RESEARCH

COMMERCIAL DIPLOMACY AND POLITICAL RISK

The modern investor-state arbitration regime was explicitly designed to replace commercial diplomacy as a mechanism for protecting foreign investment. I argue, however, that diplomacy continues to play an important role in managing political risk, particularly in countries with weak rule of law. Yet since commercial diplomacy occurs primarily behind closed doors, it is difficult to observe, let alone test for its effects. To overcome this obstacle, I exploit variation in vacancies among US ambassadors to foreign countries—conditions overwhelmingly driven by US domestic political factors—which provides for a quasi-natural experiment for testing the effects of commercial diplomacy. I show that American firms operating abroad are significantly more likely to initiate investor-state arbitration disputes during temporary vacancies in US ambassadorships. The effects of these vacancies prove particularly strong in countries with weak rule of law. The results suggest American investors frequently seek assistance from the US government in informally resolving incipient investment disputes; if diplomatic channels are unsuccessful or unavailable, investors then file formal arbitration cases. These findings underline that even in highly legalized issue areas in world politics, such as investment protection, informal diplomacy continues to influence important political economy outcomes.

Published in International Studies Quarterly 62 (1): 94-107 (March 2018).

LEGALIZATION, DIPLOMACY AND DEVELOPMENT: DO INVESTMENT TREATIES DE-POLITICIZE INVESTMENT DISPUTES?

with Srividya Jandhyala and Lauge Poulsen

Developing countries have entered into investment treaties for decades. One promise of signing up to these potent agreements was that it would allow risky investment climates to attract more capital. This proclaimed benefit of the investment treaty regime is subject to a large, and growing, empirical literature – with mixed findings. Yet, another, and potentially far more important promise of the treaties has been entirely ignored in empirical literature. Architects of the investment treaty regime as well as many current proponents have suggested that the treaties would allow developing countries to de-politicize investor-state disputes; i.e. shield commercial disputes from broader political and diplomatic considerations with developed states. While this argument is widely accepted by many scholars and practitioners, it has never been subjected to empirical investigation. We provide the first such test, using an original dataset of US diplomatic actions in 219 individual investment disputes across 73 countries as well as detailed case studies drawing on internal US State Department diplomatic cables. We find no evidence for the de-politicization hypothesis: diplomatic engagement remains important for investor-state dispute settlement, and American diplomats are just as likely to intervene in developing countries that have ratified investment treaties with the US as those that have not. And though aggressive, coercive American intervention in investment disputes is rare, this is a general feature of American investment diplomacy after the Cold War, rather than one limited to investors with recourse to legalized dispute settlement procedures. These findings provide a critical corrective to our understanding of the investment treaty regime, and have important implications for understanding the effects of international legalization on developing countries.

Published in World Development 107 (1): 239-252 (July 2018).

TRADE ENFORCEMENT AND DOMESTIC SUPPORT FOR TRADE LIBERALIZATION

In democracies, executives seeking to ratify new trade agreements need support from legislatures and domestic interest groups with influence over trade policy. One concern of such groups is that the executive branch may be reluctant to aggressively enforce the rules of new trade agreements, since doing so often entails diplomatic costs. These doubts could lead these veto players to withhold their support for further trade liberalization. I argue that in order to assuage such concerns and gain domestic political support for new trade agreements, governments use the initiation of WTO disputes as a costly signal of their commitment to trade enforcement. I show that democratic governments are more likely to initiate WTO disputes in the period immediately preceding the ratification of new free trade agreements, when executives are most in need of burnishing their reputations for trade enforcement, and thereby increasing domestic support for trade liberalization. The results underline how governments use international law in order to shape not only their international reputation but also their domestic reputation among key domestic stakeholders.

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© 2017 Geoffrey Gertz