Type to search

Ecuador and Investment Treaties

Three experts on the results of Ecuador's withdrawal of bilateral investment treaties.

Inter-American Dialogue

The government of Ecuador recently announced plans to withdraw from at least nine bilateral investment treaties, a move that follows the country’s partial withdrawal last October from the International Centre for Settlement of Investment Disputes (ICSID) and comes amid growing discontent among some South American governments with the system for international investment protection. What’s wrong with the system? How can it be improved to the benefit of both countries and investing companies?

Jonathan Hamilton, Partner at White & Case LLP: The question of 'what's wrong' with bilateral treaties for the promotion and protection of investment (BITs) derives in part from an interpretation that the 'promotion of investment' should be evident in a direct correlation between BITs and increases in foreign direct investment (FDI). The lack of FDI flows appears to be the basis for Ecuador's announcement that it plans to terminate nine BITs with smaller countries like El Salvador and Paraguay. This follows on the heels of Ecuador's announcement that it would no longer consent to ICSID jurisdiction over disputes in the oil and mining sectors. Despite these steps, Ecuador cannot immediately terminate its BITs due to survival provisions. It cannot immediately extract itself from the treaty framework put into place over many years. A spate of studies reveals mixed results on the impact of BITs on FDI, though there appears to be some positive correlation, and many factors affect FDI flows. Yet, commentators also have observed that BITs promote investment in less direct ways, such as by promoting the rule of law and deepening economic ties across borders and regions. This apparently is not Ecuador's current aim, given it is cutting BIT ties with a number of its own Latin American neighbors. Meanwhile, Ecuador for now maintains BITs with capital-exporting countries like the US and certain countries in Latin America and Europe, which ironically are the countries most likely to result in BIT claims against Ecuador.

Kevin Gallagher, Professor of International Relations at Boston University: Investment treaties should attract investment that facilitates economic development. The evidence on BITs in the Hemisphere suggests otherwise. Studies prepared for the World Bank find that BITs have no independent effect on attracting investment; others by the United Nations find that BITs have a small and secondary effect, yet researchers at the London School of Economics find a robust relationship between BITs and investment. Brazil does not have BITs and is the largest recipient of foreign investment in the region. According to studies prepared by the Inter-American Development Bank, when foreign investment has come to Latin America it has tended to 'crowd-out' domestic investment. Since 1980, although foreign investment has increased, total investment (foreign plus domestic) as a share of GDP has decreased and is now under 20 percent. In China and other nations in East Asia, foreign investment has increased and has 'crowded in' domestic investment, leading to a total investment rate just shy of 40 percent per annum. This partly explains why annual GDP per capita growth in Latin America has been just over one percent over the past 20 years, and over 6 percent in China and East Asia. Asian nations also operate in a foreign investment regime much more conducive to growth than Latin American nations do. Under the Trade-Related Investment Measures (TRIMS) treaty at the WTO, [Asian nations] have the space (and use it) to screen which firms come into the country pre-establishment, bargain hard for linkages to their economy, joint ventures, research and development operations, and so forth. BITs tie the hands of most Latin American governments from using such measures. Nations in the region can strike much better deals at the multilateral level.

Mélida Hodgson, Counsel at Miller & Chevalier: Ecuador and the other countries that have threatened to leave the ICSID have a problem with the World Bank and the multilateral development system. It is their perception that the system is pro-developed country (and it is a system designed by the developed world), but the real issue is that they don't like investor-state arbitration (not a view exclusive to developing countries). ICSID is seeking to improve the arbitration system, starting with educating countries about the process. But it is hard to change an arbitration system to address external political disputes. The reality is that states have fared well at the ICSID. But the institution is a scapegoat for issues that these countries have with their multinational investors and their home countries, who they perceive have greater bargaining power. At play is a reassertion of sovereignty on the part of governments that feel that their predecessors 'sold out' their countries—in the treaties, and in the approval of investments that have led to disputes under the treaties at the ICSID. This latest move by Ecuador is part of the reassertion of sovereignty—why have treaties that do not bring enough significant investment to merit the risk of large claims? With the exception of Romania, the treaties Ecuador denounced are all with Latin American countries, so it may seem puzzling. But none of these are big capital-exporting countries. Ecuador's concern may not be with investors from 'fellow traveler' countries, such as Nicaragua and Cuba, but rather with third-country investors that may be able to take advantage of treaties with those countries.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 


To read this post, you must purchase a Latin Trade Business Intelligence Subscription.
Scroll to top of page
Begin Zoho Tracking Code for Analytics