Allies side with China and join the Asian Infrastructure Investment Bank
Summary: China founded its own multilateral financial institution, similar to the IMF or World Bank, called the Asian Infrastructure Development Bank (AIIB). America opposed the formation of the AIIB on the grounds that transparency and good governance could not be assured. In March, most of America’s allies, throughout Europe and Asia, with the exception of Japan, opted to join the AIIB, over the US’s objection. Definitely a miscalculation and diplomatic defeat for the US. Maybe not a home run for China.
America has been humiliated. Her allies stabbed her in the back and sold out to China. And China has just bought a huge amount of influence on the world stage.
Those are just a few of the assertions that have been made in the wake of the events of the past month relative to the Asian Infrastructure Investment Bank (AIIB), a pet project of China’s that America opposed. Though there is a kernel of truth in each of those assertions, the reality of the situation is far less dramatic.
AIIB intended to help Asian countries develop
Putting China’s capital to work to the benefit of Asia (and trade with Asia)
Let’s start with a review of the basics. The AIIB will be an international financial organization similar to the World Bank, the International Monetary Fund, and the Asian Development Bank, except that while the preceding organizations are dominated by the US (and Japan in the case of the ADB), China has cast itself as founder and leader of the AIIB. The US has opposed the creation of the AIIB, stating that it is unnecessary due to the existence of the aforementioned organizations and that China is not qualified to lead such an organization. Over the past month, starting with the UK and including Germany, France, Italy, Australia, and South Korea, just about every major ally America has, except Japan, announced they would join the AIIB. Reportedly America’s allies acted contrary to America’s wishes with hardly any consultation or advanced warning for America. While “humiliation” might be a bit of an overstatement, it is fair to say that such a public and widespread split between America and her allies on a diplomatic issue like this is fairly unusual.
As we try to figure out how this happened to America and what the implications are, the following points are worth considering.
The world is used to doing business with China
The US underestimated the extent to which the world has already adjusted to China
Although China is actually still relatively poor (per capita GDP less than one-fifth of the US), its size and tremendous growth over the last three decades has resulted in the following. First, most countries in the world, both their governments and businesses, are quite accustomed to doing business with China. They buy from China, sell to China, invest in China, and negotiate with China regularly. Secondly, China is already a major exporter of capital around the world. China is the world’s leading holder of US Treasury Bonds. China has made major investments in natural resources around the world, from Australia and Canada to Africa and South America. Chinese direct investment in the advanced economies, including both corporate and real estate investment, began growing substantially a few years ago. Most countries in the world, and every state in the US, has some sort of effort or program aimed at attracting Chinese investment. As such, when the US staked out its position on the AIIB, it perhaps did not give enough weight to the fact that countries are already fairly comfortable with China.
Standards and transparency are not new risks
The US’s objections are obstacles that others think can be overcome
The US’s main objection to the AIIB is that China, given its record relative to democracy and governmental transparency, would not apply the same standards of governance to the AIIB as have been adopted by other international lending organizations. This concern is not entirely unreasonable. All emerging markets suffer from weakness in the rule of law. China is no exception. But again, countries around the world are accustomed to this risk when dealing with China. Despite this risk, companies from the US and all of her allies have poured capital into China. Though there have been problems for many companies, doing business with China has, for the most part, grown easier and more predictable over time. Most observers would also agree that the more China integrates with the global economy the more incentive it has to play by the same rules as everyone else. Certainly the fact that China has complied with all WTO rulings against it would be a good example. Relative to the AIIB, China has already signaled that, despite being the institution’s leading investor, it will not ask for veto power and will work according to standards that all can accept. So while it is reasonable to be concerned about standards, it is not unreasonable to think those concerns can be overcome.
The US dragged its feet so China acted
Emerging nations feel under-represented at multilateral institutions so China acted on its own
Based on their existing rules, institutions like the World Bank and the IMF do not permit emerging economies like China and India with much of a role. Proposals have been made to give emerging economies more influence in the existing organizations. Over the years the US has delayed consideration of those rule changes with the most recent delay coming from the Congress which has failed to ratify changes that the Obama administration has accepted. It is possible that China would have proposed the AIIB anyway. But ignoring China’s appeal for a greater role in other institutions certainly didn’t decrease the likelihood that China would pursue the AIIB against US wishes.
When it comes to international investing, there is no guarantee of success or influence
China and the AIIB will face the same challenges that have hampered the US, IMF, and WB
While we don’t have time to get into the details here, the fact is that the World Bank and IMF have received as much or more criticism for being ineffective as they’ve received accolades for doing good. Plus, if you asked Americans whether they think America’s leadership of global financial institutions has helped America pursue its objectives, would more than 10% respond positively (and could that 10% provide factual support for their conclusion)? International investing, whether it is government sponsored or not, isn’t easy. China began investing heavily in overseas energy and natural resources six or seven years ago. A Chinese government economist recently estimated that 80% of those investments have lost money due to operational problems and over paying. China has invested heavily in Africa and has had to endure numerous attacks and kidnappings of its own citizens in Africa from those who oppose China’s presence. Backlashes and resistance to China’s presence have been also been seen in Vietnam, Sri Lanka and other countries. America knows that investing in emerging markets can be very tricky. China is learning that lesson now. There is a tendency for countries to love you before the money arrives and to then ignore or resent you after the money has been spent. Plus, China has produced quite a few “bridges to nowhere” over the last decade or so during its own infrastructure spend spree. There is no guarantee that China’s international infrastructure projects will be successful.
One more small step along China’s rise
The US has to get used to China’s growing influence
America is far more economically and technologically advanced than China. It is politically freer and more stable. That is beyond debate. But China has made tremendous progress and, despite current headwinds, is likely to continue to do so. America continues to have more influence in the world than any other single country. But China’s influence is growing along with its economy. The AIIB situation seems to be a case in which the US underestimated China’s ability to influence other countries. As a practical matter the impact of this misjudgment by the US will not be very significant. The US won’t lose its position in the world over night. But times are changing. China is rising. The US would do well to calibrate its diplomacy accordingly.