AIIB: America's Influence In the Balance

The US is making a strategic error in opposing the Asian Infrastructure Investment Bank (AIIB), which is giving China increasing leverage in the region.


America is right to be worried about China's new Asian Infrastructure Investment Bank (AIIB) that was launched in Beijing last week. This clever economic initiative challenges traditional American leadership in Asia just as seriously as Beijing's more flagrant military gambits in the East and South China Seas. But America and its allies are wrong to oppose it, because that just makes them look weak.

Don't imagine for a moment that the AIIB is just about economics. For decades, US strategic and political pre-eminence has been underwritten by Washington's primary role in international financial institutions like the World Bank and the Asian Development Bank (ADB). So Americans know how effective the AIIB could prove to be in expanding China's influence in Asia, not just economically but politically and strategically too.

There is no doubt that the economic rationale for such an institution is very strong. Asia's economic growth will be seriously constrained without massive infrastructure developments over the next few decades. Some estimates suggest that US$8 trillion (S$10.2 trillion) will need to be spent in East Asia alone over just the next six years to allow the region to realise its potential.

Existing institutions simply do not have the capital needed to fund even a tiny fraction of that. Nor do they have the administrative capacity to get money and projects moving fast enough to meet the urgent demand. The ADB, especially, has acquired an unenviable reputation for slow, bureaucratised decision-making.

China has plenty of capital to invest, and strong economic incentives of its own to get Asia's infrastructure moving. Moreover, it has unrivalled expertise in just the kind of breakneck programmes that will be required to keep Asia growing, having itself delivered over the past two decades the most remarkable infrastructure development in history.

For China, the advantages are many and obvious. By taking the lead in the development of Asia's infrastructure, China can ensure that it is developed in ways that best serves its interest, consolidating its place as the hub of Asia's regional economy and the focus of Asia's links with other regions.

It will provide exceptional opportunities for Chinese companies to win contracts and profits. And, of course, it will offer great scope for enhancing China's political influence among its neighbours.

America's interests, of course, would have been much better served by persuading China to help recapitalise and reform the old funding institutions rather than build a new one. But the US itself has done a lot to encourage China to launch the AIIB, by consistently rebuffing China's bid for a larger voting weight on the governing boards of the ADB, International Monetary Fund and World Bank, which would have given Beijing a bigger say in their running and a bigger stake in their success. Beijing has quite naturally concluded that its interests are better served by setting aside the old bodies and creating a new one.

The interests of other Asian countries may well be better served by the AIIB too, but there are some risks to be considered.

Every country in Asia finds itself pulled two ways by the rise of China's power. They all welcome the immense economic opportunities that China's rise offers them, and they all recognise and accept that as its wealth and power grow, China will inevitably come to exercise more regional influence.

But they all fear living under China's shadow and want to avoid finding themselves reduced to mere satellites in a Sino-centric regional system. Washington has tried to play on this fear in the campaign that it has evidently been waging in recent weeks to discourage Asian countries from joining the AIIB, though for public consumption it has laid more stress on concerns about the new bank's governance arrangements, and the risk that its lending policies will not enforce strict environmental and social standards.

These are real issues but they do not necessarily cut much ice in Asian capitals. Western-imposed standards are not necessarily seen as a great boon in Asia, and the reputation of the old-established institutions have never really recovered from their ill-conceived, Washington-imposed role during the East Asian financial crisis in the late 1990s.

At any rate, Washington's concerns do not seem to have dissuaded many Asian governments from signing up as founding members of the new bank last week. And those, like Australia, that have held back for now are unlikely to do so for long. The momentum behind the AIIB looks irresistible.

This must be especially galling to Washington as its own attempt to use economic leverage for political and strategic advantage in Asia seems headed for failure. The Obama administration clearly saw the Trans-Pacific Partnership (TPP) trade deal as central to the US "pivot" to Asia. It hoped this would reinforce US regional leadership against Beijing's challenge by marginalising China and allowing the US to displace it as the focus of Asia's regional economy.

The TPP was supposed to be concluded this year, and high-level ministerial talks continue with this aim in view. But it faces a raft of formidable and even insurmountable problems - not the least of them being a hostile US Congress. And even if it does materialise, the TPP is not going to shift the patterns of trade enough to erode China's immense and growing economic weight and political clout.

The US decision to oppose the AIIB thus seems a serious strategic error. Rather than buttressing America's strength in Asia against China's challenge, US diplomacy on this issue has simply confirmed its growing weakness.

Moreover, it has confirmed that US policy in Asia is still based on the illusion that America can continue to lead Asia in future, as it has done in the past, despite China's increasing economic and military power, and its evident determination to force changes.

The sooner the US abandons that illusion and recognises that the regional order in Asia is already and inevitably changing, the sooner America can start thinking creatively and realistically about how to maximise its influence in the new Asian order, which is what all of us in Asia should hope it will do. Welcoming the AIIB would be a good place to start.

The writer is professor of strategic studies at the Australian National University in Canberra.

Join ST's Telegram channel and get the latest breaking news delivered to you.