Jean Monnet Center at NYU School of Law

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Explaining The Popularity of Bilateral Investment Treaties:Why LDCs Sign Treaties That Hurt Them

Andrew T. Guzmán [*] 26 August, 1997 Abstract

Bilateral Investment Treaties (BITs) have become the dominant mechanism for the international regulation of foreign direct investment. The tremendous popularity of these treaties is puzzling because they provide investment protections that exceed those offered by the former rule of customary international law, the Hull Rule, to which developing countries have long objected on sovereignty grounds. Furthermore, as the paper demonstrates, BITs may be welfare reducing for developing countries. By forcing LDCs to compete for inward foreign investment, and by providing a mechanism through which developing countries are able to make binding commitments to investors, BITs may reduce the benefit developing countries obtain from foreign investment.

Because the treaties are bilateral in nature, however, they offer an LDC an advantage over other countries in the competition to attract investment. For this reason, individual countries are willing to sign such agreements, despite the fact that LDCs as a group are harmed.

After developing the above analysis, the paper discusses the implications of its results on the role of BITs in the formation of customary international law, concluding that the treaties should not be taken as evidence of the existence of customary law.

[*] Visiting Assistant Professor, University of Chicago Law School. For helpful comments and suggestions on earlier drafts, I am indebted to Stephen Choi and Dhananjai Shivakumar. I also owe special thanks to Jeannie Sears. Financial support from the John M. Olin foundation is gratefully acknowledged

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