Monday, October 15, 2007

Van Aaken: Perils of Success? The Case of International Investment Protection

Anne Van Aaken (Univ. of St. Gallen - Law) has posted Perils of Success? The Case of International Investment Protection (European Business Organization Law Review, forthcoming). Contents include:

Foreign direct investment forms an ever more important part of globalized market structures and International Investment Law has become one of the most successful and judicialized areas of public international law. In order to attract investment, states commit themselves to treaties which restrict their regulatory sovereignty in ways which are sometimes unpredictable, owing to vague terms in the treaties and the use by investment tribunals of their delegated discretion broadly.

This article uses economic contract theory in order to understand whether the commitment problem ex ante and the flexibility problem ex post are solved optimally. It is hypothesized that the participation constraint of states may be overlooked by investment tribunals, thereby leading to undesired weakened protection of investors in the long run due to reactions by states. First, states may opt out of the system, e.g. by exiting treaties or by non-compliance. Second, they may also water down the substantive or procedural protections. Third, whereas investment treaties were seen in the beginning as a restraint on developing countries, more and more investment flows to equally highly regulated developed countries. As legal protection is reciprocal but the capital flows used to be unilateral, developed countries might also react to their restriction of sovereignty, as e.g. the United States have already done. These perils could lead to a backlash in international investment protection of which indications are already visible.