The (political) economics of bilateral investment treaties: The unique trajectory of Brazil

Bellak, Christian; Leibrecht, Markus Article The (political) economics of bilateral investment treaties: The unique trajectory of Brazil Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Bellak, Christian; Leibrecht, Markus (2024) : The (political) economics of bilateral investment treaties: The unique trajectory of Brazil, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 12, Iss. 6, pp. 1-19, https://doi.org/10.3390/economies12060130 This Version is available at: https://hdl.handle.net/10419/329056 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Citation: Bellak, Christian, and Markus Leibrecht. 2024. The (Political) Economics of Bilateral Investment Treaties—The Unique Trajectory of Brazil. Economies 12: 130. https:// doi.org/10.3390/economies12060130 Academic Editors: Bruce Morley and E. M. Ekanayake Received: 18 March 2024 Revised: 30 April 2024 Accepted: 21 May 2024 Published: 24 May 2024 Copyright: © 2024 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). economies Review The (Political) Economics of Bilateral Investment Treaties—The Unique Trajectory of Brazil Christian Bellak 1and Markus Leibrecht 2,* 1Department of Economics, Vienna University of Economics and Business, 1020 Vienna, Austria; [email protected] 2School of Finance, City University of Macau, Macau, China *Correspondence: [email protected] Abstract: Brazil, after signing several traditional Bilateral Investment Treaties without ratifying them, recently shifted towards a different type of bilateral investment agreement, i.e., Investment Cooperation and Facilitation Agreements. Two claims have been made in the literature regarding the transition from traditional Bilateral Investment Treaties to Investment Cooperation and Facilitation Agreements—Claim #1: The non-ratification of the traditional BITs has not harmed Foreign Direct Investment into Brazil, a claim which puts into question the purpose of Bilateral Investment Treaties. Claim #2: While Investment Cooperation and Facilitation Agreements avoid some of the problems of traditional Bilateral Investment Treaties, on balance they are less effective than traditional Bilateral Investment Treaties would have been. We examine the two claims from an empirical economic point of view. We build on the literature about Brazil’s position vis-à-vis Bilateral Investment Treaties, which must be viewed by an amalgamation of (i) a historical legacy; (ii) domestic initiatives, and (iii) a particular U-turn in the political debate. Using empirical evidence on Foreign Direct Investment effects of Bilateral Investment Treaties, the following conclusions emerge: With regard to claim #1, empirical evidence in general as well as specific to Brazil suggests that Brazil has forgone Foreign Direct Investment by not ratifying traditional Bilateral Investment Treaties. Concerning claim #2, while Investment Cooperation and Facilitation Agreements include alternative dispute settlement mechanisms, which aim at a better compliance of states with the Investment Cooperation and Facilitation Agreements’ rules, rather than the compensation of foreign investors, the lower stringency of the State–State dispute settlement mechanism compared to Investor–State dispute settlement mechanism makes Investment Cooperation and Facilitation Agreements less effective. Yet, this weakening effect must be weighed against the effects on Foreign Direct Investment from innovative clauses in Investment Cooperation and Facilitation Agreements, which are absent in many traditional Bilateral Investment Treaties. Keywords: investment treaties; Brazil; foreign direct investment; hold-up 1. Introduction Foreign Direct Investment (FDI) is considered as an important part of a country’s development strategy. 1 Developing countries’ governments regularly compete for FDI, often with neighboring countries of similar levels of development. One possible route taken by countries is to conclude, i.e., sign and ratify, International Investment Agreements (IIAs). Dolzer and Schreuer (2008) (p. 9) even stress that “investment treaties are today seen as admission tickets to international investment markets. Their limiting impact on the sovereignty of the host state, controversial as it may be in the individual case, is in this sense a necessary corollary to the objective of creating an investment-friendly climate”. Investment treaties are based on the presumption of the existence of a hold-up problem (Hart 1995) in international investment. Over time, more and more developing countries have concluded IIAs, which fall into Bilateral Investment Treaties (BITs), treaties with Economies 2024,12, 130. https://doi.org/10.3390/economies12060130 https://www.mdpi.com/journal/economies Economies 2024,12, 130 2 of 19 investment provisions and investment-related instruments. 2 Clearly, IIAs are just one puzzle stone in the puzzle of location factors that matter in an investment decision.3 Despite subtle differences, Elkins et al. (2006, p. 7) emphasize the fact that in the past, there has been one dominant treaty model, mainly reflecting the interests of developed nations. Developing countries could opt to take it or to leave it. A similar conclusion has been reached by Alschner and Skougarevskiy (2016, p. 562) who find that “wealthier states achieve considerably more consistent IIA networks than their poorer counterparts, which lends support to the argument that developed countries are the IIA system’s rule-makers, while developing countries tend to be its rule-takers”. While this is undisputed, not all developing countries have been rule-takers at all times. A case in question is Brazil, which undoubtedly enacted trade policies (e.g., negotiating the trade agreement between the European Union and Mercosur, Baur et al. 2023) and other economic policies, like privatization programs, in line with the Washington consensus and conducive to FDI. In Brazil, the organization of companies and their interaction with the state are relatively weak, which resulted in policies less conducive to domestic business. Instead, a policy oriented towards financial stability aiming at attracting foreign investors has been conducted (Pedersen 2009, p. 472). Brazil followed a special path with respect to FDI policies. “It is widely acknowledged that Brazil has been the most reticent to conclude BITs as a result of national concerns over the effect of such agreements on limiting developmental policy space (Barbosa 2003).” (quoted from Dixon and Haslam 2016, p. 1091). Indeed, Brazil never ratified any traditional BITs, but it has recently ratified a new type of BIT, namely the Investment Cooperation and Facilitation Agreements (CFIAs), which deviate from traditional BITs substantively (i.e., regarding the clauses included) and procedurally (i.e., regarding the enforcement mechanism included). The current (traditional) international investment policy regime, notably BITs, is confronted with substantial criticism. For example, Tienhaara et al. (2023, p. 1197) state that the enforcement mechanism included in traditional BITs “likely obstruct(s) a just transition by chilling supply-side climate measures and diverting public funds away from climate change mitigation and adaptation efforts”. Brazil’s CFIAs could potentially act as a role model for a new generation of BITs, which avoids the pitfalls of traditional BITs (like an asserted chilling effect on public regulation) but at the same time also acts as a promotor of FDI. With this paper, we aim at providing a systematic and structured review of the likely effects of Brazil’s old and new BIT policies on FDI. Our analysis adds new insights to the discussion of “FDI, BITs, and the Brazilian way” as hitherto the literature on Brazil’s CFIAs mainly focused on legal issues and has largely neglected economic and political science issues. The findings of this review will help policy makers in their attempt to form a new institutional set-up for international investment. To achieve this goal, we have surveyed the legal, economic, and political science literature dealing with effects of BITs on FDI in general and with the absence of traditional BITs in Brazil in particular. To put structure in the survey, we use two claims made by scholars regarding the effectiveness of Brazil’s BIT policies for FDI (see Section 2). We surveyed the theoretical and empirical literature to provide our answer regarding the empirical validity of the two claims made. Thereby, we focused only on studies available in the English language and we left out the vast legal literature written in the Portuguese language. To avoid deviations from the original content of and conveyed implications by the surveyed papers, we frequently use direct citations (in “ ”). Finally, throughout this review, we focused on inward FDI, while it is undisputed that BITs also affect outward FDI and indeed a central motivation of Brazil to enter into CFIA negotiations is to stimulate outward FDI of Brazilian firms. This paper is organized as follows: Section 2puts Brazil’s BIT policies in context and it introduces two claims made by scholars regarding the impact of these BIT policies on FDI. Theoretical (economic, political science, and legal) justifications of BITs are summarized in Economies 2024,12, 130 3 of 19 Section 3. Section 4reviews the historical genealogy of BITs in Brazil. Section 5provides an overview on the established empirical evidence of four types of effects of BITs on FDI, and it reflects on the Brazilian transition to the new type of BITs in the light of this evidence. Section 6summarizes, and Section 7sketches limitations and avenues for further research. 2. Brazil’s BIT Policies in Context Brazil has signed several BITs between 1994 and 2020. These include 14 traditional BITs between 1994 and 1999, 13 CFIAs between 2015 and 2020, and 20 treaties with investment provisions (thereof 16 in force)—most of them related to MERCOSUR. 4 In addition, Brazil has adopted 20 investment-related instruments. Only three BITs, both from the second period (2015–2020), have been ratified and thus are actually in force. 5 Monebhurrun (2017, p. 100) stresses that these agreements “symbolize Brazil’s true entry in the landscape of international investment law”. Carvalho (2018, p. 33) remarks concerning the treaties of the second period that “the signed agreements seem to be following the same path towards ratification as the two already ratified agreements”. It is for sure that in recent years, other countries have taken different unilateral and multilateral routes to IIAs (see Behn et al. 2015;St. John 2018, p. 239; Table 1below), and they are united in their discontent with the current BIT system. The list of states that sometimes radically change their position towards traditional BITs continues to grow (Soopramanien 2017, p. 609). Yet, the route that the Brazilian state has taken, that is back to a State–State dispute settlement (SSDS) and expanding exception clauses, certainly is of special economic interest. Table 1. Country-level reactions to critical issues about IIAs on the national level. • Denouncing the system of BITs and of Investor–State dispute settlement (ISDS; e.g., South Africa) •Not renewing their BITs (India, see Kotyrlo and Kalachyhin 2023) •Following individual trajectories (e.g., Brazil and its treaty partners (back to State–State dispute settlement); China (new dispute settlement mechanism ISDS)) • Withdrawing from the system (e.g., Venezuela in 2012, Bolivia since 2009, Ecuador from 2009 to 2021) and the denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which constituted ICSID (Bas 2022) • Terminating BITs (e.g., India’s unilateral mass termination); gradually terminating BITs (e.g., Indonesia; Pakistan, which terminated 23 out of 48 BITs and will not ratify 16 signed BITs) •Considering moving or actually moved away from the Energy Charter Treaty (in 2023, the European Commission (EC) formally recommended a coordinated European Union (EU) withdrawal from the Energy Charter Treaty6; see United We Leave or Divided We Stay? Why it’s time for the EU to speak with one voice regarding the Energy Charter Treaty | International Institute for Sustainable Development (iisd.org accessed on 20 May 2024)) •Expanding the role of exception clauses (e.g., Brazil) •USA phasing out its ISDS with CAN in the new NAFTA (USMCA—United States–Mexico–Canada Agreement) •Shifting to the mega-regional level: Integration of investment issues into trade agreements (e.g., the Regional Economic Comprehensive Partnership) Source: Authors’ compilation. Economies 2024,12, 130 4 of 19 Regarding the switch of Brazil to CFIAs, two fundamental claims have been made in the literature: Claim #1: The switch to CFIAs and away from traditional BITs is justified as the non-ratification of the traditional BITs has not harmed FDI in Brazil. This claim puts into question the purpose of traditional BITs. For example, Vidigal and Stevens (2018, p. 486) stress that “at least for a country with the characteristics of Brazil, it appears that IIAs are not determinant for attracting FDI”. Cavallo (2019, p. 69) mentions that “Brazil has consequently been seen as an example that BITs do not have any effects on FDI inflows, or that countries can do without them”.7 Claim #2: While CFIAs avoid some of the problems (i.e., direct and indirect costs) of traditional BITs, on balance they are less effective than traditional BITs would have been had they been ratified (e.g., Hegdekatte 2023;Sarmento 2021). In what follows, we review the theoretical and empirical literature and investigate the empirical validity of these two claims. With regard to claim #1, empirical evidence in general as well as specific to Brazil suggests that Brazil has forgone FDI by not ratifying traditional BITs. The CFIA partner country mix and recent estimates of a rather low impact of BITs on FDI suggest that one should not be overly optimistic with regard to CFIAs as a promotor of FDI. Concerning claim #2, while CFIAs include an alternative dispute resolution mechanism, which aims at a better compliance with a BIT’s rules, rather than the compensation of foreign investors, the lower stringency of the dispute resolution mechanism makes CFIAs less effective. Yet, this weakening effect included in CFIAs must be weighed against potentially positive effects on FDI from innovative clauses (such as environment, labor, human rights, and investor obligations), which are absent in many traditional BITs. 3. Theoretical Justifications of BITs: A Review The overarching motive for the conclusion of BITs is to attract FDI. BITs can be separated into two types: BITs for FDI protection and BITs for FDI liberalization. Most BITs that entered into force in the 20th century were of the protection type, while the liberalization type has become the mainstream in the 21st century (Urata and Baek 2022). The Brazilian government has recently added a third type, which may be termed the facilitation type. While the protection type has a focus on the protection of property rights of foreign investors, the liberalization type emphasizes market access (admission and establishment; see Dolzer and Schreuer 2008, p. 79f.) as well as the protection of investors and investments in the pre-entry stage. The facilitation type aims at fostering the compliance with the treaty (i.e., on deterrence of a breach). Common to all BITs is the inclusion of property rights protection clauses and procedural clauses. Property rights protection clauses may include, for example, the Most Favored Nation (MFN) clause, the Fair and Equal Treatment (FET) clause, or a Non-Discrimination (ND) clause. Procedural clauses typically include some form of dispute resolution mechanism, either an Investor–State dispute settlement (ISDS) or State–State dispute settlement (SSDS). From the viewpoint of foreign investors, the dispute resolution clauses are at the heart of BITs, as they include procedures as to how disputes between the investor and the host country government can be resolved outside the domestic legal system. While in international law, SSDS is standard, IIAs have increasingly shifted to ISDS. 8 Various disciplines provide a range of theoretical justifications for BITs. 3.1. Economic Justifications From an economic perspective, a credibility problem (due to information asymmetry) exists between the foreign investor and the developing host country government. Not all information about future government policy is publicly available and, therefore, the investor considers the possibility of opportunistic behavior of governments, once the investment is undertaken. This creates the so-called hold-up problem (political risk; in the context of investment treaties, Odoemena and Horita 2017;Bonnitcha et al. 2017;Horn and Economies 2024,12, 130 5 of 19 Norbäck 2019). The idea of reneging conforms with the obsolescing bargain view, where the ex ante power of the investor, who promises positive effects on development, shifts to the host country government, which may renege on the agreement ex post once the assets have been invested (“sunk”) in the host country. In other words, “one possible role (for BITs, authors) is to serve as a commitment device for governments that lack the ability to make credible unilateral commitments to protect inward investment” (Horn and Norbäck 2019, p. 14). Cavallo (2019, p. 72) summarizes the economic view stating that “a host government’s credibility to abide by the terms of a contract increases when it enters into a BIT, which then stimulates greater FDI inflows”. From a theoretical perspective, how do BITs provide a possibility to solve the hold-up problem? 9 Broadly speaking, when they contain a clause, which makes ex post reneging on the agreement by the government irrelevant for investors, because they are compensated (i.e., investment neutrality). If the clause provides for full compensation of losses after expropriation, this reduces the political risk of a foreign investor and, hence, is an efficient solution to the hold-up problem (e.g., Guzman 1997). The above-mentioned ISDS clause is a clause in question, as it provides for a dispute settlement mechanism outside the domestic legal system of the host country. Indeed, this clause is considered “the most important aspect of the international protection of investments’” from the viewpoint of foreign investors (Schreuer 2013). 10 Frenkel and Walter (2019, p. 1316) mention that “the literature argues that international dispute settlement clauses are a crucial component of BITs, as they provide a way to sanction deviating behavior, determine the credibility of legal promises and allow investors to enforce their rights independent of the local level of the rule of law”. In addition to the commitment effect, some authors argue for a signaling effect of BITs—Cavallo (2019, p. 72): “(B)y signing BITs, host governments signal their underlying intention not to interfere with foreign investment”. When a country ratifies a BIT, “it sends a signal to investors from all foreign countries, including those not covered by investment treaties, that it has laws and policies in place that protect foreign investment.” (Bonnitcha et al. 2017, p. 158). And, from a practical economic perspective, Maggetti and Moraes (2018, p. 301) argue that “many countries signed up to BITs containing ISDS clauses—especially developing countries—as this was considered an important signal by cash-strapped economies to attract much-needed foreign investment”. To act as a credible signal, it must be less costly for states with favorable investment climates “to become and remain parties to investment treaties than it is for states with bad investment climates. If that were not the case, all states would be equally likely to ratify investment treaties, and the existence of a treaty would not convey any meaningful information about the quality of the investment climate” (Bonnitcha et al. 2017, p. 158). For the credibility of the signal, thus, ISDS again is crucial. For states with inferior investment conditions, i.e., high political risk, the probability to face costs arising from ISDS claims is high, while for countries with good investment climates, the risk is miniscule. Haftel (2010, p. 359) points out that only signing, but not ratifying, a BIT does not send a positive signal to investors: “since signing a BIT is not costly, foreign investment cannot rely on this action to distinguish between pro-FDI and anti-FDI countries. In this interpretation, signing a BIT does not add believable information to foreign investors. A signed BIT does not protect investors in situations in which the host government violates their legal rights. It is not surprising, then, that signed treaties fail to boost FDI”. In addition, signing but not ratifying could be seen by foreign investors as evidence that the host government does not intend to honor the terms of the treaty and that the rights of foreign investors enshrined in the treaty are not fully guaranteed, or even that the intention of the host country is not to provide the rights of the signed treaty to foreign investors. Thus, while the commitment effect is relevant only to foreign investors covered by the BIT, a possible signaling effect is relevant to all foreign investors. Economies 2024,12, 130 6 of 19 3.2. Political Science Justifications From a political science perspective, the rationales of home countries of FDI to ratify BITs are the de-politization of disputes and the reduction in diplomatic interventions, which may jeopardize foreign policy goals (Jandhyala 2015). However, Gertz et al. (2018) find no evidence of the de-politization of dispute resolution through BITs. Another political science-related justification of BITs is expressed by Ostˇranskýand Aznar (2023), who argue that “conventional accounts presume that these treaties improve national governance, leading to good governance and the rule of law for all”. Yet, critical accounts charge that investment treaties empower foreign investors and cause a regulatory chill. 11 Indeed, the most compelling caveat to BITs from the government’s point of view concerns regulatory chill as a reaction to investment disputes and this pertains to all areas of economic activity (Berge and Berger 2019;Horn and Norbäck 2019). Horn and Norbäck (2019, p. 26) even argue that regulatory chill is “one of the most pervasive claims” in the debate about BITs. They, however, also mention that there is little systematic empirical evidence to support this claim. Concerning the possibility of regulatory chill, ISDS is again of special importance. According to Bas (2022, p. 3), the ISDS mechanism “acts as a filter that constrains national policy space by allowing foreign investor to question measures taken in exercise of the right to regulate (the heart of the policy space)”. Due to ISDS, “investment courts operate as external control bodies of the legality of States’ actions, even regarding human rights, public health or environmental protection” (Bas 2022, p. 2). 3.3. Legal Justifications From a legal point of view, the provision of legal standards for an investor-friendly environment aims at “safeguarding foreign investment against interference of the host state” (Schreuer 2013). To this end, a BIT defines “obligations of the host states to treat foreign investment according to specific standards” (Bonnitcha et al. 2017, p. 11). It is important to note that international investment law “sets accepted standards for the unilateral conduct of the host state” (Dolzer and Schreuer 2008, p. 22). The provision of legal safeguards includes the stability of the legal conditions under which the foreign investor can operate, the quality of the local public administration, the transparency of the system of local regulations, and an effective system of dispute settlement (Schreuer 2013). The latter is backed by a theoretical argument, initially advanced by Allee and Peinhardt (2014, p. 60), who maintain that “if the host has a particularly strong need to convey its intent to respect FDI, it is more likely to sign treaties that contain elements to strengthen enforceability, including preconsent clauses and multiple, institutionalized enforcement options”. These legal safeguards comprise domestic laws and IIAs. Furthermore, from a legal perspective, investment treaties respond to the bias and unreliability of domestic courts. Hence, concerning arbitration, it is claimed that investment arbitration advances fairness and the rule of law in the resolution of investment disputes (Van Harten 2010). In particular, legal scholars emphasize the increased efficiency of the process of investment disputes and the final execution of verdicts (no legal recourse) as well as transparency. None of these legal justifications have, however, fully materialized. There are major concerns about the efficiency of the process, as the average length of decided cases is 3.73 years (Behn et al. 2020, p. 209). Also, the final execution of verdicts poses tremendous problems in some of the disputes, and Pohl et al. (2012, p. 36) note that “in only 35 out of 1600 treaties examined, the verdicts of the arbitration councils have to be published”. Table 2summarizes the main motivations for the conclusion of BITs. In most of these motivations, an effective ISDS mechanism plays a key role. Economies 2024,12, 130 7 of 19 Table 2. Summary of main motivations. Approach Motivation for IIAs is to increase FDI (inward and outward) via... Economic Commitment effect Signaling effect Political Science De-politization and reduction in diplomatic interventions Improvements in national governance Legal Provision of legal safeguards Increasing the efficiency of the process Final execution of verdicts Transparency of process and reasoning Source: Authors’ compilation. We now turn to a discussion of Brazil’s position towards BITs over time. 4. Brazilian Bilateral Investment Treaties: An Overview This section reviews the transition from the early stages of BIT conclusion up to the present situation in Brazil. 4.1. The Early Stage—1994–1999 Concerning the traditional BITs, which Brazil did not sign before 1994, 12 Escobar (1996, p. 91) mentions that “one of the most prominent features of these and of all recent investment treaties (of Brazil, authors) is their provision for the settlement of disputes between covered investors and the host state by means of binding international arbitration”. 13 Regarding conflict resolution enshrined in these agreements, it is worth noting that the BITs of the early stages have shifted from SSDS to state–private entity dispute resolution (Maggetti and Moraes 2018).14 Between 1994 and 1999, Brazil signed 14 traditional BITs. Yet, “they were never approved by the country’s National Congress, which saw the investor–state arbitration regime as limiting states’ right to regulate 15 and as granting extraordinary benefits to foreign investors, hence discriminating against domestic investors. For the same reasons, Brazil did not sign the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). 16 Even so, it continued to receive significant amounts of foreign direct investment (FDI), consolidating its position as one of the world’s top recipients of FDI and reinforcing the understanding that having BITs in force is not decisive for attracting investments” (Martins 2017, p. 1)17. Despite that BITs were part of Brazil’s development strategy, and despite Brazil’s quest to attract FDI mentioned above, Welsh et al. (2014, p. 112) explain that “Brazil’s negotiations over BITs, however, must be understood as largely reactive. In most cases, the home states of international investors initiated the negotiation process for Brazilian BITs as they sought to assist their corporations with managing costs and risk”. This also explains why the early BITs negotiated by Brazil very much adhere to the model of developed countries, including ISDS provisions (e.g., Brazil–Germany BIT, Brazil–UK BIT). At this point, it is important to understand that during the 1990s when Brazil’s BIT negotiations started, several economic and political factors were given that may have impacted positively on FDI and which help to explain the non-prioritization of BITs besides the direct criticism of being unconstitutional: 1. Brazil’s executive and legislative authorities created alternative sources of investment protection (Cavallo 2019, p. 71), so the rejection of one type of investment protection was accompanied by another type of investment protection. “Major elements of investment protection identified as international standards [ . . . ] were addressed by the Brazilian government during the 1990s and early 2000s” (Welsh et al. 2014, p. 123). This “met the most important needs of foreign investors while protecting the most Economies 2024,12, 130 8 of 19 important interests of the state, thus substantially eroding the perceived need for a BIT”. (ibid., p. 123)18. 2. With regard to investment disputes, Brazil built a “local or national-level system of investment arbitration that differs from the ICSID model in terms of language, location, the requirements for consent, and subject matter jurisdiction” and thus, “even without BITs and a system of ICSIDstyle quasi-precedential arbitral decisions, Brazil provides the same level of investment protection” (Welsh et al. 2014, p. 129). 3. The BIT policy was not a stand-alone policy, as Brazil continued to introduce a number of important policy measures conducive to the attraction of FDI.19 4. Brazil joined MIGA in 1993, giving full access for foreign firms to political ri sk insur ance. As a result of the interplay between political and economic factors as well as legal developments, the traditional BITs signed in the early period (i.e., 1994–1999) were very much in line with the treaties that other Latin American countries concluded and indeed have been negotiated by countries in other parts of the world (see also Welsh et al. 2014, p. 109). This is an expression of the fact that the negotiating partners were powerful “northern” countries and also of the convergence of the BIT model during that period. Eventually, in 2002, the executive branch withdrew the signed agreements from Congress after determining that “treaty provisions on international Investor-State Dispute Settlement (ISDS) were unconstitutional” (US Department of State 2023, p. 12). Titi (2016, p. 6) explains: “Another element that at least at some stage seemed to reinforce Brazilian discomfort with the ICSID Convention was the fact that the latter signified a step away from diplomatic protection. What in other states may have played out in favour of the investor-state dispute settlement mechanism, in Brazil seemed to constitute an argument for its rejection”. In addition, Monebhurrun (2017, p. 82) mentions the “lack of equality and reciprocity between the host State on one side and the investors and their home States on the other”. 20 “Investor-state dispute settlement provisions [ . . . ) were perceived not only as unconstitutional [ . . . ) but also as contrary to Brazil’s wish to adopt public policies critical to the country’s development” (Titi 2016, p. 6)21. Welsh et al. (2014) and Campello and Lemos (2015) provide a detailed account of the underlying political process behind the non-ratification. Out of the three main potential factors for the non-ratification of the BITs, none actually apply to Brazil according to Campello and Lemos (p. 1064f.): (i) the absence of presidential veto power; (ii) constraints on executive power; and (iii) content of particular treaties. 22 Campello and Lemos (2015) argue that “the main factor to explain the quandary of non-ratification was an unresolved executive, which was never fully committed with the treaties in the first place, and became less and less so as their costs and benefits became clearer over time”. (p. 1066). One could say that this is a case of a learning process in the government on the basis of concerns raised by the opposition.23 In addition, international developments became relevant as Argentina experienced a large number of investment disputes related to emergency measures introduced during the Peso crisis (see Bellak and Leibrecht 2021). Perrone and César (2015) point out, “the 2001 Argentine crisis confirmed Brazil’s concerns about investor-state arbitration and national sovereignty”. (p. 1). 4.2. The Transition to New Agreements Why has Brazil started new BIT negotiations after a long period of inactivity and why is the result of these negotiations so different to the BITs of the early stage? Already in 2014, Welsh et al. (p. 107) hypothesized that “(m)eanwhile, Brazil’s role in foreign investment has evolved as its own multinational corporations increasingly engage in foreign investment. Inevitably, these corporations seek to reduce the risk of their foreign investments. As a result, they may encourage Brazil’s executive and legislative branches to take a second look at BITs. As circumstances change, so may the definition of success”. This movement is noted in the early 2000s, in which “a transition from the Brazilian position as solely a large investment recipient to also being an investor has led to the Economies 2024,12, 130 15 of 19 both aspects, since property rights, which have been key in investment disputes (e.g., FET), and a key enforcement mechanism (ISDS) have been omitted at the same time. Hence, it is undisputed that governments send a negative signal to foreign investors; whether it will be as detrimental as an exit from the system or a termination of treaties, only time will tell. Second, with respect to the possibility that CFIAs are a role model for a new generation of BITs, the answer is negative in the sense that CFIAs likely will not fulfill the primary goal of BITs, namely the attraction of FDI. Governments thus have to resort to other means of FDI attraction like the provision of infrastructure, stepping up investment promotion activities abroad, etc. On the basis of the inclusion of innovative clauses in CFIAs, there is hope that governments will not engage in a race to the bottom on a broad scale. Third, the sole reliance on a State–State dispute settlement as an enforcement mechanism suggests that governments are aware of the potential costs/externalities of a State– State dispute settlement. As long as FDI is a major component of a country’s development strategy, the enforceability of property rights needs to be guaranteed. Of course, this could be achieved by plenty of other means rather than BITs like impartial and efficient domestic courts, setting up an effective system of private political risk insurance (which has been rather limited in the past), or extending the public system of political risk insurance (e.g., MIGA). Additionally, the development of a new (multilateral) system of investment protection could be considered, but there are no indications that this is actively contemplated by Brazil at present. As a consequence, countries relying on CFIAs will experience the locational competition much stronger than countries relying on traditional IIAs. Hence, the need arises to proactively undertake economic reforms stemming from the transition to or the introduction of CFIAs. 7. Limitations and Avenues for Future Research We conclude that by avoiding ISDS (and FET), Brazil likely will forego FDI. However, in this review, we only used the literature that is available in the English language, and we left out the related literature in the Portuguese language. We therefore may have missed studies that paint a different picture regarding the effectiveness of Brazil’s FDI policies for FDI. What is more, with this review paper, we do not provide our own empirical evaluation of CFIAs’ effectiveness. Future analyses, therefore, could be based on Cavallo (2019) and use the Synthetic Control approach of Abadie et al. (2010) to investigate whether the ratification of CFIAs by Brazil with partner countries (the treatment pairs) spur Brazilian inward and outward FDI from and to the partner countries, respectively. Certainly, whether the opportunity costs of having CFIAs rather than traditional BITs in force are of an economically meaningful size needs additional investigation. Author Contributions: Both authors contributed equally to the: Conceptualization: M.L. and C.B.; investigation: M.L. and C.B.; writing—original draft preparation: M.L. and C.B.; writing—review and editing: M.L. and C.B. All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Informed Consent Statement: Not applicable. Data Availability Statement: No new data has been used. Conflicts of Interest: The authors declare no conflicts of interest. Notes 1See Jenkins (1987)orBiglaiser and DeRouen (2006 on Latin America) for analyses on the role of FDI as a development tool. 2 On other sources of international investment law, see Schreuer (2013), Microsoft Word—EPIL Investments_International_ Protection_RevAut_Schreuer_20110201zG.doc (univie.ac.at accessed on 20 May 2024). 3For a concise summary of the international IIA regime, see, e.g., Simmons (2014)orHorn and Norbäck (2019). 4 Brazil is a partner to several regional/multilateral agreements, which also contain investment-related clauses with a potential impact on FDI (see Brazil|International Investment Agreements Navigator|UNCTAD Investment Policy Hub). Economies 2024,12, 130 16 of 19 5 Three bilateral investment treaties are in force (as of 23 May 2024) are Brazil–Mexico BIT (signed 2015) Acuerdo De Cooperación Y De Facilitación De Las Inversiones Entre La República Federativa Del Brasil Y Los Estados Unidos Mexicanos (entered into force 2018); Angola–Brazil BIT (signed 2015) Acordo De Cooperação E Facilitação De Investimentos Entre O Governo Da República Federativa Do Brasil E O Governo Da República De Angola (entered into force 2017) and Brazil–United Arab Emirates BIT (signed 2019) Acordo De Cooperação E Facilitação De Investimentos Entre A República Federativa Do Brasil E Os Emirados Árabes Unidos (entered into force only in 2023, after the data collection process had been completed). 6 The Energy Charter Treaty provides a multilateral framework for energy cooperation that is unique under international law (see Energy Charter Treaty—Energy Charter). 7 Also see, e.g., Fritz (2015), Martins (2017), and Monebhurrun (2017), as well as Maggetti and Moraes (2018, p. 313) and Cavallo (2019, p. 70) referring to statements made by Brazilian officials. 8 Investor–State disputes are solved in different fora, and the most important is the International Centre for Settlement of Investment Disputes (ICSID). ICSID has 158 member states and has administered roughly 70% of all known ISDS cases (Kinnear 2023). 9We focus on the allocative consequences here and largely omit distributive consequences. 10 In this context, it is interesting to note that actually “ICSID, in turn, was never meant to operate as a comprehensive remedy to a host state’s failure to honor contractual or treaty obligations. World Bank Group risk mitigation products, particularly relating to PRI (private risk insurance, authors), were designed to supplement such obligations. Over time, the PRI market grew out of sync with developments in the international investment treaty law” (Soopramanien 2017, p. 609). St. John (2018, p. 186, quoting Georges Delaume) reports that in its first twenty years, ICSID was “begging for cases but cases didn’t come”. 11 Van Harten (2010,2020) includes excellent critical reviews of BITs. 12 Other Latin American countries, however, had signed BITs already in the early 1990s. 13 Escobar (1996, p. 91) also makes reference to the 1960s: “This is of course a complete reversal from the position taken en bloc in the mid-1960s by Latin American governments against the creation of an international arbitration mechanism for investment disputes”. 14 Brazil had executed—and ratified—a BIT with the United States. However, “it created an enormous controversy, and never came to be applied” (Welsh et al. 2014, p. 112). 15 The right to regulate is “the power of the State to limit private freedoms in order to protect a higher legal good: the public interest” (Bas 2022, p. 5). 16 Five pertinent features of ICSID are as follows (Dolzer and Schreuer 2008, p. 20): (a) Foreign companies and individuals can directly bring a suit against the host state. (b) State immunity is severely restricted. (c) International law can be applied to the relationship between the host state and the investor. (d) The local remedies rule is excluded in principle. (e) ICSID awards are directly enforceable within the territories of all state parties to ICSID. 17 Non-membership in the ICSID convention applies, for example, also to India and South Africa among the BRICS countries. 18 In the same vein, see Vidigal and Stevens (2018, p. 486) and Cavallo (2019). 19 Indeed, Brazil’s Investment Policy Measures as collected by UNCTAD (see Investment Policy Monitor|UNCTAD Investment Policy Hub) can be described as supportive of FDI with a few exceptions. 20 “ . . . only the judiciary had constitutional competence to administrate justice in Brazil”; . . . “investor-State arbitration offered privileges to the investors that was in contradiction with the principle of equality (and reciprocity)”. (ibid., p. 90). 21 See also Cavallo (2019, p. 71), Vidigal and Stevens (2018, p. 486), Kalicki and Medeiros (2008), and Alvarez et al. (2021). For the major points that were raised during the Congressional debates, see Welsh et al. (2014, p. 116ff). 22 E.g., Cavallo (2019, p. 75) mentions that the MFN clause made the opposition uncomfortable “because it put Brazil’s sovereignty in jeopardy by offering preferred terms to foreign investors while taking away Brazil’s ability to decide how and with whom to negotiate agreements”. 23 These concerns have been summarized by Campello and Lemos (2015, p. 1068) and by Moraes and Cavalcante (2021, p. 5). 24 Model BITs are blueprints, which are adapted during negotiations based on compromises between the negotiating states. 25 See FN 15 in Moraes and Cavalcante’s (2021) work for references to the legal analysis of this new type of investment treaty. Various acronyms are used in the literature: CFIAs or ICFAs; CIFAs. Also, several different terms are used in the literature, i.e., Friendship Agreements, Cooperation and Friendship Investment Agreements, etc. 26 The features of the new treaties are described, e.g., by Carvalho (2018), Moraes and Cavalcante (2021), and Wei and Ning (2022, p. 70f). The differences between the traditional and the new treaties are described by Moraes and Hees (2018), Carvalho (2018), and Brauch (2020), who uses the example of the Brazil–India treaty. 27 The “investor-State dispute settlement mechanism was seemingly excluded for practical political reasons” (Monebhurrun 2017, p. 90). 28 What are the top risks to doing business in Latin America? |World Economic Forum (weforum.org accessed on 5 February 2022). 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