Looking at MCC through legal lens

AN ISSUE OF HOT DEBATE for each government in power, Millennium Challenge Compact (MCC) has attracted much attention not only from people interested in politics and diplomacy but also lawyers. As a lawyer who also studied international relations and diplomacy, I couldn’t resist the urge to read and analyse the MCC and write this piece. This article analyses MCC from a legal perspective while also distinguishing MCC with China’s Belt and Road Initiative (BRI) to which Nepal is already a member.

Development grants and loans are significant sources of foreign capital inflows for Nepal. While China’s BRI that Nepal accepted without much public scrutiny is a development loan, the extensively scrutinised, debated and criticised MCC program is actually a development grant. 

One reason for this stark difference in the extent of scrutiny is possibly due to the US’s reputation as the global policeman with its military presence - American boots, arsenal and bases - spread across the world. 

On the other hand China avoids noise, and instead fulfils its interest in shadows.

Despite this scrutiny, a set of clearly stated economic benefits of the MCC projects and repeated negotiations from the US side, a segment of the public and politicians are still doubtful about the MCC and impeding the program. So how do we clear doubts? To answer this, it is important we understand what MCC really is.

Section 6.4 of the MCC Agreement clearly states that it is an international agreement governed by the principles of international law. What does this mean? According to Section 4 of the Nepal Treaty Act, 1990, for any agreements to take effect as international law, the parliament must endorse such agreements. Furthermore, MCC is governed by the Vienna Convention on the Laws of Treaties 1969, therefore is not a mere bilateral agreement unlike the BRI which works under a different regime largely unregulated by international law. 

As an international agreement, both the parties are expected to fulfil the agreement with good faith. This slims down the chances of any mala fide and/or hidden intention(s) of either party - in this case the speculation surrounding the US military component vis-à-vis Indo-Pacific strategy. It is not a contention that everything international is good; however it is always a safe option when it comes to an agreement between a large power like China/US and a small power like Nepal so that the international community can easily distinguish the risk of undue influence and coercion and international law can govern such practices if they exist. 

When we look at the purpose of MCC, it is straightforward. The US seeks to support Nepal in its economic growth. It also wishes that Nepal is politically stable and prosperous, because it is beneficial to the US interests, which is clearly stated in the MCC Agreement itself. 

So suspicions looming around MCC as to why the US is pushing the MCC grant to Nepal has a simple answer. The money is not entirely free from US interest (clearly written in the text of the agreement itself under Annex-I) whereby the text presses on the importance of a politically stable and economically growing Nepal to the US. 

It is a no-brainer that an unstable Nepal would be prone to China’s influence, and MCC is therefore an effort, on the part of the US, to make Nepal stable and economically growing so that it could contain China’s influence. This, however, doesn't mean that MCC is a pretext for the US to deploy its military power in Nepal, as wrongly speculated, feared and spread by some.

Now this piece may sound like favouring the US influence and rejecting China’s, but in general, the modern international legal regime is more inclined to democratic values and transparency and adherence to international principles whereby you are aware of what is really happening, than the authoritative, largely clandestine and opaque system.

Furthering on the text of the agreement itself, one of the most overlooked provisions in the MCC Agreement is Section 5.1 whereby either party can walk out any time and terminate the treaty with a 30 days prior notice without showing cause. This is an essential guarantee to the recipient of the fund - Nepal - that if anything hidden under the compact as to the true purpose/interest of the United States emerges at any time, Nepal can walk out of the compact.

With regard to the other hotly debated aspect of MCC as to its supremacy over domestic laws and its potential threat to Nepal’s sovereignty, Section 9 of the Nepal Treaty Act, 1990 gives a straightforward answer. Given that MCC is an international agreement, in case of any conflict with Nepal's domestic laws, MCC prevails as soon as it is ratified by the parliament.

This clause provides stability in any international agreement signed by a government irrespective of what views the subsequent government holds about the agreement. This guarantee of supremacy of MCC is a part of regulatory guarantees that is common in a number of international investment agreements as well. Else wise, any agreement ratified by one government could be threatened with changes in domestic law making the whole regime of international treaties unstable and unreliable. So what is actually presented as a big threat under the MCC is in fact nothing but a normal phenomenon under international law and well accepted by Nepal's domestic laws. 

It is fitting here to note that BRI functions in a largely clandestine manner under its two-level framework - the primary agreements creating soft-law obligations and the secondary agreements creating hard-law obligations. To add, most of these secondary agreements are unavailable to the public, depriving them of public scrutiny. Further, it is not upon the recipient country to walk out of BRI loan projects. 

If disputes arise, the highly political nature of BRI agreements mean that the disputes will be subject to informal government-to-government discussions whereby the Chinese government will have considerable economic, political and diplomatic influence over countries with weaker negotiation power like Nepal. 

MCC, on the other hand, is open to the public and governed by international law for dispute settlement and offers an easy exit mechanism for both parties.

So how risky is the MCC? When compared with BRI and the numerous examples of countries such as Sri Lanka and Pakistan and a number of African countries being trapped in Chinese debts under BRI, MCC is a much safer choice for Nepal to fund its development. After all, the US is a democracy whereby the government is accountable to its public, is transparent and continuously under public scrutiny. In contrast, the sovereign loans under China’s BRI are payable with interest, opaque in nature and tucked away from any public scrutiny. 

Under the MCC, there are also efforts to ensure transparency and accountability concerning the money spent under the project(s) such as the provision for independent auditing from the US. Reading together with Section 5.3, if any misuse of funds is found, it has to be refunded to the MCC within 30 days. As a country ranking 118 out of 180 countries in the Transparency International Report 2021, this provision will alarm the wrongdoers like a noose hanging around the neck. 

To conclude, the problem with MCC is that it hasn’t been read in its true sense. Those who have read it are misleading the public into believing that MCC is about opening gates to American military interventions.

The fact, however, is that MCC promises a large sum of money that it will duly monitor to ensure proper and timely utilization in the two development areas that are clearly agreed upon in the text of the agreement. Though caution has to be taken while accepting foreign money, just because it is coming from the United States does not ipso facto make it vile.