectiveof an economic nationalisthome state.
The problemfor the home stateis thatits long-terminterestsmaybe betterserved
bya genuine liberalism,ratherthan nationalismin liberalgarb. Developingstatesneed
foreigninvestment and theycurrentlyare willingto affirm
liberalismpubliclyto get it.141
The timewillcome,however,whendevelopingstateswillnotfeelthesame compulsionto
attractforeigninvestment and maybe temptedto renegeon theirpromiseofinvestment
security. trueifinwardforeigninvestment
This willbe particularly does not appear to be
contributing to economic development,eitherbecause it has failedto raise productivity
or because it is exacerbatingexistinginequalities.143 At that point, the
sufficientlyl42
capital-exporting statesmaywishthattheyhad nurtureda more genuine commitment
to liberalismamong the capital-importing states.
Toward GenuineLiberalism
No state has adopted a purelyliberal internationalinvestmentpolicy. States have
importantinterestsotherthan maximizingproductivity, such as ensuringan acceptable
distributionof wealthand protectingnational security,thatmaynecessitatedeviations
fromthe liberal model.144These interestswill inevitablylead even an avowedlyliberal
stateto intervenein the marketon at least some occasions.145
As has been noted, the danger of policies thatjustifyinterventionsin the marketis
thattheymayprovidea pretextforilliberalmeasuresundertakenas a resultof corrup-
tion,clientismor incompetence.146 Further,one interventiontends to create pressure
forothersthatwillextendor even counterbalancethe effectsof the first.147Accordingly,
theestablishment ofa genuine,eventhoughqualified,liberalismcan be facilitatedbythe
creationofrulesthatprovidesome basisforevaluatingand limitingstateinterventions in
the market.BITs can promote liberalismby both requiringstatesto liberalize their
internationalinvestmentregimes and acknowledgingthe necessityof, and imposing
some controlson, the inevitabledeparturesfromliberalprinciples.
If BITs are to promote a liberal investmentregime in this manner, theymust be
restructured. The followingmeasureswould effectsuch a restructuring.
(1) The BITs wouldguaranteeto investorstherightto acquire or establishinvestment
in the host state,includingin formerstateenterprisesundergoingprivatization.Since
everystate reservesthe rightto screen foreigninvestmentto some extent,it almost
certainlywillbe necessaryto permitstatesto designatesome sectorsof the economyin
whichtheywillcontinueto screenor impose conditionson investment.148 Nevertheless,
thereshould be a commitmentnot to expand the numberof sectorsin whichaccess is
denied or limitedand to reduce the numberof such sectorsover time.149
140
141
SeeVandevelde,supranote 4.
142
This mayoccur,forexample,because of marketfailuresin the host state,seeTODARO, supranote 25, at
588-89, or because of the effectsof host stateregulationof the investment.SeeGILPIN,supranote 5, at 267-
69; RAPLEY, supranote 10, at 60-63.
143
SeeTODARO, supranote 25, at 533-34.
144
SeeVandevelde,supranote 136, at 517.
145
SeeVandevelde,supranote 4, at 393-94.
146
147 Vandevelde,supranote 4, at 394-95.
148
Even the U.S. BITs, whichare unique in guaranteeingMEN and national treatmentwithrespectto the
rightto establishinvestment, permitthe partiesto designatesectorsof the economythatwillbe exemptfrom
the obligationof MFN and national treatment.Seenote 99 supra.
149 The model is theGeneralAgreement on Tariffsand Trade (GATT), which,in ArticleXXVIII bis,providesfor
a seriesof negotiatingroundsin whichmemberstatesnegotiatereductions in tariffs.
GeneralAgreement on Tariffs
and Trade,Oct. 30, 1947,TIAS No. 1700,55 UNTS 188. Eightsuchroundshavebeen conductedsince 1947.
(2) The BITs would containcommitments byeach partyto permitthe establishment

or acquisitionof investmentby its nationalsor companies in the territoryof the other
party.That is, the BITs would impose investment neutrality
obligationson home as well
as host states.
(3) The BITs would restrict theuse ofperformancerequirementsas a conditionofthe
establishment or operationof the investment.'50Performancerequirementsrepresenta
compromisebetweenclosinga sectorof the economyto foreigninvestment and permit-
tingforeigninvestment in thatsectorunconditionally.Justas a hoststatemaybe unwill-
ing to open a sectorat all, so mayit be willingto open thatsectoronlyifit can impose
performancerequirements.Permittingforeigninvestmentsubject to performancere-
quirementsin some sectorsthus maybe the price of opening those sectorsto foreign
investment. As in the case ofprohibitionson establishment,however,permissibleperfor-
mance requirementswould be limitedto certainsectorsof the economyand qualified
bya commitmentto reducingthemover time.
(4) The REIO exceptionin the BITs would be limitedto arrangementsthathave a
netliberalizingeffecton trade.'5'In effect,
theBITs wouldlimittheexceptionto arrange-
mentsthatare consistentwiththe GATT.152
(5) The taxationexception'53would be eliminatedor, at a minimum,restrictedto
concessions included in double taxationtreaties.'54Double taxationtreatiestypically
allocate betweenthe twopartiesthe rightto tax certainincome thatboth statesmight
otherwisetax and do not granttax incentivesforspecificinvestors.'55 Alternatively,
the
BITs would specifythe sectorsof the economyin whichdiscriminatory taxationwould
be permitted, whilecommitting the partiesto reducingthe numberof sectorsovertime.
150
On the prevalenceof performancerequirements,see note 14 supra.U.S. BITs generallyprohibitcertain
typesof performancerequirements,but mostBITs do not specifically addressthem.Language illustrativeof
thatcurrently used in the U.S. BITs maybe found in ArticleVI of the United States-UzbekistanBIT, which
states:
NeitherPartyshall mandate or enforce,as a condition for the establishment,acquisition,expansion,
management,conductor operationofa coveredinvestment, anyrequirement(includinganycommitment
or undertakingin connectionwiththe receiptof a governmentalpermissionor authorization):
(a) to achieve a particularlevel or percentageof local content,or to purchase,use or otherwisegive
a preferenceto productsor servicesof domesticoriginor fromany domesticsource;
(b) to limitimportsby the investmentof productsor servicesin relationto a particularvolume or
value of production,exportsor foreignexchange earnings;
(c) to export a particulartype,level or percentageof productsor services,eithergenerallyor to a
specificmarketregion;
(d) to limitsales by the investmentof productsor servicesin the Party'sterritory in relation to a
particularvolume or value of production,exportsor foreignexchange earnings;
(e) to transfertechnology,a production process or other proprietaryknowledgeto a national or
companyin theParty'sterritory, exceptpursuantto an order,commitment or undertakingthatis enforced
bya court,administrative tribunalor competitionauthority to remedyan alleged or adjudicatedviolation
of competitionlaws;or
(f) to carryout a particulartype,level or percentage of research and developmentin the Party's
territory.
Such requirementsdo not include conditionsforthe receiptor continuedreceiptof an advantage.
U.S.-UzbekistanBIT, supranote 108, Art.VI.
1-51REIO exceptionsare inconsistentwithinvestment As a practicalmatter,however,it mayprove
neutrality.
difficultto conclude a BIT withoutsuch an exceptionbecause the partythatbelongs to a customsunion may
not wishto extend the concessionsit has made to othercustomsunion membersto all partieswithwhichit
concludes a BIT. The proposal in the textthusrepresentsa compromise.
152
SeeGATT, supranote 149, Art.XXIV.
153
154This is as opposed to advantagesprovidedby tax treatiesgenerallyor by legislation.
155SeeORGANIZATIONFOR ECONOMIC CO-OPERATIONAND DEVELOPMENT,MODEL TAX CONVENTIONON INCOME
AND ON CAPITAL (1992).
(6) The BITs wouldgrantinvestors the rightto enterthe hoststatein connectionwith

theirinvestment'56 and grantinvestments the rightto employmanagerialand technical
personnelof theirchoice,regardlessofnationality.'57
Stepswouldbe takento minimizethe
subordinationof thisprovisionto host stateimmigration laws,such as by providingthat
entry visasshallbe grantedto topmanagerialpersonneloftheinvestor, unlesstheemployee
fallsintoa categoryof aliensgenerallyexcludableon noneconomicgrounds.'58
(7) Investmentagreementsofferingspecial incentivesto investorswould be enforce-
able throughthe BITs only to the extentthattheyare consistentwithBIT principles.
Investment incentiveswould not be permittedunlesstheyare availableon a nondiscrimi-
natorybasis to all investors.'59 the BITs would specifythe sectorsof the
Alternatively,
economyin whichdiscriminatory incentiveswould be permitted, witha commitmentto
reducingthe numberof sectorsover time.
(8) The BITs would have more elaborateprovisionson transparency, requiringstates
to make public not only laws relatingto investment,but also informationabout the
businessclimateand investmentopportunities.160The obligationwould be placed on
both home and host states.'6'This is an importantway that statescan address a key
marketfailurein developingstates.'62
(9) The BITs wouldrequirebasiclevelsofprotectionforintellectualproperty rights.'63
Because there alreadyis an increasinglycomplex networkof multilateralintellectual
propertyagreements,164one approach would be simplyto require the BIT partiesto
156 For a typicalU.S. BIT provision,see note 96 supra.

157 A typicalU.S. BIT provisionstates:"Companies whichare legallyconstitutedunder the applicable laws
or regulationsof one Party,and whichare investments, shallbe permittedto engage top managerialpersonnel
of theirchoice, regardlessof nationality."Ecuador-U.S.BIT, supranote 111, Art.11(5).
158 Thus, an employeecould be excluded because of a priorcriminalrecord,if such personsare normally
excludable. The employeecould not be excluded, however,merelyon the basis of nationality.
Some host stateswill want to retain the discretionto exclude third-country nationals because of hostile
relationsbetweenthe hoststateand the thirdstate.Accommodationof thesekindsofconcernsalmostcertainly
is a politicalnecessity.
159 For example, a statethatrevisesits tax code to providefor accelerated depreciationschedules should
applysuch schedulesto all investors.The experiencein eastAsia suggeststhattaxincentivesare more effective
in raisingproductivity whenthe statetriesgenerallyto encourage investment, ratherthanattemptingto target
the tax incentives.WORLDBANK,supranote 16, at 231.
160The U.S. BITs, forexample, typically providethat"[e]ach Partyshall make public all laws,regulations,
administrative practicesand procedures,and adjudicatorydecisions that pertain to or affectinvestments."
Mongolia-U.S.BIT, supranote 95, Art.11(7).
161 Many developed statesalready provide various typesof information and technical assistanceto their
investorsseeking to investin developing states. See UNDTCI, supranote 12, at 314-15. Such information,
however,appears oftento be outdated,seeid.,and thustherecould be real value in requiringthe twoparties
to cooperate in exchangingand disseminatingsuch information.
162 The developmentof a mechanismfor the exchange of information is crucial to the developmentof
markets.SeeGRABOWSKI& SHIELDS, supranote 43, at 270-71. Because information disseminationis directed
at curinga marketfailure,thereshould be no objectionon liberalgroundsto stateinvolvement in thisactivity.
Some liberals,however,particularly adherentsof the Chicago school of economics,are waryof anystateaction
intended to remedymarketfailure.They note that governmentscan failjust as marketsdo and that state
efforts to cure marketfailuresmaysimplycreate new problems,whetherbecause of the state'sincompetence
or because of the politicalmotivationsof state actors. SeeWarrenJ. Samuels, The ChicagoSchoolofPolitical
Economy: A ConstructiveCritique,
in THE CHICAGO SCHOOL OF POLITICAL ECONOMY 1, 13 (WarrenJ. Samuels
ed., 1993); GRABOWSKI& SHIELDS, supranote 43, at 267, 273-76.
163 In general, strongintellectualpropertyprotectionis correlatedwith the attractionof foreigndirect
investment. CAVEs,supranote 11, at 50. This is particularly
trueforinvestment involvingresearchand develop-
ment. See EDWIN MANSFIELD, INTELLECTUAL PROPERTY PROTECTION, FOREIGN DIRECT INVESTMENT, AND TECH-
NOLOGY TRANSFER19 (1994). Failure to protectintellectualpropertytends to encourage foreignproducers
to preferlicensingover direct investmentand exportingto the host state over either alternative,thereby
foreclosingaccess to the latesttechnology.SeeCAVEs,supranote 11, at 170.
164 For a good overview
ofthesubjectand thetextofthemajoragreements,see INTERNATIONALINTELLECTUAL
PROPERTY ANTHOLOGY (AnthonyD'Amato & Doris Estelle Long eds., 1996).
adhere to certainexistingmultilateralagreementsfor intellectualpropertyprotection

and leave the taskof detailed regulationto the otheragreements.
(10) The BITs would require host statesto provideinvestorswitheffective means of
resolvingprivatedisputesinvolvinginvestments in those states.165A liberal investment
regimerequiresthatthe stateprotectpropertyand contractrightsagainstprivateas well
as public infringement.'66
(1 1) The BITs would protectall investmentin the host state,regardlessof national-
ity.In principle,of course, there is no reason that a BIT cannot protectdomestic as
well as foreign investors.'67This would ensure genuine investmentneutralityand
create a host stateconstituencyin supportof an enduringliberal investmentregime.
Anyinvestmentinjured as a resultof a violation of a BIT provision,including invest-
ments owned by host state nationals,would be authorized to invoke the investor-to-
state dispute provisions.
If this last proposal were adopted, conclusion of a single BIT could obviate the
need for a host state to conclude additional BITs, since all investmentwould be
covered. Some home states,however,probablywould wish to conclude additional
BITs with the host state, in part to obtain furtherprotectionsnot included in the
firstBIT concluded by the host state,in part to provide a common legal framework
forall of theirinvestorsinvestingabroad, and in part to give themselvesthe rightto
invoke the state-to-statedispute resolutionmechanism.
This particularproposal will meet withskepticismfromthose concerned about the
problemof freeridingbyhome stateswithwhichthe host statehas no BIT.168Further,
the factthat investorsof other home stateswere protectedby a host state's firstBIT
would reduce the incentiveof those otherstatesto conclude BITs withthe host state,
in turn reducing the host state's abilityto obtain reciprocal guarantees fromthose
other home statesand therebyeliminatefree riding.This problem would be amelio-
rated to some extent,however,by the factthata state thatregarded itselfas a victim
of free ridingwould be able at the same time to free ride on other states' BITs to
which it was not a party.'69
One wayto addressthefreeriderproblemwould be to limitprotectionin the territory
of the host state only to investmentsof investorsfrom the two BIT parties. Such a
provisionwould assure protectionfor host state investments, withoutcreatinga free
riderproblem.This approach is less desirablefromthe standpointof investorneutrality,
butthe hoststatewillmovetowardgreaterneutrality as itconcludesmoreBITs, reducing
the numberof foreigninvestorsnot under BIT protection.
165
Typical language found in the U.S. BITs providesthat "[e] ach Partyshall provide effectivemeans of
assertingclaims and enforcingrightswith respect to investment,investmentagreements,and investment
authorizations."Mongolia-U.S.BIT, supranote 95, Art.11(6).
166
167
The protectionof local as well as foreignpersonsis a well-established
practicein internationalhuman
rightstreaties.See,e.g.,InternationalCovenant on Civil and Political Rights,Dec. 16, 1966, Art. 2(1), 999
UNTS 171 ("Each StatePartyto the presentCovenantundertakesto respectand to ensure to all individuals
withinits territory and subjectto itsjurisdictionthe rightsrecognizedin the presentCovenant. . .").
168Afterconcludingitsfirst BIT, a hoststatewouldfindthatithad grantedprotectionto all foreigninvestors,
even thoughit had concluded a BIT withonlyone otherstateand had not obtained anyreciprocalrightsfor
itsinvestorsin the territory
of anystatesotherthanthe one withwhichit concluded the firstBIT. These other
statesthuswould be able to enjoy a freeride on the one BIT concluded by the host state.
169 This assumes,of course, thatthe statewas a capital exporteras well as a capital importerand that all
BITs adopt thisproposal. The firststateto include thislanguage in its BITs obviouslywill have the greatest
free riderproblem,since it will have grantedrightsto all foreigninvestors,withoutany guarantee that its
investorswillbenefitfromanyother state'sBITs.
BeyondtheBITs
Provisionscomparable to those found in the BITs alreadyhave been included in a
numberof regionaland sectoralagreements.170In May 1995, the OrganisationforEco-
nomic Co-operationand Development(OECD) decided to commence negotiationof a
multilateralagreementon investmentthatwould include manyof the same provisions
thathave become typicalof the BITs.171Negotiationsoriginallywere to have been com-
pleted by the date of the OECD ministerialmeetingscheduled formid-1997,172but as
of April 1998 a number of issues remained unresolved.'73The negotiatinggroup was
scheduled to reconvenein October 1998.174Some have proposed thatsimilarnegotia-
tionsbe initiatedunder the auspices of the World Trade Organization(WTO). The
discussionswithinthe OECD and potentiallythe WTO hold out the prospectthatthe
networkof thirteenhundredbilateraltreaties,withsupplementingregionaland sectoral
instruments,176 willsomedaybe largelysupplantedbya singlemultilateralinstrument.
A multilateralagreementon investmenthas much to commend it as an instrument
of liberalism.Multilateralagreementsthat command widespread adherence tend to
universalizenormsand thusgivebroad scope to the core liberalprinciplesofinvestment
securityand investmentneutrality.'77 Multilateralagreementsare usuallyof indefinite
durationand therebycreate the kind of long-termcommitmentthatis essentialto the
success of a liberal policy.'78Because theywill seem to representa global consensus,
normsadopted in a multilateralnegotiationwillhave greaterand more enduringlegiti-
macythanthoseadopted in a bilateralsettingand forthatreasonwillbe moreproductive
oflong-term investment securityand neutrality.
179In short,all else beingequal, a multilat-
eral agreementis likelyto be more genuinelyliberalthana networkof bilateraltreaties.
As the OECD negotiationshave demonstrated,however,negotiationof a multilateral
agreementis a complex undertakingbecause of the difficulty of balancing the desire
forinvestmentneutrality and securityagainstthe necessityof accommodatingcompro-
mises.The moregenuineliberalismofa multilateral agreementmaybe effectively under-
mined by the extensivequalificationsthat could be the price of gaining widespread
adherence.180
Whetherstructuredas a multilateralagreement,a seriesof regionalagreementsor a
networkofBITs, a liberalinvestment
regimecan deliverthepromiseofgreaterprosperity
onlyifthe marketis properlyfunctioning.
None of the BITs has yetto addresspervasive
17()For a compilation of these agreements, see UNCTAD, INTERNATIONAL INVESTMENT INSTRUMENTS: A COM-
PENDIUM (1996).
171 See ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT [OECD], TOWARDS MULTILATERAL
INVESTMENT RULES 3 (1996).
172Id. at 9.
173
The April 1998 workingdraftof the agreementand an accompanyingcommentarymay be found on
the OECD's Web site (http://www.oecd.org).
174OECD Meetingat MinisterialLevel: Paris,27-28 April 1998, OECD News Release (Apr. 28, 1998).
175
OECD, supranote 171, at 36-37.
176
See,e.g.,NorthAmericanFree Trade Agreement,Dec. 8, 11, 14 & 17, 1992, ch. 11, 32 ILM 289, 639
(1993); EnergyCharterTreaty,Dec. 17, 1994, pt. II, 34 ILM 360, 385 (1995).
177
178 SeeVandevelde,supranote 136, at 527.
179
of a multilateralagreementcould be avoided or deferredbyseekingto conclude
180 Some of the difficulties
a seriesof regional agreementsliberalizinginvestments. There is a livelydebate, however,over whetherthe

negotiationof regional agreementsacceleratesor underminesthe process of global liberalizationthrough
multilateralagreements.SeeJamesMichael LawrenceII, JapanTradeRelationsand IdealFreeTradePartners: Why
theUnitedStatesShouldPursueIts NextFreeTradeAgreement withJapan,NotLatin America,20 MD. J. INT'L L. &
TRADE61 (1996); FrankJ. Garcia, NAF-TA and theCreationofthe.FTAA: A Critique
ofPiecemealAccession,
35 VA.
J. INT'L L. 539 (1995).
problemsof marketfailurethat may distortor inhibitthe flowof capital to its most

use, especiallyin developingstates.'8'For example,the smallsize of local mar-
efficient
ketsrendersdevelopingstatesparticularly susceptibleto restrictive
businesspractices,'82
whichmaybe addressed in part throughinternationalagreements.'83 The problem of
externalitiesmay necessitateagreementson environmentalstandards.'84The problem
of marketssegmentedalong national boundaries may call for,among other things,
agreementsto harmonizetax policies to preventtax-inducedmarketdistortions.'85 The
problemof theimmobility oflabor maydemand agreementson immigration to facilitate
the movementof personsnecessaryforthe operationof an investment.'86 The absence
of public goods, such as physicalinfrastructureand educational facilities,mayrequire
substantialfinancialresources,'87
whichcould be mobilizedthroughmultilateral arrange-
ments.Each of theseproblemsraisesitsowncomplexitiesand difficulties, but each must
be addressedon the wayto liberalizinginternationalinvestment flows.
In concluding the vast networkof BITs, the nations of the world have affirmeda
thousandtimesover thattheyseek a liberalinvestment regime.If theyare sincere,and
perhaps theyare not, thereis much workto be done.
181
SeeTODARO, supranote 25, at 589.
182See UNCTAD& WORLDBANK,supra note 87, at 47. Indeed, foreigninvestment
involvinghorizontal
integrationoftenreduces competitionbecause the transnationalenterpriseproceeds by acquiring its local
competition.SeeSODERSTEN & REED, supranote 11, at 469.
183The danger of leavingregulationof monopolies solelyto host statediscretionis thatit maybe used as
a facadeforeconomicallynationalistactivity or theregulatory processmaybe capturedbyhoststateproducers.
SeeUNCTAD & WORLD BANK, supranote 87, at 42-44, 47.
184SeeNAFZIGER, supranote 31, at 338.
185 SeeCAVES, supranote 11, at 245- 46.
186SeeUNCTAD& WORLDBANK, supranote 87, at 45. The relationshipbetweenlabor and capitalmovements
thus presentsan interestingparadox. The text suggeststhat internationalmovementof capital is in some
cases facilitatedby the internationalmovementof labor. At the same time,one of the reasons that capital
movesacrossbordersis preciselythatlabor does not. In otherwords,the capital seeks out inexpensivelabor.
Thus, the complete internationalmobilityof labor would eliminateone of the reasons forthe international
movementof capital. The point in the textis not that immigrationbarriersshould be removedto permit
completemobilityof labor, but onlythatit maybe necessaryto relax themin particularinstancesto attract
foreigninvestment. On the relationshipbetweenthe movementof capital and the movementof labor in the
servicessector,see id.
187Vandevelde,supranote 4, at 397.

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The Political Economy of a Bilateral Investment Treaty

Author(s): Kenneth J. Vandevelde

One of the more remarkabledevelopmentsin internationallaw in the mid-1990sis

I. THE POLITIcAL ECONOMYOF INVESTMENTPOLICY

In this century,international political economy has been dominated by three theories

of political economy and then identifiesthe essentialdistinctionbetween liberal and

Economic nationalism,whichfindsits originsin the seventeenth-century doctrineof

same time,theyhave imposed restrictions on outwardinvestment16to preventa loss of

9 SeeGILPIN, supranote 5, at 241-45.

rightsof propertyand contract26 and correctingmarketfailures.27 Liberalismseeks to

Their concern about a liberal foreigninvestmentregime is twofold.5'First,foreign

5" TODARO, supranote 25, at 533-35.

58 SeeGHATAK, supranote 42, at 34, 242-43; TODARO,supranote 25, at 132.

particularlyobjectionablewhere the enterprisesubject to foreigncontrolis important

II. THE LIBERAL IDEOLOGY OF THE BITs

65 SeeCAvEs,supranote 11, at 252.

68 For a discussionof economic nationalistconcernsabout foreigndirectinvestment in the United States,

to negotiateanyBIT thatdid not embracethe prompt,adequate and effective standard,

III. THE SUBSTANCE OF THE BITs

75See id. at 25-26.

164; Michael Mandelbaum, TheBushForeignPolicy,FOREIGN AFF.,Winter1990-91, at 5; Coit D. Blacker,The

An economic nationalistinvestmentregime,by contrast,would retainfor the state

Investmentneutrality provisionsshould ensure thatthe host and home stateswillnot

managerialpersonnel needed in connectionwith the operation of the investment.96

host statefromofferingspecial concessionsto foreigninvestorsand, in the eventthat

The preference,however,is not withoutsignificance.In Colombia,forexample,successfullegal actionwas

TreatyConcerningthe Encouragementand ReciprocalProtectionof Investment, Dec. 16, 1994, U.S.-Uzb.,S.

Marketfacilitationprovisionsare those directedat curingmarketfailures.A fewBITs

IV. REASSESSING THE IDEOLOGY OF THE BITs

In theirstrongpromotionof investmentsecurity,the BITs clearlyrejectMarxisteco-

in developingstates,see GRABowsKI & SHIELDS, supranote 43, at 270-71.

of trade-divertingeconomic integration agreements.124 Host states also enjoy the right

it is not clear thathome statespromoteliberalismfor its own sake in any aspect of a

'32Amost all of the typicalBIT's provisionsare intended to provideinvestment security.Seetext supraat

who do investabroad in a legallypreferredpositionwithinthe host state,140the perfect

(2) The BITs would containcommitments byeach partyto permitthe establishment

(6) The BITs wouldgrantinvestors the rightto enterthe hoststatein connectionwith

156 For a typicalU.S. BIT provision,see note 96 supra.

adhere to certainexistingmultilateralagreementsfor intellectualpropertyprotection

a seriesof regional agreementsliberalizinginvestments. There is a livelydebate, however,over whetherthe

problemsof marketfailurethat may distortor inhibitthe flowof capital to its most

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