2.1.1. The formal and substantive rule of law

Scholars often divide the rule of law into a formal and a substantive rule of law: The formal rule of law is alleged to be value-neutral and can apply to any political system. It will not assess the content of law (Raz, Reference Raz2009, p. 211; Craig, Reference Craig1997, p. 468). Thus, a formal approach to the rule of law will reject that the rule of law can be used to assess whether a law, which is compatible with the substantive and procedural rules of a constitution, can be considered illegitimate. The substantive rule of law claims that not all law can be accepted and will often include human rights and democracy as relevant elements of the rule of law (Tamanaha, Reference Tamanaha2018, p. 15; Craig, Reference Craig1997, p. 477). These differences in approaches to the rule of law are also reflected in ENP and BRI MENA policies, leading to uncertainty and an increase in transaction costs.

As I have mentioned elsewhere (Andersen, Reference Andersen, Martinico and Wu2020, pp. 107–8), the rule of law contains some basic components to ensure its function: transparency and predictability, access to justice, and equality.

2.1.2. The multilevel dimension of the rule of law

The rule of law protects the individual in the vertical power relationship between the state and the individual: the state has the power to regulate the conduct of the individual but cannot exercise that power beyond the limits of the law, and the individual can challenge the state if the individual rights, including due process, contractual rights, or other legal expectations are impaired by the state or by any other party. In international law, the rule of law must be understood differently. In traditional legal theory, the power relationship between states has a more horizontal nature where no state can impose its rules on another state. In contrast to national political systems, international law does not, at least formally, have institutions with the power to regulate states unless states have consented through treaties.

An international rule of law serves various functions. An empirical study of the state expectations of an international rule of law demonstrated that states are looking for a rule of law that can provide (1) non-arbitrariness, (2) consistency, and (3) predictability (Arajärvi, Reference Arajärvi2021, p. 175).

Although the international rule of law may provide a framework to secure the function of the law between states, the question is whether it also reaches into the relationship between the state and the MENA business. Scholars disagree as some suggest a formal type of international rule of law (Chesterman, Reference Chesterman2008, p. 342), while other scholars take a substantive approach that includes, inter alia, human rights (McCorquodale, Reference McCorquodale2016, p. 296).

In respect of transparency and predictability, the international system of law may be seen as fragmented and incomplete (Koskenniemi and Leino, Reference Koskenniemi and Leino2002, p. 556). The fragmentation concerns the different sectors of international law, like WTO law, human rights law, and environmental law. These sectors are regulated by different sector-specific treaties and particular principles of law, and they can potentially be in conflict with no clear superior authority. Constitutional theories of international law, on the other hand, see international law as a complete system (Petersmann, Reference Petersmann2007, p. 529; Stone Sweet, Reference Stone Sweet2009, p. 621).

In respect of access to justice, there are problems for individuals to access the courts. For example, if a MENA business has expectations that a state will comply with international law of relevance for its market activities, the question is whether the MENA business can use international or national courts. Generally, businesses cannot use the international courts to enforce international law, i.e. locus standi is for states, not individuals,Footnote ⁸ with a few exceptions, like the Human Rights Courts, the Human Rights Council, and the International Centre for Settlement of Investment Disputes (ICSID).Footnote ⁹ The MENA business must instead rely on the national courts’ acceptance of applying international law. National courts have different approaches, and legal bases, concerning the applicability of international law in the domestic system (Crawford, Reference Crawford2019, p. 45). Similarly, the EU courts have different approaches to WTO law in contrast to their approach to general international law (Andersen, Reference Andersen2022c, p. 550).

The lack of access to international courts for the MENA business might also lead to inequality under the law between the state and the individual, unless the MENA business can directly or indirectly make a claim against the state for violating the law.

Finally, the human rights component is more difficult to trace in an international setting. Although the component referred to all the above referenced international treaties, the translation of human rights from an international level to a national—or EU—level is not particularly clear. Where the outset of the international dimension concerns the horizontal relations between states, and where the national concerns the vertical relations between the individual and government, the idea of human rights in the horizontal setting seems misplaced: a state does not have human rights. Nevertheless, it does not imply that in theory, overall human rights principles cannot have a constitutional status where they are not only relevant from a national constitutional level, but also through higher ranking norms at the international level (Petersmann, Reference Petersmann2007, p. 529; Stone Sweet, Reference Stone Sweet2009, p. 630), and where they might be directly applicable in the national systems.

For a MENA business operating on global markets, it must go through a minimum of three different levels of the rule of law: (1) the home-state of the MENA business where it manufactures the goods, (2) an international level of the rule of law about access to sell the goods on a foreign market, and (3) the rule of law in the state of the export market where the buyer is located.

3.2.1. Overall WTO rule of law components

There are two rule of law dimensions concerning the WTO: (1) the first concerns the WTO and the rule of law within the WTO system; (2) the second concerns the legal requirements that WTO law imposes on the WTO members to provide rule of law in the national systems.

3.2.2. Relationship between WTO law and other international law

The legal expectations of businesses regarding market access under WTO law may fall short considering the broader context of international law. Overlaps and conflicts can arise between different sectors of international law, and varying rules within international organisations can increase legal uncertainty. The same legal issue between states may sometimes be addressed by different international organisations. Here are two examples:

• The Swordfish cases: The EU filed a case against Chile in the WTO, claiming that Chile’s ban on unloading swordfish in Chilean ports violated WTO law.Footnote ³⁸ Concurrently, Chile filed a case against the EU before the International Tribunal for the Law of the Sea, alleging that the EU violated its obligations under UNCLOS by not ensuring the conservation of swordfish in fishing activities by vessels under EU member states’ flags in the high seas adjacent to Chile’s exclusive economic zone.Footnote ³⁹ The cases were eventually discontinued as the parties reached an agreement (Orellana, Reference Orellana2001). However, had the cases proceeded and the respective dispute settlement institutions reached incompatible decisions, it would have highlighted a clear conflict between the two systems of international law, thereby increasing legal uncertainty (Andersen, Reference Andersen, Martinico and Wu2020, p. 115).

• In the case Brazil vs Retreaded Tyres Footnote ⁴⁰ there was a potential institutional and legal conflict between WTO law and MERCOSUR law. Brazil had imposed a ban on the import of retreaded tyres. Uruguay, a fellow MERCOSUR member, challenged Brazil before the MERCOSUR Arbitral Tribunal, claiming the ban violated MERCOSUR law as it constituted a trade restriction. The MERCOSUR Arbitral Tribunal ruled in favour of Uruguay, and Brazil complied by amending its law to allow the import of retreaded tyres from MERCOSUR members while maintaining the ban for other countries. The EU then filed a complaint against Brazil in the WTO, arguing that the ban violated WTO law. Brazil defended the ban, citing the need to protect human health due to the presence of disease-carrying mosquitoes in retreaded tyres. Brazil also argued that it was obligated to discriminate between MERCOSUR and WTO members to comply with the MERCOSUR ruling. The AB found that the MERCOSUR ruling was not a justifiable reason under the chapeau of Article XX of GATT 1994 for discrimination between MERCOSUR and WTO members, as the MERCOSUR ruling was unrelated to the human health policy objective of Article XX(b) of GATT 1994.Footnote ⁴¹ The question is whether the AB with its decision takes priority over other international trade courts and whether it ranks WTO law higher than MERCOSUR law. The AB stated that there was no conflict between WTO and MERCOSUR law, nor between its decision and the MERCOSUR ruling, as Brazil had not used the human health argument before the MERCOSUR Arbitral Tribunal. The AB noted that Brazil could have invoked Article 50(d) of the Treaty of Montevideo, which provides similar exceptions as Article XX(b) of GATT 1994 but chose not to.Footnote ⁴² Thus, the case before the MERCOSUR Arbitral Tribunal cannot be directly compared with the one before the AB.Footnote ⁴³

These examples illustrate how different international legal frameworks can intersect and potentially conflict, leading to increased legal uncertainty for businesses. Not all overlaps lead to conflict between WTO law and other international law.Footnote ⁴⁴ There might in a treaty be provided a hierarchy between the systems, or there might be solutions that can be inferred from the system itself. In case of conflict with the UN Charter, the UN Charter prevails.Footnote ⁴⁵ In addition, it follows from the security exemptions in WTO law that if WTO members comply with Security Council Resolutions, they will not violate WTO law.Footnote ⁴⁶

One area of interest is the relationship between WTO law and human rights. Certain human rights, however, do not need any defence under WTO law if they qualify as jus cogens, i.e. peremptory norms of public international law.Footnote ⁴⁷ Protection against slavery is an example of such a norm.Footnote ⁴⁸ A state that complies with its primary obligations under peremptory norms cannot be held responsible for wrongful acts under public international law.Footnote ⁴⁹ Human rights that do not qualify as jus cogens are more difficult to protect in WTO law. None of the WTO treaties refer to human rights. However, they may to some extent be protected by WTO members through, for example, the use of the exceptions to the trade principles in Art. XX of GATT 1994. However, the use of Art. XX of GATT 1994 to human rights is not settled in practice but finds some support in the literature (Marceau, Reference Marceau2002, p. 753; Andersen, Reference Andersen2015, p. 383).

Despite these potential solutions to some of the overlaps between WTO law and other international law, the picture is nevertheless fragmented due to the uncertainties about these relationships. A MENA business cannot solely rely on expectations under WTO law in its trade with businesses abroad. Other international law and its potential conflict with WTO law must be taken into consideration.

3.2.3. Overall WTO transaction cost considerations

The trade reviews in the WTO system have a function of improving institutions of relevance for trade. That also means it can facilitate the improvement of the rule of law. Even though the general rule of law number of MENA states has been going downwards for the past 10 years, there are many geopolitical factors behind that decrease—not only the rule of law decreases in the WTO with the dysfunction of the AB. However, it does not mean that the rule of law impact of the WTO is perfect from a business perspective.

Transparency and predictability: Uncertainties about WTO law lead to an increase in costs of consultation on rights and obligations on the global market. For example, the unclear relationship between WTO law and other international law lowers the expectations of the free trading system if other values prevail. Such uncertainties increase the costs of decision-making and bargaining costs of the contract. Furthermore, as the example mentioned above: anti-dumping duties can have a negative impact on the competitiveness of the market. It will impact the contract between a MENA seller and the importer in another state. The cost structure and price strategies must be reconsidered by the contracting parties, which raises the transaction costs between the parties.

Access to justice: The transaction costs of the global market increase due to the unclear enforcement mechanism to claims based on WTO law. The WTO system does not provide the solution that must be found in the national systems or through private dispute resolution arrangements. However, the latter is not possible if the dispute concerns a state unless there is a contractual issue where the state is involved with the MENA business.

Equality: The different access to resources may also imply that MENA businesses can have difficulties in persuading their governments to file a case against another WTO member for the violation of WTO law.

Human rights: It is not part of the WTO vocabulary and as such not a part of WTO law. However, states may use human rights as justification for imposing trade restrictions on MENA states. Such restrictions may be justified under the exceptions in Art. XX of GATT 1994. It is unsettled in practice. This uncertainty in WTO law raises the transaction costs: it can become a factor in the negotiations with the other business party, and it can be necessary to change operations in the production of goods to comply, for example with a certain level of working conditions. Otherwise, the other contracting party might consider other partners unless the practices between the parties have become so institutionalized, for example, where information flow is easy, and, for example through asset-specific investments, which are tailored for the two parties, that the transaction costs through these developments are lower than the potential negotiation costs concerning these new uncertainties.

3.3.1. The ENP

In 2004, the EU launched the ENP. The aim is to provide support to neighbouring countries, including Southern Neighbourhood countries, which include, inter alia, Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Palestine, Syria, and Tunisia. It aims at improving market access for goods and services from the neighbouring countries into the EU.Footnote ⁵⁰ These market access opportunities are specified in bilateral or multilateral agreements.Footnote ⁵¹ Market access of third country goods brings them into free circulation in the EU, which implies that they are treated in the same manner as EU goods on the EU internal market after the customs clearance.Footnote ⁵²

The specific rules concerning the support, including funding, are regulated in the European Neighbourhood Instrument Regulation.Footnote ⁵³ Funding through the regulation must be in compliance with the EU values, which under the regulation are liberty, democracy, the universality and indivisibility of, and respect for, human rights and fundamental freedoms, and the principles of equality and the rule of law.

The increased levels of conflicts in MENA states, the global threat of terror, and the problems of COVID-19, resulted in a renewed EU policy agenda for the region.Footnote ⁵⁴ It includes, inter alia, an economic and investment plan for the Southern neighbours, joined forces to combat climate change, and a renewed commitment to the rule of law, human and fundamental rights, equality, democracy, and good governance. Actions are proposed in the following key policy areas: (1) human development, good governance, and the rule of law; (2) strengthening resilience, building prosperity, and seizing the digital transition; (3) peace and security; (4) migration and mobility; and (5) green transition: climate resilience, energy, and environment. However, as already noted, the rule of law level has generally been declining in MENA states. The policy actions can be difficult to pursue due to the factors mentioned above about the current geopolitical situation, internal wars and conflict, and then the operational problems of changing mindsets and institutions towards the rule of law values.

3.3.2. The EU and the rule of law

What is meant by an EU rule of law? The EU has the rule of law as a core value with binding legal force for the EU institutions and the member states.Footnote ⁵⁵ In Regulation 2020/2092, the Parliament and the Council have—based on EU case law—specified the content of the rule of law:

The EU rule of law provides, first of all, the formal requirements: law is predictable and legislative procedures are transparent, and the execution of the law by public authorities follows due process; there is easy access to an effective system of justice, which implies independent and impartial courts; and citizens and public authorities are equal under the law, which follows from the requirement that public powers must act within the constraints of the law, i.e. cannot be above the law, and arbitrary exercise by public powers is prohibited. As mentioned above, some of these elements are touching on substantive aspects of the rule of law: it is connected to (1) values of democracy and (2) fundamental rights. That could imply that the interpretation of the legal concept of the rule of law must be done in light of the values of democracy and fundamental rights.

The European values of rule of law, democracy, and human rights are part of the EU’s policies in the international community. Art. 21(1) of the TEU provides:

It is worth noting that Art. 21(1) is not a legal requirement. Rather, the EU institutions “shall be guided” by the fundamental values of the EU. If the EU institutions could only make international agreements with states that follow the EU values, the ENP would be impossible. Thus, a lower level of the rule of law in MENA states can be accepted as long as the rule of law improvements take place. As several MENA states rank low on the WJP rule of law, the ENP assumption is that it can help improve that status. However, there are political transaction costs: a state does not change from one day to the other into a rule-of-law-based system. There must be a general trust from the citizens in the judicial organs. That requires a long-term investment in independent judges that are not open to bribes as well as a safe system where a court has the power to reject an unconstitutional act from the government/lawmaker without the fear of retaliatory action from the government.

There is generally a strong level of transparency and predictability in the EU legal system. There are open procedures in the legislative actions and all case law is published. However, there are two problems: Although it is rare, it does happen that a member state—or a court of a member state—refuses to comply with EU law, i.e. there can be a conflict between the systems of EU law and national law leading to uncertainty about which of the conflicting rules to apply.Footnote ⁵⁷ The second problem concerns the relationship between EU law and international law. International law is an integral part of EU law. Nevertheless, even though UN Security Council resolutions are binding, the ECJ has made it clear that if such a resolution violates the EU fundamental rights, these rights will prevail. ^{Footnote 58} Thus, if there is a conflict between international law and the EU Charter of Fundamental Rights, the ECJ will favour the EU Charter over international law. These potential conflicts between different systems of law can raise the information costs of the MENA business involved in trade on the EU markets as law becomes unpredictable.

Access to justice is generally also highlighted in the EU internal system. For a MENA business, there can be some expectations from the judicial systems and access to justice before the courts of EU member states. The requirement of independence is strongly protected by the ECJ (Andersen, Reference Andersen, Nielsen and Olsen2022a, p. 95). However, it does also have problems:

There have recently been issues about the independence of the national courts in some member states. In particular, Poland has been subject to criticism by scholars, judges, and politicians for the attempt by the Polish government to gain more control of the courts. That limits judicial independence and may imply reduced access to justice in cases against the government if the government manages to either intimidate or control the courts. This has led to cases before the ECJ where the ECJ found the Polish laws regulating their courts incompatible with EU law (Andersen, Reference Andersen, Nielsen and Olsen2022a, p. 101). There are also problems about access to justice in cases concerning WTO law in the EU system. As mentioned above, international law is an integral part of EU law. The ECJ has stated that it is also directly applicable. However, that is not the case of WTO law unless EU secondary law makes explicit reference to WTO law or the EU legislative institutions have intended to give WTO law direct applicability (Andersen, Reference Andersen2022c, p. 556). The implication is that a MENA business cannot make a case against decisions of the EU institutions in WTO matters that affect the trade relations between EU businesses and foreign businesses unless one of the exceptions applies. These problems can raise the enforcement and dispute resolution costs of the MENA business if, for example, the contract with the EU partner does not clearly allocate the risk associated with potential breaches of WTO law, which cannot be tried through the EU judicial system, or the parties have not sufficiently made asset specific investments with each other. Furthermore, there can be additional bargaining costs if it is necessary to find business partners in other states due to the trade restrictions in the EU.

The equality condition implies that all are equal before the law. The ECJ has recognized the principle of equality since the early days of the EEC and the Coal and Steel Community,Footnote ⁵⁹ and it has consistently referred to the principle in its subsequent case law.Footnote ⁶⁰ The principle is now enshrined in Art. 20 and Art. 21 of the Charter. In the relationship between government institutions and individuals, the ECJ has not hesitated to make preliminary rulings against national governments.Footnote ⁶¹ Furthermore, the ECJ has also invalidated EU secondary law, like decisions against individuals if the EU institutions have not provided a sufficient legal basis or violated due process.Footnote ⁶² However, there are institutional problems if an individual wants to challenge EU secondary law: there are rigid locus standi rules and case law that make a challenge of EU secondary law very lengthy as they must go through the national courts and the preliminary ruling system unless the individual can demonstrate a direct and individual concern. Individuals often fail that test (van Wolferen, Reference van Wolferen2016, p. 915). The implication is that a MENA business must consider these temporal challenges of potentially invalid EU secondary law in the risk allocation negotiations with the EU partner.

Human rights: Art. 21 of the TEU provides that the European values of rule of law, democracy, and human rights are part of the EU’s internal and foreign policies. In the relationship between international law and human rights, human rights prevail. The EU promotes democracy in MENA states, which is not always a successful policy (Direkli and Ashiekh, Reference Direkli, Ashiekh and Özsağlam2022, p. 109). ‘Democracy’ can be associated with ‘equality’ as it concerns equal access to the judicial system as well as equal access to the political system. Furthermore, EU importers are under a due diligence requirement to identify adverse human rights impacts from the supply chain.Footnote ⁶³ That includes MENA producers. That may lead to additional negotiation costs with the EU partners concerning the standards for monitoring the MENA producers’ compliance with human rights. There can also be costs associated with demonstrating to their EU partners that the MENA business complies with minimum standards of human rights in their production processes, including the implementation costs of integrating human rights standards into the business procedures. This may raise monitoring and managerial costs in MENA businesses.

3.4.1. The BRI

In 2013, the President of China, Xi Jinping, initiated the BRI. The aim is to establish a Euro-Asian land bridge and a 21st century Maritime Silk Road by improving, inter alia, the infrastructure along the Belt and Road states, which facilitates trade along the Belt and Road. The BRI is highly significant for MENA states, and several MENA states participate in the BRI (TRT World Forum, 2018). The core principles of BRI are that the principles of the UN Charter must be followed, which implies expectations that all BRI projects must conform to the principles of securing international peace and security, but also that they conform with a minimum degree of international human rights and justice.Footnote ⁶⁴ It must also be expected that disputes are settled peacefully in line with the UN Charter. Furthermore, by referring to the UN Charter, it must be expected that compliance with public international law is followed in general, and the Five Principles of Peaceful Coexistence are followed.Footnote ⁶⁵ The BRI principles include inclusiveness, and that the market will have a decisive role in the allocation of resources with a primary role of enterprises and where governments perform their due functions. The question is what abiding by market rules implies. Markets will have a decisive role, but is that only in international relations or does it include the Chinese internal markets as well? Abiding by market rules will naturally lead one to consider the free market ideas: resources should be allocated to their most efficient use. Although improved infrastructure can improve trade, provided that the regulatory barriers to trade are reduced or eliminated leading to economic growth in Belt and Road states (Cui and Song, Reference Cui and Song2019, p. 41), there are also concerns. One concern is China’s overcapacity of goods that potentially can oust competition in the market. A second concern is the lack of transparency in the corporate structures and state interference in business decisions. Furthermore, even though infrastructure may be improved, there exist various market-related problems that also need to be considered, including improved regulatory transparency, recognition of shared product standards, and facilitating shared information about legitimate shipments (Johns et al., Reference Johns, Clarke, Kerswell and McLinden2018, p. 5). Finally, the principles of the BRI contain seeking mutual benefits for all parties involved.Footnote ⁶⁶ The problem with the BRI is the level of mutual benefits. Even though the BRI will abide by market economy principles, the question is whether it is more related to facilitating China’s overcapacity reaching new shores (Zhang, Reference Zhang2016) and whether the concept of “market economy” is equally understood between the Chinese government and MENA businesses.

These overall BRI policies provide a soft framework of elements that may be included in the bilateral or multilateral treaties made with respect to Chinese investments in the Belt and Road facilities with other states. The next sub-part takes the BRI into question and the rule of law.

3.4.2. The BRI and the rule of law

The BRI does not have a clear, institutionalized shape based on a constitutional and legal setting. It is a flexible structure based on dialogue with China at its centre. That does not imply that the rule of law developments within the BRI cannot be considered. There are political statements and contractual and economic realities of the progress of the BRI that can point in the direction of the rule of law traits of the BRI. The rule of law traits build on Chinese and international approaches to the rule of law. A Chinese rule of law must be seen in the context of Chinese political and economic history that is well explained elsewhere. In the 1970s, the leader Deng Xiaoping wanted to introduce a rule of law as part of China’s economic reforms that included more openness towards the West. The debate centred on the type of legal system: the rule of law or rule by law where the latter, according to Perenboom can be defined as “a form of instrumentalism where law is merely a tool to be used by the state to control others without imposing meaningful restraints on the state itself” (Peerenboom, Reference Peerenboom2002, p. 64). Ultimately, China adopted a rule of law and gave it a constitutional basis in a socialist state with a high degree of public ownership.Footnote ⁶⁷ In 2021, the CPC issued its five-year plan on legal awareness (State Council – The People’s Republic of China, 2021). In the plan, the rule of law should be strengthened. It concerns a socialist legal system with Chinese characteristics with the constitution in the centre. It also includes a strengthened regulation of the exercise of discretionary powers by the authorities as well as the improvement of the judicial system and the strengthening of human rights (The People’s Government of Fujian Province, 2021). It aims to strengthen the rule of law between the state and the individual. It is also a part of attracting interests of international businesses’ engagement in China (Kwan, Reference Kwan2021, p. 60).

Even though the rule of law has been promoted in China, it still has severe problems. As mentioned above, China also ranks low on the WJP rule of law index. The first problem relates to transparency. Even though China pursues a transparency policy, it might not easily adapt into the political and judicial system. For example, the Supreme People’s Court of China (SPC) uses the promoted transparency to solve the agency problems between the judicial approach by local courts and the overall guidelines of the SPC (Chen, Liu and Tang, Reference Chen, Liu and Tang2022, p. 727). Even though courts are supposed to make judgements public, 60% of lower courts do not disclose their judgements in cases concerning corporations, and they are selective about which judgements they decide to publish. There is a tendency not to publish judgements concerning state-owned enterprises (Liu et al., Reference Liu, Wong, Yi and Zhang2022, p. 222). That leads to transparency problems for foreign businesses if they cannot rely on legal expectations from the lower courts based on precedents from the SPC. Furthermore, the corporate structures of Chinese companies can be difficult to see through. The problem for foreign businesses in competition with Chinese businesses is whether the Chinese businesses are supported by the Chinese government in a concealed manner (Froese et al., Reference Froese, Sutherland, Yul Lee, Liu and Pan2019, p. 251). That makes it difficult to assess whether state subsidies in reality take place. These uncertainties are reflected in the EU’s trade policies towards China, in particular in the EU anti-dumping policies where the EU considers China as a distorted market economy (see, e.g. EU Commission (2017)).

The SPC is a promoter of transparency by also issuing policy opinions on the interpretation of BRI contracts, like the P.R.C. Foreign Investment Law, to “lawfully and equally protect the lawful rights and interests of Chinese and foreign investors, and to create a stable, fair, and transparent business environment under the rule of law” (Finder, Reference Finder2020). These policy opinions are naturally important in respect of providing legal certainty—or at least legitimate expectations—in the Chinese judicial system. However, these policies do not change the overall political impact of the political system in China: even if the policies are followed by lower courts, there is the risk that judgements can be overturned by the political system (see right below). This raises the transaction costs for MENA businesses: they must consider the information and search costs to ensure that the Chinese partner is reliable and cannot easily overturn a contract.

The second concerns access to justice. It is part of the policies of the SPC to address these issues. Several specialized courts are established, like the China International Commercial Court, and there are specialized IP courts. In addition, the SPC has in its policy documents highlighted a clean Belt and Road free of corruption. Furthermore, there is a recognition and enforcement of foreign civil and commercial judgements (Du and Yu, Reference Du and Yu2020). However, it requires that the courts be independent, where there still exist problems with independent courts in China (Du and Kong, Reference Du and Kong2020, p. 898). The issue of independent courts in China is highly debated (Zhao, Reference Zhao2019, p. 132). These debates are a result of the special constitutional and institutional structure in the Chinese political systems: the courts have a degree of judicial autonomy while being political agents under the overall supervision of the Chinese Communist Party (CCP) (Li, Reference Li2019, p. 22). For example, the SPC issues policy opinions related to the BRI to support the government BRI policies, like the policy paper mentioned above (Finder, Reference Finder2020), instead of issuing policy papers that may conflict with government policies. In addition, the government has, in its One Country, Two Systems policies, interfered in the judiciaries in Hong Kong. In the mask ban case, the High Court of Hong Kong found that a mask ban was unconstitutional. The Standing Committee of China’s National People’s Congress claimed that it was the only authority to declare the mask ban unconstitutional. The Appeal Court partly overruled the High Court judgement (Pang, Reference Pang2022, p. 627). In addition, the South China Sea issues have also led to questions about the relationship between international courts and state power. China is bound by the Arbitral Tribunals established under the United Nations Conventions on the Law of the Sea (UNCLOS).Footnote ⁶⁸ However, in Philippines vs China, ^{Footnote 69} which concerned, inter alia, exclusive rights to resources in certain parts of the South China Sea, China rejected the mandate of the Arbitral Tribunal as it, according to China, handled territorial issues outside its jurisdiction. In addition, China claimed that the dispute should be handled through negotiation as stipulated in bilateral agreements between China and the Philippines. Nevertheless, the proceedings continued, and in 2016, the Permanent Court of Arbitration issued an arbitration award that mostly favoured the Philippines’ arguments. China rejected the award and upheld its argument that the Arbitral Tribunal had acted beyond its mandate as the case concerned territorial issues beyond the scope of UNCLOS.Footnote ⁷⁰ The Chinese argument has found support in the literature, i.e. that the Arbitral Tribunal acted beyond the scope of UNCLOS (Wu and Zou, Reference Wu and Zou2016). But it leads to the question about the risk if a state unilaterally can reject an international court or tribunal if the particular issue is of sensitive character. And a question about how to design the international system of law and enforcement when there are only limited checks on international courts.

In addition, access to justice does not only concern directly the access of businesses involved in the BRI. It also concerns internal issues. For example, it is a problem for global competition if a minority group is under working conditions that resemble forced labour. There have been such allegations against the Chinese government in respect of the Uyghur citizens (Xu et al., Reference Xu, Cave, Leibold, Munro and Ruser2020, pp. 27–28). If the Uyghur citizens do not have proper access to a judicial system to make a claim based on inhuman conditions, it violates the rule of law, damages international competition, and leads to questions about the compatibility of China’s conduct with its policies of improved human rights. The influence of the CCP on the judicial system is a problem from a rule of law perspective as there cannot be a guarantee of independent judicial institutions, in particular, if a business wants to challenge governmental decisions. These problems raise the costs of transactions for MENA businesses. There is the risk of corruption costs if it is necessary to navigate through a political system without an independent judicial institution. Furthermore, there are the costs of dispute resolution through alternative means if the judicial system in China is not working properly.

Equality. The BRI reference to the Five Principles of Peaceful Coexistence reflects a policy based on equality between the participating states. According to former Vice-minister for Foreign Affairs of China Liu Zhenmin, The Five Principles of Peaceful Coexistence contain four core values: the concept of sovereignty, the concept of peace, the concept of win-win progress, and the concept of justice. Related to the latter, former Vice-minister Liu Zhenmin states:

The statement here indicates a principle of equality between states. However, there are two points to make:

1. 1) What does equality between states imply? The equality may be in respect of all states complying with their obligations and duties under the law. However, it does not imply political or economic equality. China is exercising its economic power to gain access to MENA countries. Furthermore, as mentioned above, China has demonstrated its power in the South China Sea.

2. 2) It is not equality between the state and the business. Foreign businesses have generally been reluctant to make litigation in China against governmental agencies due to the uncertainty about the relationship between courts and the state as well as the fear of retaliation (Santoro, Reference Santoro2009, p. 113). Furthermore, in disputes between foreign businesses and Chinese businesses, the government may interfere with the foreign businesses to protect the Chinese interests (Li and Alon, Reference Li and Alon2020, p. 63). The MENA businesses can instead—by following Williamson’s theory of transaction costs and incomplete contracts (Williamson, Reference Williamson1979, p. 233)—secure their investments in their contractual relations with Chinese businesses through strengthened informal relations by making transaction-specific investments with high sunk costs to signal to the Chinese contract partner that by not fulfilling the contractual obligations, the MENA business will suffer an economic loss. However, that model requires that the Chinese counterpart show similar signals. These risks can be reduced if the rule of law is strengthened. Thus, MENA businesses should, in their screening of potential business partners on the market, consider these transaction costs.

Finally, there is the human rights dimension. Where the separation between the rule of law and human rights in the EU system is not clear, China separates human rights from its official position on the rule of law. However, there has been an increased focus on human rights in China since 1997 (Li, Reference Li2021, p. 114), and Art. 33 of the Constitution protects human rights (State Council – The People’s Republic of China, 2019). However, the implementation and enforcement of these rights have been subjects of significant international scrutiny and criticism. There are problems concerning the protection of ethnic minority rights and problems concerning free speech and religious rights.Footnote ⁷¹ Human rights in China are people-centred in pursuit of people’s happiness and security, where economic prosperity is on top of the list (Tiezzi, Reference Tiezzi2021). MENA businesses may not have to consider the human rights dimension as part of the supply chain in transactions with Chinese businesses compared to the situation with EU businesses. However, the downside is that the MENA business’s own human rights expectations, for example, state surveillance and the right to privacy, can be problematic, in particular, if trade secrets are revealed. That may lead to reputational damage towards other business partners, like a lack of confidence in the development of technology. Also, there can be problems with Chinese partners’ approach to human rights, which may have a negative impact on a MENA business. Such issues raise the search costs to get Chinese partners that comply with human rights standards.