Selecting an Investor-state Arbitration Mechanism for Disputes Arising Under China's Belt and Road Initiative Projects

• Citation: Vol. 34 No. 2
• Publication year: 2020

Selecting an Investor-State Arbitration Mechanism for Disputes Arising Under China's Belt and Road Initiative Projects

Yuwei Liu

SELECTING AN INVESTOR-STATE ARBITRATION MECHANISM FOR DISPUTES ARISING UNDER CHINA'S BELT AND ROAD INITIATIVE PROJECTS

Introduction

Investor-state arbitration (ISA) is a popular way to resolve investment law disputes and has become a common component of bilateral investment treaties (BITs) and other international investment agreements.¹ As China promotes its cooperation among the countries in Asia, Europe, and Africa under its Belt and Road Initiative (BRI), an inter-state investment plan led by the Chinese government, an increasing number of ISA cases among Chinese investors and the countries along the ancient silk roads are foreseeable because the investment in those countries are potentially risky.² Also, the BRI is an investment plan between states signed under memorandums of understanding (MOUs), which do not have legal binding power.³ There is no treaty that specifically targets BRI investments, and there are limited numbers of BITs between the BRI participants.⁴ Because the features of the arbitration rules might affect the outcome,⁵ it is important for BRI participants to incorporate the proper arbitral forum for ISAs in future treaties.

This Comment begins with a brief description of the Belt and Road Initiative and investor-state arbitration. This Comment then compares the disadvantages and advantages for having arbitration under three institutions: the International Centre for Settlement of Investment Disputes (ICSID), the U.N. Commission on International Trade Law (UNCITRAL), and the China International Economic and Trade Arbitration Commission (CIETAC). Some advantages of ICSID and UNCITRAL include the institutions' familiarity with Chinese law, incorporation of Chinese legal features, and low costs. Although UNCITRAL and ICSID are widely applied and included in most BITs between China and BRI countries, Chinese investors might choose CIETAC to resolve the investment disputes that arise under BRI projects.

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I. Belt and Road Initiative and the Risks Under BRI Investment Projects

The BRI, also known as One Belt One Road or yi dai yi lu, is a massive trade and infrastructure project with an ambitious effort "to improve [regional] connectivity and cooperation on a transcontinental scale."⁶ The idea of the BRI was raised in September and October 2013, when Chinese President Xi Jingping visited Central Asia and Southeast Asia.⁷ The name of the plan has its origin from the Silk Road because it mimics the ancient Silk Road, which traversed Eurasia and the seas between China and Africa.⁸

The BRI consists primarily of the Silk Road Economic Belt and the New Maritime Silk Road.⁹ The Silk Road Economic Belt refers to the infrastructure and investment plan along the ancient Silk Road that starts from China and ends in Europe. The New Maritime Silk Road refers to the cooperation plan along the Indian Ocean, from Southeast Asia to East Africa.¹⁰ However the scope of the initiative is not limited to those areas, rather it is claimed to be open for all countries and international organizations for engagement.¹¹ So far, seventy-six countries from Asia, Africa, and Europe have participated in the BRI.¹² These projects are a "coherent enterprise of unprecedented scale: $4 trillion dollars of promised investments ... representing 70 percent of the world's population, 55 percent of its GNP, and 75 percent of its energy reserves."¹³

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The BRI is comprised of various cross-border, bilateral, and multilateral agreements.¹⁴ The BRI first put large emphasis on the industries of energy and infrastructure. The scope of the BRI then expanded to trade, manufacturing, tourism, and the Internet.¹⁵ Chinese state-owned entities—the companies in which the Chinese government is a dominant stockholder—together with the Chinese banks, are the most active participants and investors in BRI projects.¹⁶ The Reconnecting Asia Project, a research project led by the Center for Strategic and International Studies, tracks $90 billion of Chinese funding for BRI railway, road, and port construction projects from 2014 to 2017.¹⁷ The American Enterprise Institute and Heritage Chinese Global Investment Trackers report a total of roughly $340 billion Chinese BRI investment across all sectors from 2014 to 2017.¹⁸ A senior Chinese official at the National Development and Reform Commission, which is a top economic planning body, said "China would spend a further $600-800 billion more over the next five years on outbound investment," with a large proportion of the money going into BRI projects.¹⁹

Geographically, most BRI investment has gone to Southeast Asia and South Asia.²⁰ However, Africa, South America, and Europe are also benefiting.²¹ Marc Merlino, Citibank's Global Head of the Global Subsidiaries Group, stated that there are "multiple levels" of potential opportunities for investors, especially infrastructure and activities surrounding major projects under the plan.²² Merlino further stated, "It's the opportunities for micro infrastructure beyond the core projects. All the knock-on effects ... if building a railroad, there's going

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to be a lot of goods and services moving. You need warehouses ... distribution capabilities. That's where private investors are getting more involved."²³

While there are huge opportunities involved in BRI investment, weak governance and compliance, undefined or poorly executed rule of law, and corruption—which are not uncommon in the countries where large, debt-financed, long-term infrastructure projects are located—increase the risk of default on loans and payments, or even damages to physical assets.²⁴ According to one study, sixty-three countries covered under the BRI projects are at the risk of "debt distress," which means they have high possibilities of not being able to repay the loan.²⁵ Another study finds that eight BRI countries, including Tajikistan, Kyrgyzstan, Laos, Pakistan, and Mongolia, have a particularly high risk of default.²⁶ For example, a Chinese corporation built Hambantota International Port in Sri Lanka under the BRI project but Sri Lanka failed to repay the Chinese loans that built the port.²⁷ Although media often used the Sri Lanka port as an example to illustrate that the Chinese government purposefully puts countries in debt to control these countries, Chinese investors suffered from the defaulting of the loan as well.²⁸ Chinese investors not only lose money but also lose bargaining power and sometimes even need to renegotiate the terms for the projects that have already started.²⁹ For instance, Malaysia recently put off a rail project under the BRI and renegotiated to reduce the cost to one third of the original loan.³⁰

Also, most of the projects that involve BRI investors are large-scale projects, which require a long time to finish and intense capital investments.³¹ According to a study, the large-scale infrastructure investors are "particularly vulnerable to regulatory changes that can undermine their profitability."³² More than half of the investor-state disputes involve utilities, constructions, and real estate

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sectors.³³ Scholars also concluded that investors are less likely to invest in the countries that provide weak property rights protections, which bring high uncertainty for the investors.³⁴

Finally, the level of protection the investment laws in the BRI countries provide to the foreign investors vary.³⁵ According to the analysis, most of the investment laws in the BRI countries do not include an explicit provision for fair and equitable treatment.³⁶ Turkey and Russia have particularly low levels of protection for foreign investors under all the provisions.³⁷ Given the high likelihood for disputes between investors and states under the BRI as well as minimal protections for investors under the current legal mechanism, it is essential to find an effective way to reduce potential risks and protect investors moving forward.

II. Overview of Investor-State Arbitration

Investor-state arbitration (ISA) is the mechanism that solves disputes when an investee-government makes discriminatory regulations or policies against foreign investors including expropriating foreign investors' property without compensation, denying foreign investors' justice in criminal, civil, or administrative adjudicatory proceedings, or declining to transfer foreign investors' capital.³⁸ When a foreign investor "feels that its rights under the treaty been violated, it can bring a complaint for redress before an international arbitration tribunal, normally composed and administered under the auspices of a prominent arbitral institution but occasionally created ad hoc."³⁹ Investment arbitration permits a foreign investor to sue the country that receives the investment and guarantees the investor will have access to independent and qualified arbitrators who can solve the dispute and render an enforceable award.⁴⁰ The foreign investor is thus allowed to bypass national jurisdictions,

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which may be biased or lack independence, to resolve the dispute in accordance with different protections afforded under international treaties.⁴¹

Investment arbitration involves "public international law grafted onto a substructure of private commercial arbitration," which means a host state must give consent before foreign investors are able to initiate investment arbitration.⁴² Consent to ISA takes many forms, including provisions to agree to have ISA in investment contracts, domestic investment law, and bilateral investment treaties (BITs).⁴³ A BIT, a type of an international investment agreement, is signed by two countries and lists out the standards of protection for investors from one country to invest in the other country.⁴⁴

Since the 1960s, there have been approximately 3000 BITs, which cover most of the countries in the world.⁴⁵ A BIT not only...