In the last two decades, the world has witnessed an unparalleled expansion of investment treaties entered into by countries from all corners of the earth. This phenomenon is largely the result of widespread adherence to the economic assertion that developing countries seeking to increase their inflow of foreign direct investments (FDI) need to sign and ratify Bilateral Investment Treaties (BITs) in order to attract fresh investment. In short, these States, assuming that there is indeed a positive correlation between BITs and FDI, have followed the economic ideology behind BITs in the belief that doing so will promote the growth of their national economies.
In reality, however, there are also several disadvantages to BITs. Firstly, by agreeing to confer specific treatment on foreign investment, in line with previously negotiated standards of protection, States in effect restrict their regulatory powers over certain areas, i.e., they curtail their sovereignty in return for the promise of new flows of investment. Second, by agreeing to submit to international tribunals disputes arising from the investment treaties States to all intents and purposes accept that such tribunals have powers to review the legality and legitimacy of national regulatory measures.
Given the potential downsides, States should carry out a balancing test of the costs and benefits of investment treaties, before deciding to sign and ratify a BIT. Furthermore, it should be reasonable for any such balancing test to take into account the fact that the findings of the most relevant econometric studies into the presumed positive impact of BITs are, at best, unclear. To date, there is no hard evidence that BITs actually do lead to an increase in the inflow of additional FDI into the economies of developing countries. The exponential increase in BITs seems, rather, to derive from a firm, widely held belief in the positive effects of those investment treaties, a belief, which, in reality, is unsupported by objective evidence.
The literature on the matter indicates that there are studies which argue that BITs increase FDI (e.g., K. Sauvant & L. Sachs eds., The Effects of Treaties on Foreign Direct Investment: Bilateral investment treaties, double taxation treaties and investment flows (Oxford U. Press 2009); J. Salacuse & N. Sullivan, Do BITs really work? An evaluation of bilateral investment treaties and their grand bargain, 46 Harv. Intl. L.J. 67 (2005); D. Swenson, Why do developing countries sign BITs? (12 J. Intl. L. & Policy 131-154 (2005); R. Grosse & L. Trevino, New Institutional economics and FDI in Central and Eastern Europe (2005, MIR, 45: 123-135); K. Gallagher & M.B.L. Birch, Do Investment agreements attract investment? Evidence from Latin America, 7 J. World Investment & Trade 1–21 (2006), whilst others show completely opposite results: Hallward-Driemeier, Do Bilateral Investment Treaties Attract FDI? Only a bit and they could bite (2003), at 22; Jason Webb Yackee, Do BITs really work? Revisiting the Empirical Link Between Investment Treaties and Foreign Direct Investment (in The Effects of Treaties on Foreign Direct Investment 379, Karl P. Sauvant & Lisa E. Sachs eds., 2009) and Emma Aisbett1.
Note that, on her study, Emma Aisbett argues that earlier studies which had sought to demonstrate a supposed positive impact of BITs on FDI growth had failed to take into account certain methodological challenges, which, if correctly addressed, would in fact have demonstrated the non-existence of any correlation between BITs and FDI flow (supra, at 31-32).
Brazil has maintained its historical position on BITs and has not yet ratified a single investment treaty. It has, rather, preferred to resolve investment disputes diplomatically or through domestic litigation or arbitration. Whether Brazil should take a different stance on the matter and ratify its first BIT, given the size of the Brazilian economy and its presumed potential for further growth is a recurring issue among Brazilian politicians, economists and lawyers.
Data taken from the Economic Commission for Latin America and Caribbean (ECLAC) website shows that Brazil received total FDI of approximately USD 442 billion between 1993 and 2012. Net FDI value stood at USD 801 million in 1993 and increased steadily, with an influx of approximately USD 19 billion in 1998. There was a slight fall in 1999, followed by a return to growth in 2000, when the country received approximately USD 30 billion. From 2001 to 2006 FDI declined, but 2007 saw a fresh growth cycle, with the injection of around USD 27 billion and USD 66 billion in 2012. Brazil, therefore, was the highest ranking South American country, in terms of FDI inflow from 1993 to 2012. The FDI indexes of all other South American countries as well as Mexico (a Member State of NAFTA) were significantly lower. Although this comparison does not take into account the relative size of the national economies, it still provides a strong indication that the number of ratified BITs does not directly correlate with the overall FDI levels – with not a single signed BIT, Brazil is ranked last in terms of ratified treaties2.
More recently, the arguments put forward in support of Brazil ratifying BITs have shifted from the hackneyed claim that ratification will lead to an increased flow of FDI; proponents now concentrate on the need to confer greater protection on Brazilian investments abroad. The thrust of this argument is that the increasing internationalization of Brazilian companies has given rise to a need to confer additional protection on Brazilian investors. As such, according to this view, the restrictions on part of sovereignty as a result of the ratification of BITs are justified, not by the prospect of increase in internal FDI, but by the need to establish a legal environment which is more favourable and secure for the foreign operations of Brazilian multinationals. (See Eugênia Zerbini, O Brasil à distância do direito internacional dos investimentos, RDB 35/11; Gilberto Giusti and Adriano Drummond C. Trindade, As Arbitragens Internacionais Relacionadas a Investimentos: A Convenção de Washington, o ICSID e a posição do Brasil, RARB 7/49; José Carlos de Magalhães, Acordos Bilaterais de Promoção e Proteção de Investimentos, RARB 20/53; Jean Kalick and Susana Medeiros, Investment Arbitration in Brazil: Revisiting Brazil’s Traditional Reluctance Towards ICSID, BITs, and Investor-State Arbitration, RARB 14/57; and Eduardo Felipe P. Matias, O Brasil e os Instrumentos Internacionais de Proteção aos Investimentos, RARB 21/114.) However, there are no empirical studies which back up this proposition either.
Considering that the costs involved in ratifying investment treaties may be considerably higher than the proclaimed and unproven benefits and paying heed to current realities (rather than mere beliefs), there is no reason yet for Brazil to modify its traditional position.
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1 - Bilateral investment treaties and foreign direct investment: correlation versus causation, Munich Personal RePEc Archive, 2007, https://mpra.ub.uni-muenchen.de/2255/, accessed 7 Jul. 2013
2 - https://interwp.cepal.org/sisgen/ConsultaIntegradaFlashProc.asp, accessed 07 Jul. 2013.
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*Gustavo Fernandes de Andrade is a partner in the Rio de Janeiro office of Tauil & Chequer Advogados, where he focuses his practice on Litigation and Arbitration.
