NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, March 19, 2015

The floodgates have opened. After the U.K. announced last Thursday that it would seek to join the Chinese-led Asian Infrastructure Investment Bank (AIIB), a trio of other European powers — Germany, France, and Italy — followed suit. With a March 31 deadline looming for countries to gain “founding member” status, expect more states – possibly including Australia and South Korea – to join in as well.

In another context, those decisions might have gone mostly unnoticed. However, the U.S. insured this would be global news by its stark opposition to the AIIB, and by its shocking sharp response to London’s decision to join — effectively accusing the U.K. of appeasing China. It’s been clear from the beginning that Washington was opposed to the creation of the bank and trying to keep its friends and partners from joining. But the stark criticisms leveled at London when it joined underlined just how badly Washington wanted to keep its allies away from the bank – and how powerless it ultimately is to convince them to stay away.

The irony is that the AIIB became a symbol of China-U.S. competition precisely because that is how Washington framed it. Aside from governance issues, the U.S. was worried the AIIB would undermine its own favored financial institutions, the World Bank and the Asian Development Bank. By encouraging allies to stay away from the initiative, the Obama administration turned a regional infrastructure back into a test case for its global influence – a case that the U.S. is now seen as losing. Gideon Rachman, writing for Financial Times, called Washington’s handling of the AIIB issue a “diplomatic debacle” that “will make America look isolated and petulant.”

That’s not to say that the U.S. should have embraced the AIIB with open arms. There are real concerns about the governance structure of the bank, including whether or not China will play an outsized role in determining who gets funding and who doesn’t. Such a set-up would only make it easier for China to wield its economic clout as a carrot (or a stick) to ‘encourage’ desired behaviors in other states. There are also legitimate worries about lax environmental and human rights safeguards for AIIB-funded projects.

However, as other analysts pointed out last fall, the best way to ensure that China doesn’t dominate the AIIB is to fill it with other regional powers, particularly those close to the U.S. Stacking the deck, as it were, with like-minded allies would result in much stricter governance rules and safeguards than an AIIB where China’s clout is unchallenged. That’s a major reason why a number of well-known China experts urged the U.S. itself to join the AIIB back in October – that and the recognition that there’s a real need for extra financial support for infrastructure projects in the reason.

In addition, the U.S. apparently underestimated the growing frustration with stalled reforms to the existing Bretton Woods organizations the U.S. prefers, the World Bank and the International Monetary Fund. “It’s not an accident that emerging economies are looking at other places because they are frustrated that, frankly, the United States has stalled a very mild and reasonable set of reforms in the IMF,” Treasury Secretary Jack Lew told Congress Tuesday. But it seems the White House didn’t recognize this issue when it mattered – before the AIIB floodgates opened.