Economics of International Arbitration

Lastly, Prof. Dr. Jordi Paniagua, professor of economics at the University of Valencia, explained how international economic flows follow the gravity equation. FDI and trade increase with economic activity (meaning more producers and consumers) and decrease with certain frictions, comprising both natural frictions, such as distance and cultural and linguistic links, and man-made frictions, which include the contractual and institutional environment.

Prof. Dr. Paniagua also said that international commercial arbitration alleviates these man-made frictions that impede international flows of goods and services by providing an effective and predictable commercial dispute settlement mechanism. He identified the three main economic benefits of international arbitration. First, international arbitration is flexible, confidential, and final. Second, it increases trust between commercial parties. Third, it reduces the uncertainty of trade dispute litigation in domestic courts. Academic research shows that increasing the quality of arbitration laws significantly and positively impacts FDI and trade.