Release Date: May 14, 2019
BUFFALO, N.Y. — New research from the University at Buffalo School of Management suggests the Trump administration’s decision to withdraw from various multilateral trade agreements may have been misguided.
In the study, published in the Journal of Banking and Finance in May, the researchers examined investor-state dispute settlements (ISDS), which allow foreign investors to sue a host government in a third-party international court.
“Imagine you opened a business in a developing nation and feel you’re being unfairly regulated or taxed,” says lead author Veljko Fotak, PhD, associate professor of finance in the UB School of Management. “Without this dispute system, you’re at the mercy of that country’s potentially corrupt court system.”
Dispute panels are an important component—and source of controversy—in trade agreements from which the Trump administration has withdrawn, including the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP).
Proponents argue the dispute systems help American investors protect their assets abroad. Meanwhile, critics counter that they allow international courts to question U.S. court decisions and undermine national sovereignty.
“That’s a good soundbite,” Fotak says, “but in reality, these cases are rarely, if ever, brought against the United States, and without this mechanism, U.S. firms abroad may suffer.”
To isolate and evaluate the impact of ISDS systems, the research team looked at loans made under bilateral investment treaties—agreements where dispute systems are virtually the exclusive feature. The study compiled more than 45,000 loans made from January 1980 to December 2013, representing 161 countries and a total value of $20.75 trillion.
Fotak and the team then compared the loan terms and data, and found the presence of a dispute mechanism increased the availability of capital, average loan size and average time to maturity, and decreased the cost of debt. In their sample, the average loan was for $1.2 billion, and the presence of a dispute system resulted in about $7 million in savings over the life of the loan.
“Overall, we found investors feel more confident entering developing markets where a treaty allows them to address any grievances and protect their investment,” Fotak says. “By pulling out of the TPP and other trade agreements, we’re not defending U.S. sovereignty—we’re abandoning U.S. investors.”
Fotak’s co-authors were UB School of Management alumnus Haekwon Lee, PhD ’18, lecturer at the University of Sydney Business School, and William Megginson, professor and Price Chair in Finance at the University of Oklahoma Price College of Business. The project received funding from the UB School of Management’s HSBC Center for Global Business Leadership and Bocconi University’s Sovereign Investment Lab.