By Nicole Gaouette and Andrew Mayeda 

The Obama administration’s vain attempt to prevent allies from joining China’s Asian Infrastructure Investment Bank is feeding a growing perception that U.S. influence in Asia is declining and America is losing its 70-year grip on global economic institutions.

“This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system,” former Treasury Secretary Larry Summers wrote in an April 5 column in which he also blamed Congress for domestic politicking that has rendered the U.S. “increasingly dysfunctional.”

The administration’s campaign against China’s new investment bank stands in contrast to its push for greater regional leadership to battle Islamic extremists, remedy climate change and address other global issues. And while administration officials argue that domestic economic realities limit America’s ability to police the world, they’re trying to resist the reality of China’s growing economic clout, said a U.S. official who requested anonymity to speak frankly.

The U.S. “knows only too well that China is rising and that it wants to reshape the global order, and it is trying to prevent this from happening.” said Tom Miller, senior Asia analyst at Gavekal Dragonomics based in Beijing.

That’s leaving the U.S. increasingly isolated.

Although the administration has refused to join the $100 billion AIIB and urged others to follow suit, allies such as Australia, the U.K., South Korea, Germany and France are among the more than 40 countries that have joined the new bank, which will fund infrastructure in Asia and be fully established by year’s end.

‘Best Way Forward’

The U.K. decided that “seeking to ensure that governance is robust from the inside is the best way forward” with the AIIB, British Foreign Secretary Philip Hammond told reporters in Washington March 27. The U.S. has argued that the new bank would lack the lending standards of the World Bank.

Despite its chilly relations with China, Japan hasn’t ruled out joining, and Japanese Finance Minister Taro Aso said on Tuesday in Tokyo that he’ll meet his Chinese counterpart, Lou Jiwei, in Beijing in June.

“The most damaging part of this at the moment is the reaction of the allies; it’s a real snubbing,” said Mathew Burrows, a former U.S. intelligence analyst who’s now director of the Strategic Foresight Initiative at the Atlantic Council, a Washington policy group. “I think we fumbled badly, but I’m not convinced that there was any way to get the Chinese to back down on this institution.”

Lew, Kim

Treasury Secretary Jack Lew said in a March 31 speech that the U.S. is ready to welcome new institutions such as the AIIB, provided that they “complement existing international financial institutions and that they share the international community’s strong commitment to genuine multilateral decision making and ever-improving lending standards and safeguards.”

The launch of the AIIB represents an attempt by China to embrace multilateralism, which is good for the world, World Bank President Jim Yong Kim told Bloomberg TV in an interview on Wednesday.

With six of the world’s 10 fastest-growing economies this year and a growing middle class, Asia is central to the administration’s plans for U.S. economic growth. While the U.S. tried to block the AIIB, it’s attempting to build other regional institutions such as the twelve-nation Trans-Pacific Partnership trade bloc to enforce rules, settle disputes and create a level economic playing field.

Rules of Engagement

The administration’s goal has been to draw China deeper into the existing international order. Former Secretary of State Hillary Clinton often spoke about the administration’s belief that the international economic system is based on universal freedoms that emerging powers such as China would have to protect as they gained stature.

“We believe any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks,” former State Department spokesman Jen Psaki said March 16. “We have concerns about whether the AIIB will meet these high standards, particularly related to governance and environmental and social safeguards.”

Standing Outside

“A more nuanced approach by the U.S. would have seen it also join in, have a voice, and shape and adapt the bank with others,” said Kerry Brown, professor of Chinese politics and director of the China Studies Centre at the University of Sydney. “Instead, it stood outside and tried to force other countries to run against their own economic interests.”

For the moment, said Miller of Gavekal Dragonomics, the world should see China’s new institutions, including the New Silk Road Fund and the New Development Bank founded with Russia, Brazil, India and South Africa, “as supplementing the global economic architecture, rather than a rejection of it.”

Kim, the World Bank president, said he’s prepared to collaborate with China to ensure the new development bank meets high standards on the environment, labor and procurement.

“We are ready to bring all of our 70 years of experience to helping AIIB figuring out what it wants to do, and welcoming them with open arms,” Kim said Monday in Washington on a conference call with reporters.

‘Parallel Institutions’

China, though, increasingly resists being contained by the international system that the U.S. has dominated since 1945.

“The U.S.’s post-World War II dominance is via international institutions,” said Zhang Baohui, director of the Center for Asian Pacific Studies at Lingnan University in Hong Kong. “It doesn’t exercise brute power; it is smarter, but now the Chinese are starting parallel institutions.”

The Chinese “see themselves now as a big power,” Burrows said. “They do want to have a set of institutions particularly that operate in the region and show that China is the big power on the block.”

President Xi Jinping announced plans to form the AIIB in October 2013, and China plans to complete the bank’s charter by June. Standing alongside President Barack Obama at the Great Hall of the People in Beijing on Nov. 11, Xi explained the bank’s creation, saying “underdeveloped infrastructure is the main bottleneck obstructing the economic development in Asia.”

Insufficient Capital

The Manila-based Asian Development Bank, whose major shareholders are the U.S. and Japan, has pegged the region’s infrastructure needs through 2020 at $8 trillion. The World Bank, which directed 15 percent of its lending last year toward East Asia and the Pacific, has $223 billion in subscribed capital, and the ADB has $163 billion.

The AIIB will be authorized to lend as much as $100 billion, though initially its subscribed funds, which include paid-in and callable capital, will be $50 billion.

The formation of the bank also may have been driven by China’s frustration with its representation in the International Monetary Fund and the World Bank, said Kevin Gallagher, a professor of global development policy at Boston University.

The U.S. Congress has refused to pass changes to the IMF’s share structure that would give emerging powers such as China and India more clout. “Part of it is definitely feeling like they’re shut out of some of the other institutions,” he said.

Resisting Reform

Summers, in his column, said that because of “resistance from the right, the U.S. stands alone in the world in failing to approve the International Monetary Fund governance reforms that Washington itself pushed for in 2009.”

Congress isn’t likely to change its mind on the World Bank or agree to pay the capitalization fee for the U.S. to join the AIIB, said Victor Cha, a senior adviser for Teneo Intelligence in New York and former National Security Council official.

The question, said Cha, is what’s driving Beijing.

“No one is sure if AIIB is a manifestation of China being more of a responsible stakeholder in the international community, or whether it’s China coming up with alternative institutions that are completely self-serving,” Cha said.

The new bank gives China another vehicle to invest its $3.8 trillion in reserve assets while creating opportunities for Chinese firms to win construction contracts throughout Asia, said Gallagher, the Boston University professor.

“They’re brimming with cash and looking to diversify,” he said. “They’ve already built cities with no people in them and roads to each one of them, so you’ve got companies that don’t have anywhere to go at home.”

Source: Bloomberg


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