Investor-State Arbitration in Brazil: Should Brazil enter BITs?

Julia Cincinatis I6081617 MAASTRICHT UNIVERSITY Faculty of Law International Investment Law Research Paper Course Code: IER4015 Course Coordinator: Dr. LD Choukroune Investor-State Arbitration in Brazil: Should Brazil enter BITs? Julia Cincinatis I6081617 1 Julia Cincinatis I6081617 Table of Contents Introduction ................................................................................................... - 3 Brazil, land of the future and yet ... BIT-less ................................................. 4 1. BITs: Is More really Better? ............................................................................ 5 2. BITs as a Credible Commitment ....................................................................... 6 - Existing Investors Protection and Arbitration Law............................................. 7 3. The other side of the coin: What about Brazilian Investors abroad?..................................... 8 - Petrobras v Bolivia: Structuring investment ...................................................... 9 - Petrobras v Ecuador: Brazilian Soft-Power Culture .............................................. 10 4. Trading Sovereignty for Credibility.................................................................... 10 - Basic inequality: the essence of BITs ............................................................. 11 - ICSID: The Vulture Arbitration ..................................................................... 12 Conclusion ...................................................................................................... 13 2 Julia Cincinatis I6081617 Introduction Unlike many other South American states and its BRICS counterparts and despite the importance of foreign investment to its economy; Brazil is not a party to any bilateral investment treaties (BITs) and has not ratified the ICSID Convention. 1 Some have argued that it should follow China's lead if the country wants to maximize its economic growth and establishes itself as a host state for foreign investors. 2 To date there has been little agreement on whether or not Brazil should enter BITs. This essay critically discusses the common assumptions for entering into BITs and seeks to address the following questions: How relevant it is for Brazil to enter B ITs? How his reluctance has impacted on Brazil's economic performance? What are the existing investment mechanisms for foreign companies in Brazil and for Brazilian companies abroad? Finally, how entering bilateral investment treaties would affect Brazil's sovereignty? In the pages that follow, it will be argued that at the moment it is mostly un necessary for Brazil to sign bilateral investment treaties. Granting protections to foreign investors through the establishment of BITs would not guarantee more foreign direct investment (FDI) and could expose policymakers to potentially large-scale liabilities related to environmental, health and safety regulations. Moreover, Brazil has taken significant steps towards international arbitration and has today a modern and effective Arbitration Law. Throughout this paper we will analyze the more common assumptions about investment treaties and explain how Brazil has successfully mana ged to bypass them. This paper has been divided into four parts. It first gives a brief overview of Brazil's current economic trends and lays down the foundations for the understanding of bilateral investment treaties. We will then review the evidence of a connection between the signature of BITs and an increase in FDIs. We will give two important counter-arguments to our claim: the credible commitment theory and the situation of Brazi lian investors abroad. The fourth part deals with the issue of Sovereignty. It begins with the inherent inequality of BITs and then go on to international arbitration dispute settlement mechanisms and how the current model of BITs clashes with Brazilian national interests. 1 https://icsid.worldbank.org/ICSID/FrontServlet The People's Republic of China entered into its first BIT in 1982 and since then the country has been prolific in entering such treaties. Today, with more than 120BITs in force, China has made itself the second largest contracting party in BITs worldwide after Germany. 2 3 Julia Cincinatis I6081617 Brazil, land of the future and yet ... BIT-less Among the major economic players and emerging markets of the BRICS , Brazil is the largest emerging countries in South America. In absolute numbers, Brazil is the world's 4 th most favored destinations for mu ltinational companies in 2012: a lthough Foreign Direct Investments (FDI) slowed in 2012, they remained robust reaching US$65 billion. 3 Brazil is perceived as a "sought-after place with potentialities and attractiveness".4 The UNCTAD 2012 Report highlights the importance of natural resources including oil, gas and metal minerals as well was its rapidly expanding middle class. 5 However, Brazil remains the only country in South America not to have ratified the ICSID Convention, or any BIT. Bilateral Investment Treaties have proliferated, especially in the last two decades. According to the UNCTAD, while there were only 100 BITs in 1980, there are more than 2860 BITs implemented today, involving a great majority of the countries in the whole world. 6 These treaties seek to set out the rules for treatment of foreign investment and guarantee direct access for investo rs to neutral forums for resolution of their claims. 7 Most BITs typically include guarantees for foreign investors of "fair and equitable treatment" in accordance with international standards after the investment has taken place, non-discriminatory and "most favoured nation" treatment, "full protection and security", free transfer of capital, and prohibitions on expropriation and nationalization without compensation. 8 Furthermore, the BITs include a provision concerned with the mechanism of dispute resolution between the investors and the host country in connection with an investment. Access to arbitration is considered as one of the most important guarantee provided by BITs, without which an investor could not effectively enforce the above protections. In brief, these provisions protect property and contract rights of foreign investors in host countries against political and other risks highly prevalent in many developing countries. The BITs continue to be the most relevant source of International Investment Law for foreign investors.9 3