The limits of diplomacy by treaty: Evidence from China's bilateral investment treaty program

• Published date: 01 December 2024
• Author: Adam Chilton,Weijia Rao
• Date: 01 December 2024
• DOI: http://doi.org/10.1111/jels.12399

ORIGINAL ARTICLE

The limits of diplomacy by treaty: Evidence from China’s

bilateral investment treaty program

Adam Chilton

1

| Weijia Rao

2

1

University of Chicago Law School, Chicago, Illinois, USA

2

Boston University School of Law, Boston, Massachusetts, USA

Correspondence

Weijia Rao, Boston University School of Law, 765 Commonwealth Ave, Boston, MA 02215, USA.

Email: wrao@bu.edu

Abstract

The web of over 3000 Bilateral Investment Treaties (“BITs”) is the primary body of inter-

national law regulating cross-border investments. Research suggests that these treaties

may have had a limited impact on promoting new investments, but that they still may

have helped to improve countries’political relationships. In this paper, we document that

this pattern was reversed for one of the most prolific signers of BITs: China. Using a

stacked-event research design, we find that Chinese BITs are associated with an increase

in Bilateral Foreign Direct Investment Flows but a divergence in voting patterns at the

United Nations. We then explore two explanations for why the Chinese BIT program led

to increased investment while also producing foreign policy divergence: that the domestic

political costs of economic engagement with China push countries away, and that there

are offsetting international pressures that have stronger pulls than China’s efforts. We

find no support for the domestic political costs explanation, but we do find evidence that

the countries that received increased aid from the United States after signing a Chinese

BIT had greater foreign policy divergence with China.

INTRODUCTION

Since the first Bilateral Investment Treaty (“BIT”)wassignedbetween

Germany and Pakistan in 1959, pairs of countries have signed over 3000 of

these agreements (Alschner & Skougarevskiy, 2016). At the most basic level,

BITs provide reciprocal legal rights for Foreign Direct Investments (“FDI”)

in the treaty partners’territories. And, when a private party believes that

their rights under a BIT have been violated, the agreements typically allow

the investors to initiate international dispute settlements against the states

that signed them.

DOI: 10.1111/jels.12399

©2024 Cornell Law School and Wiley Periodicals LLC.

J Empir Leg Stud. 2024;21:1023–1101. wileyonlinelibrary.com/journal/jels 1023

However, although BITs are the primary legal tool for regulating cross-

border investments, there is evidence suggesting that they may not actually be

associated with increased FDI. Although some studies have found that BITs are

associated with new FDI, the balance of evidence appears to suggest that BITs

are not associated with increased investment (e.g., Reiter & Bellak, 2021).

1

But

despite their limited economic impact, there is evidence that signing BITs is

associated with countries having improved political relationships. For example,

Chilton and Rao (2024) find that signing a BIT is associated with countries sub-

sequentially voting more similarly at the United Nations (UN), which is a

widely used measure of foreign policy convergence (e.g., Voeten, 2000). Taken

together, this suggests that BITs may have done more to improve countries’

political relationships than they have done to improve their economic

relationships.

In this paper, we document that this pattern was reversed for one of the

world’s largest economies and most prolific signers of BITs: China. By 2022,

China was the world’s second-largest source of FDI inflows and FDI outflows,

trailing only the United States, and it had signed 145 BITs with countries

around the world (United Nations Conference on Trade and Development,

2024). And, while investment promotion was one of the Chinese BIT program’s

goals, China also actively pursued these agreements in the hopes of fostering

improved diplomatic relationships with treaty partners (Shaffer & Gao, 2020).

This was particularly the case as China sought to overcome the diplomatic isola-

tion it faced following the fall of the Eastern Bloc and the crackdown on the

Tiananmen Square protests in 1989 (Berger, 2019). In fact, while China’s early

BIT partners were primarily with wealthy countries, in the aftermath of these

events, China turned to signing BITs with developing countries, many of which

were former socialist countries or countries in transition (Kong, 2003). The evi-

dence is clear that China hoped that signing treaties with these emerging econo-

mies would be a way to gain political partners that would support its position

on a range of issues, including human rights and Taiwan (Cohen &

Schneiderman, 2017; Hadley, 2013; Taylor, 1998).

Our research empirically tests whether the Chinese BIT program produced

either economic or political benefits.

2

For this project, we compiled a dataset

that includes information on up to 196 countries from 1975 to 2015. The unit of

observation for this dataset is pairs of countries—also known as dyads—in each

year. We then use a stacked event-study research design (e.g., Cengiz et al.,

2019; Deshpande & Li, 2019; Rozema & Schanzenbach, 2019) to compare the

changes for dyads including China where a BIT was signed with changes in

1

Reiter and Bellak (2021) conducted a meta-analysis of studies on the effect of BITs on investment and, after

correcting for possible publication bias, concluded that the effect of BITs on FDI is “below 1%.”

2

The only other research that we are aware of that tests the impacts of the Chinese BIT program is Hadley (2013),

which uses a smaller dataset and panel regressions to find that China’s BITs are associated with an increase in

FDI inflows into China, but not with any increase in FDI outflows from China.

1024 THE LIMITS OF DIPLOMACY BY TREATY

similar dyads where a BIT was not signed during the same window. Using this

method, we estimate the impact of signing a BIT on China’s economic relation-

ship with the treaty partner by using data on Bilateral FDI Flows and on

China’s political relationship with the treaty partner by using data on UN vot-

ing patterns (e.g., Carmody et al., 2020; Voeten, 2000,2004).

We find evidence suggesting that signing a BIT with China is associated with

increased investments but not greater foreign policy alignment. Across specifica-

tions, we observe a statistically significant and substantively meaningful increase

in Bilateral FDI Flows between China and the co-signatory in the 5 years fol-

lowing the signing of a BIT. For instance, our most straight-forward, and con-

servative, specification suggests that there was a 148% increase in Bilateral FDI

Flows after China signed a BIT. This increase is dramatic given the evidence

suggesting that BITs have a limited impact on FDI in other contexts, and it is

likely attributable to the fact that the Chinese government is able to direct

investments toward particular countries after signing BITs in ways that market-

driven Western economies cannot (Blanchard, 2019). In contrast to these

changes in FDI, in our preferred specification, we observe a statistically signifi-

cant 13% divergence in the voting at the UN for China and the co-signatory in

the 5 years following the signing of a BIT. In other words, this suggests that

Chinese BIT partners have less aligned foreign policies after signing the agree-

ments. Importantly, this combination of results is the opposite of what exists for

the overall universe of BITs (e.g., Chilton & Rao, 2024; Reiter & Bellak, 2021).

We further explore these results by breaking out our analysis by generation

of Chinese BITs. As we explain below, scholars have previously divided Chinese

BITs into three generations: (1) BITs signed during the 1980s that primarily

were negotiated with developed countries; (2) BITs signed between 1990 and

1997 that were primarily intended to help ease China’s post-1989 diplomatic iso-

lation; and (3) BITs signed beginning in 1998 coinciding with Chinese “Going

Abroad”policy of encouraging enterprises to invest overseas. We find that both

the largest increases in FDI, and the largest divergences in UN voting, occurred

for BITs signed as part of the second generation of BITs between 1990 and

1997. Importantly, the historical record is clear that this was the period when

China was signing BITs in the hopes of reducing its post-1989 diplomatic isola-

tion (Cohen & Schneiderman, 2017). But, on average, China’s treaty partners

during this period had foreign policy preferences that actually moved further

away from China.

We then explore two explanations for why, despite appearing to increase

Bilateral FDI Flows, Chinese BITs did not increase foreign policy alignment.

The first explanation involves the role of domestic political costs for China’s

BIT partners. Research suggests that BITs can come with political costs for

leaders of signing countries (Kerner, 2009). Additionally, in the case of China,

prior studies have documented how increased economic engagement with China

has, at times, produced significant domestic challenges for partner countries.

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