Social and Environmental Protection in Bilateral Investment Treaties: Foreign Investors' Perspective

The limit of host states' right to regulate foreign investment within their jurisdiction has been the main, yet unresolved issues in International investment law. This makes it more difficult, given the global structure of investment law that consists of networks of Bilateral Investment Treaties (BITs). This article will not deal with the question of optimal structure of regulatory discretion under BITs which is still debatable among scholars. The central agenda of this article is to address the precondition for an efficient outcome to materialize within the complex web of BITs already signed among states. It is even more complex to be concluded. This issue is due to the absence of International coordinating institution, letting alone that of global supranational authority. This is different from the case of domestic regulatory takings which “simply” requires the correct information and measure from the benevolent government, that means, the existence of an efficient provision, if any, will not necessarily result in an efficient outcome. The main research question addressed in the article is: under what condition a capital exporting state could introduce higher flexibility for regulating public interest in an investment treaty negotiation? The article offer the answer on issue linkage between the level of protection under BIT, the degree of openness of access to domestic legal and regulatory making of the host state, and the foreign investor's capabilities to deal with the trade-off. Ceteris paribus, the linkage enables a set of feasible Pareto improving deals out of BIT negotiation

Having.considered.the.above.underlying.frameworks,.the.article.argues. that. although. allowing. for. more. discretion. in. regulating. public. interest. is. desirable from the efficiency point of view, the current structure of the global investment architecture prevents any significant modification driven by the potential host states, as the parties suffering from losses. High reputational costs and.high.transaction.costs.become.the.major.stumbling.block.of.any.demand.for. efficient outcome.

BITs and Social and Environmental Provisions in a Nutshell
Bilateral 75.ẽ ffect against investments" or "having effect equivalent. to. nationalisation. or. expropriation".or."any.other.measure.or.series.of.measures,.direct.or.indirect,. tantamount.to.expropriation.(including.the.levying.of.taxation,.the.compulsory. sale. of. all. or. part. of. an. investment,. or. the. impairment. or. deprivation. of. its. management,. control. of. economic. value…" 23 . Further,. growing. number. of. cases.and.jurisprudences.concerning.indirect.expropriation.(and.in.particular. environmental. regulations in BITs that provide more rooms for government regulations is more efficient and.incur.joint.surplus.for.both.parties..The.analysis.will.focus.on.the.incentive. structures of the BIT signatories, as well as the cost and benefit associated with signing.one. .Tecmed,.supra.note.33,.points.out.that."under.international.law,.the.owner.is.also.deprived.of. property where the use or enjoyment of benefits related thereto is exacted or interfered with to a similar extent, even where legal ownership over the assets in question is not affected, and so long as the deprivation is not temporary. The government's intention is less important than the effects of the measure [i.e. the economic value of the use, enjoyment or disposition of the assets or rights affected by the administrative action or decision have been neutralized or destroyed] on the owner of the assets or on the benefits arising from such assets affected by the measures; and the form of the deprivation measure is less important than its actual effects." 48 .  (1998),.p..45-66. 55 .See.the.analogy.of.the."Ugly.Princess".to.overcome.the.problem.of.credible.commitment.during. the Middle Ages in Oliver E. Williamson, The Economic Institutions of Capitalism,.(Free.Press,.1998). 56  signal will also be influenced by the quality of the domestic institutions, be it of the legal system or of political stability affairs. This will be described later in the subsequent section about the benefit of investment treaties from various empirical.studies.

b. Flexible Provisions and Credible Threat
The. In order to be optimal, a contract must assess the mutual benefit of the. parties. involved,. being. welfare. enhancing. in. sum.. That. is. to. say. that. the. participation constraint must be met prior to concluding the contract. While the ex-ante approach finds that contract must be rigid and definite to provide security. and. prevent. opportunistic. behavior,. the. ex-post. approach. under. the. hadow of uncertainty must allow a room for modification and flexibility. "Rigidity. always. hurts. states. since. certain. risks. are. shifted. to. them,. whereas. flexibility usually hurts the investor since the risk allocation is on his side." 66 .As. such, a welfare-enhancing BIT must decide a tradeoff between ex-ante security and ex-post flexibility, as summarized below: "A balance needs to be found between commitment and flexibility with the following.goals.of.the.contract.in.mind:.securing.a.high.level.of.cooperation. ex ante, distinction between ( state. Foreign investors can also have "accounting illusion" that will affect their financial analysis over the costs and benefits associated with certain projects. Some projects will always be considered to be profitable because they do not take.the.social.costs.into.the.assessment. 66 . Van in the global market in general. The perception of which will affect also its participation in the global trade flows, international financial market, and even signals a country's political stability. This incurs highly inefficient reputational costs for an efficient breach to prevail. Potential host states have relatively weaker bargaining power to influence the result of the negotiation (
Most  Report",.29.Regulation.4.(2006-2007 Treaties",.(University.of.St..Gallen.Law.and.Economics.Research. Paper.Series.No..2007-22,.2007 effective, yet it would take only one country to defect in order to start the domino effect that would motivate other countries to defect as well. Suppose there are 10 potential host states, all of which have agreed to offer flexible provisions as.non-negotiable.clause.in.a.BIT.negotiation..Transaction.costs.will.cover.the. negotiation.costs.and.enforcement.costs.among.all.10.of.them..However,.once. one.state.defects,.the.others.have.the.impulse.also.to.defect,.creating.such.costly. cooperation. very. fragile. to. single. defection,. as. the. maintenance. costs. are. ten. times.higher.than.the.value.it.needs.for.starting.defection. The real economic benefit of signing an investment treaty, especially for potential.host.states,.remains.debatable.among.economists.and.scholars..Many. past empirical works on the economic significance of the growing number of BITs has produced contradictory findings concerning their impact on FDI. Meanwhile,.the.answer.to.this.issue.serves.as.an.important.foundation.to.analyze. the. bargaining. power. and. power. structure. between. the. potential. host. states. countries. and. the. capital. exporting. states. in. investment. treaty. negotiations.. If BITs do not have any significant impact on FDI, any effort to negotiate (and renegotiate) more flexible public interest provision, whatever the cost is, would then not justify the benefit.

Benefit of BITs: Summing Up Empirical Studies
Several respected findings will be introduced below to frame the empirical economic context. It is then concluded that these conflicting results are merely the result.of.neglecting.the.important.political-economic. There are a number of possible explanations for the differences in these results, which are obviously caused by the differences in methodology and research design. Tobin and Ackerman's first research has noticed this problem when.comparing.their.result.with.that.of.Salacuse.and.Sullivan's..This.includes. differences in the dataset, in the variables, in the time frame coverage. They also argue that the selection of sample size creates their different result with Neumayer.and.Spess,.while.it.is.also.admitted.that.their.research.omitted.major. countries. including. South. Korea,. China,. and. Central. and. Eastern. European. Countries..Meanwhile,.Neumayer.and.Spess.claim.that.Hallward-Driemeier.fails. to detect the signaling effect and lacks representative sample; while the work of.Salacuse.and.Sullivan.is.cross-sectional.that.it.falls.short.when.detecting.the. direct impact. However, they cannot elaborate their extremely different outcome with.that.of.Tobin.and.Ackerman.

Organization of Legal System and Foreign Investors' Choices
Having.discussed.previously.about.the.role.of.access.to.legal.and.regulatory. making and the trade-off foreign investors must make, the next issue would be what exactly the meaning of the term is. In short, how to define the degree of openness of access to legal and regulatory making? This sub-section briefly seeks.to.identify.and.further.scrutinize.which.legal.institutions.matter.and.how. domestic legal processes affect investor perceptions, toward which end I call for better definitions of the interplay, a conceptual structure relating domestic legal institutions to a foreign firm, and information about the role of domestic legal institutions.

Conclusion
As. a. response. to. the. question. of. which. condition. that. would. allow. a. capital exporting state to introduce higher flexibility for regulating social and environmental affairs in a BIT negotiation, the article offer the answer on issue linkage.between.the.following.issues:.1)..the.level.of.protection.under.BIT;.2).. the. degree. of. openness. of. access. to. domestic. legal. and. regulatory. making. of. the.host.state.and.3)..the.foreign.investor's.capabilities.to.deal.with.the.tradeoff. Ceteris paribus, the linkage enables a set of feasible Pareto improving deals out.of. BIT.negotiation..Foreign.investor.will.no.longer.require.a.strong.level.of. protection.by.means.of.strict.BIT.provisions.concerning.the.host.state's.right.to. regulate.social.and.environmental.matters.if.it.succeeds.to.manage.in.gaining. access.to.the.domestic.legal.system.of.the.host.state,.which.subject.conditionally. to the legal system's degree of openness. This implies a two-level trade-off, namely with regard to the BIT provisions (strict vs. flexible) and the access to domestic. legal.system.(open.vs..closed)..
The informal model offered in the article is a dynamic one because it is not only.incorporating.the.objective.views.on.the.level.of.BITs.protection.and.the. domestic.legal.system's.degree.of.openness,.but.also.the.subjective.capabilities. of foreign investors to make the trade-off and their respond to exogenous change. At the domestic level, this means that the degree of openness affects foreign investors' preferences, but foreign investors will also try to influence the structure.of.the.legal.system..