Bilateral investment treaties treatment of international capital movement: time for reform?

Abstract

While the freedom to move capital is necessary for foreign investors, the power of the state to regulate capital transfers is necessary to prevent volatile capital from causing financial crises as well as to mitigate such crises when they occur. Thus, in regulating international capital movement, a balance should be made between the right to transfer funds and the state’s right to protect the stability of its economy. It is in relation to achieving this balance that this thesis argues that bilateral investment treaties’ (BITs) regulation of capital transfers is deficient, both substantively and procedurally. On substance, this thesis identifies three substantive defects that affect obligations under BITs: absoluteness, immediacy, and breadth. First, many BITs adopt an absolute approach in liberalizing capital that does not permit any restrictions or exceptions, nor does it distinguish between different kinds of capital, or between the right to import capital and the right to repatriate capital. Second, the obligation to permit transfers is immediate and does not allow for a gradual liberalization of capital. Third, many BITs’ terms and obligations are broad and therefore vague, such as the broad definition of investment, or the obligation to grant fair and equitable treatment, which is also broad and interpreted in a manner that restricts the regulatory powers of the host state. Such results could have been partly mitigated if there were a dispute settlement mechanism with the power to create precedent and with it a clearer and more coherent body of rules. But BITs’ investor-state arbitration is also deficient since it consists of ad hoc tribunals, which are not bound by precedent; and their decisions are not generally subject to substantive review. This leads to an inconsistent and incoherent body of law that protects neither the state’s regulatory powers nor the legitimate expectation of investors