Investment treaties grant international legal rights to foreign investors. Historically, investment treaties focused exclusively on the protection of existing investments from adverse government action – for example, by requiring a host state to pay compensation if it expropriates a foreign investment. However, modern investment treaties also contain investment liberalisation provisions that govern the admission and establishment of new foreign investment. Investment liberalisation provisions limit states’ ability to restrict or place conditions on new foreign investments. Foreign investors can usually enforce these provisions through a system of international arbitration popularly known as investor-state dispute settlement or “ISDS”.
Investment treaties are controversial. But, to date, academic and policy debate has focused almost entirely on their role in protecting foreign investment. The relative neglect of investment liberalisation provisions in the academic literature stands in stark contrast to public unease about the regulation of incoming investment. Recent public debates about the Chinese acquisition of Australian agricultural land and the privatization of the Port of Darwin are examples. In diplomatic practice, disagreement over investment liberalisation provisions has held up an investment treaty between China and the US for over a decade.
Investment liberalisation provisions are difficult to reconcile with existing theories that purport to explain and to justify investment treaties. In particular, such theories struggle to account for the relationship between unilateral investment liberalisation and states’ decisions to enter into binding investment liberalisation commitments. In this context, this paper asks: Why do states agree to binding investment liberalisation provisions in investment treaties? Integrating insights from law, economics and political science, the paper proposes a new conceptual framework to answer this question. It also provides some initial thoughts on how this framework could be tested empirically, and on the framework’s relevance to wider debate about whether investment liberalisation provisions place undue constraints on states’ ability to regulate incoming investment.
Dr Jonathan Bonnitcha is a Lecturer in Law at the University of New South Wales. His most recent book, is The Political Economy of the Investment Treaty Regime, published in July 2017 by Oxford University Press. Much of his research is inter-disciplinary, drawing on perspectives from economics and political science.
Prior to joining UNSW Law Jonathan lived in Myanmar, where he worked as an advisor to the Myanmar Government on investment governance. For several years he also worked for the Australian Attorney General’s Department, as a member of the team that successfully defended a multi-billion dollar challenge to Australia’s tobacco plain packaging laws brought under an investment treaty.