The Belt and Road Initiative has lately been met with growing skepticism in some countries, as concerns about debt sustainability have emerged. A recent set-back is in Malaysia, where the newly elected government cancelled the construction of a major railway link between its east and west coasts. It was reported that the project owner – Malaysia Rail Link (MRL) – sent a letter to China Communications Construction Company (CCCC) suspending all work on the project. Not surprisingly, CCCC responded that it regretted the suspension and was upset and concerned about the project and its staff. Crucially, in announcing the project cancellation, the Malaysian government noted that several key details – including compensation – have to be worked out. Resolving compensation issues in a project as large and complex as this one would be difficult in general. In this case, it may be further complicated by the fact that CCCC is a Chinese state-owned company. And given the political significance of the project (and its cancellation), these challenges may impact the bilateral relationship between the two governments.
China, for its part, has foreseen the possibility of such disputes. Earlier this year, they announced plans to establish international courts in China to address trade and investment disputes in the Belt and Road projects. Notwithstanding skeptics’ fears of bias, Beijing promises that the courts will be “lean, clean, and green”.
One motivation for promoting such a legal structure might be the idea that these disputes should be treated as commercial conflicts, and not disputes that drag governments and political objectives into the mix. And the Chinese courts would be in good company to make such claims. The World Bank’s division dealing with investment disputes (ICSID), the United States Trade Representative (USTR), and others have long argued that an option that gives affected companies a legal alternative to resolve a dispute with a foreign government will mean that they don’t have to call on their home governments to intervene diplomatically in foreign countries, thus preventing a state-to-state conflict. Political motivations and foreign policy objectives will not have to be dragged into a commercial dispute. In other words, this would bring the dispute from the realm of politics into the realm of law.
While this line of reasoning certainly has a long history, there is little empirical evidence that home governments will refrain from representing the interests of affected companies in foreign markets. A new study in the journal World Development with my co-authors Geoffrey Gertz and Lauge Poulsen tested this assumption. Although we focus on US investors’ disputes with foreign governments during the late 1990s and 2000s (rather than the current Chinese disputes), the findings are striking. The data show that in our sample the United States government often involves itself in foreign investment disputes with different types of diplomatic efforts. Importantly, a company’s access to a legal dispute settlement option (through treaty-based investor-state arbitration) has no effecton the likelihood of diplomatic intervention. The US government is just as likely to intervene diplomatically when firms have access to a legal alternative as when they don’t. To put it another way, we find no empirical support that legal alternatives “de-politicize” investment disputes.
What does this mean for the current BRI disputes? The new courts may yet prove to be independent and fast. But don’t wait for Chinese companies – especially state-owned entities – to rush there at the first sign of trouble in foreign countries. Nor is it likely that the Chinese government will push firms to pursue a legal remedy if the dispute can be leveraged to gain a strategic, political, or foreign policy advantage.