Over the last few decades China has not only become Africa’s largest trading partner, but is its biggest bilateral lender. In the last 15 years, trade between China and African nations reached $282.1 billion (in 2023).
Out of these numbers, most of the exports to China were supplied by South Africa, Angola and the Democratic Republic of Congo; while Nigeria remained the largest importer of Chinese goods. Various bilateral contracts and treaties have been entered into between China and African states to access Africa’s vast natural resources and strategic infrastructure.
Today, Chinese companies are involved in 31% of African infrastructure contracts. This has largely been fuelled by China’s Belt and Road Initiative (“BRI”), which aims to revive the old trading routes- the Silk Road (by land) and the Maritime Silk Route. Since the inception of the BRI in 2013, China has funded several mega-projects, such as railways in Kenya and ports in Djibouti and Nigeria.
However, several Chinese infrastructure projects in Africa have garnered criticism for being debt traps. Several countries accuse China for pursuing the “debt trap diplomacy”, whereby it creates project-loan terms designed in a manner that prevent contracting parties to repay their debt and eventually accept reduced concessions or high economic tariffs. The enforcement of these obligations are often through gunboat diplomacy and international arbitration instead of litigation in African courts.
The Chinese Investment Model
As part of its debt trap diplomacy, it is observed that Chinese administration provides loans to sustain infrastructure projects like BRI but seizes strategic assets of such countries if they are unable to clear their debts.
Former Secretary of State of US Rex Tillerson stated China’s strategy fosters dependence through unclear contracts, predatory loans, and corrupt dealings that burden nations with debt and erode their sovereignty, hindering sustainable growth.
This approach, coupled with political and fiscal pressures, jeopardizes Africa’s natural resources and undermines its long-term economic and political stability, resulting in increased debt and minimal job creation in most countries
The above can be noted in several complaints raised by several African countries and their citizens. Kenya is one of the leading examples of Chinese debt-tactics. In 2022, the people of Kenya opposed to China funded projects, such as the Nairobi Expressway, claiming that the projects are secretive, high costing and debt creating.
This project is specially criticised for charging high tolls from Kenyans which are payable in dollars. The revenue collected from expressway tolls would go to China Road Bridge Corporation (CRBC) for 27 years until the debt was paid off. Interestingly, the CRBC has been debarred by the World Bank in 2009 for engaging into corrupt practices in the Philippines.
Additionally, it is noted that the Kenyan Government struggles with repayment of debt related to Chinese funded construction projects and Beijing has been known to reject applications for deferment of debt obligations.
On a similar note, in 2021 the Kenya Airport Authority was forced into negotiate with a Chinese firm China National Aero-Technology International Engineering Corporation, which purportedly demanded Sh22 billion (approximately USD 38.6 million) for termination of a contract to construct the second terminal in Jomo Kenyatta International Airport.
As of 2023, China holds ownership or operational control over ports and terminals situated in nearly 100 locations across more than 50 countries, encompassing diverse geographical regions.
These facilities are strategically positioned along crucial international waterways. Predominantly, the investments have been executed through Chinese state-owned entities, thereby establishing China as the principal operators of ports integral to global supply chains. China officially acknowledged the construction of a military base in close proximity to the Chinese-operated port of Djibouti, giving it some military advantage as the port was situated mere six miles away from a United States military base within the same jurisdiction.
The Contract Trap
Through disbursement of large development loans under unilateral contracts, China has been known to arm-twist recipient countries by abusing its dominant position. In addition to geo-political pressure tactics, one weapon in its arsenal has been the threat of international arbitration.
While most of the contracts concluded between Chinese State-Owned Entities and African nations are highly confidential that bar borrowers from revealing the terms of the agreement or even the existence of debt, public records and studies shed some light on the macro-patterns of contract structuring and practice.
Chinese lending agreements contain unique commercial clauses structured in a manner that unfairly maximize its commercial advantage. A noteworthy clause is China’s versions of cross default clause, which entitles the lender to terminate and claim full and immediate repayment when the borrower defaults its other lenders, especially when any action is averse to China’s interests in the borrowing countries. This is in stark contrast with traditional cross-default clauses, which allow lender to terminate the contract if the debtor fails to fulfil its obligation under different contracts with the same lender.
Other additional clauses include termination of diplomatic relations with the borrowing party on default, and even cancellation of contract in case of significant law or policy changes in the borrower’s country, despite the lender possessing significant influence in policy changes. It is anticipated that China’s insistence on its domestic governing laws, coupled with the aforementioned contract structuring mechanism and gunboat diplomacy would make countries hesitant in instituting arbitration against China even when valid claims exist.
Instances like the Hambantota port case in Sri Lanka come to mind where the inability to meet repayment obligations for a loan associated with a BRI project aimed at the development of the strategically significant Hambantota port resulted in the necessity to concede a 99-year lease on the port to Chinese entities.
While commercially, the foreclosure on the Hambantota loans represents a customary recourse by the creditor, however, in a geo-political sense, this highlights the ceding of control over a pivotal national seaport to foreign entities. In essence, this is a glorified form of post-modern colonialization by contracts.
China’s Double Standards on Arbitration
China has signed and ratified the Washington Convention on Settlement of Disputes between Investors and Host States, 1965 (also known as the ICSID Convention). This provides Chinese investors the option of commencing international arbitration under the ageis of the ICSID Centre in Washington DC, without having to first litigate any dispute before the local courts.
Additionally, there is anecdotal evidence to suggest that some of the disputes are resolved through arbitration conducted under the ageis of local Chinese arbitral institutions like China International Economic and Trade Arbitration Commission (CIETAC) which has seen a huge increase in arbitrations involving foreign parties.
While China has been a signatory to ICSID since 1991, it has featured as a Respondent in only 3 cases and a Claimant in only 2 cases. In contrast, African states have been a Respondent in over 20 cases.
This indicates that despite criticism of abuse of dominant position, China has been successful in dissuading nations from suing its entities by carefully employing treaties and contracts that give preference to investor-rights over the rights of the host states. Additionally, unilateral terms built into contracts and gunboat diplomacy ensure that claimants are effectively dissuaded from initiating arbitration against China and its state-owned entities.
Even where arbitration awards are passed against China, it has seldom respected the same and has used all available legal tricks to avoid liability. Some common defences in China’s kitty include a reliance on the absolute theory of state immunity and rejecting enforcement of awards through the New York Convention by relying on the “commercial” exception, as seen in a case against Nigeria, where Nigeria’s motion to dismiss a Chinese investor’s action to enforce a $55 million arbitral award was not granted by the U.S. District Court due to the “commercial” exception in the New York Convention, 1958.
The South China Sea Arbitration provides yet another insight into China’s tactic to evade arbitration. Despite a UNCLOS tribunal being constituted to decide maritime boundary issues between China and the Philippines, China refused to participate.
In its final ruling against China, the Tribunal noted that the major elements of China’s claim—including its nine-dash line, recent land reclamation activities and other activities in Philippine waters—were unlawful. However, China reacted negatively to the ruling, refused to abide by it and till date maintains that it is “null and void” on grounds of national immunity.
Conclusion
China’s expanding economic influence in Africa, particularly through its Belt and Road Initiative, has raised concerns about the nature of contracts and their subsequent impact on the involved nations. The debt trap diplomacy, characterized by opaque contracts, predatory loans, and strategic asset seizures, has left African countries grappling with increased debt burdens and minimal economic benefits.
hina’s double-standards regarding international arbitration, with its emphasis on confidentiality and unique commercial clauses is enabling it to misuse its dominant position to its commercial and geo-political advantage.
(pmldaily.com)