What is a Bilateral Investment Treaty?

John Lister

A bilateral investment treaty is an agreement between two countries about the rules governing cross-border investment by private companies. It does not directly involve governments making foreign investments. A bilateral investment treaty usually forms part of a wider package of trade agreements,

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The concept of a bilateral investment treaty is that both countries agree to rules that make it more attractive for firms in one country to invest in another country. This investment can take several forms, such as buying out a local company, merging with it, or engaging in a jointly-financed project. It doesn't include simply investing in a company by buying some of its stock.

The precise terms of a bilateral investment treaty can vary greatly. There are some measures that appear in most treaties, though. These include a guarantee that the country will treat foreign companies fairly, and that the government will not seize a company's assets, for example by nationalizing its resources.

One of the most important elements of a treaty is that it allows a company that feels it has been mistreated by a foreign government to take the complaint to an independent international body. The best known of these is the International Centre for Settlement of Investment Disputes. Without this element in a treaty, a company would have to take legal action against a foreign government in the courts of that country. As well as being an expensive proposition, there will often be a suspicion — justified or otherwise — that it would not get a fair hearing. The independent system does not always work though; some countries, such as Argentina, that have lost a lot of cases have threatened to leave the system.

As of 2009, the United States had 40 active bilateral investment treaties in place, with another seven awaiting official confirmation by the governments of one or both countries. The United States has a standard model treaty that forms its starting base for negotiating new treaties. Some of the specific measures it looks for include the right for companies to move money in and out of countries freely at market exchange rates, a block on countries forcing foreign companies to appoint locals to senior management positions, and a limit on countries placing performance restrictions on foreign companies.

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