“Re-Arm”! Assessing the Interplay Between Arms Export Regulation and International Investment Law

Key Takeaways

• IIAs contain security exceptions that can shield states imposing arms‑export controls
• Peace‑and‑security clauses let governments block transfers that threaten stability
• CSR provisions in BITs push firms to adopt internal compliance programmes
• Soft language in many BITs limits enforceability, enabling forum‑shopping via subsidiaries
• Rearmament surge raises arbitration risk over export restriction disputes

Pulse Analysis

The post‑Cold‑War surge in defence spending has revived cross‑border partnerships for arms and dual‑use technologies. Initiatives such as NATO’s "Re‑arm" strategy and the EU’s Programme Readiness 2030 encourage joint ventures, but they also expose investors to a maze of controls, from the Arms Trade Treaty to the EU’s Regulation 2021/821. While these regimes target end‑users, the corporate structures that facilitate investment—subsidiaries, special‑purpose vehicles, and JV partners—often sit in jurisdictions with lax oversight, creating loopholes that regulators are eager to close.

International investment agreements, traditionally drafted to protect foreign direct investment, embed three categories of clauses that can intersect with arms‑export rules. National‑security exceptions allow a host state to justify export bans when they are deemed essential to its safety, echoing WTO language but demanding good‑faith justification. Peace‑and‑security provisions grant similar discretion for measures that preserve international stability, offering a legal shield for states that block shipments to conflict zones. Meanwhile, CSR and human‑rights clauses—though frequently soft‑law—encourage firms to adopt internal compliance programmes, aligning corporate due‑diligence with the risk‑assessment obligations of the ATT. The enforceability of these provisions varies, and many BITs rely on non‑binding language, which can be exploited for forum‑shopping.

For defence manufacturers and investors, the practical upshot is a heightened risk of arbitration over export restrictions. As rearmament drives up transaction volumes, parties must anticipate challenges under both investment law and arms‑control regimes. Implementing robust compliance frameworks, documenting good‑faith security assessments, and negotiating BITs with clearer, binding CSR obligations can mitigate exposure. Policymakers, too, should consider harmonising IIA language with existing export controls to reduce legal uncertainty and promote responsible investment in the burgeoning defence sector.