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Bilateral investment treaties have become the dominant vehicle through which North-South investment is protected from host country behavior. Because these treaties allow investors and hosts to establish binding and enforceable contracts, there is little doubt that BITs increase the efficiency and reduce the cost of foreign investment. In particular, the treaties solve the dynamic inconsistency problem by permitting the host state to bind itself to a particular course of action before the investment takes place.
This paper has shown, however, that there is more to the story. First, the enthusiasm of LDCs to sign BITs appears to be inconsistent with the attempts by developing countries to reduce the obligations of host states toward investors. This paradox is explained, however, when one recognizes that the welfare of individual developing states may be in conflict with the welfare of developing states as a group. An individual country will almost certainly be better off, all else equal, if it is able to negotiate and agree to a binding and enforceable contract with potential investors. The ability to do so will make the country a much more attractive location for investment and, accordingly, is likely to lead to a greater inflow of FDI.
The benefits to such a country, however, will come in large part from a shift in investment toward itself and away from another developing country. This will be the case if investment flows to developing countries, as a group, are relatively insensitive to changes in the costs of investment. The investment flows from one LDC to another will not, of course, enhance the welfare of developing countries as a group.
If, rather than competing against one another to attract investment, however, developing countries could force potential investors to commit to investing in a particular country before the host and the investor settled the terms of the investment, developing countries could extract much more from foreign investors. This latter situation is what exists if neither the Hull Rule nor BITs govern investment. If investors have very few protections, the host can wait until an investment is made and, at that point, increase the costs to the investor. Just as a monopolist increases the price and reduces the quantity of goods sold in order to maximize profits, host countries under the Charter of Economic Rights and Duties can increase the costs to investors and maximizes the gains to the host country.
This strategic analysis of the behavior of developing countries explains why they support the Charter of Economic Rights and Duties -- a collective action which allows them to maximize their profits as a group -- and, contemporaneously, sign BITs -- an individual action which gives a signatory an advantage relative to other developing countries. It also allows us to assess the welfare implications of BITs. There is little doubt that BITs increase the overall efficiency of foreign investment, but they appear to do so at the cost of reducing the gains to developing countries. Whether this is a desirable trade off is beyond the scope of this paper.
Finally, the analysis herein suggests a strong argument against viewing BITs as evidence of customary law. Developing countries sign these treaties in order to gain an advantage in the competition for investment. They do not appear to do so out of a sense of legal obligation, as is required to establish customary law.
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