Washington’s Big China Screw-up

Washington’s Big China Screw-up

In March alone, France, Italy, Germany, and the United Kingdom have now all agreed to join a major, China-led initiative that could one day rival the U.S.-led World Bank in size and influence. It’s called the Asia Infrastructure Investment Bank (AIIB), and since China formally established the bank in October 2014, it’s attracted dozens of member nations. It’s also raised hackles in the United States, whose officials initially attempted to dissuade countries like the U.K. from joining. But on March 22, U.S. Treasury Undersecretary for International Affairs Nathan Sheets told the Wall Street Journal that his country “would welcome new multilateral institutions that strengthen the international financial architecture.” Is the damage to U.S.-China relations nevertheless done? And how might a China-led AIIB shape the world moving forward? ChinaFile asked several experts to opine. –The Editors

Stephen Roach, Senior Fellow, Jackson Institute of Global Affairs:

In 2005, then-U.S. Deputy Secretary of State Robert Zoellick famously called on China to be a “responsible stakeholder.” He meant that China needed not only to comply with its international commitments, but also to provide public goods to the international community. Well, be careful what you wish for.

Since then China has become much more active in global governance. Chinese occupy leadership positions in a wide range of institutions. In 2013, China helped broker an interim deal in the World Trade Organization’s Doha Round, and in November 2014, China, along with the United States, made a new pledge to limit carbon emissions, creating momentum heading into the United Nations meeting in Paris later this year. But the AIIB is China’s first signature contribution.

China certainly could have done a better job of selling the need for a new development bank. It is still unclear why it would be impossible to improve the quality and quantity of development assistance in Asia through either the Asian Development Bank (ADB) or the World Bank. The arguments that those banks were un-fixable and not open to a greater Chinese role or that China deserves pride of place in a new institution given how much it is contributing leave the impression that the AIIB is a vanity piece or a disguised cash register for Chinese state-owned enterprises.

That said, the United States has performed even worse. Although joining the AIIB was not an option since Congress would not have allocated the funds, the U.S. could have adopted the posture of a friendly outside voice. Instead, it discouraged others from joining in the hope the initiative would collapse or leave China with a small coalition of the willing. They argued that the bank would not follow international best practices, but in reality it appears the U.S. opposed the AIIB simply because it was a Chinese initiative, full stop. Such knee-jerk antagonism gives life to arguments that the U.S. opposes China’s rise and is bent on containing it. Even more important, American bungling fuels the perception that China can drive a wedge between the United States and its allies and that U.S. leadership in Asia is on the wane just when it is needed more than ever.

It’s a shame that China did not provide greater reassurances early on that the bank would not be a tool of Chinese industrial policy and geo-strategic maneuvering, and that the U.S. did not do more to pursue such reassurances and find a way to serve as a constructive supporter. The so-called best practices of existing multilateral aid institutions too often have not translated into sustained poverty alleviation and development. There are many other areas of global governance in need of reform, and we can be sure that the AIIB will not be China’s last major initiative. Let’s hope China and the United States learn from this experience and find ways to identify areas in need of change where they can collaborate or at least not get in each other’s way, instead of being in opposite camps and forcing others in the region and elsewhere to pick sides. Then both countries will be able to justly claim they are truly acting as responsible stakeholders.

Zha Daojiong, Professor of International Political Economy, Peking University:

That the United States is not going to join the AIIB is in and of itself not a surprise. But the level of fury Washington has put on public display in recent weeks is remarkable in several ways.

First, China has offered to negotiate terms as it established the AIIB. Among other things, Natalie Lichtenstein, a Harvard-educated lawyer who worked at the World Bank for over 30 years, was invited to help prepare the bank’s charter. That gesture alone is indication that China, too, wants the bank to build on the experiences and lessons of existing multilateral development banks. After all, being the AIIB’s largest underwriter, China has the greatest stake in seeing the proposed bank start off with a well-conceived institutional structure.

Second, the AIIB is but one among a number of existing Chinese initiatives linking it to the world economy. For example, the pilot Shanghai Free Trade Zone — and subsequent establishment of similar zones into the provinces of Fujian and Guangdong, and the city of Tianjin — indicates China is serious about further liberalizing its own investment and trade policies.

Concerns in the United States and some allied nations about the AIIB not being an exact copy of the World Bank or the ADB in governance structure are in some ways understandable. But the last thing China and other founding members of the AIIB want is validation of their critics’ and skeptics’ fears. The real test is not so much who is in the AIIB and who is not. Rather, it is whether or not the bank can satisfy its customers and shareholders.

If the United States is concerned about the AIIB’s effect on its soft power, the U.S. can serve itself better by keeping an open mind about the project and looking to collaborate on specific investment projects in the future. For China, it would be ill advised to see Washington’s disapproval of its allies in joining the AIIB as an affront. It’s better to listen. After all, no country has money to burn.

Scott Kennedy, Deputy Director of the Freeman Chair in China Studies, Center for Strategic and International Studies:

The Obama Administration has obviously made a major strategic blunder in resisting the establishment of the AIIB. Many of America’s most loyal allies have rejected the folly of this intransigence. By opting to join this start-up international lending institution, they will be much better positioned to shape the governance of the AIIB as insiders, rather than voicing criticism as outsiders, as the United States apparently prefers. Washington’s Cold-War style criticism of its allies for their “constant accommodation” of China is a new and embarrassing low in the China debate.

It is both ironic and hypocritical that Washington’s response is to circle the wagons around the existing Bretton Woods institutions—the International Monetary Fund (IMF) and the World Bank. The U.S. Congress has repeatedly dragged its feet on IMF reforms. And lending programs of the U.S.-dominated World Bank have done little to address infrastructure deficiencies in any part of the world. The ADB estimates an Asian infrastructure void of some $8 trillion over the 2010 to 2020 period. Clearly new lending capacity is needed to meet this daunting challenge.

Nor does the AIIB pose a threat to more established and experienced international lending institutions. Its initial capital base of $50 billion is less than a third of that which supports the ADB and less than a quarter of that held by the World Bank. Surely, an $80 trillion global economy can afford to support much greater lending capacity than is the case today.

But there is a more sinister aspect of Washington’s resistance to this China-sponsored initiative. It is but the latest in an increasingly worrisome string of anti-China actions. The Obama Administration has focused on the TPP as its signature initiative on trade liberalization; unfortunately, it excludes China, the source of America’s largest trade imbalance. Yet another anti-China currency manipulation bill has been introduced in the U.S. Senate. And there are ongoing frictions over cyber issues, as well as over territorial claims in the China Sea. Suddenly, America’s Asian pivot seems like nothing more than a thinly veiled China containment strategy.

Is the rise of China a risk or an opportunity? Washington is clearly fixated on the threat – all but ignoring the benefits that are likely to come with the emergence of a consumer-led Chinese economy. This shouldn’t be so surprising. History tells us that dominant powers always have trouble with rising powers. Washington is bristling over China’s ascendancy. China, with the baggage of 150 years of a perceived sense of deep humiliation by the West, doesn’t take kindly to that reaction. The AIIB folly only deepens concerns over an increasingly troubled relationship. A rethink by Washington is urgently needed.

Patrick Chovanec, Managing Director, Silvercrest Asset Management:

Many of the concerns the U.S. has with China’s AIIB are valid. The problem with developing much-needed infrastructure in Asia is not money—the world is floating in money right now—but selecting and managing projects in way that will deliver the desired results. Given the track record of development lending by China’s existing policy banks (the China Ex-Im Bank and China Development Bank), at best the AIIB risks being merely a vehicle to “buy business” for Chinese companies and absorb China’s huge overcapacity. At worst, it threatens to undermine the “good governance” that is key to the region’s genuine economic development. Many of the U.S. allies who broke ranks to join the bank appear—like the U.K., eager to win China’s “blessing” as an offshore RMB trading hub—to have done so for deeply misguided and even delusional reasons.

All that said, it’s hard to think of a more ham-fisted and ineffectual way to deal with these concerns than the United States employed. It was a classic case of “you can’t beat something with nothing.” The Chinese have accumulated a large pool of savings, and to pretend that Chinese capital won’t play a role in the global economy—with or without U.S. permission—is simply untenable. Issuing a blanket “no” to Chinese capital, rather than offering constructive ideas or alternatives, was never going to fly. Strong-arming allies isn’t going to work if it looks like China has a plan, and the U.S. is just a carping bystander.

The AIIB potentially has flaws. One of two things will happen: either those flaws will become evident, or China will find a way (perhaps working with other member countries) to overcome them. Either way, China has taken the lead and whining about it isn’t a convincing argument.

If the U.S. wants to lead, then lead. Making progress—and a real commitment—to the TPP and the Transatlantic Trade and Investment Partnership (TTIP) is one way to do this. But the Obama Administration, despite pursuing these objectives, has yet to make them a real priority. President Clinton sent Vice President Gore out to debate NAFTA with Ross Perot on live TV. He spent real (and precious) political capital to bat down opposition (much of it within his own party) and ensure congressional passage. By letting pending Free Trade Agreements with South Korea and Colombia twist in the wind for most of his first term, President Obama sent the signal, to friends and foes alike, that his trade agenda wasn’t very important, and certainly not worth fighting for.

Into that leadership void has stepped China, with a different vision for the global economy. Can we really blame our friends for taking them more seriously, if we fail to contest that vision in a more credible way?

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