Wednesday, 25 March 2015

AIIB: Washington loses campaign against Beijing

'What was he thinking?' is the kind of rhetorical question we would direct at, for example, the lazy high-school student who ended up plagiarising the historical narrative posted on the website of the Ku Klux Klan (KKK) and submitted it as a class paper on race relations in America. It was a silly idea that didn't make a lot of sense, and it wasn't going to work.


Guanyu said...

AIIB: Washington loses campaign against Beijing

Leon Hadar
25 March 2015

'What was he thinking?' is the kind of rhetorical question we would direct at, for example, the lazy high-school student who ended up plagiarising the historical narrative posted on the website of the Ku Klux Klan (KKK) and submitted it as a class paper on race relations in America. It was a silly idea that didn't make a lot of sense, and it wasn't going to work.

Which is unfortunately the kind of question we need to ask US policymakers who appeared not to make a lot of sense on many levels when they decided to launch a major diplomatic campaign against China's proposed Asian Infrastructure Investment Bank (AIIB).

Remember how American officials and lawmakers were delivering those sermons to the Chinese a few years ago, arguing that as China was emerging as a leading geostrategic and geo- economic power, it needed to take a more activist role as a "stakeholder" in world affairs? In particular, the Americans were complaining that as it was becoming one of the world's two largest economies, China should start using its financial resources to help stabilise the global economy.

Indeed, the Americans were pointing to the role that they had played in the aftermath of the Great Depression and World War II when Washington helped establish the foundations of the so-called Bretton Woods system, including by creating and providing most of the funding for the World Bank (WB) and the International Monetary Fund (IMF), and proposed that China follow in America's footsteps and do the same now in responding to the needs of struggling economies worldwide.

So the Chinese got the message and expressed their interest in playing a more central role in the IMF in a way that befits their economic power. In response, the administrations of both Republican President George W Bush and Democratic President Barack Obama proposed plans aimed at restructuring the decision-making system of the IMF and other financial multilateral institutions in a way that would give the Chinese more votes but would also place more responsibility on them and on other emerging markets to help stabilise the global economy.

But then the US Congress, driven by the pressure of Republican majorities, refused to endorse the plan advanced by both Mr Bush and Mr Obama that would have transferred more power at the IMF to the Chinese. The nationalist Republicans warned that the Chinese, together with other emerging markets, would use their new power to supposedly shift the direction of the Washington-based institution in a way that would run contrary to US interests.

Recognising the opposition they faced at the IMF and elsewhere as they tried to become responsible stakeholders, officials in Beijing decided to adopt a different strategy, by helping to form new multilateral financial institutions. Hence the plan offered by Chinese President Xi Jinping during a trip to Indonesia in 2013 to launch an Asian Infrastructure Investment Bank. The AIIB was then unveiled in October 2014 in Beijing.

The Chinese explained that Asia's rising infrastructure financing needs - estimated by some experts to eventually rise to the trillions - could not be met by other US-led financial institutions, like the WB and the Asian Development Bank (ADB), and that Beijing would be providing half of the planned initial US$50 billion financing for the AIIB. They even invited the Americans to become one of the founding members of the new institution.

India, a top US ally, agreed to join the organisation, followed by South Korea and Japan, as well as leading European partners of the United States like Germany, France and Italy - and also Britain, whom the Americans accused of "constant accommodation" of China after London applied for membership in the new institution.

Guanyu said...

American officials and pundits countered the Chinese move by arguing that the AIIB and other IMF-like multilateral institutions advanced by the Chinese were posing a challenge to the international economic order that the Americans and their allies established in the post-1945 era - particularly because the new institutions would not operate on the principles adopted at Bretton Woods.


All these pointed to the Catch-22 situation that China was finding itself in. It couldn't gain more power at the IMF because the Republicans in the US Congress worried that Beijing would then challenge the international economic order. But then, China wasn't also allowed to promote new financial institutions, because some in Washington suspected that that would allow Beijing to, well, challenge the international economic order. So it wasn't surprising that from the Chinese perspective, US opposition to the AIIB was seen as part of an effort to contain China, especially at a time when the United States was championing a new regional trade organisation - the Trans-Pacific Partnership (TPP) - which Beijing was not invited to join.

But as it became evident that US opposition to the Chinese plan had forced Washington into a diplomatic cul-de-sac as more of its allies began indicating that they planned to apply for membership in the AIIB, the Obama administration started turning around. It adopted the kind of accommodative approach advocated by critics of its policy in Washington that calls for forming partnerships between the AIIB and the parallel US-backed financial multilateral institutions, like the WB and the ADB.

In the spirit of "if you can't beat 'em, join 'em", the Americans have concluded that collaborating with the Chinese and other AIIB members would allow them to exert more influence in the organisation - by ensuring that it would adhere to current lending standards of the international financial system, like transparency and worker protections and the environment - and that American companies would not face discrimination when they try to participate in infrastructure projects in Asia.

During congressional testimony last week, US Treasury Secretary Jacob Lew expressed willingness on the part of the Obama administration to cooperate with the AIIB if it would conclude that the new institution was following current lending standards. And he also urged America's allies in Asia and Europe to do the same before the joining the organisation.

American concern has always been whether the AIIB would "adhere to the kinds of high standards that the international financial institutions have developed", Mr Lew told Congress. "I hope before the final commitments are made, anyone who lends their name to this organisation will make sure that the governance is appropriate," he stressed.

Then he explained to US lawmakers that if they were worried that the American position in the international financial system was being challenged by China, the most effective way for them to respond to that threat would be by approving the proposed plan to reform the IMF, and allow the Chinese to play a constructive role as stakeholders in the current multilateral financial system - ensuring that America's international credibility and influence wouldn't be threatened.