The Memorandums of Understanding that govern China’s Belt and Road industrial development initiative may make borrowing countries more vulnerable to unintended political influence.
The Belt and Road Initiative (the B.R.I.) is Chinese President Xi Jinping’s greatest foreign undertaking. In the B.R.I.’s nearly eleven years of existence, China has lent cumulatively $1.34 trillion to 149 countries for industrial development projects. China uses these loans to boost borrowing countries’ economies and, in doing so, further develop its foreign presence.[2] Now, however, China is at a crossroads: does the financial headache of hundreds of billions of dollars of debt outweigh the diplomatic gains China originally hoped for when executing these agreements?[3]
Many Western critics argue that China lends heavily under the B.R.I. to exert political control through “debt-trap diplomacy.”[4] Debt-trap diplomacy alleges creditor states excessively lend to low-income states—with the knowledge that the debtor countries will be unable to repay the debts—and then reduce indebted countries’ debt burdens through political concessions in “debt-for-equity swap[s].”[5] Despite the financial strain this lending strategy has had on China’s own economy, the potential for partnership and political influence seemed to make the B.R.I. too valuable to scale back. But now, with accumulating debts, China’s willingness to take such aggressive economic risks may be due to the lack of legal clarity around the B.R.I.
Instead of making B.R.I. agreements through a formal treaty, China and the borrowing country adopt a Memorandum of Understanding (MOU), which is not binding as a matter of international law.[6] This approach allows the B.R.I. to evade the complications of binding hard laws and sovereignty concerns by making frequent nonbinding soft law agreements as China reevaluates and updates its “relational contracts” with borrowing countries.[7] Legal scholars have called these soft law influences “invisible law,” which determine how China and its borrowers will resolve problems when they arise.[8]These MOUs do not fully enunciate the depth and breadth of the underlying agreements, meaning terms of the agreements may only be found by reading between the lines; however, the loan agreements are kept secret, preventing anyone outside of the negotiating parties from analyzing them, making their implications virtually invisible to all but the parties to the agreements.[9]
An emerging international legal concept that could be applied to the B.R.I. is estoppel—the principle that countries will not go back on their previous representations when those representations have induced reliance. Estoppel is a relatively new concept in international law. Prior to 1984, estoppel was limited to only territorial disputes.[10] However, in 1986, the International Court of Justice (ICJ) introduced the concept of estoppel into international law to establish jurisdiction in a case brought by Nicaragua against the United States. for the U.S.’s military activities in the state.[11] The U.S. withheld its consent to be bound by the Court’s jurisdiction because Nicaragua was not a party to the ICJ’s compulsory jurisdiction statute.[12] The ICJ found jurisdiction based on the U.S.’s acquiescence, citing to nonbinding prior reports by the ICJ involving Nicaragua, which recognized the validity of Nicaragua’s consent to jurisdiction.[13] Therefore, because of the U.S.’s previous representations to the Court and Nicaragua, the Court applied estoppel to bind the U.S., but it did so without ever directly defining estoppel.[14]
The ICJ did not discuss the ramifications of extending the concept of estoppel to matters of international law, such as resolving cases involving inconsistencies in jurisdiction and acquiescence.[15] The repercussions of introducing estoppel in the international law arena are largely unknown and highly debated. There is significant argument as to whether MOUs themselves qualify as a representation that would legally bind states through estoppel.[16] If it applies to MOUs, estoppel arguably would be the “most immediate” way MOUs can generate legal effects.[17] States who entered agreements under the pretense of unenforceability may be legally bound to their non-binding agreements.
China’s B.R.I. could be an example of the ramifications of using estoppel to give legal effect to MOUs. China has economically relied on borrowing countries through their previous representations to repay debts. If estoppel applies, states may have a legally binding obligation to meet the representations upon which they entered their MOUs. The application of estoppel poses a problem with respect to the B.R.I. as B.R.I. agreements do not fully enunciate and articulate the legal rules governing the loans; they instead reference large bodies of law to vaguely regulate state conduct.[18] Complications arise because these large bodies of law may make it difficult to ascertain the proper legal rule, or potential judicial interpretation, that would apply under each specific B.R.I. agreement.[19] China may now have the legal grounds to exploit the ambiguity of both the terms in the MOUs and the referenced larger bodies of law. Therefore, these “invisible laws” pose a particular threat to indebted countries in B.R.I. agreements because governing B.R.I. law may not only be uncertain but also hidden to borrowers.[20] If MOUs are determined to be legally binding through estoppel, B.R.I. countries may be bound by terms they did not intend, expect, or ultimately understand.
Western critics of debt-trap diplomacy fear that the economic pressure of debt has resulted in political concessions by borrowing countries; examples include responses to Taiwanese sovereignty, the global coronavirus response, and China’s geopolitical posturing.[21] Now, through estoppel, China may have legitimate grounds to impose legal pressures on B.R.I. countries at risk of defaulting. While unlikely, even the potential threat of suit may put more pressure on borrowing states to renegotiation of B.R.I. agreements in China’s favor, further increasing the risk of “invisible laws” becoming a mechanism of debt-trap diplomacy and political concessions.
Currently, it is unclear whether estoppel applies in the context of B.R.I. agreements. Because B.R.I. agreements are frequently updated, the looming threat of legal action may now be an additional factor influencing the political and economic chess match of B.R.I. negotiations. China’s growing leverage on borrowing countries will increase the risk of political concessions, shifting the international balance of power between China and the West.
[1] AFP, Photograph of Chinese flag over Taiwan industrial skyscape, in Reuters, China Tells Taiwanese to Visit ‘in High Spirits’ Despite Execution Threat, FMT (June 29, 2024, 10:17 AM), https://www.freemalaysiatoday.com/category/world/2024/06/29/china-tells-taiwanese-to-visit-in-high-spirits-despite-execution-threat/.
[2] Rachel Savage & Clare Baldwin, China Lent $1.34 Trln in 2000-2021, Focus Shifts From Belt and Road to Rescue Finance-Report, Reuters(Nov. 6, 2023, 6:31 PM), https://www.reuters.com/world/china/china-lent-134-trln-2000-2021-focus-shifts-belt-road-rescue-finance-report-2023-11-06/#:~:text=JOHANNESBURG%2FHONG%20KONG%2C%20Nov%206,from%20infrastructure%20to%20rescue%20lending.
[3] Carla Freeman & Henry Tugendhat, Why China Is Rebooting the Belt and Road Initiative, U.S. Inst. of Peace (Oct. 26, 2023), https://www.usip.org/publications/2023/10/why-china-rebooting-belt-and-road-initiative.
[4] Lee Jones & Shahar Hameiri, Debunking the Myth of ‘Debt-trap Diplomacy’, Chatham House (Dec. 14, 2020), https://www.chathamhouse.org/2020/08/debunking-myth-debt-trap-diplomacy.
[5] Michal Himmer, Chinese Debt Trap Diplomacy: Reality or Myth?, 18 J. Indian Ocean Region 250, 250 (2023), https://www.tandfonline.com/doi/full/10.1080/19480881.2023.2195280.
[6] Tom Ginsburg, The B.R.I., Non-Interference, and Democracy, 62 Harv. Int’l L.J. 40, 50 (2021), https://journals.law.harvard.edu/ilj/wp-content/uploads/sites/84/BRI-Non-interference-and-Democracy-Ginsburg.pdf.
[7] Id. So-called “hard laws” refer to formal treaties and other legislation imposing legally binding obligations on parties, while “soft laws” refer to instruments governing international relations that lack the formality and enforceability of hard laws. See Kenneth W. Abbott & Duncan Snidal, Hard and Soft Law in International Governance, 54 Int’l Org. 421, 421–22 (2000).
[8] Michael Yip, “Extraterritorial Observance”: The Invisible Laws That Compete to Govern China’s Belt and Road Loan, Harv. Int’l L.J. (Feb. 5, 2024), https://journals.law.harvard.edu/ilj/2024/02/extraterritorial-observance-the-invisible-laws-that-compete-to-govern-chinas-belt-and-road-loans/.
[9] Id.
[10] Megan L. Wagner, Jurisdiction By Estoppel in the International Court of Justice, 74 Cal. L. Rev. 1777, 1777 (1986).
[11] Id. at 1789.
[12] Id. at 1791.
[13] Id.
[14] Id. at 1792.
[15] Id. at 1789.
[16] Andreas Zimmermann & Nora Jauer, Possible Indirect Legal Effects Under International Law of Non-Legally Binding Instruments 16 (Berlin Potsdam Rsch. Grp. 'The International Rule of Law – Rise or Decline?', KFG Working Paper Series, No. 48, 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3840767.
[17] Id.
[18] Yip, supra note 8.
[19] Id.
[20] Id.
[21] Elaine K. Dezenski & Josh Birenbaum, Tightening the Belt or End of the Road? China’s BRI at 10, Found. for Def. of Democracies (Feb. 27, 2024), https://www.fdd.org/analysis/2024/02/27/tightening-the-belt-or-end-of-the-road-chinas-B.R.I.-at-10/#easy-footnote-bottom-99-200095.
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