Download pdf
Balancing the Investor-country Interests: Reforming FET Standards and Indirect Expropriation
- 1 Department of Law, Sun Yat-sen University, Guangzhou 510006, China
* Author to whom correspondence should be addressed.
Abstract
Foreign Direct Investment (FDI) plays a key role in the global economy, and its protection is often ensured through provisions in Bilateral Investment Treaties (BITs), particularly the Fair and Equitable Treatment (FET) standard. However, when the host country's actions lead to substantive devaluation of an investor's assets, often referred to as indirect expropriation, investors frequently invoke FET clauses to seek redress. Both FET and indirect expropriation are vaguely defined in international law, resulting in considerable space for interpretation by arbitral tribunals. Due to the protective nature of these provisions, tribunals often interpret these standards in favor of investors, which may lead to an imbalanced protection of investor rights. This imbalance can, in turn, encroach upon the sovereignty of host states and their ability to regulate in the public interest. Although Tribunals recently have taken some measures to restrict the interpretation of FET and indirect expropriation in dispute, these two treatments still face the risk of being abused by investors and becoming a “pocket clause”. This paper uses case studies and legal analysis to explore the ways in which such unbalanced interpretations undermine the interests of host states, particularly with respect to their regulatory and sovereign powers. This paper further proposes potential reforms of FET and indirect expropriation aimed at restricting the interpretation space of Tribunals while sustaining the flexibility of these two treatments, rebalancing the interests of both foreign investors and host countries.
Keywords
FET, indirect expropriation, unbalancing, reforming
[1]. Aitken, B. J., & Harrison, A. E. (1999). Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review, 89(3), 605-618.
[2]. Bubb, R. J., & Rose-Ackerman, S. (2007). BITs and bargains: Strategic aspects of bilateral and multilateral regulation of foreign investment. International Review of Law and Economics, 27(3), 291-311.
[3]. Charvi Devprakash. (2024). Demystifying tech-related investor-state arbitration: Understanding the role of the FET Clause. In Opportunities and Risks in AI for Business Development (pp. 455-461).
[4]. De Brabandere, E. (2016). States’ reassertion of control over international investment law-(Re) defining ‘Fair and Equitable Treatment’ and ‘Indirect Expropriation’. Cambridge University Press, 1-17.
[5]. Djajić, S. (2021). Good faith in international investment law and policy. In Handbook of International Investment Law and Policy (pp. 1-34).
[6]. Emmanuel T. Laryea. (2020). Legitimate expectations in investment treaty law: Concept and scope of application. In Handbook of International Investment Law and Policy (pp. 1-24).
[7]. Gamze Öztürk. (2017). The role of legitimate expectations balancing the investment protection and country’s regulations—Can countries have legitimate expectations?. Master Programme in Investment Treaty Arbitration.
[8]. Guajardo, D. F. (2000). Redefining the expropriation of a foreign direct investment in Mexico. S. Tex. L. Rev., *42*, 1309-1329.
[9]. Holmer, M. P. (2006). Regulatory expropriation under international investment law. Master thesis, University of Lund.
[10]. Isakoff, P. D. (2013). Defining the scope of indirect expropriation for international. The Global Business Law Review, 3(2), 189-209.
[11]. Jack, Biggs. (2021). The scope of investors’ legitimate expectations under the FET standard in the European renewable energy cases. ICSID Review-Foreign Investment Law Journal, 36(1), 1–30.
[12]. Karun Roy, N. Viswam, & N. Madhu. (2023). Balancing investors rights and regulatory action: A study of fair and equitable treatment standard in investment law. International Journal of Law Management & Humanities, 6(2), 43–57.
[13]. K Chovancova. (2023). The fair and equitable treatment standard and its current status in international investment law. Pravny Obzor, 106, 433.
[14]. Kurtishi-Kastrati, S. (2013). The effects of foreign direct investments for host country's economy. European Journal of Interdisciplinary Studies, 5(1), 26-38.
[15]. Legesse Tigabu Mengie. (2016). Host countrys' police power and the proportionality test in international investment law. Jimma UJL, 8, 81.
[16]. Levashova, Y. (2020). Fair and equitable treatment and investor’s due diligence under international investment law. Netherlands International Law Review, 67(2), 233–255.
[17]. Malakotipour, M. (2020). The chilling effect of indirect expropriation clauses on host countrys’ public policies: A call for a legislative response. International Community Law Review, 22, 235–270.
[18]. Maximo Romero Jimenez. (2001). Considerations of NAFTA Chapter 11. Chicago Journal of International Law, 2(1), 243-251.
[19]. Patrick Dumberry. (2024). The cost of inaction: Arbitral practice in respect of earlier generation FET clauses and current approaches to FET clauses. Report, OECD.
[20]. Pulkeria, R. (2014). The progressive expansion of the expropriation concept and its impact on country responsibility. International Investment Law Journal, 10(4), 45-67.
[21]. Ramil Gachay. (2023). Collisions between international intellectual property law and international investment law caused by the FET principle. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4611578
[22]. Rumana, Islam. (2013). Proportionality as a tool for balancing competing interest in investment disputes: Fair and equitable treatment (FET) standard in context. Jahangirnagar University Journal of Law, 1(2023), 119-139.
[23]. Shrestha, O. K. (2016). A host state regulatory right in fair and equitable treatment (FET) in bilateral investment treaties (BITs). Master thesis, University of Lapland.
[24]. Winters, K. (2015). Indirect and regulatory expropriation in international investment law: A critical review. LL.M(R) thesis, University of Glasgow.
[25]. Ying Zhu. (2019). Do clarified indirect expropriation clauses in international investment treaties preserve environmental regulatory space? Harvard International Law Journal, 66(2), 377-416.
[26]. Carlos Glave Mávila. (2015). The role of international environmental law in the application of foreign investment law. Anuario de investigación del CICAJ, 2015, 187-221.
Cite this article
Xu,Q. (2025). Balancing the Investor-country Interests: Reforming FET Standards and Indirect Expropriation. Journal of Applied Economics and Policy Studies,17,68-74.
Data availability
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.
Disclaimer/Publisher's Note
The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of EWA Publishing and/or the editor(s). EWA Publishing and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content.
About volume
Journal：Journal of Applied Economics and Policy Studies
© 2024 by the author(s). Licensee EWA Publishing, Oxford, UK. This article is an open access article distributed under the terms and
conditions of the Creative Commons Attribution (CC BY) license. Authors who
publish this series agree to the following terms:
1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons
Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this
series.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published
version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial
publication in this series.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and
during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See
Open access policy for details).