The new Asian bank wedge

The British government’s decision to join the new Asia Infrastructure Investment Bank (AIIB) proposed by China has opened the door to other governments that wish to act likewise. The result has been a rush to join the new financial institution as founding members, prompting a public and embarrassing rift with the United States.

There are many reasons for the sudden change of heart by European governments, but a key motivation is the fear of being left behind in the race to exploit economic opportunities with China. At the same time, however, Washington has been wrong-footed by the sudden change in policy and appears weakened and feckless as a result.

Britain announced last week that it was prepared to join the AIIB as a founding member, making it the first Western country to sign up to the $50 billion financial institution that aims to fill an infrastructure investment shortfall that threatens to limit Asia’s growth prospects. Days after London signed up, the governments of France, Germany and Italy also said they would become founding members of the bank.

Martin Schultz, president of the European Union Parliament, said he backed the move. Australia, South Korea and Luxembourg have also been considering whether to join the AIIB and are now much more likely to sign up.

Officially the European governments acted so that they would have more influence over the governance of the bank and ensure that it complemented other international investment institutions, such as the World Bank and the Asian Development Bank, rather than undercut them.

It would be naive, however, to ignore the economic motivations. The British government has been blunt about its desire to forge a closer relationship with China to goose the U.K. economy. George Osborne, the British chancellor of the Exchequer, conceded as much when he explained that the move would “create an unrivaled opportunity for the U.K. and Asia to invest and grow together.”

This is an outgrowth of Prime Minister David Cameron’s decision in 2013, during a stagnating domestic economy, to make Britain China’s first choice for international investment.

As a result, London has downplayed contentious issues with Beijing. Cameron will no longer meet the Dalai Lama, after a 2012 sit-down with the Tibetan spiritual leader triggered a diplomatic tempest with China.

London also moderated criticism of Beijing during pro-democracy protests in Hong Kong last year. The House of Commons foreign affairs committee argued that the British government should do more to push China to introduce political reforms in the Special Administrative Region.

Whatever the motive, the U.S. is not happy. An anonymous government official criticized London’s “constant accommodation” of China, and complained that the U.S. had not been consulted ahead of the decision, a charge that the U.K. denies.

Washington’s objections make some sense. The U.S. worries that the rush to join the AIIB will diminish the leverage that Western governments have in influencing decision making within the AIIB. Washington believes that the prospect of membership affords it and its allies the most leverage over governance decisions within the bank.

There are legitimate questions about China’s policy, concerns that also affect Japan. Washington and Tokyo, like other Western governments, have been skeptical about the AIIB, worrying that the new bank, like other Chinese initiatives, is intended not only to fill a regional need but to lay the foundation for a larger normative and institutional challenge to institutions that do similar work, like the World Bank and the ADB.

This is part of a broader assault on the international order that has emerged in the aftermath of World War II, one that reflects the political and economic pre-eminence of the U.S. and the developed West.

China argues that it had no role in constructing that order and that its “rise,” along with that of other emerging powers, demands a reassessment and modification of institutions to reflect the values and interests of these other states. One example of this adjustment is the demand for a reweighing of voting rights at the International Monetary Fund — a move that has been held up by gridlock in the U.S. Congress.

In the abstract, this is a reasonable request. Japan has a similar motivation when it seeks modification of membership on the United Nations Security Council. Such thinking also lines up with the demand that China act more responsibly in international affairs and do more to provide international public goods. Suspicions about Chinese intentions are valid, but knee-jerk opposition to any Chinese initiative is not. The U.S. position looks increasingly like the latter and appears to be using its influence to keep like-minded nations out.

The readiness of other governments to work with China to address these questions and blunt the sharper edges of the Chinese challenge to the international order is the smart course. Washington appears to be rejecting a Chinese initiative that meets an important regional need, merely because it is a Chinese initiative.

The refusal by other governments to back Washington makes the U.S. look weak and isolated. The U.S. should reconsider and be ready to push for reform within the AIIB, rather than from a distance.

  • Liars N. Fools

    Neither the Americans nor the Japanese are going to change their approach and support the AIIB with capital and, more importantly, ideas. Their best course now is to wish China and the bank well and to encourage friends and allies who are bank members to press for a credible governance structure and to make sure that the World Bank and the Asian Development Bank coordinate well with the fledging institution.

    Let us see if the Americans and Japanese can rebound constructively and not merely with grumbling resentment.