Coase-Sandor Working Paper Series in Law and Economics

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Law & Economics Working Papers


This paper develops a positive theory of the rules regarding standing and remedy in international trade and investment agreements. In the investment setting, the paper argues that a central objective of investment treaties is to reduce the risks confronting private investors and thereby to lower the cost of capital for capital importing nations. This objective requires a credible government-to-firm commitment (or signal) that the capital importer will not engage in expropriation or related practices. A private right of action for money damages is the best way to make such a commitment. In the trade setting, by contrast, importing nations have no direct interest in reducing the risks confronting exporters of goods and services, and will desire to make market access promises more secure only if such behavior secures reciprocal benefits for their own exporters. Consequently, commitments in trade agreements are best viewed as government-to-government rather than government-to-firm. The parties to trade agreements can enhance their mutual political welfare by declining to enforce commitments that benefit politically inefficacious exporters, and can most cheaply do so by reserving to themselves the standing to initiate dispute proceedings—a right to act as a "political filter." The paper also suggests why governments may prefer to utilize trade sanctions rather than money damages as the penalty for breach of a trade agreement.



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