Microsoft Word apsa paper VII jen doc

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A BIT is Better Than a Lot: 

Bilateral Investment Treaties and Preferential Trade Agreements 

 

 

 

 

 

 

Jennifer Tobin

†

 and Marc L. Busch

‡

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

†

Public Policy Institute, Georgetown University, Washington, DC 20057 

[e-mail]

 

‡

Walsh School of Foreign Service, Georgetown University, Washington, DC 20057, 

[e-mail]

 

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I. Introduction 

The landscape of the global economy is dotted with institutions that regulate in-

vestment and trade.  In recent years, the number of bilateral investment treaties (BITs) 

and preferential trade agreements (PTAs), in particular, has grown at a torrid pace, the 

upshot being that nearly every country is a member of at least one of these institutions, if 

not many.  For all the scholarly attention that these institutions have received, however, 

there is no research tying BITs and PTAs together.  This is surprising, since both aim to 

increase commerce, and investment treaties typically precede trade agreements.  We aim 

to fill in this gap in the literature.  Specifically, we argue that a BIT signed between a de-

veloping and developed country will increase the odds that this pair of states goes on to 

conclude a PTA.  That said, the twist in the story is that more is not better in this regard; 

we further argue that, even with a BIT in hand, these states are less likely to form a PTA 

if the developing country has many investment treaties with other wealthy countries.  In 

other words, as poor governments enter into greater numbers of BITs, the likelihood that 

they will form a North-South PTA decreases. 

The logic of our argument is as follows.  Firms in developed countries look to 

outsource some of their production to developing countries.  There are two concerns in-

herent in pursuing this strategy: the risk of (tantamount) expropriation, and the transac-

tion costs of getting inputs to, and exports from, their foreign affiliates.  BITs address the 

former, PTAs the latter.  Indeed, provisions for third party dispute settlement in the event 

of (uncompensated) expropriation are the central tenet of investment treaties, while trade 

agreements lower protectionism on a reciprocal and preferential basis, enabling firms to 

more readily trade with foreign affiliates. 

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The demand for BITs is relatively easy for rich governments to meet, as they im-

pose few additional obligations on them, little FDI flows from south to north, and their 

court systems are already capable of handling investor disputes.  Trade agreements are a 

different story; PTAs are more costly to sign, as they involve deeper and (typically) re-

ciprocal obligations.  Rich governments, and the firms they represent, are thus likely to 

look more carefully at their expected benefits.  We conjecture that, while a BIT between 

a developing and developed country ought to better the chances that they sign a PTA, the 

odds of doing so will fall if the poorer state has many investment treaties with other 

wealthy states.  Specifically, we expect that there is a “tipping point” beyond which the 

number of BITs serves to congest the exporter rents that would otherwise be secured by a 

PTA (Grossman and Helpman 1995; Krishna 1998), making the trade agreement less