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Washington University Journal of Law and Policy




In the past decade, investor-state arbitration has made tremendous gains in both credibility and use. There is now widespread accession to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention” or “Washington Convention”). States have executed more than 2,000 bilateral investment treaties (BITs) defining the terms and conditions under which one (“investor”) state’s nationals and companies will invest in the other (“host”) state. Such terms include provisions allowing foreign investors to initiate arbitration proceedings against the host state, and at this point, more than 500 disputes have been submitted to investor-state arbitration. There is, however, one very notable example of a rapidly developing state that has rejected this system of international dispute resolution in favor of nation-level structures. That example is the largely industrialized state of Brazil.

Brazil boasts the seventh largest economy in the world, $65 billion in foreign direct investment, and enticing investment opportunities in advance of its hosting of the 2014 World Cup and 2016 Olympic Games. But Brazil does not have a single BIT in force. Brazil’s notorious absence from international investment arbitration has been described as the product of the region’s recent economic history, coupled with technical and political barriers that have impeded the ratification of BITs in particular. Some commentators have also found that Brazil’s failure to enact BITs and its general avoidance of international forums for dispute resolution are largely the result of shifting priorities on the part of the executive branch of the Brazilian government.Those who are most interested in international investment arbitration often present Brazil’s choice not to ratify its BITs as problematic and, indeed, as a failure. This label, however, is only used by certain audiences in assessing Brazil’s actions.

Using Hirschman’s theory of exit, voice, and loyalty — supplemented by procedural justice research and theory — a different conclusion emerges. The failure of Brazil’s executive and legislative branches to reach agreement on BITs represents a story of Brazilian legislators’ exit from the product that had been negotiated by the state’s diplomats. But this exit also evidences the executive’s acknowledgement and even-handed, dignified treatment of the voice expressed by Brazilian legislators. Ultimately, such voice and acknowledgement led to executive and legislative collaboration in the creation of new, unbundled legislation that responded to state concerns while also providing sufficient protection to foreign investors. Such products include: constitutional equal protection for foreign investors, protections for the free flow of capital, double taxation treaties, investment opportunities through privatization and concessions, and arbitration law reforms.

For Brazil’s domestic constituents and its foreign investors, these alternative approaches to investment protection actually represent superior products that were more responsive than BITs to the needs and interests of the state at that time. Far from representing failure, then, the development of these products represents a success for Brazil’s domestic and foreign stakeholders. Perhaps as evidence of this, foreign investment in Brazil continues to be strong.

Meanwhile, Brazil’s role in foreign investment has evolved as its own multinational corporations increasingly engage in foreign investment. Inevitably, these corporations seek to reduce the risk of their foreign investments. As a result, they may encourage Brazil’s executive and legislative branches to take a second look at BITs. As circumstances change, so may the definition of success.

Ultimately, the Article urges that Hirschman’s theory and the theories and research regarding procedural justice encourage a reconceptualization of Brazil’s alleged “failure” in choosing not to ratify the BITs that had been negotiated by its diplomats.

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Washington University School of Law

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