Investor-State Treaty Regimes and Arbitral Processes

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Investor-State Treaty
Regimes and Arbitral
Processes
Exploratory Research
Beth A. Simmons
Straus Institute, 2009-2010
Introduction to the Topic


Characteristics of the emerging “regime” for the
facilitation and protection of FDI
Uniqueness of the emerging system




Growing questions of legitimacy





Largely bilateral
Largely North-South
Special status of investors in dispute settlement
Asymmetrical aspects
Not especially transparent
Law BIT by BIT? Law through litigation?
Increasingly, state actors are resisting: exit and voice
My purpose: to develop a theory of the way this system
works
WTO Trade Disputes and ICSID Investment Disputes
number of new ICSID arbitrations
number of new GATT/WTO disputes
60
50
40
30
20
10
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Introduction to the Topic


Characteristics of the emerging “regime” for the
facilitation and protection of FDI
Uniqueness of the emerging system




Growing questions of legitimacy





Largely bilateral
Largely North-South
Special status of investors in dispute settlement
Asymmetrical aspects
Not especially transparent
Law BIT by BIT? Law through litigation?
Increasingly, state actors are resisting: exit and voice
My purpose: to develop a theory of the way this system
works
Comparison of defendants in trade
and investment disputes
GATT/WTO defendants by incom e category
low er middle
income
9%
low income
4%
ICSID respondents by income category
low income
19%
upper middle
income
14%
high income
73%
high income
4%
upper middle
income
42%
low er middle
income
35%
References to "ICSID", UNCITRAL" and "International
Arbitration" in U.S. news sources, 1990-2009
"ICSID" hits
"UNCITRAL" hits
"International Arbitration" hits
Source: LexisNexis database
70
60
50
450
400
350
300
250
40
30
200
150
20
100
10
50
0
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
ICSID and UNCITRAL hits
80
500
International Arbitration hits
90
References to "ICSID, "UNCITRAL" and "International
Arbitration" in world news sources, 1990-2009
ICSID hits
UNCITRAL hits
Int. Arbitration hits
200
Source: LexisNexis database
140
120
1000
800
100
80
60
600
400
40
20
0
200
0
International Arbitration hits
1200
160
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
ICSID and UNCITRAL hits
180
1400
Outline of presentation






The rise of BITs
BITs as bargains – a look at contents
The consequences of BITs
Trends in arbitration
Push-back: annulment proceedings
Conclusions
The Rise of BITs
Cumulative BITs world wide
3000
2500
2000
1500
1000
500
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
Average number of BITs negotiated each year by…
left governments
center government
right governments
3.5
3
Average, left = 1.45/year**
Average, center = 1.72/year
Average, right = 1.67/year*
2.5
2
1.5
1
0.5
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
0
Why the BIT mania?
Technology for joint gains
Spread of neo-liberal ideas of development


But also
High stakes
Tough competition
 Hard times


High stakes
200
4
Number of Treaties Signed
Average Foreign Direct Investment
150
N um ber of Treaties Signed
3
2
100
50
1
0
1960
1970
1980
Year
1990
2000
Tough Competition

Predictors that a developing will ratify a BIT
with any other country:
Ratification in countries with similar infrastructure
 Ratification in countries with similar work force
 Ratification in countries with similar export profile


Developing countries do what their closest economic
competitors for capital do.
Hard Times
World GDP Growth and BITs
cumulative BITs
world GDP growth
5 per. Mov. Avg. (world GDP growth)
6000
5
4.5
4
3.5
4000
3
3000
2.5
2
2000
1.5
1
1000
0.5
0
0
1980
1985
1990
1995
Year
2000
2005
World GDP growth
Number of treaties signed
5000
Average Growth Rates Preceding Any BIT Signing
Any BIT signed
No BITsigned
4
3.5
growth rate
3
2.5
2
1.5
Note: difference in mean
growth rates is statistically
significant (p<.05) in years
-3 and -2.
1
0.5
0
-4
-3
-2
-1
0
1
Year (0=year of BIT signing)
2
3
4
Average Growth Rates Preceding BITs Sprees (>4 BITs/year)
BIT spree
no BIT spree
4.5
4
3.5
growth rate
3
2.5
2
Note: difference in mean
growth rates is statistically
significant (p<.05) in years
-3,-2,-1 and 0.
1.5
1
0.5
0
-4
-3
-2
-1
0
1
Year (0=BITs spree year)
2
3
4
BITs as bargains: a look at
contents




Getting the text – not as easy as it sounds.
Deciding what to code – not as obvious as it may seem.
Starting point: dispute settlement clauses.
Simple assumptions:



Capital importing countries want as much local control as
they can get away with
Investors want a dispute as removed from local host country
institutions as possible
Hypothesis: host countries in weak bargaining positions
lose more sovereign control in the event of disputes
Hard-to-find BITs
texts found
texts missing
250
150
100
50
0
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
number of new BITs
200
"missing" = could not be found on UNCTAD
or major country-specific websites
Source: Allee and Peinhardt, 2010
year
How random are the “hard-to-find” BITs?
texts found
texts missing
10
(less dem) polity scale (more dem)
8
6
4
2
0
-2
-4
-6
-8
-10
poorer partner
richer partner
combined
Mean democracy scores of countries' whose BITs
texts are "easy" versus "difficult" to find are
significantly different (p=.0000).
"Found" BIT texts are likely to be a biased (highly
democratic) sample.
BITs as bargains: a look at
contents




Getting the text – not as easy as it sounds.
Deciding what to code – not as obvious as it may seem.
Starting point: dispute settlement clauses.
Simple assumptions:



Capital importing countries want as much local control as
they can get away with
Investors want a dispute as removed from local host country
institutions as possible
Hypothesis: host countries in weak bargaining positions
lose more sovereign control in the event of disputes
Number of New BITs that Mention ICSID
no mention of ICSID
mentions ICSID
140
120
100
80
60
40
20
0
04
20
01
20
98
19
95
19
92
19
89
19
86
19
83
19
80
19
77
19
74
19
71
19
68
19
65
19
62
19
59
19
year
Numbert of new BITs that Mention UNCITRAL
no mention of UNCITRAL
mentions UNCITRAL
140
120
100
80
60
40
20
0
04
20
01
20
98
19
95
19
92
19
89
19
86
19
83
19
80
19
77
19
74
19
71
19
68
19
65
19
62
19
59
19
BITs as bargains: a look at
contents




Getting the text – not as easy as it sounds.
Deciding what to code – not as obvious as it may seem.
Starting point: dispute settlement clauses.
Simple assumptions:



Capital importing countries want as much local control as
they can get away with
Investors want a dispute as removed from local host country
institutions as possible
Hypothesis: host countries in weak bargaining positions
lose more sovereign control in the event of disputes
What explains the choice of dispute settlement
provisions?
Results of a series of probit models;
dependent variable: presence or absence of particular kind of clause
ICSID
provision
UNCITRAL
provision
Neither
ICSID nor
Local body
provision
Exhaust
Local
remedies
UNCITRAL
Growth past
3-yrs (host)
-.005
(p=.422)
-.021***
(p=.003)
.027**
(p=.012)
.024***
(p=.000)
.028**
(p=.028)
Joint
democracy
.038***
(p=.000)
.011
(p=.112)
-.034***
(p=.000)
-.005
(p=.315)
-.007
(p=.477)
Difference in
development
.096
(p=.102)
-.054
(p=.427)
-.078
(p=.261)
-.283***
(p=.000)
-.203**
(p=.015)
Year
.061***
(p=.000)
.093***
(p=.000)
-.061***
(p=.000)
.050***
(p=.001)
-.037*
(p=.098)
# obs.
1213
1213
1213
1204
1205
Pseudo R2
.120
.091
.135
.082
.053
Data on provisions: Allee and Peinhardt 2010.
Effect of Grow th Rate on probability of clause
relating to local recourse
The consequences of
the host business cycle
for BITs dispute
settlement clauses…
0.8
0.6
0.4
0.2
0
10% growth
Effect of Grow th Rate on probability of no
ICSID or UNCITRAL clauses
Effect of Grow th Rate on probability of an
UNCITRAL clause
0.1
probability
probability
0.08
0.06
0.04
0.02
0
10% grow th
-10% grow th
-10% growth
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
10% growth
-10% growth
What are the consequences of
signing BITs?

Great source of collected articles:


Sauvant, Karl P., and Lisa E. Sachs. 2009. The Effect of Treaties on Foreign
Direct Investment. Oxford: OUP
Effect of BITs signings/ratifications on FDI flows:

very little if any, conditional on:




good domestic institutions (Hallward-Driemeier 2003; Rose-Ackerman and
Tobin 2005) and
the capital source (Gallagher and Birch 2006).
Some positive benefits Eggera and Pfaffermayr 2004; Neumayer and
Spess 2004; Kerner 2009).
The most predictable outcome of ratifying BITs…
BITs: If you Ratify, They Will Litigate…
BITs and ICSID cases, world wide
number of new cases
cumulative BITs world wide
40
6000
5000
30
4000
25
20
3000
15
2000
10
1000
5
0
0
1980
1985
1990
1995
year
2000
2005
cumulative BITs
number of ICSID cases
35
BITs: If you Ratify, They Will Litigate…
BITs and ICSID cases, Latin America
Number of Latin American cases
cumulative BITs, L.A.
25
700
500
15
400
300
10
200
5
100
0
0
1980
1985
1990
1995
year
2000
2005
cumulative BITs
number of ICSID cases
600
20
BITs: If you Ratify, They Will Litigate…
BITs and ICSID cases, Argentina
Number of Argentine cases
cumulative BITs, Argentina
18
60
16
12
40
10
30
8
6
20
4
10
2
0
0
1980
1985
1990
1995
year
2000
2005
cumulative BITs
number of ICSID cases
50
14
Growth in Investor-State Arbitration, ICSID Cases
number of new cases
40
35
30
25
20
15
10
5
Year
20
08
20
05
20
02
19
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
19
75
19
72
0
Average number of arbitrations by…
left governments
center governments
right governments
0.6
0.5
0.4
0.3
0.2
0.1
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
Average number of arbitrations by…
left govs
center govs
right govs
excluding Argentina
0.35
0.3
0.25
0.2
0.15
0.1
0.05
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
Economic Conditions prior to
Arbitrations
World GDP Growth and Arbitration
5 per. Mov. Avg. (world GDP growth)
40
7
35
6
30
5
25
4
20
3
15
2
10
5
1
0
0
1976
1981
1986
1991
Year
1996
2001
2006
World GDP growth
number of new cases
5 per. Mov. Avg. (number of new cases)
Economic Conditions prior to
Arbitrations
Latin America & Caribbean GDP Growth and Arbitration
5 per. Mov. Avg. (Number of Latin American cases)
5 per. Mov. Avg. (Latin America GDP Growth)
25
10
6
15
4
10
2
0
5
-2
0
-4
1972
1977
1982
1987
1992
year
1997
2002
2007
Latin America &
Caribbean GDP growth
number of new cases
8
20
Economic Conditions prior to
Arbitrations
Arbitration and GDP Growth - Argentina
(5-year moving averages)
5 per. Mov. Avg. (Number of Argentine cases)
5 per. Mov. Avg. (Argentine GDP growth)
18
15
16
number of new cases
10
14
12
5
10
0
8
6
-5
4
-10
2
0
-15
1972
1977
1982
1987
1992
year
1997
2002
2007
Conditions associated with arbitration
Dependent variable: arbitration in a given year (probit coefficients, p-values)
Explanatory Variables:
Model 2
Model 3
Model 4
Model 5
Log of arbitration, (t-1)
.202***
(p=.000)
.215***
(p=.001)
.224***
(p=.001)
.220***
(p=.000)
log of cumulative # of BITs
.133***
(p=.000)
.255***
(p=.000)
.119**
(p=.011)
.224***
(p=.000)
Year
.029***
(p=.000)
.024***
(p=.001)
.030***
(p=.000)
.025***
(p=.000)
Log inflation (t-2)
.067*
(p=.055)
--
--
--
Log change in reserves
(t-2)
--
-.088***
(p=.002)
--
--
FDI outflows (t-2)
--
--
-.004**
(p=.027)
--
Change in foreign debt
service/GDP(t-3)
--
--
--
-.009**
(p=.047)
Overall R2
.074
.096
.079
.092
# of countries
162
118
155
130
Total # observations
2739
2065
2094
2037
It’s the economy, stupid!
Annulments


No appeals of ICSID tribunal decisions
(compare WTO DSM).
Annulments on only very narrow grounds
absence of proper reasoning
 manifest "excess of powers"


And yet…
ICSID: Awards and annulment registrations
awards
annulment registrations
18
16
14
12
10
8
In 2008 the number of new
registrations for annulment
proceedings exceeded the
number of awards on the
merits* made by ICSID
tribunals in that year
*excluding awards on jurisdiction and
settlements parties requested to be written
in the form of awards
6
4
2
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
0
A Closer Look at Annulment
Attempts…
Argentina
8
Egypt
4
Chile
3
Ecuador
2
Malaysia
2
Peru
2
Cameroon
1
DRC
1
Gabon
1
Guinea
1
Guyana
1
Indonesia
1
Kazakhstan
1
Morocco
1
Philippines
1
Seychelles
1
United Arab
Emirates
1
Central
SE Asia Asia
3%
13%
Middle
East
19%
Africa
16%
Latin
America
49%
high
low income income
3%
9%
lower
middle
41%
upper
middle
47%
Sectors in which annulments have
been sought…
Other
22%
Agricultural products
3%
Extractive Industries
9%
Financial Services
9%
Water, Gas, Electricity
26%
Broadcasting and Telecoms
3%
Transportation and
distribution 13%
Consumer Goods 6%
Construction
9%
ICSID: Awards and annulment registrations
awards
annulment registrations
Average
democracy
score, post
2006: 6/10
18
16
Average democracy score,
through 2006: 2/10
14
12
10
8
6
4
2
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
0
Things to think about



The model that BITs are freely accepted fully-informed contracts
should be re-examined.
Though not coerced, many developing countries entered these
agreements under “stressful” conditions.
Bargaining asymmetries have consequences:






Rapid BIT spread
Poor terms
Insufficient consideration of the risks
Systemically – result is an asymmetrical regime that gives investors much
more than was “customary” and puts most of the risk of economic
vulnerability on states.
Many are questioning the payoffs (attracting more litigation than
investment?)
Fortunately, there are pressures for change…
United States Net FDI
200
150
50
0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
billions of US dollars
100
-50
-100
-150
Complainants and Forums:
Canadian, UNCITRAL:
Mexican, UNCITRAL:
ICSID:
-200
year
Reasonable responses

Reduce the asymmetries.

Interpret contracts flexibly

Allow for appeals.

Rely more on an insurance regime
than a litigation regime.
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