The latest wedge in Sino-American relations is not China’s support of North Korea or its alleged cyber warfare tactics, but instead the creation of a new economic institution: the Asian Infrastructure Investment Bank (AIIB). Despite its innocuous name, the AIIB has been contentious from its conception, polarizing governments while strengthening China’s global influence.
The idea of the AIIB bank originated in October 2013, during an annual Asia-Pacific Economic Co-operation (APEC) forum. The plan has since developed and expanded; the AIIB now has a fund of $50 billion to invest in Asia. Ostensibly, the Chinese government proposed the bank to simply improve infrastructure throughout the region. The continent is in dire need of funding to sustain its economic growth, and the bank has been presented as a means of maintaining such necessary investment. China’s long-term strategy, however, is more nuanced: Many analysts have alleged that China’s actions stem from a desire to undermine American dominance in the world order and replace it with a Chinese sphere of influence in Asia.
The AIIB, along with the BRICS’ New Development Bank, is considered a threat to American influence because it has been established to operate in the same sphere as the International Monetary Fund (IMF) and World Bank, two intergovernmental organizations dominated by American funding. These Bretton Woods Institutions, as they are generally known, have directed global economic development since their founding in 1944 at the close of World War II. The World Bank was created to finance economic development, initially managing the reconstruction of Europe after the war. The IMF, on the other hand, provides oversight to member nations’ monetary and exchange rate policies. It was created to bring a measure of stability to global exchange rates, an important facet of international trade.
The Bretton Woods Institutions have long been established as key players in global economic policy. However, they have also been criticized for promoting Western or American interests at the expense of emerging markets. The United States is the World Bank’s single largest donor and has the highest voting power in the IMF. As a result, the US government has great leverage in both institutions. China’s bid to create a parallel fund will provide an alternative source of funding for developing countries and thus undercut American soft power.
Although the AIIB is by definition a potential competitor to the World Bank and IMF, a rivalry of sorts has been created by the reactions of the US government. The Obama administration has long opposed the formation of the bank. While American officials have not openly lobbied against it, they have attempted to subtly pressure other governments into steering clear of the Chinese initiative. When Britain decided to join the AIIB in February, a senior official publicly criticized them for their “constant accommodation” of China. This statement led to further embarrassment when other nations began to join the bank.
The US opposition to the AIIB was a foreign policy disaster for the Obama administration. Despite US disapproval, American allies such as Australia, France, Germany and Italy have followed Britain’s lead and joined the Chinese-led bank. These diplomatic snubs to the United States were made all the more humiliating by their public nature, and such actions demonstrate China’s growing influence on the world stage and signify a shift in international allegiances. It is now apparent that American approval is no longer the decisive factor it once was in foreign policy.
But the US government is partially responsible for its own embarrassment. By treating the AIIB as a threat to the established Bretton Woods Institutions, the US government raised the bank’s profile and inadvertently gave it more credibility. The fact that its attempts at obstruction failed to dissuade allies from joining the bank only emphasizes Washington’s ineffectiveness. The snub also highlights the general discontent with the American stewardship of the IMF and World Bank. The US Congress has persisted with its trademark inability to peform and stalled IMF reforms in 2014. The lack of necessary reform has led emerging markets to look elsewhere for support, giving impetus to the AIIB.
Not only does American opposition to the bank appear ineffectual, but it also seems unnecessarily truculent. The AIIB has the potential to make a positive difference in Asia, particularly in developing nations that depend on foreign aid. This is particularly significant because of Washington’s failure to expand the capacity of the IMF and assign more focus to World Bank initiatives. The AIIB especially benefits the Association of Southeast Asian Nations (ASEAN) by devoting much of its spending to the largely under-developed region. It also concentrates its $50 billion in capital on public infrastructure, as opposed to the World Bank’s concurrent focus on environmental and social projects. This bodes well for the continent, especially since the Asian Development Bank (ADB) had estimated a regional infrastructure-funding gap of $8 trillion between 2010 and 2020. To ensure further economic growth, this funding gap needs to be filled, and Chinese aid will go a long way in meeting such standards.
Of course, it is naïve to think that the AIIB will not be embroiled in the same structural issues and controversies as the Bretton Woods Institutions. It will likely face similar criticism, with detractors claiming it inordinately promotes Chinese interests and lacks transparency. Nonetheless, the involvement of European powers gives the initiative more legitimacy and stability. It will also ensure that China is held to more rigorous environmental and social standards. As Elizabeth Economy of the Council on Foreign Relations explains, Beijing has not prioritized environmental protection in the past but can be prevailed upon to do so with the AIIB – particularly if European and American pressure is involved.
To minimize its embarrassment and gain a measure of control over Chinese projects in Asia, the United States should consider joining the AIIB. While retreating from its staunch opposition may be humiliating, the decision will allow it to monitor China’s actions in Asia. American oversight will also promote a more efficient system, as the United States could encourage better governance practices. Most importantly, joining the bank would ensure that the US government does not lose its influence to China and remains involved in major economic decisions in Asia.
It is time for the United States to recognize that the Bretton Woods Institutions are not under immediate threat. They are too influential to be marginalized by a single Chinese initiative. The creation of the AIIB does not signal the advent of Chinese dominance, though it certainly highlights the failures of American diplomacy. That being said, unless the United States can commit to reforming the IMF and increasing funding to the World Bank, its influence will slowly diminish. In the meanwhile, the AIIB can be considered the beginning, but certainly not the culmination, of China’s push for a new world order.