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The Economic Structure of International Investment Agreements with Implications for Treaty Interpretation and Design

  • Alan O. Sykes (a1)


This Article argues that international investment agreements (IIAs) serve a dual economic function—to discipline host country policies that impose international externalities on foreign investors, and to curtail inefficient risks associated with agency costs, risk aversion, asymmetric information, and time inconsistency problems that uneconomically increase the cost of imported capital in host countries. It draws on the economic analysis to explain central features of IIAs and their evolution over time, and to address various controversial issues in international investment litigation.

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I have benefited immensely from related collaborative work with Ralph Ossa and Bob Staiger, from the comments of Joe Bankman and Louis Kaplow, from participants in workshops at Harvard, Northwestern, and Stanford Law Schools, from comments at the 2019 annual meeting of the American Law & Economics Association, and from numerous suggestions by AJIL reviewers.



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1 The majority of international investment agreements are stand-alone bilateral investment treaties (BITs), of which there are now over 2,300 in force. Other international investment agreements in force, numbering over three hundred, are incorporated within broader economic treaties such as the North American Free Trade Agreement (NAFTA) and its potential successor, the United States-Mexico-Canada Agreement (USMCA). See UNCTAD, International Investment Agreements Navigator, available at

2 See, e.g., Henrik Horn & Thomas Tangeräs, Economics and Politics of International Investment Agreements (IFN Working Paper No. 1140, 2017); Jonathan Bonnitcha, Luage Poulsen & Michael Waibel, The Political Economy of the Investment Treaty Regime, ch. 5 (2017), and sources cited therein; Jonathan Bonnitcha, Substantive Protection Under Investment Treaties: A Legal and Economic Analysis (2014); Emma Aisbett & Jonathan Bonnitcha, Compensation Under Investment Treaties – As If Host Interests Mattered (UNSW Law Research Paper No. 18-80, 2018); Aisbett, Emma, Karp, Larry & McAusland, Karol, Police Powers, Regulatory Takings and the Efficient Compensation of Domestic and Foreign Investors, 86 Econ. Record 367 (2010); Aisbett, Emma, Karp, Larry & McAusland, Karol, Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest, 1 J. Globalization & Dev. Article 6 (2010); Janeba, Eckhard, Regulatory Chill and the Effects of Investor-State Dispute Settlements (mimeo 2016).

3 See, e.g., Elizabeth Warren, The Trans-Pacific Partnership Clause Everyone Should Oppose, Wash. Post (Feb. 25, 2015), at; Public Citizen, Investor-State Dispute Settlement: Extraordinary Corporate Power in “Trade” Deals, at

4 See, e.g., Been, Vicki & Beauvais, Joel C., The Global Fifth Amendment? NAFTA's Investment Protections and the Misguided Quest for an International “Regulatory Takings” Doctrine, 78 N.Y.U. L. Rev. 30 (2003).

5 See, e.g., Blume, Lawrence & Rubinfeld, Daniel L., Compensation for Takings: An Economic Analysis, 72 Cal. L. Rev. 569 (1984); Blume, Lawrence, Rubinfeld, Daniel L. & Shapiro, Perry, The Taking of Land: When Should Compensation Be Paid?, 99 Q. J. Econ. 71 (1984); Kaplow, Louis, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509 (1986).

6 See Guzman, Andrew, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int'l L. 639 (1998); Bubb, Ryan J. & Rose-Ackerman, Susan, BITs and Bargains: Strategic Aspects of Bilateral and Multilateral Regulation of Foreign Investment, 27 Int'l Rev. L. & Econ. 291 (2007); Lauge Poulsen, Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries (2015). There is also a substantial empirical literature that seeks to identify the effect of IIAs on direct foreign investment flows, which is discussed briefly in Section I.E.

7 Sykes, Alan O., Public Versus Private Enforcement of International Economic Law: Standing and Remedy, 34 J. Leg. Stud. 631 (2005) (hereinafter Public Versus Private Enforcement).

8 van Aaken, Anne, International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis, 12 J. Int'l Econ. L. 507 (2009); Sykes, Alan O., Economic “Necessity” in International Law, 109 AJIL 296 (2015).

9 See Puig, Sergio & Shaffer, Gregory, Imperfect Alternatives: Institutional Choice and the Reform of Investment Law, 112 AJIL 361 (2018).

10 See, e.g., Eric A. Posner & Alan O. Sykes, Economic Foundations of International Law, ch. 6 (2013).

11 See, e.g., Sykes, Alan O., When Is International Law Useful?, 45 N.Y.U. J. Int'l L. & Pol. 787 (2013).

12 An excellent up-to-date survey is Grossman, Gene M., The Purpose of Trade Agreements, in Handbook of Commercial Policy, Vol. 1A (Bagwell, Kyle & Staiger, Robert W. eds., 2016).

13 See, e.g., Paul R. Krugman, Maurice Obstfeld & Marc J. Melitz, International Economics: Theory and Policy 198–202 (11th ed. 2018).

14 Johnson, Harry G., Optimum Tariffs and Retaliation, 21 Rev. Econ. Studs. 142 (1953–54).

15 For clarity, however, this theory of trade agreements does not require that importing nations deliberately exploit national monopsony power, or even that their trade policy officials understand the concept. Johnson's original model of the optimum tariff is written from the perspective of an optimizing government pursuing its national welfare, and the modern economic literature often refers to importing governments “manipulating” their terms of trade (the price of imports in relation to exports). But it is enough that when governments make decisions without regard to their effects on the welfare of foreigners and a harmful externality arises for foreign firms, there will be a tendency for importing governments to engage excessively in whatever behavior produces the externality. Put differently, when an important interest group is missing from a political process, the resulting political equilibrium will tend to burden that group for the benefit of others to an excessive degree.

16 The monopsony analogy also explains why the “pecuniary” externality associated with tariffs yields global inefficiency. Pecuniary externalities do not produce inefficiency if all actors are price takers, but the importing country in the optimum tariff setting has the power to affect price.

17 For further discussion in the regulatory context, see Staiger, Robert W. & Sykes, Alan O., International Trade, National Treatment and Domestic Regulation, 40 J. Leg. Stud. 149 (2011).

18 The reader may note that even if the host country lacks monopsony power, an investor that has made irreversible capital investments in the host country may have to absorb costs imposed by the host country if they come as a “surprise” after the fact (and hence are not priced into the required rate of return on capital up front). Host countries will likely have difficulty engaging in such behavior systematically, however, as rational investors will adapt their expectations to take account of it.

19 One recent estimate suggests that the combined global bond and stock markets have a valuation of roughly U.S.$160 trillion. See 5 Bond Market Facts You Need to Know, Motley Fool, at

20 See, e.g., Blanchard, Emily J., Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?, 82 J. Int'l Econ. 63 (2010).

21 See China – Certain Measures on the Transfer of Technology, Request for Consultations by the European Union, WT/DS549/1/Rev. 1 (Jan. 8, 2019).

22 An analysis of these two cases involving local content requirements may be found in Bagwell, Kyle & Sykes, Alan O., India – Measures Affecting the Automotive Sector, in The WTO Case Law of 2002 (Horn, Henrik & Mavroidis, Petros C. eds., 2005).

23 See, e.g., Aisbett, Karp & McAusland, supra note 2.

24 The same phenomenon arises in the international trade context when a “large” importing country imposes regulatory compliance costs that exporters partially absorb by lowering their prices. See Staiger & Sykes, supra note 17.

25 See Rodrik, Dani, The Economics of Export Performance Requirements, 102 Q. J. Econ. 633 (1987).

26 For a formal model contrasting unilateral and bilateral policies, see Janeba, supra note 2.

27 Just as capital becomes specialized and vulnerable to the exercise of monopsony because of sunk investments in intellectual property, human capital, and the like, other investment risks arise because of sunk investments. If investments were fully reversible and investors could always leave with their original capital intact, they would face no risk and have no reason to demand any more than the required riskless rate of return.

28 Formally, let the gross return to investors (in the state of the world where the host country does not transfer a portion to itself) be denoted Y. The host country with probability p will transfer a fraction α of the investors' gross returns to itself. The value of Y will represent the solution to the following expression:

$${\rm R} = \lpar {{\rm 1} + {\rm r}} \rpar {\rm K} = {\rm} \lpar {{\rm 1} - {\rm p}} \rpar {\rm Y} + {\rm p(1} - {\rm \alpha){\rm Y}} = {\rm (1} - {\rm \alpha} {\rm p)Y}$$


$${\rm Y}-{\rm R} = {\rm \alpha} {\rm pY}$$

The expected value of the transfer to the host country is αpY. But the investors require an increase in their gross return Y to offset that amount exactly so that the expected return remains equal to R.

29 To illustrate, suppose that αp=½. Then, the gross return to investment Y in the state where the transfer does not occur must equal 2R if the investment is to be made at all. Returns at that level may be impossible to achieve. And in a more general framework, one could imagine a partial loss of surplus to the host government if the investment still occurs but on a smaller scale.

30 More precisely, the cost of the regulatory policy will be passed onto the host state in full, possibly through the price of imported capital, or possibly through the prices charged by the enterprise that the investor owns. The exact mechanism does not matter to the argument.

31 Indeed, national income maximization is a controversial normative benchmark, and deviations from that maximand, presumably for distributive purposes, need not be seen as a “problem” at all.

32 See Eric Rasmusen, Games and Information, ch. 11 (4th ed. 2007) on the concept of signaling and separating equilibria.

33 None of this is to deny that situations may arise in which investors have better information than host governments about some risk or hazard associated with an investment and may fail to disclose it in the hope that they can escape regulation and earn greater profit. See Puig & Shaffer, supra note 9. This possibility does not alter the analysis in the text, however, as such investors neither require treaty protection nor benefit from protection under sensible IIAs that allow host countries the freedom to engage in sensible regulation. See the discussion of regulatory issues in Section III infra (sections on fair and equitable treatment and expropriation). One could imagine hypothetical IIAs that allow host countries to sue investors for taking advantage of their superior information in a manner that imposes unreasonable costs on the host state, but there is no apparent reason why host countries cannot address such matters in their domestic legal systems.

34 Key insights were developed with reference to the challenges of writing complete contracts between private actors. See Klein, Benjamin, Crawford, Robert G. & Alchian, Armen, Vertical Integration, Appropriable Rents and the Competitive Contracting Process, 21 J. L. & Econ. 297 (1978). Here, as discussed further below, the problem can be viewed as a contracting problem between the investor and the host state.

35 Time inconsistency issues are a primary focus of the limited existing literature on the economics of IIAs. See sources cited in note 2 supra.

36 See Markusen, James R., Commitment to Rules on Investment: The Developing Countries “Stake,” 9 Rev. Int'l Econ. 287 (2001).

37 This class of problems bears considerable resemblance to aspects of the international externality problem discussed in Section I.A, in that the same kinds of policies may be involved and the underlying issue arises because investors have incurred certain kinds of sunk costs. The analytical difference in this section is that the costs of host country policies are borne in full by the host country via attendant adjustments in the cost of capital, and hence no international externality arises.

38 Interestingly, a parallel arises once again to the literature on international trade agreements. Even in the absence of international externalities, trade agreements may help governments to “tie their hands” in the face of time inconsistency problems. Standard models involve a government that wishes to commit ex ante to efficient trade policy that eschews protectionism and discourages wasteful domestic investment in industries that are not competitive. Once investment occurs, however, the government knows that it will face overwhelming political pressure to afford protection in adverse scenarios. Trade agreements may enable the government to resist those pressures ex post and thus make the desired credible commitment ex ante. See, e.g., Grossman, supra note 12, at 415–21. The difference is that the trade literature concerns the problem of making credible commitments to domestic firms, while the problem for IIAs to solve here involves the need for credible commitments to foreign investors.

39 This proposition follows from the well-known “folk theorem.” See Eric Rasmusen, Games and Information 131 (4th ed. 2007).

40 To be sure, large multinational companies may at times exercise undue influence over host governments through corruption or the exploitation of superior information and are not always going to be at a disadvantage in the domestic legal system. See Puig & Shaffer, supra note 9. This fact does not affect the utility of IIAs where foreign investors are vulnerable, it simply means that foreign investors are not always vulnerable. And where foreign investors have availed themselves of opportunities to benefit themselves through corruption or deception, various doctrines have evolved to deny the investors the benefits of IIA protection. See, e.g., Aloysius P. Llamzon, Corruption in International Investment Arbitration (2014).

41 Once again, however, one must acknowledge the possibility that arbitral tribunals may also be biased, perhaps in favor of foreign investors. See Puig & Shaffer, supra note 9.

42 A further implication of this point is that the substantive commitments of IIAs are best treated as default rules, and that sophisticated investors and host countries should be able to contract around these defaults if they are unsuitable to a particular situation. Arbitral tribunals should not treat treaty provisions as non-waivable by sophisticated investors. For extensive discussion of this issue see Arato, Julian, The Private Law Critique of International Investment Law, 113 AJIL 1 (2019).

43 The text of the Convention and its role in international arbitration cases is surveyed extensively at

44 For a formal model addressing these issues, see Ossa, Ralph, Staiger, Robert W. & Sykes, Alan O., Dispute Settlement in International Trade and Investment Agreements (mimeo 2019).

45 See Sykes, Public Versus Private Enforcement, supra note 7.

46 Published arbitral decisions may be accessed promptly, for example, at

47 See Rodrik, Dani, What Do Trade Agreements Really Do, 32 J. Econ. Persp. 73 (2018); Lise Johnson, Lisa Sachs & Jeffrey Sachs, Investor-State Dispute Settlement, Public Interest and U.S. Domestic Law (CCSI Policy Paper, May 2015), available at; Stiglitz, Joseph E., Towards a Twenty-First Century Investment Agreement, in Yearbook on International Investment Law and Policy 2015–16 (Johnson, Lise & Sachs, Lisa eds., 2018).

48 Ossa, Staiger & Sykes, supra note 44, develop a formal model in which the desirability of ISDS turns importantly, inter alia, on the accuracy of tribunals. If tribunals are perfectly accurate in identifying inefficient decisions by host governments, disputes do not arise because neither party can benefit from opportunism and it does not occur in equilibrium. If tribunals are horribly inaccurate, then the parties cannot benefit from ISDS. The case of intermediate accuracy creates the possibility of disputes arising in equilibrium, and ISDS will prove more valuable the greater the accuracy of the tribunal, the greater the cost of host country opportunism, and the greater its probability.

49 See notes 60–61 infra and accompanying text.

50 See Model Text for the Indian Bilateral Investment Treaty, Art. 15, available at

51 Ecuador terminated its BITs after a multi-billion-dollar judgment against it on behalf of Occidental Petroleum. See Cecilia Olivet, Why Did Ecuador Terminate All Its Bilateral Investment Treaties?, TNI (May 25, 2017), at Australia threatened to withdraw from its BITs and the ISDS system in response to the plain-packaging tobacco litigation filed by Phillip-Morris. Australia changed its view after a change in government, however, and ultimately prevailed in the plain-packaging case—the current position of Australia remains favorable to ISDS. See Australian Government, Department of Foreign Affairs and Trade, Australia's Bilateral Investment Treaties, at Indonesia has terminated a number of its BITs and embarked on an effort to renegotiate them, sparked in part by a response to case brought by Churchill Mining. See Leon E. Trakman & Kunal Sharma, Why Is Indonesia Terminating Its Bilateral Investment Treaties?, E. Asia F. (Sept. 20, 2014).

52 Multilateral Investment Guarantee Agency, Investment Guarantee Guide (July 2015), available at

53 See Section I.A.3 supra.

54 The current results are accessible at

55 UNCTAD reports 942 known cases as of year-end 2018. See UNCTAD, Investment Policy Hub, at There is no comparable database on state-to-state claims, but academic writing suggests that such claims are quite few in number. See Roberts, Anthea, State-to-State Investment Treaty Arbitration: A Hybrid Theory of Interdependent Rights and Shared Interpretive Authority, 55 Harv. Int'l L.J. 1 (2014); Nathalie Bernasconi-Osterwalder, State-State Dispute Settlement in Investment Treaties (International Institute for Sustainable Development, Oct. 2014).

56 There are a variety of reasons why the number of formal state-to-state dispute settlement disputes may not be a reliable indicator here—compliance rates with market access commitments could be quite high, for example, obviating the need for formal disputes.

57 This category includes both free trade agreements and customs unions.

58 Jo-Ann Crawford & Barbara Kotschwar, Investment Provisions in Preferential Trade Agreements: Evolution and Current Trends, 17 (WTO Staff Working Paper ERSD-2018-14, Dec. 14, 2018).

59 Under the Treaty on the Functioning of the European Union, pre-establishment “national treatment” is not formally included but the principle is implicit in various non-discrimination, right of establishment and free movement provisions. See Consolidated Version of the Treaty on the Functioning of the European Union, Arts. 18, 49, 63, OJ C 326/47 (Oct. 26, 2012), available at

60 Institute for Sustainable Development, Side-By-Side Comparison of the Brazil-Mozambique and Brazil-Angola Cooperation and Facilitation of Investment Agreements (2015), available at See Article 11(2) in each treaty.

61 See Brazil Direct Investment Abroad, CEIC, at

62 An extensive collection of papers on the subject may be found in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows (Sauvant, Karl P. & Sachs, Lisa E. eds., 2009). See also the survey in Bonnitcha, supra note 2, at 105–09. A relatively recent study arguing that IIAs can significantly increase investment flows and enhance the credit and good governance ratings of signatories is Salacuse, Jeswald W., Of Handcuffs and Signals: Investment Treaties and Capital Flows to Developing Countries, 58 Harv. J. Int'l L. 127 (2017).

63 See Pauwelyn, Joost, Rational Design or Accidental Evolution: The Emergence of International Investment Law, in The Foundations of International Investment Law: Bringing Theory Into Practice (Douglas, Zachary, Pauwelyn, Joost & Viñuales, Jorge E. eds., 2014).

64 See, e.g., Poulsen, supra note 6.

65 See Adam Chilton, The Political Motivations of the United States Bilateral Investment Treaty Program, 23 Rev. Int'l Pol. Econ. 614 (2016).

66 See Guzman, supra note 6; Elkins, Zachary, Guzman, Andrew & Simmons, Beth, Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000, 60 Int'l Org. 811 (2006).

67 See sources cited in note 51 supra.

68 We do not mean to suggest that all IIAs are initially “optimal” in every respect and cannot be improved. Indeed, as discussed later, one observes considerable evolution in the terms of IIAs over time. Renegotiation is also observed with some regularity. See Meyer, Timothy & Park, Tae Jung, Renegotiating International Investment Law, 21 J. Int'l Econ. L. 655 (2018).

69 See sources cited in note 62 supra.

70 This observation is a corollary of the fact that protectionism through fiscal instruments such as tariffs is in general less inefficient than “regulatory protectionism.” See Sykes, Alan O., Regulatory Protectionism and the Law of International Trade, 66 U. Chi. L. Rev. 1 (1999).

71 North American Free Trade Agreement, Art. 1103, 32 ILM 289 (entry into force Jan. 1, 1994) [hereinafter NAFTA]; U.S. Model BIT, Art. 4.

72 The problem is analogous to the well-known problem of “trade diversion” that arises when one country receives a tariff preference from an importing nation. See, e.g., Kyle Bagwell & Robert W. Staiger, The Economics of the World Trading System, ch. 5 (2003).

73 NAFTA, supra note 71, Art. 1105; U.S. Model BIT, supra note 71, Art. 5.

74 U.S. Model BIT, supra note 71, Art. 5(2). This elaboration of the two concepts is not found in NAFTA and was introduced into the Model BIT in response to some early NAFTA cases that interpreted the minimum standard of treatment more broadly than customary international law implies.

75 See Perlman, Rebecca L. & Sykes, Alan O., The Political Economy of the Foreign Corrupt Practices Act: An Exploratory Analysis, 9 J. Leg. Analysis 153 (2017).

76 This observation is subject to the caveat that better protection for foreign investors may give them an effective “subsidy” that can provide a competitive advantage and lead to inefficiently high levels of foreign investment.

77 See Guzman, supra note 6; Bubb & Rose-Ackerman, supra note 6.

78 See Blume & Rubinfeld, supra note 5.

79 See Kaplow, supra note 5.

80 For an extended discussion, see Steven Shavell, Foundations of Economic Analysis of Law, ch. 5 (2004).

81 See Richard Epstein, Takings: Private Property Under the Power of Eminent Domain (1985).

82 See Horn and Tangeräs, supra note 2, for a formal model along these lines.

83 NAFTA, supra note 71, Art. 1109(4); U.S. Model BIT, supra note 71, Art. 7(4).

84 ICSID Case No. ARB/02/18, Decision on Jurisdiction (Apr. 29, 2004), paras. 21–70.

85 Partial Award, at 46–50 (UNCITRAL Mar. 17, 2006).

86 See also NAFTA, supra note 71, Art. 1113(2). The NAFTA treatment of third-country investors is the same, but the Model BIT added the reference to host country investors.

87 EU-Canada Comprehensive Economic Trade Agreement, Art. 8.16, OJ L 11/23 (Jan. 14, 2017) [hereinafter CETA].

88 ICSID Case No. ARB/00/4, Decision on Jurisdiction (July 31, 2001).

89 See id., paras. 28–35. In this instance, the decision was a merits ruling rather than a jurisdictional ruling, as the claimant had properly filed against the state of Morocco.

90 See Sykes, Public Versus Private Enforcement, supra note 7; Ossa, Staiger & Sykes, supra note 44.

91 See, for example, the lists of covered “investments in CPTPP, Article 9.1 and CETA, Article 8.1.”

93 Phillip Morris Asia Ltd v. Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, at 166–85 (UNCITRAL Dec. 17, 2015).

94 See, e.g., Waibel, Michael, Opening Pandora's Box: Sovereign Bonds in International Arbitration, 101 AJIL 711 (2007); Ortolani, Pietro, Are Bondholders Investors? Sovereign Debt and Investment Arbitration After Poštová, 30 Leiden J. Int'l L. 383 (2017).

95 See UNCTAD, supra note 92.

96 See Poštová Banka, a.s. and Istrokapital SE v. Greece, ICSID Case No. ARB/13/08, Award, paras. 248–350 (Apr. 9, 2015) (sovereign debt not covered); Abaclat v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, paras. 352–57 (Aug. 4, 2011) (public securities covered).

97 ICSID Case No. ARB/00/4, Decision on Jurisdiction (July 23, 2001).

98 Id., paras. 50–58.

99 See Mitchell v. Congo, ICSID Case No. ARB/99/7, Decision on the Application for Annulment of the Award (Feb. 9, 2004) (not shown that activity of claimant's law firm contributed to development of the host state); Malaysian Historical Salvors v. Malyasia, ICSID Case No. ARB/05/10, Decision on Jurisdiction (May 17, 2007) (alleged breach of marine salvage contract not actionable because insufficiently related to development).

100 See Romak S.A. v. Uzbekistan, PCA Case No. AA280, Award, paras. 180, 207 (UNCITRAL Nov. 26, 2009). An extensive discussion of Salini and its progeny may be found in Krista Nadakavukaren Schefer, International Investment Law: Text, Cases and Materials 84–112 (2016).

101 See Salini, supra note 88, para. 52.

102 Unlawful investments are generally excluded from coverage under IIAs. See Schefer, supra note 100, at 125–34.

103 Deutsche Bank v. Sri Lanka, ICSID Case ARB/09/2, Award, paras. 306–07 (Oct. 31, 2012).

104 ICSID ARB/01/11, Award, paras. 46–62 (Oct. 12, 2005). Contrast SGS v. Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction (Aug. 6, 2003).

105 See Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Arts. 1 (“investment agreement” defined), 9.19 (entry into force Dec. 30, 2018) [hereinafter CPTPP].

106 See General Agreement on Tariffs and Trade, Art. III(2), (4), Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 UNTS 187, 33 ILM 1153 (Apr. 15, 1994).

107 See, e.g., CPTPP, supra note 104, Art. 9.4(1).

108 See, e.g., CETA, supra note 87, Art. 8.6(1).

109 Final Award (UNCITRAL Nov. 15, 2004).

110 Id., paras. 114–15.

111 Id., para. 114.

112 Id., para. 115.

113 See, e.g., Cargill, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award (Sept. 18, 2009).

114 Id., paras. 208–10.

115 LCIA Case No. UN3467, Final Award (UNCITRAL July 1, 2004).

116 Id., paras. 167–79.

117 ICSID Case No. ARB/97/7, Award (Nov. 13, 2000).

118 The most-favored-nation clause appears in conjunction with the fair and equitable treatment obligation in the Spain-Argentina BIT and reads as follows: “In all matters governed by this Agreement, such (fair and equitable) treatment shall not be less favorable than that accorded by each Party to the investments made in its territory by investors of a third country.” Article 4 (2). Note the absence of any reference to “like circumstances,” as in NAFTA and the U.S. Model BIT.

119 See Plama v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction (Feb. 8, 2005). On the heterogeneity of most-favored-nation clauses generally see Simon Batifort & J. Heath, Benton, The New Debate on the Interpretation of Most-Favored-Nation Clauses in Investment Treaties: Putting the Brakes on Multilateralization, 111 AJIL 873 (2017).

120 See, for example, the Australia-China BIT.

121 See especially Metalclad v. Mexico, ICSID Case No. ARB(AF)/97/1, Award (Aug. 30, 2000); Pope & Talbot v. Canada, Award on the Merits of Phase 2 (UNCITRAL Apr. 10, 2001).

123 Note 118, supra.

124 PCA Case No. 2009-04, Award on Jurisdiction and Liability (UNCITRAL Mar. 17, 2015).

125 See, e.g., Been & Beauvais, supra note 4; Bonnitcha, supra note 2, § 3.7; UNCTAD, Fair and Equitable Treatment: A Sequel (2012), available at (discussing various treaty language options for protecting the “right to regulate”).

126 See also CETA, supra note 87, Art. 8.9(2).

127 See Fortier, L. Yves & Drymer, Steven L., Indirect Expropriation and the Law of International Investment: I Know It When I See It, or Caveat Investor, 19 ICSID Rev. For. Inv. L.J. 293 (2004).

128 See, e.g., Glamis Gold v. United States, Award (UNCITRAL June 8, 2009) (reduction in value from $49 million to $20 million insufficient for expropriation).

129 See, e.g., SD Myers v. Canada, Partial Award (UNCITRAL Nov. 13, 2000).

130 Fortier & Drymer, supra note 127.

131 See, e.g., Phillip Morris v. Uruguay, ICSID Case No. ARB/10/7, Award (July 8, 2016); Methanex v. United States, Final Award of the Tribunal on Jurisdiction and Merits (UNCITRAL Aug. 3, 2005).

132 Note 2, supra.

133 Full compensation would lead to overinvestment (due to moral hazard stemming from “insurance” against regulation), however, and so an optimal compensation mechanism would deliver compensation only under certain contingencies (ideally, only when regulation is globally inefficient). If that condition is not verifiable, various second-best options emerge in their model. See also Aisbett & Bonnitcha, supra note 2 (distinguishing regulatory changes attributable to time inconsistency issues from those driven by “new information”).

134 This analysis accords with the defense of ISDS in the regulatory arena put forward most forcefully by Charles Brower. See, e.g., Brower, Charles N. & Blanchard, Sadie, What's in a Meme? The Truth About Investor-State Arbitration: Why It Need, Not, and Must Not, Be Repossessed by States, 52 Colum. J. Transnat'l. L. 689 (2014) (arguing that ISDS does not impair regulatory sovereignty).

I have benefited immensely from related collaborative work with Ralph Ossa and Bob Staiger, from the comments of Joe Bankman and Louis Kaplow, from participants in workshops at Harvard, Northwestern, and Stanford Law Schools, from comments at the 2019 annual meeting of the American Law & Economics Association, and from numerous suggestions by AJIL reviewers.

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