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June 14, 2012

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Hmmnn. re: "In fact, the standards have been getting stricter, to the point where governments are required to grant a “guarantee of stability in a secure environment, both physical, commercial and legal” that may, for some countries, be impossible ... and is certainly more protection than that granted to domestic investors."

Doesn't that makes some sense, though? As a domestic investor, I should be well placed to determine if, say, Newburgh is too dangerous to set up a retail establishment in or not. As an overseas outsider, though, I am not well placed to figure such things out easily. This must act as a barrier to entry. The upshot is, ceteris paribus, I will avoid overseas projects that I would do in a domestic context. I'd think the more stringent level of guarantees makes the playing field more even from the state looking to encourage FDI.

*from the POV of the state looking to encourage FDI.*

Hi, Bernard! It certainly makes some sense for governments to commit to protect property rights.

The problem is that most governments were not aware of what they were signing on to. The full protection clauses generally referred only to police protection: U.S. BITs are quite explicit about this. Your Newburgh example seems to show that this is what you were thinking of, and it certainly is what the signatories of the treaties had in mind.

Tribunals, however, have begun to extend the full protection standard to legal and commercial security. That is a lot more problematic, because it puts states in the position of granting foreigners greater protection than domestics. In addition, even the physical security standard, if taken too far, obviates the kind of force majeure clauses that are common in domestic law.

It would be one thing for a government to choose to do this, but in most cases the tribunals have made the decision for them. Too many cases holding states to an unintended and unachievable standard, and the legitimacy of the investor-state system will come under risk. Lose the legitimacy of the system, and it will disappear.

At which point we're back to sanctions, gunboats, and the CIA.

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