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Brazil and China – A Need for International Arbitration to Secure Foreign Direct Investment?

Brazil and China – A Need for International Arbitration to Secure Foreign Direct Investment?

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Published by André Feldhof
This paper investigates the relationship between a country’s openness to international arbitration and its capacity to attract FDI by comparing two emerging economies, Brazil and China. Brazil has not ratified a single BIT up to today and refused to sign up to ICSID while China is an ICSID member and the country with the second-most BITs in the world, only surpassed by Germany. The paper shows that ICSID membership is not a sufficient condition to protect foreign investors.
This paper investigates the relationship between a country’s openness to international arbitration and its capacity to attract FDI by comparing two emerging economies, Brazil and China. Brazil has not ratified a single BIT up to today and refused to sign up to ICSID while China is an ICSID member and the country with the second-most BITs in the world, only surpassed by Germany. The paper shows that ICSID membership is not a sufficient condition to protect foreign investors.

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Published by: André Feldhof on Jul 30, 2012
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05/13/2014

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Brazil and China – A Need for InternationalArbitration to Secure Foreign Direct Investment?
 André Feldhof Course: International Economic LawCourse coordinator: Prof. Harm SchepelDate: 24 April 2012
 
2
IntroductionDani Rodrik (2007) holds that international economic regimes such as the WorldTrade Organization (WTO) and international arbitration regimes such as theInternational Centre for the Settlement of Investment Disputes (ICSID) limit adeveloping country’s policy space and thereby limit its possibilities of economicdevelopment
1
. This has been exemplified by the case of Argentina. Argentina largelyfollowed the advice of the Washington institutions and the guidance of the US until ithad to devalue its national currency and compensate international investors for thedamages resulting from this policy choice
2
. Van Harten (2010) has focused on bilateral investment treaties (BITs) and complemented Rodrik’s insights with theargument that BITs, intended to protect foreign investors through recourse to aninternational tribunal, do not encourage foreign direct investment (FDI) and fail tomeet other objectives which would benefit the capital-importing state
3
. This paper therefore wants to investigate the relationship between a country’s openness tointernational arbitration and its capacity to attract FDI by comparing two emergingeconomies, Brazil and China. Brazil has not ratified a single BIT up to today andrefused to sign up to ICSID
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while China is an ICSID member and the country withthe second-most BITs in the world, only surpassed by Germany
5
.To compare the relationship between openness to international arbitration andthe ability to attract FDI, this paper is divided into two parts. The first part presentsthe economic opening of China and Brazil and investigates their attitude
 
towardsinternational arbitration based on their regulatory action in favor of FDI and investor  protection. Building upon the first part, the second part outlines Brazil’s and China’seconomic development and compares the consequences of their policies in favor of investor protection. It analyzes the degree to which international arbitration instillsinvestor confidence in China, and the degree to which Brazil’s refusal to open tointernational arbitration has had adverse consequences. The conclusion will bringtogether the main results of this analysis and try to answer whether on the basis of the

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Rodrik, 2007, p. 19
2
Kalicki & Medeiros, 2008, pp. 440f 
3
Van Harten, 2010, p. 19
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Kalicki & Medeiros, 2008, pp. 426ff 
5
Shen, 2010a, p. 164
 
3
findings, openness to international arbitration seems beneficial for attracting FDI or not.1. Brazil’s and China’s economic opening process – Policies for and againstinternational arbitration1.1 BrazilBefore the late 1980s, Latin American countries were downright hostile tointernational arbitration. An arrangement called the “Calvo doctrine” forbade them totreat foreign investors any more favorable than domestic investors
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. On grounds of this arrangement, they rejected the idea of allowing a foreign investor to appeal to aninternational panel while a domestic investor could only rely on the domestic legalsystem. They also refused to ratify the ICSID Convention which allowed for disputeresolution in ICSID
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. At the end of the 1980s, however, many Latin Americancountries gave up their reluctance to international arbitration and BITs and joined theICSID Convention and the New York Convention on Recognition and Enforcementof Arbitral Awards
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.The Brazilian government also decided to move away from the Calvo doctrineand progressively included investor protection in its policies to attract FDI. Firstly,the government launched a program towards the middle of the 1990s that includedstabilization of the exchange rate of the
real 
and a plan to pay back government debt
9
.Scholars agree that this reform program greatly boosted investor confidence althoughBrazil refused to sign the ICSID Convention
10
. The result was an inflow of capitalinto the car manufacturing industry. Brazil actively offered foreign car producers preferential import tariffs for finished cars if they achieved 60% of local content inthe assembly of the cars, and proposed investors to benefit from its multiple tariff agreements with other countries to save costs in the export of finished cars
11
.

6
Kalicki & Medeiros, 2008, pp. 425f; p. 432
7
Kalicki & Medeiros, 2008, p. 426
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ibid.
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OECD, 1998a, p. 21; ECLAC, 2004, p. 104. It is interesting to note that in the process of signing the Real Planthat aimed to reduce government debt, the government consented to international arbitration as a means of disputeresolution, albeit only in the framework of debt reduction. (OECD, 1998a, p. 48)
10
OECD, 1998b, p. 81; ECLAC, 2004, p. 104
11
OECD, 1998b, p. 80

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