The U.S. and China’s Asian Infrastructure Development Bank

By Daniel Corrin and David Hamon
Sunday, September 25th, 2016 @ 4:34PM

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Using economics as a tool of foreign policy to sanction or to provide aid to control another country’s behavior is nothing new.

Take the Chinese, for example; the Chinese Communist Government, long an opponent of international agreements that it did not initiate, announced in 2014 its intention to establish an investment institution for Asia to rival the World Bank and the IMF.  In January 2016, after 22 nations, including non-Asian, indicated their willingness to join, the Chinese inaugurated theT

The stated purpose of the AIIB is to finance loans that promote economic developments, including infrastructures, especially in the developing world.  Among the non-Asian countries choosing to join the AIIB, are also U.S. allies, such as Japan, Germany, Great Britain, South Korea, and Australia. Soon after China announced its plan for the bank, the U.S. lobbied its allies against joining the AIIB, arguing that such participation would further embolden an already adventurous China. But in the past year, the U.S. all but abandoned its efforts.  A post on The Economist blog sums up the mad dash to join the AIIB:

China will use the new bank to expand its influence at the expense of America and Japan, Asia’s established powers.  China’s decision to fund a new multilateral bank rather than give more to existing ones reflects its exasperation with the glacial pace of global economic governance reform.  The same motivation lies behind the New Development Bank established by the BRICS (Brazil, Russia, India, China and South Africa).  Although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s and the bank’s president has always been Japanese.  Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and even if they go through America will still retain far more power.  China is, understandably, impatient for change. It is, therefore, taking matters into its own hands.

As with any bureaucracy over time, the IMF, the World Bank, and the Asian Development Bank (ADB) have become bogged down in turf-wars and group-think, while branching out into areas that were not part of their original purview—e.g. climate change and gender issues. The developing nations of Asia, in desperate need for infrastructure development – estimated at $800 billion annually – offered China the opportunity to create a new institution, and a reason for other nations want to participate.  At its launch, Chinese President Xi Jinping said, “Asia’s financing needs for basic infrastructure are enormous, and the bank would invest in projects that were high-quality, low-cost.”  Furthermore, “(t)he AIIB will require projects to be legally transparent and protect social and environmental interests, but it will not force borrowers to adopt the kind of free-market practices favored by the IMF,” sources told Reuters.  After all, China is the second largest economy in the world and wants to use its economic leverage to expand its growth potential, not to mention its political might and regional influence. According to Teymoor Nabaili:

The existing global financial architecture, devised 50 years ago when no alternatives existed, and all were happy to concede leadership (and benefits) to Washington, is no longer fit for purpose.  Not only are its institutions – the World Bank, the IMF, the ADB (Asian Development Bank) et al – thoroughly dominated by the US  (helped, in the case of the Asian Development Bank, by Japan), they impose a coercive and ideologically driven agenda on developing countries that can do more harm than good.  Not to mention the fact they simply don’t have the capacity to handle emerging Asia’s development needs.  What Washington has chosen to ignore, in fear of losing political power, is that a change to global financial structures is a very necessary evolution.  The US would do well to join the rest of the international community in acknowledging this fact and working to ensure its success. 

Could the U.S. blunt some of the AIIB’s impact?  Daniel Blumenthal of the American Enterprise Institute suggests that the influence of a Chinese-led AIIB could be tempered by the Trans-Pacific Partnership (TPP).  The TPP, he says,  would create a greater economic and political integration between the U.S. and these other Asian nations and promote greater economic growth.  It would also act as an indicator of the U.S. willingness to stand-by China’s neighbors and use free trade as means to advance economic development.

Blumenthal and other supporters of the TPP argued that Free trade pacts have a subtle advantage.  Agreements with other countries put a positive light on the U.S., by demonstrating its willingness to treat other countries—especially smaller, developing ones—as equals.  Even if such agreements do not lead to measurable increases in income in the U.S., they would have positive impacts on the other nations that are part of the pact.  Moreover, they claimed, could lead to savings in foreign aid and military spending, freeing up funds for domestic projects, and creating new jobs.

According to Robert M. Lampton, such agreements would also lead to long-run political reforms.  He explains in Foreign Affairs“[W]hen people gain control over economic resources, they have far more choice regarding where they live, what property they acquire, how they educate their children, and what opportunities they will pursue.  This is not unfettered liberty, but it is certainly a beginning.”

So what happened to the TPP? President Obama claims that the obstacle for ratifying the TPP is not the U.S. slowing economy, but the current presidential campaign.  Donald Trump gained the Republican nomination in part because of his opposition to the TPP. The below-average economic and employment growth since 2000, are leading many Americans to oppose the (TPP) specifically, and free-trade agreements in general. The Democratic nominee, Hillary Clinton, also came out in opposition to the pact, despite supporting it when she was Secretary of State.  Even pro-trade Congressmen—after reading the election tealeaves—have voiced opposition to this agreement and more generally, to free trade.

The Obama administration diminished the U.S. influence in international organizations by shrinking its operational role, To stay on top, the incoming Administration will have to figure out how to maintain its de-facto veto power over major policy decisions.  This would help negate the influence of the Chinese-led AIIB where the U.S. plays no part in the decision-making process.

However, this will be difficult in the near-term due to the anemic economic growth in the U.S. and the large current account deficit of—$125 billion in the 1st quarter of 2016. This deficit indicates the dearth of savings in the country, which  relies on Japan, Germany, and China to make up its shortfall. In the meantime, the Chinese-are filling a void with the AIIB.

Any plan to counter the Chinese should highlight the ideological difference between the U.S. and China. Communist China adheres to central planning, while the U.S. is a democratic republic that is based on individual freedom, the rule of law, and free markets.

To effectively counter the Chines and others, the next U.S. president will have to reemphasize the American ideals and develop policies that promote long-term economic growth, greater transparency and stronger defense at home and abroad.

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Categories: Asian Infrastructure Investment Bank (AIIB)., China, Hillary, Obama, TPP, Trump