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Jonathan E. Hillman and Matthew P. Goodman, SCRS
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In February, following a protracted dispute, Djibouti unilaterally terminated a container terminal contract with DP World, based in Dubai. The country strategically located on the Horn of Africa can offer control of the terminal to Chinese companies, who ushered in a free trade zone in the same region earlier this month. The terminal is located a few kilometers from the only permanent US military base in Africa and even closer to China's only foreign military base. "If the Chinese seized this port, the consequences could be significant," said the senior US military official in Africa at a congressional hearing in March.
The conflict provides insight into what could become more common expansion of the Belt and Road Initiative (IRB), where business and strategic objectives mix easily. The size and complexity of many infrastructure projects ensures that disputes will arise. This is why China is not only pushing its projects overseas, but more and more, it is writing new rules that advance its interests. The implications for the rules-based international order – and US interests – could be profound.
A recent decision that deserves more attention is China's decision to create two international tribunals to deal with BIS project disputes. Beijing's Supreme People's Court announced the courts in January and pbaded provisions that came into force on July 1. A court is based in Shenzhen, southern China, and will handle disputes along the sea route. Xi'an will occupy cases along the terrestrial "belt". There are many outstanding issues, but the courts could possibly play a more serious role in promoting Chinese interests.
Inevitably, the IRB will continue to create disputes. Large projects are generally delayed, costlier than expected and offer fewer benefits than expected. When something goes wrong, the parties seek compensation. Overall, the most common reason for construction disputes, according to the consulting firm Arcadis, is the failure to properly administer a contract. The next on the list are poorly drafted or incomplete claims, non-compliance, and errors or omissions in the contract, respectively. About 32% of construction joint ventures are in dispute. The average conflict takes 14 months to resolve and costs nearly $ 43 million. Costs are highest in Asia, where they cost an average of $ 84 million in 2016.
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"Empirical experience would tell you that things will always go wrong," says a consultant. Litigation is even more likely because the BRI aims to cross some of the world's most challenging business environments. In South Asia, for example, 75% of countries use paper registers for land rights, which leads to confusion and competing claims to property. In the countries participating in the IRB, the average time to settle a trade dispute in a local court is 621 days, according to the World Bank. Investment protections are often weak. These risks are the main reason why many investors avoid developing fully Asia. These are riskier areas, especially small border markets, where the IRB of China has the biggest impact.
Because disputes are so commonplace, there are well-developed ways to deal with them. If the mediation fails, the parties may request a formal arbitration or litigation. The dispute resolution process is typically set out in trade and investment agreements as well as in individual project contracts. After the termination of his contract by Djibouti DP World commenced proceedings before the International Court of Arbitration of London. The international courts of Hong Kong and Singapore would have seen an increase in China's BRI cases. The International Chamber of Commerce, which helped draft an international arbitration instrument known as the New York Convention in the 1950s, recently announced a commission that will make recommendations to respond to litigation in the United States. IRB
. places? The essence of its sales pitch may seem similar to that of the Asian Infrastructure Investment Bank (AIIB), which Beijing has ensured that skeptics would be "thin, clean and green". Existing dispute resolution processes can be costly and time consuming. Expect promises that Chinese courts will act faster while maintaining the impartiality and fairness of their international counterparts. True, Beijing has identified a need, but it is not clear how the market will respond to its untested solution.
The most convincing tool of Beijing is not the reason but the resources. Arousing attractive infrastructure loans in many areas that lack viable alternatives, China has been successful in persuading countries to accept conditions that would otherwise be difficult to swallow. The contract at the origin of a troubled motorway project in Montenegro, for example, not only gives Chinese workers the lion's share of the work, but also requires that any dispute be settled by the Chinese courts. International companies are likely to find these requirements too risky. But perhaps this is also part of the strategy to favor Chinese companies.
Most importantly, the BIS courts emphasize 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 as the BIS tends to expand – now in the Arctic, cyberspace and space since its announcement in 2013 – the ambitions of its courts could also increase. As BWI projects materialize, China will naturally prefer to play according to its own rules rather than following the status quo.
The implications for American interests are not only commercial but also strategic, as illustrated by the ongoing dispute in Djibouti. . By becoming more central to the dispute settlement process, Beijing will have more influence to access and control strategic badets. When projects fail, he will be in a better position to protect his own interests and transfer losses to his partners. It could also require onerous terms for the refund. Beijing throws itself as lender and builder to all along the belt and the road. But if his courts succeed, he could become judge and jury.
Jonathan E. Hillman is director of the Reconnecting Asia project at the Center for Strategic and International Studies (CSIS) in Washington. Matthew P. Goodman is Senior Vice President and Simon Chair in Political Economy at CSIS.
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