Unlocking BRI success through the legal keyhole

An ancient Chinese proverb states that ‘preparedness ensures success’. The strategic concept, vision and implementation of the Belt and Road Initiative (BRI) will not be accomplished with a single stroke but with effort over a number of decades. Of course, any international strategy must take into account the investment environment and its political, economic, cultural, social and legal elements. 

From its official launch in September 2013, to when its underlying framework and principles were unveiled in March 2015, the BRI has grown from a grand concept into a vision attracting positive consensus and action with the support and participation of neighbours and international organisations. Moreover, its importance was manifested in two documents: one from the UN General Assembly in November 2016, and another from the UN Security Council in March 2017. Chinese enterprises invested US$51.1 billion in countries along the BRI between 2014 and 2016. In 2016, the total trade volume between China and countries along the route exceeded US$1 trillion, with China’s foreign trade totalling US$3.65 trillion. Though this situation seems encouraging, the five aforementioned elements must not be overlooked.

Political turmoil and frequent chaos haunt some regions neighbouring the BRI; and some countries still have not made specific provisions of compensation for national requisition and expropriation.

Economic objectives

Over the past five years, the average annual economic growth rate of developed countries has been 2.5%, while developing countries have outpaced them at 4.0%. China’s average annual GDP growth over the same period has been 7.2% – the highest in the world. However, many of its partner countries along the BRI have a long way to go towards adjusting their economic structures and establishing their economic development objectives.

Clearly, the world is still mired in the impact of the international financial crisis that began in 2007–2008. In January 2017, global economic growth was forecast to grow by 3.1% over the year; currently, predictions have been raised slightly, to 3.5%.

At the start of 2017, the World Trade Organization (WTO) forecast that global trade would increase by 1.7%. In May, after China had already registered double-digit trade growth, the WTO increased that forecast to 3.4% – still below the world economic growth forecast, and indicating that the world economy is still overshadowed by the ongoing impact of the global financial crisis, as well as nebulous economic development goals and a maladjusted economic structure.

Guarding against risk

The growing tendencies towards extreme nationalism in some regions, triggered to some extent by cultural homogeneity, will require particular attention. This can be overcome by clean governance that supports the growth of investment and a fair and just social environment. Law enforcement in countries along the BRI remains inadequate and needs to be updated to build fit-for-purpose, modern legal systems.

Risks are often regarded as threats to be avoided, yet a strategy of international development and co-operation of this scale will inevitably encounter risk, and we must therefore learn to guard against it. The BRI proposes the principles of extensive consultation, joint contribution and shared benefits, which could be said to be founded on the most basic principles of international law. Extensive consultation serves as an expansion of an important principle of international law – mutual respect for sovereignty. Proceeding from this principle, all countries – regardless of their size, strength or levels of development – will work together to discuss the push to complete the BRI. The second principle, that of joint contribution is grounded in the primacy of the contract. The major issue concerning the construction of the BRI is how to carry forward the spirit of contract. Finally, achieving shared benefits requires many legal principles – property rights, labour laws and intellectual property protection.

The legal element

To translate the ambitious vision of the BRI into reality, the legal system must be reconsidered as the most fundamental element, which can be built up from the following dimensions:

1. Legislation in China must be improved. The Foreign Investment Law should be enacted and made a fundamental legal tenet. In 2016, China ranked third in the world in enticing foreign investment, importing about US$124 billion of investment, a slight decrease of 1% over the previous year. China’s overseas investment in 2016 was US$183 billion, the second-highest in the world, with its overseas investment growth rate reaching 44.1%. Against such a backdrop, it is very important for China to promulgate the foreign investment law to enable Chinese enterprises, state- or privately owned, to make giant strides in keeping up with the rest of the world.

2. More negotiations on international treaties should be completed. China has, so far, signed bilateral tax treaties with 56 countries, bilateral investment agreements with 60 countries and bilateral aviation agreements with 52 countries. Those three kinds of agreements are extremely valuable – yet they are still far from enough.

3. Capitalise on the current legal framework. An important contribution to the BRI’s progress would be, for example, partnering with non-governmental associations such as the Asian-African Legal Consultative Association, which consists of 47 member states, 28 of which are countries along the route.

4. Endeavour to advance building the institution of the WTO. Many countries along the BRI are yet to join the 164-strong WTO membership. To create a multilateral system, China must push to strengthen the WTO by urging these countries to join. Once this has been achieved, it will be essential to prioritise the negotiation of the peripheral system. The most crucial current peripheral system negotiation is the Regional Comprehensive Economic Partnership (RCEP). Those taking part in the ‘10+6’ negotiation – including the 10 members of the Association of Southeast Asian Nations plus Australia, China, India, Japan, New Zealand and the Republic of Korea – have committed to completing these negotiations by the end of 2018. The success of RCEP negotiations could reap benefits for the implementation of the BRI, its ‘six corridors’ and ‘5+15 port constructions’. Trilateral negotiation between China, Japan and the Republic of Korea over a free-trade agreement can also play a leading, exemplary role in the development of the BRI.

5. Dispute settlement. Four controversies plague Chinese enterprises ‘Going Out’. The first is the controversy over contract law. Risks here can be managed by finding a means of dispute resolution and the ability to guard against risks. The second controversy is protection of intellectual property rights. The third is labour law-related disputes, and the fourth is property law-related disputes. On the one hand, to resolve these disputes, we could resort to appropriate law, accounting and auditing firms. On the other – especially if disputes among enterprises arise – the 1958 New York Convention and the 1965 Washington Convention should be studied fully to extract complete awareness of successfully resorting to arbitration. 

Some commentators have argued that the global legal system can be divided into a common law and a civil law system. However, no two countries have the same legal system. To this end, as an investment country, the most important means for China’s enterprises to ‘Go Out’ while preventing risk is to gain the most thorough understanding of the status quo, structure and content of the laws of destined countries.

The first step for the BRI is to establish a sound legal environment that will serve as a bedrock and holds the key to controlling elements in the political, economic, cultural and social environments.

This article is part of The IFF China Report 2018, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.