Authors: Henrik Horn** and Pehr-Johan Norbäck***
Published: December 2019
International investment agreements (“IIAs”) are State-to-State treaties that aim to promote investment, especially foreign direct investment (“FDI”), by protecting foreign investors against host-country policy measures. The first IIAs appeared in the late 1950s, but most of the currently almost 2,700 IIAs in force were formed after the mid-1990s. The vast majority of the agreements are bilateral, but it has become increasingly common for preferential trade agreements to encompass such protections.
Thousands of investment agreements have been formed in the last fifty years, strongly suggesting that both source and host-countries have perceived these agreements to be beneficial. Although initially formed without much political opposition, IIAs have become increasingly controversial. IIAs have been alleged to be beset with a large number of deficiencies that harm host-countries in particular. Perhaps the most prominent allegation is that the agreements cause “regulatory chill,”—that they dissuade host-countries from taking actions that are somehow desirable, such as regulations aimed at protecting the health of its citizens or the environment. Another claim is that the possibility for private investors to bring disputes against host-countries outside the host-countries’ legal systems—the Investor-State Dispute Settlement (“ISDS”) mechanisms that normally are included in the agreements—cause excessive arbitration.
The skepticism regarding traditional investment agreement has also been reflected in changes in the IIA regime itself. A number of countries are changing their agreements, both concerning fundamental undertakings and dispute settlement procedures. The EU has radically changed its position due to the criticism it faced during the EU-Canada Comprehensive Economic and Trade Agreement (“CETA”) and the Transatlantic Trade and Investment Partnership (“TTIP”) negotiations. The Netherlands recently presented for public comment a revised Model BIT that contains sweeping changes compared to their 2004 Model BIT. There are ongoing efforts in various international organizations, such as the Organization for Economic Co-operation and Development (“OECD”) and the United Nations Conference on Trade and Development (“UNCTAD”), to revise the investment regime, and the investment protection chapter of the North American Free Trade Agreement (“NAFTA”) has been renegotiated.
*This paper was presented in the Columbia Law School Trade Seminar – Fall 2018. We are very grateful to Robert L. Howse, Damien J. Neven, and the audience for very helpful discussions. Financial support from Jan Wallanders och Tom Hedelius stiftelse is also gratefully acknowledged. An earlier version of this article appeared as Henrik Horn and Pehr-Johan Norbäck, “A Non-Technical Introduction to Economic Aspects of International Investment Agreements”, Research Institute of Industrial Economics Working Paper No. 1250, Stockholm (Nov. 22, 2018).
**Henrik Horn, Professor of International Economics, Senior Research Fellow, Research Institute of Industrial Economics, Stockholm; Research Fellow, Centre for Economic Policy Research, London; and Non-Resident Fellow, Bruegel, Brussels.
***Pehr-Johan Norbäck, Associate Professor, Senior Research Fellow, Research Institute of Industrial Economics, Stockholm.