U.S. Failure

Dealing With China

Asian Infrastructure Investment Bank AIBB Source Reuters DISTORTED Chinas-President-Xi-Jinping_effect
The China-led Asian Infrastructure Investment Bank: Germany is in, Britain is in, the United States is out.
  • Why it matters

    Why it matters

    The new China-led development bank poses a challenge to the longtime U.S. dominance of the global financial system.

  • Facts

    Facts

    • The Asian Infrastructure Investment Bank was launched last October, with China as its biggest contributor.
    • Germany, Britain, France and Italy as well as 52 other nations have signed up to the new bank.
    • It will promote investment in Asian transport, energy, telecoms and other infrastructure.
  • Audio

    Audio

  • Pdf

Politicians and bankers from nearly 190 countries will gather again this weekend for the spring meeting of the International Monetary Fund and World Bank. Since the end of World War II, they have met twice a year to discuss the world economy and global financial system.

Traditionally, representatives of the most important industrial nations set the tone, and the United States has veto power in both institutions. So the IMF and World Bank perfectly reflect the dress codes of the post-war era: Without America, nothing functions in global economic and financial regulation.

Or is that about to change?

On Wednesday, China announced the final list of 57 founding members for the Asian Infrastructure Investment Bank, including big industrial nations like Great Britain, Germany, Italy and France – but not the United States.

Washington cited concerns over lack of transparency and doubts over lending and environmental safeguards, but failed to persuade its major allies not to join. Ultimately, U.S. leaders fear the outsize influence of China in a bank that could become a nucleus for new global financial regulation – in direct competition to the IMF and World Bank.

Although the new Asian bank only proposes to finance large infrastructure projects in Asia, U.S. Treasury Secretary Jack Lew warns the new development bank could circumvent the “high global standards” of the IMF and World Bank.

Other critics fear that China would unhinge the entire Bretton Woods system of fixed exchange rates and use the Asian infrastructure bank as a tool of its geopolitical interests.

The United States first underestimated the development and now has isolated itself – and that is mostly its own fault.

In any case, it is clear that the balance of power is shifting in international financial regulation. Another sign of rebellion against the old order was the creation last year of a new development bank by five emerging world powers – Brazil, Russia, India, China and South Africa, also known as the BRICS countries.

The United States first underestimated this development and now has isolated itself – and that is mostly its own fault. Five years ago, the IMF decided to grant more influence to emerging countries, to account for new balances in global economic power. But the U.S. Congress has yet to ratify the reform package. No wonder emerging powers like China are now going their own ways.

What is more important for global economic and financial regulation is how the rest of the world positions itself between the old and new superpowers.

Many U.S. allies want to be part of the AIIB more out of fear of losing lucrative infrastructure contracts than a belief in a new multipolar order. Europeans must ask themselves which rules global finance and trade should follow in the future. As long as there are no persuasive alternatives to the Bretton Woods system of currency relations, Europe should not carelessly question the current framework.

The German government hopes to shape the rules of the game at the new Asian development bank from the inside. These rules are not limited to certain social and environmental standards when the Asian bank finances projects worth billions of dollars. The leadership of the bank itself also must meet the highest governance demands.

As the largest shareholder, China must first prove that it is willing to do that. In countries such as Zambia or Sri Lanka, the Chinese have often stirred up social and political conflicts with their engagement.

Also, credit risks are not always checked by Beijing, as they would be, for instance, in the frugal German ministry of finance. In this point, it is not only China that has an obligation, but also all countries that have jumped onto the Asian bank’s bandwagon.

The United States is in a tight spot. Until now, Washington has given no response to the latest soft-power offensive from Beijing. But it is clear that the struggle for future supremacy in Asia is more about financial and economic power than military might.

So America needs to work to integrate China even more into the international order. Allowing it into the World Trade Organization in 2001 showed how Beijing could be moved to more “fair play.”

Washington could now open the door for China to join the planned free trade agreement known as Trans-Pacific Partnership, which aims to regulate trade between the United States, Canada, Mexico and a number of countries bordering the Pacific Ocean, including Chile, Australia, New Zealand and Singapore.

That would be another step to bring the ambitious middle empire out of the shadows – and to bind it to standards that guarantee free exchange of capital, goods, knowledge and services.

 

Torsten Riecke is an international correspondent for Handelsblatt. To contact him: riecke@handelsblatt.com.

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