Investment treaties protect foreign investors from adverse action by the states in which they invest. They do this by granting foreign investors legal rights to compensation for losses caused by certain types of government action. Foreign investors have used investment treaties to demand compensation for a wide range of government actions, including changes to tax policy, the imposition of new environmental and public health regulations and financial measures taken in response to economic crises. Numerous countries are reconsidering or reducing their involvement and the investment treaty regime is widely accepted to be facing a crisis of legitimacy.
In our view, policy responses to these calls for reform should be grounded in an analysis of the underlying economic rationales for investment treaties. Our core insight is that investment treaties as they are currently drafted address two conceptually distinct economic problems: dynamic inconsistency of host state policy; and undervaluing foreign investors’ interests relative to those of other actors or its own revenue.
In this paper, we argue that investment treaties should provide the minimum protection necessary to solve dynamic inconsistency problems for the host state. Our proposal is that a state should only have to compensate the investor if it breaches or modifies the domestic legal regime governing the investment, and that compensation should be the lesser of the investor’s loss and the host state’s gain from the host state not having had the new legal regime in place when the investment was made.
One implication of our rule is that much government conduct for which compensation is currently required should not be compensable. Another implication is that, insofar as compensation is required, it should generally be less than is currently the case under investment treaties.
Emma Aisbett is a Fellow at the School of Regulation and Global Governance (RegNet) and Transdisciplinary Research Leader for ANU Grand Challenge - Zero Carbon Energy for the Asia Pacific. Emma’s research is characterized by a set of recurring themes, which include economic globalization, environmental policy, developing countries, and political economy. She is best known for her work on international investment agreements where she has influenced both academic debate and policy. On this topic Emma has been an invited expert at both the OECD and the UN Commission on Trade and Development (UNCTAD). She is also an approved supplier of policy advice to developing countries through the UK Governments TAF2+ initiative.
(Authors) Emma Aisbett & Jonathan Bonnitcha