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

This paper develops an economic theory of international investment agreements, applies it to explain central features of modern investment treaties, and uses it to address a number of prominent issues in international investment litigation. The paper argues that investment agreements have a dual function – to overcome international externalities akin to the “terms of trade” externality associated with protectionism in international trade, and to enable capital importing countries to commit more effectively to eliminate inefficient risks to foreign investors that uneconomically raise the cost of imported capital. Core features of typical investment agreements perform both functions to some degree, and an understanding of their relative importance helps to explain why the predominant approach to investment agreements is bilateral or minilateral rather than multilateral. The economic analysis also sheds light on a number of controversies in investor-state dispute settlement, including jurisdictional issues relating to the definition of “investor” and “investment,” the scope and interpretation of the national treatment and most-favored nation obligations, the evolution of the “fair and equitable treatment” obligation, the meaning of “expropriation,” and the current controversy over the interface between international investment law and domestic regulation. It also offers an explanation for recent trends in treaty provisions in response to some controversial arbitral decisions