US should stop blocking China's AIIB and join allies in new club

China’s growing economic clout is complicating US efforts to maintain its grip on the world’s leading multilateral economic institutions – as it’s done since the end of World War II.

The creation of the Asian Infrastructure Investment Bank (AIIB), established last year by China and many other Asian countries, has brought this challenge and how to address it front and center.

The AIIB is similar to the Asian Development Bank (ADB) and the World Bank – in that it’s intended to finance infrastructure investments – except that it will serve more as an instrument of Chinese rather than Western influence.

Thus far, the US has reacted by trying to marginalize the bank’s impact, urging other Western powers to follow its lead and steer clear. As we’ve seen in recent weeks, that strategy has failed miserably, with Australia, the United Kingdom, France, Germany and even Taiwan now interested in becoming founding members. Of the major powers, only Japan has continued to follow its ally’s lead.

This represents a serious setback for the White House’s ability to lead the international economic order on its own terms. While the narrative of the day is that of a policydefeat for the Obama administration, some larger points are worth noting.

Manage multilateralism, don’t block it

First, the very existence of the AIIB is a self-inflicted problem for the US. It could have been avoided had the US been willing to cede some power at the IMF and ADB.

Second, objections to European and other Western countries joining it are shortsighted because the best way to influence its actions is by being on the inside.

Finally, the AIIB is a good thing for both China and the US over the long term as it shows the rising power’s interest in taking on more global responsibilities – exactly what the White House has sought – so arguments against it are counterproductive.

The AIIB is no longer on the fringes as a growing roster of Western countries join its ranks.Reuters

Hoisted on its own petard

The AIIB is intended to solve a problem by providing money to support the trillions of dollars of infrastructure investment that emerging markets will need in coming years.

With a veritable ocean of foreign exchange at its disposal, creating a regional development bank right now makes perfect sense for China. It is a vehicle for the Chinese government to help aid regional development as well as a signpost to demonstrate its international prestige.

But China would not have been so willing to create its own international bank had it felt appropriately valued in the ones that already exist. What is frequently omitted in the discussion of the AIIB is the extent to which this problem was created by dysfunction between Washington and Tokyo over reforming the Asian Development Bank, as well as within Washington around International Monetary Fund reform.

The Asian Development Bank has been dominated by the US and Japan since its creation in 1966. China is the largest economy in Asia, while only the third-largest shareholder in the Asian Development Bank. As it has been custom that the president of the ADB is Japanese, Chinese attempts to gain influence within the bank commensurate with its economy’s size have been blocked.

Similarly, IMF reform was proposed in 2010 by the G20. Under the proposed reforms, China’s voting power was to double, making it the third-largest shareholder at the IMF behind only the US and Japan. Brazil and India would both become top-ten “quota-holders” as well, displacing Saudi Arabia and the Netherlands. In this manner, global economic governance would be reinvigorated, as these emerging economies would receive a voice at the IMF equivalent to their influence.

Though IMF reform has been approved by more than 150 countries, including many that would lose influence under the proposals, the US Congress has refused to budge.

Despite warnings from the rest of the G20 underscoring the urgency of passing the reforms, Congress has sought to squeeze compromises on the IRS and healthcare from the White House in exchange for its support.

While the Obama Administration wants the reforms, it has refused to sacrifice its signature health care law or link it to other measures. So at this point, IMF reform simply won’t happen in the current Congress. Given China’s inability to produce reforms of the existing development banks that would address China’s concerns, its move to create its own development bank was its only way forward.

China’s President Xi Jinping (center) with some of his new BFFs at the AIIB’s founding in October.Reuters

US objections are shortsighted

Washington has been on the wrong side of this issue by dismissing the AIIB rather than celebrating it.

For the past year, the White House has raised concerns about how the new bank would operate, suggesting that the AIIB would have insufficient safeguards.

The AIIB might undercut the World Bank and the Asian Development Bank, the argument goes, as countries might prefer the promise of cheap money from Beijing without the strings the other lenders attach. But questioning Chinese governance of the bank not only reminds our allies of our shortcomings in IMF reform, it also overlooks the surest route to reforming the AIIB.

Cooperation is always more difficult in large groups with divergent preferences than smaller ones. The growing list of AIIB members (including South Korea, Norway and Denmark) means that the Chinese will have to accommodate those countries concerned about safeguards.

Rather than push back on AIIB, the US should welcome the participation of many countries. It will fall to China to figure out how to reconcile this diverse membership. This will ensure that fighting climate change and improving environmental standards will not be sacrificed in favor of growth at any cost.

Chinese engagement should be welcomed

For years, Washington has sought to encourage China to be a “responsible stakeholder” in the global economy. The AIIB demonstrates that China seeks to embrace this challenge, and the fact that it is doing so multilaterally rather than bilaterally should not be overlooked.

The US has helped to support regional development banks in Africa and Europe, so a new one in Asia should not be the threat that it is made out to be. The need for infrastructure in emerging Asian economies is so acute that the two banks need not be in competition.

Embracing AIIB will help keep US-Chinese relations moving forward by moving beyond the sharp rhetoric of recent weeks. It will also give us a means to smooth over relations with European allies. More importantly, joining the AIIB gives the US a seat at the table, and a way to work with allies to moderate Chinese behavior.

What will make the difference in the long term in shaping US relationships with Asia is working with allies to address common challenges. Multilateral diplomacy is not just a means to an end, but an end in itself, and enmeshing China in a network of international organizations, regardless of who created them, provides the best route for deepening cooperation between the US and the People’s Republic of China.

Martin Edwards has received funding from the National Science Foundation and Fulbright Foundations.

Katayon Qahir does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.