Litigation bonanza: in the push for a U.S.-China investment treaty, policymakers would do well to consider the litigation concerns.

• Author: Lester, Simon

The United States has been negotiating foreign investment treaties in their current form since the early 1980s. The initial treaties were mainly with small, developing countries, and did not lead to much in the way of litigation. As a result, they flew under the radar, and did not cause much controversy.

However, with the signing of the North American Free Trade Agreement--which contained an investment chapter that mirrored a stand-alone investment treaty--in 1993, the situation changed. With the large amounts of cross-border investment among the three NAFTA countries, there were many opportunities for lawsuits, often claiming damages in the hundreds of millions of dollars. As a result, concerns were raised about the impact on "sovereignty" and national regulatory autonomy, as private investors sued governments for a range of actions and measures.

In response, the U.S. government made some minor tweaks to its "model" investment treaty over the years. But the changes were modest, and the U.S. approach to investment treaties remains substantially the same.

In recent months, a number of business groups and politicians have been pushing the idea of a U.S.-China investment treaty. If this treaty is pursued, it may provide an opportunity to think carefully about how the United States should handle foreign investment policy. In this regard, there are some fundamental questions that have received little public attention: Are investment treaties the best way to liberalize foreign investment? More specifically, do investment treaties offer the right approach to removing barriers to foreign investment, or do they instead mainly encourage litigation due to some of their vague legal provisions?

Before examining these questions, let's start with a basic assumption: foreign investment, both inward and outward, is good. Investment is a fundamental driver of economic growth. The source of the investment is irrelevant, and there are few legitimate concerns--national security is one--with the "foreign" nature of an investment. Mercedes-Benz is investing in Alabama? That's great. The nationality of the owner does not matter to the employees, and it should not matter to anyone else. Chrysler is investing in China? That's great, too. When companies locate in the most efficient production area, consumers benefit and it makes the companies more viable over the long term. Concerns about job losses from shifting production abroad Coutsourcing") are understandable...