While China has concluded investment treaties and other international investment agreements with the vast majority of its Belt and Road Initiative partners, political understandings, policy guidance, and MoUs frequently continue to shape the on-the-ground legal architecture of many projects. This creates a hybrid environment where informal diplomatic mechanisms and formal legal frameworks operate in parallel and where the interactions between them can create real legal risk for host countries. To navigate it well, governments need to understand all three layers: the hard law foundation, the soft law overlay, and the distinctive role played by Chinese SOEs. 

The Hard Law Ecosystem: Treaties and contracts

Traditional international investment governance is anchored in investment treaties, domestic investment laws, and binding contracts. For host countries participating in the Belt and Road Initiative, it is important to understand these instruments before layering on the soft law features of the Initiative.

Investment treaties are binding international agreements that set out the rules governing investment flows. They typically grant investors substantive protections—such as through contentious fair and equitable treatment clauses, provisions protecting against expropriation without compensation, and national treatment, which requires host states to treat foreign investors no less favorably than their own. They also grant procedural rights to foreign investors, including the right to bring claims directly against host states through investor-state dispute settlement (ISDS) for introducing measures impacting their investment. This includes for introducing general laws or policies, such as new labor laws or environmental standards. 85 to 90% of the investment treaties currently in force are considered “old-generation” and are at urgent need for reform. Encouragingly, we see a growing number of reform initiatives across national, regional, and international levels. However, the powerful vested interests who profit from keeping the status quo, together with reform coherence challenges, remain significant obstacles to lasting, positive change. 

Many investment treaties with China were concluded in earlier waves of treaty-making—some dating to the 1980s and 1990s—when states had less awareness of how broad investor protections could constrain public interest regulation.

Governments participating in the Belt and Road Initiative would benefit from reviewing these investment treaties and, where appropriate, pursuing reform or renegotiation to bring them into line with more recent treaty practice, including clearer carve-outs to secure space for economic, social, climate, and other public interest policies. Even where domestic frameworks are strong, an outdated treaty can still expose a host state to unexpected claims after it has adopted new regulations.

Investor-state contracts are another binding “hard law” layer at the project level, where financing, construction, and operation terms are formally agreed. A construction contract for a bridge project, for instance, might specify payment milestones, construction schedules, and a dispute resolution forum—terms that are legally enforceable regardless of what any earlier MoU said. Getting these contracts right matters enormously, and governments should not wait until the contracting stage to start thinking about their terms.

The Soft Law Ecosystem: MoUs, policy frameworks, and creeping obligations

What makes the framework for the Belt and Road Initiative distinctive is its combination of a hard law “overcoat” and a layered hierarchy of soft law instruments, rather than a single, unified legal code. This ecosystem typically includes two main types:

• Non-binding MoUs: Broad political commitments that signal intent but lack specific enforcement mechanisms. A “Statement of Intent” to cooperate on a bridge project may contain no price tag, feasibility requirements, or timeline—and yet it can create a political expectation that the project will proceed with Chinese partners who are already informally identified. These documents may set the stage for more binding commitments downstream.
• Guiding principles and policy frameworks: High-level Chinese policy documents—such as the 2021 Guidance on Overseas Investment, Cooperation and Green Development—set expectations for SOEs without being legally binding on host states. An SOE might, for instance, reference the Green Investment Principles when presenting an environmental management plan, even though compliance with those principles is not contractually required. The result is a kind of soft accountability that does not translate into hard legal obligations—unless the host state later acts in reliance on those commitments.

A central challenge for developing countries engaging with large-scale infrastructure projects is what has been termed “creeping obligations”—the phenomenon by which early, non-binding political commitments gradually harden into binding commercial obligations. This dynamic is not unique to any single investment partner, but it is a structural risk whenever soft law instruments such as MoUs are used as the entry point for major projects. In the context of the Belt and Road Initiative, this risk is heightened where the host state also has concluded investment treaties with China. Without strong legal oversight at the MoU stage, governments may find themselves effectively committed to specific contractors, financing terms, or project structures before they have completed feasibility studies or environmental assessments.

That said, this dynamic is not unique to the Belt and Road Initiative. It mirrors patterns seen in investment contract negotiations more broadly. Governments should therefore set up early-stage internal coordination mechanisms, such as inter-ministerial committees that bring together ministries and agencies responsible for finance, planning, sectoral regulation, and project oversight. Such committees help consolidate negotiating positions, avoid contradictory signals to investors, and ensure that technical, financial, and legal considerations are aligned from the start.

The Multifaceted Identity of Chinese SOEs

The Belt and Road Initiative also stands out for the central role of Chinese SOEs, which often operate in multiple capacities at once: commercial actors seeking profit and market share, policy instruments executing industrial and strategic objectives of the Chinese government, and diplomatic tools strengthening bilateral relationships. A Chinese state-owned port operator might function as a commercial partner today, while its strategic decisions are shaped by state-level directives to prioritize specific trade routes over local profitability.

This multifaceted identity can create asymmetries in bargaining power. When a host government negotiates with a Chinese SOE, it may be unclear whether it is engaging a commercial partner or effectively be negotiating with the Chinese state itself. An SOE negotiating a power plant contract might simultaneously reference its commercial track record and its alignment with China’s national development strategies, making it difficult for the host government to distinguish corporate from state-backed motivations
 

The Belt and Road Initiative also stands out for the central role of Chinese SOEs, which often operate in multiple capacities at once: commercial actors seeking profit and market share, policy instruments executing Beijing’s industrial and strategic objectives, and diplomatic tools strengthening bilateral relationships.

 

For instance, most of China’s centrally administered, non-financial SOEs are supervised by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). SASAC performs the state-investor function on behalf of the State Council, the Chinese government’s highest decision-making body, and is mandated to preserve and increase the value of state capital. Senior leadership appointments at central SOEs are primarily handled by the Chinese Communist Party's Central Organization Department. However, even where central SASAC supervision applies, SOEs also retain separate legal personality and are not automatically equated with the Chinese state. 

In short, these SOEs have a dual identity which poses distinct practical legal implications. Consider a hypothetical: a Chinese SOE builds a major highway in a developing country. The SOE later falls short of the environmental standards agreed in the contract. The host government seeks to enforce those standards and withhold payment. At that point, a fundamental legal question arises: is the SOE acting as a commercial entity subject to the contract terms, or does its relationship with the home state, China, alter the legal analysis?

How this question is resolved has direct consequences. If the SOE is treated as a commercial actor, the host state’s remedies are primarily contractual—suing the SOE for breach of the project agreement. But if the SOE’s conduct is attributable to the Chinese state under international law, the same facts may also trigger state responsibility under international law. Conversely, where a host state takes action against an SOE whose conduct could be attributed to China, it may itself face counterclaims under an applicable investment treaty, brought by the SOE or China directly, or more generally, face other diplomatic repercussions. 

Above all, these pathways are not mutually exclusive, and the same facts may give rise to parallel contractual and investor-state proceedings. The legal pathway available depends entirely on how the SOE’s role has been characterized in the project documents—and whether state approvals, guarantees, or directives have been recorded.

The practical upshot for host states is straightforward: project documents should clearly specify the legal role of the SOE—whether it is acting in a sovereign or commercial capacity—and any state approvals, guarantees, or directives that could create or support treaty-level attribution should be carefully documented and reviewed before signature. This is not a mere technical housekeeping; it is a fundamental element of managing legal exposure in Belt and Road Initiative projects.

The Transparency Gap

The challenge posed by the opacity of agreements between the parties is common to other forms of cross-border investment, just as it is to investments under the Belt and Road Initiative. However this challenge carries heightened governance implications here given the scale of the Belt and Road Initiative and the wide variation in host-country regulatory environments.

Many contracts under the Belt and Road Initiative contain expansive confidentiality clauses, a pattern documented in research on Chinese overseas lending. They include “silent clauses” that prohibit the host country from disclosing the existence, terms, or even the amount of the loan, and "No Paris Club" clauses that prohibits the borrowing country from including that specific debt in any Paris Club restructuring. This lack of transparency has several practical consequences:

• Erosion of oversight: Legislatures and audit institutions cannot fully assess the scale of sovereign guarantees or contingent liabilities.
• Limited participation: Civil society and local communities are side-lined from environmental and social impact processes.
• Debt governance risks: Hidden fiscal exposures can accumulate and later manifest as debt crises.

What Host Countries Can Do

The hybrid nature of the Belt and Road Initiative creates unique governance challenges that cannot be addressed through any single instrument. It is the combination of soft political commitments, opaque contracting practices, and the multifaceted role of SOEs that can leave host countries exposed. What makes the Belt and Road Initiative distinctive—and what requires a response going beyond general investment advice—is this layered interaction between instruments that were designed to be non-binding and those designed as binding legal frameworks.

Domestic law remains the most powerful safeguard. As IISD’s Rethinking Investment Treaties and Rethinking National Investment Laws reports both emphasize, strong domestic frameworks form the foundation of sustainable investment governance. The Belt and Road Initiative context only confirms this: host states cannot rely on the non-binding character of MoUs or the goodwill of SOEs to protect them from hard legal consequences.

The hybrid nature of the Belt and Road Initiative creates unique governance challenges that cannot be addressed through any single instrument.

 

General recommendations (applicable to all investment):

1. Robust pre-investment assessments: Require technical, financial, and legal assessments before MoUs are signed—not after. This matters especially in the Belt and Road Initiative context, where early political commitments can harden into binding obligations faster than governments anticipate.
2. Standardized contracting tools: Develop or adopt sector-specific model contract clauses for use across investor-state agreements. This means leveraging existing model frameworks and adapting them to the specificities of Belt and Road Initiative projects—not reinventing the wheel, but ensuring that standard protections on transparency, local content, labour rights, environmental safeguards, and dispute resolution are built in from the start.
3. Cross-sectoral alignment: Ensure that every Belt and Road Initiative project is legally tied to national development plans, environmental statutes, and fiscal frameworks. Inter-ministerial committees that coordinate early and consistently—across finance, planning, sectoral regulation, and legal affairs—are essential to avoiding the contradictory signals and overlooked linkages that can create legal exposure later.
4. Review and reform investment treaties: Outdated investment treaties with China can expose host states to investment claims even where domestic frameworks are robust—because investors can rely on treaty protections regardless of domestic law. Governments should audit their treaty portfolio, identify provisions that unduly restrict their space to regulate in the public interest, and pursue reform or renegotiation where needed. Termination should also be considered as an option where reform is not feasible.

Recommendations specific to the Belt and Road Initiative:

1. Review MoUs for potentially binding language: Governments should conduct a systematic review of existing and proposed MoUs for the Belt and Road Initiative, screening for language that creates expectations, commits to specific partners or financing arrangements, or could later be relied upon as the basis for legal claims. Where possible, MoUs should include standard clauses explicitly clarifying that they create no binding legal obligations and do not constitute consent to investor-state arbitration. Legal counsel should be involved before signature, not after.
2. Clarify SOE status in contracts: Project contracts with Chinese SOEs should include express language specifying whether the SOE is acting in a sovereign or commercial capacity, and should document any state-level approvals, guarantees, or directives that connect the SOE’s actions to the Chinese state. This record-keeping matters for managing legal exposure in both directions: it protects the host state if it needs to establish state attribution, and it manages the risk of the SOE later claiming state immunity from contractual claims.

The flexibility of the Belt and Road Initiative can be a significant asset for developing countries—but only when paired with strong domestic systems that prevent creeping obligations and ensure transparent outcomes aligned with sustainable development. By reinforcing domestic legal frameworks, institutionalizing early-stage coordination across ministries, standardizing contracting practices, and taking specific steps to manage the distinctive risks of MoUs and SOE involvement, host states can strengthen their negotiation power and ability to engage with the Belt and Road Initiative on their own terms.

Over the past decade, Laos experienced slow but steady economic growth, driven by hydropower, mining, and infrastructure investments. But since the COVID pandemic, the picture has darkened: high public debt, inflation, and currency depreciation have strained government finances and squeezed household purchasing power.

Overly generous tax incentives, intended to attract foreign investment, have often been abused by investors, reducing government revenue and leaving fewer funds available for essential public services like education or health care.  

In 2023, responding to a request from Laos' Investment Promotion Department (IPD) and building on years of collaboration, IISD stepped in to support the government in revising the country's Investment Promotion Law. This law serves as the primary legal framework for attracting investment, including through tax incentives granted to businesses.  

Through the reform of incentive design and administration, the government seeks to promote investment that contributes to sustainable economic growth while strengthening revenue mobilization. 

A Necessary Reform for the Country’s Financial Stability 

When IISD experts began working with Laos in 2023, the country's tax-to-GDP ratio sat at just 13%, one of the lowest in the region. This ratio, which measures a country's total tax revenue as a percentage of its economic output, tells you how much of a nation's wealth the government can actually collect to fund public services.

IPD officials pinpointed those generous incentives as one of the key sources of revenue leakage.  

Laos has made important efforts to leverage tax incentives as a tool to promote investment. But implementation challenges have emerged over time. In some cases, investors benefited from long-term tax holidays, especially those undertaking sectoral and zonal-based investments like agriculture and related value chains, who enjoyed import duty incentives for the entire duration of their projects. 

While these incentives were intended to stimulate sustainable development, they reduced government revenue without consistently delivering the full range of expected economic benefits such as sustainable job creation, technology transfer, productivity improvements or economic spillovers to local businesses.

In other instances, import duty relief schemes intended to support domestic production were used in ways that did not fully realize their intended objectives, with some imported goods being re-exported to neighbouring countries without contributing to local value addition. These experiences highlight the importance of refining the design and monitoring of incentive schemes to ensure that they maximize economic development outcomes while safeguarding fiscal sustainability. 

A report by the State Audit Organization, presented to the National Assembly, highlighted weaknesses in the administration of tax incentives, including gaps in compliance, monitoring, and project documentation. In some cases, incentives were granted without sufficient accountability measures to ensure that projects delivered meaningful economic benefits or justified the need for tax support. 

These findings underscored the importance of strengthening oversight, clarifying eligibility requirements, and improving inter-agency coordination to ensure that tax incentives contribute effectively to national development goals.

Supporting Investment Incentive Reform in Laos 

IISD has been working with the IPD since 2016, initially providing advice on revising the country's national model Bilateral Investment Treaty (BIT). In November 2023, the IPD approached IISD with a new challenge: help rationalize tax incentives in the Investment Promotion Law. 

The team analyzed the 2016 Investment Promotion Law, producing a commentary that highlighted the limited effectiveness of tax incentives as an investment promotion tool. The analysis included recommendations on tightening these incentives if the government chose to continue using them, along with a regional perspective comparing Laos' approach with similar economies.  

By June that year, a new draft Investment Promotion Law was presented to Parliament. The IPD again requested support to gather international and regional experience on tax incentive reform to strengthen their proposal. The law was passed in June 2024 and came into force in August 2024. 

Making Investment Policy Work for Sustainable Development 

Laos' government has made important improvements to its Investment Promotion Law to ensure that tax incentives are better targeted, more transparent, and aligned with national development priorities. The main changes include the following: 

1. Narrower, More Focused Eligibility Criteria 

The list of eligible business activities has been narrowed from broad categories like agriculture or health care to more specifically define the types of services or operations that qualify for tax incentives. 

For example, instead of simply listing "agriculture," the law now specifies activities such as “clean agriculture”, “industrial crop cultivation”, or “environmental and biodiversity conservation”. This increased precision aligns incentives with the government’s strategic priorities: encouraging investment in environmentally sustainable practices, supporting value-added production, and ensuring investors’ compliance with social and environmental standards. At the same time, it reduces opportunities for the misuse of incentives.   

2. Defined Time Periods for Incentives

The duration of tax incentives has now been capped at an initial period of 10 years, replacing the previous system where incentive periods were undefined. This reform aims to avoid long-term, unrevised revenue loss. Renewals for investors who reinvest profits will now be subject to sectoral compliance checks, in contrast to the previous law where renewals were granted automatically. 

3. A Strengthened Investment Screening Process 

New language has been added to enhance due diligence and screening of investment projects before granting tax incentives. Investors are now required to meet specific obligations and obtain approvals before moving forward with investment concession agreements. This screening process helps ensure that only compliant and strategically aligned projects benefit from fiscal support. 

4. Increased Monitoring and Accountability 

To improve transparency, investors must now submit financial reports to the Investment Promotion Division during and after receiving tax incentives. This allows the government to track whether incentives are delivering their intended benefits, assess their value, and identify any misuse. It also supports evidence-based policy-making for future incentive reforms. 

5. Removal of Automatic International Arbitration 

Provisions that previously allowed investors to automatically take disputes related to investment incentives to international arbitration have been removed. This change reduces legal and financial risks for the government while still allowing negotiated pathways for arbitration where appropriate. It also strengthens national legal systems by requiring disputes to be addressed through domestic legal and administrative processes before any escalation to international arbitration, thereby ensuring greater government oversight and control over how such disputes are managed and escalated. 

6. Adjustment of Investment Requirements 

Previously, low and uniform minimum investment thresholds allowed large-scale projects including agricultural and land-intensive investments to qualify for tax incentives without sufficient differentiation or risk-based safeguards. The reform introduces adjusted investment requirements that take into account the size, scale and nature of projects, including their potential environmental and social impacts. This approach ensures that incentives are more proportionate and better targeted, while applying stronger safeguards where fiscal exposure and sustainability risks are highest. 

A Sustainable Path Forward

These reforms strengthen fiscal policy while promoting responsible investment that delivers tangible benefits for the country.

Moving forward, IISD remains committed to supporting the country in implementing these reforms, ensuring that investment policies contribute to long-term economic stability and shared prosperity. As Laos continues its journey toward fiscal sustainability, this policy change stands as a testament to the power of evidence-based decision making and international collaboration.