July 26, 2018|By By Jonathan E. Hillman and Matthew P. GoodmanPhoto credit: CARL DE SOUZA/AFP/Getty Images
In February, following a protracted dispute, Djibouti unilaterally terminated a container terminal contract with Dubai-based DP World. The strategically located country on the Horn of Africa may gift control of the terminal to Chinese companies, which inaugurated a free trade zone in the same area earlier this month. The terminal is located just miles from the only permanent U.S. military base in Africa and even closer to China’s only foreign military base. “If the Chinese took over that port, then the consequences could be significant,” the top U.S. military official in Africa said during a congressional hearing in March.
The dispute provides a preview of what might become more commonplace along China’s ever-expanding Belt and Road Initiative (BRI), where commercial and strategic objectives mix easily. The sheer scale and complexity of many infrastructure projects guarantee that disputes will arise. That’s why China is not only pushing its projects overseas, but increasingly, it is also writing new rules that advance its interests. The implications for the rules-based order—and U.S. interests—could be profound.
One recent move that warrants more attention is China’s decision to establish two international courts that will handle disputes around projects under the BRI. The Supreme People’s Court in Beijing announced the courts in January and passed provisions that came into effect on July 1. One court is based in the southern Chinese city of Shenzhen and will handle dispute arising along the maritime “Road,” while another based in central Xi’an will handle cases along the overland “Belt.” There are plenty of outstanding questions, but the courts could eventually play a more serious role in advancing Chinese interests.
Inevitably, the BRI will continue creating disputes. Large projects are usually delayed, costlier than expected, and deliver fewer benefits than expected. When anything goes wrong, parties look for compensation. Globally, the most common reason for construction disputes, according to the consulting firm Arcadis, is failure to properly administer a contract. Next on the list are poorly drafted or incomplete claims, failure to comply with obligations, and errors or omissions in the contract, respectively. About 32 percent of joint construction ventures experience a dispute. The average dispute takes 14 months to resolve and costs nearly $43 million. Costs are highest in Asia, where they averaged $84 million per dispute in 2016. “Empirical experience would tell you that things are always going to go wrong,” says one consultant.
Disputes are even more likely because the BRI aims to traverse some of the world’s most difficult business environments. In South Asia, for example, 75 percent of countries rely on paper records for land rights, leading to confusion and competing ownership claims. Across countries participating in the BRI, the average time for resolving a commercial dispute through a local court is 621 days, according to the World Bank. Investment protections are often weak. These risks are a primary reason why many investors avoid developing Asia entirely. It is riskier areas, particularly small frontier markets, where China’s BRI is having the greatest impact.
Because disputes are so common, there are well-developed avenues for handling them. If mediation fails, parties can seek formal arbitration or litigation. The dispute-resolution process is typically spelled out in trade and investment agreements as well as individual project contracts. After Djibouti terminated its contract, DP World began proceedings in the London Court of International Arbitration. International courts in Hong Kong and Singapore have reportedly seen an increase in cases related to China’s BRI. The International Chamber of Commerce, which helped draft a key instrument in international arbitration known as the New York Convention in the 1950s, recently announced a commission that will make recommendations for responding to BRI disputes.
How will China’s new courts compete with these existing venues? The essence of its sales pitch may sound similar to the Asian Infrastructure Investment Bank (AIIB), which Beijing assured skeptics would be “lean, clean, and green.” Existing dispute resolution processes can be costly and time-consuming. Expect promises that the Chinese courts will move faster while still maintaining all the impartiality and fairness of their international counterparts. To be sure, Beijing has identified a need, but it is unclear how the market will respond to its untested solution.
Beijing’s most persuasive tool is not reason but resources. Dangling attractive infrastructure loans in many areas that lack viable alternatives, China has successfully persuaded countries to accept terms that would otherwise be difficult to swallow. The contract behind a troubled highway project in Montenegro, for example, not only gives Chinese workers the lion’s share of the work but also requires any disputes to be settled in Chinese courts. International companies are likely to find those requirements too risky. But perhaps that, too, is part of the strategy for favoring Chinese firms.
Above all, the BRI courts underscore how China is working to revise the current rules-based order. Initially, at least, the courts will focus on disputes between commercial investors rather than between states or between investors and states. But given the BRI’s tendency to expand—now stretching to the Arctic, cyberspace, and outer space since its announcement in 2013—the ambitions of its courts might grow as well. As more BRI projects break ground, China would naturally prefer to play by its own rules rather than abide by the status quo.
The implications for U.S. interests are not merely commercial but also strategic, as the ongoing dispute in Djibouti illustrates. By making itself more central in the dispute settlement process, Beijing will have more influence to gain access to, and control of, strategic assets. When projects fail, it will be better positioned to protect its own interests and shift losses onto its partners. It could also demand onerous terms for repayment. Beijing casts itself as lender and builder to all along the Belt and Road. But if its courts succeed, it could become judge and jury.
This essay was originally published by the Financial Times on July 24, 2018. It is reprinted here with permission.
Jonathan E. Hillman is a fellow with the Simon Chair and director of the Reconnecting Asia Project at the Center for Strategic and International Studies (CSIS) in Washington D.C. Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economyat CSIS.