Originally from Investor-State Arbitration--Lessons for Asia

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History of the Bilateral Investment Treaty (“BIT”). Historically bilateral commercial treaties were a traditional method of facilitating trade between states. The United States made a number of such agreements in the early days which were known of Treaties of Friendship, Commerce and Navigation (“FCNs”). These treaties were intended to facilitate trade and shipping. After the First World War these treaties increasingly dealt with investment abroad by securing agreements with other states on the treatment to be given to US investors with respect to the establishment of businesses. However the protection of US owned property from arbitrary or discriminatory action and the mechanism for the settlement of disputes were not dealt with in these FCNs. After the Second World War the US Government increasingly negotiated such treaties which sought to facilitate and protect US direct investments abroad.

The FCNs contained provisions relating to foreign property but were primarily concerned with facilitating trade as opposed to regulating foreign investment. The emergence of newly independent countries in the developing world, from the late 1950s onwards, brought about economies for which existing treaty arrangements were unsuited. The FCNs were more appropriate for agreements between states of comparable economic stature and were no longer viewed as appropriate for bilateral economic  cooperation. The BIT emerged to become the preferred type of agreement. 

In the late 1950s individual European countries started tonegotiate bilateral treaties that, unlike the previous commercial agreements, dealt exclusively with foreign investment, and sought to create a basic legal framework to govern investments by nationals of one country in the territory of another. This was the birth of the modern BIT and Germany was the first to conclude such an agreement with Pakistan in 1959. Germany then proceeded to negotiate a number of BITs and various European countries such as Switzerland, France, Italy and the United Kingdom followed. In 1981 the United States started to negotiate specific BITs with developing countries. As non-Western countries became capital exporting states they too negotiated bilateral treaties to create a legal framework for their investment with specific foreign countries. Examples are Kuwait, which has signed agreements with Tunisia, Morocco and Pakistan and Japan which has signed agreements with Egypt, Sri Lanka and China.