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

Tuesday, April 7, 2015

China launched the Asian Infrastructure Investment Bank (AIIB) in October of 2014 and has met with nothing but opposition from the United States. Officially, the objection cited by the United States is a lack of clarity about AIIB’s governance, as well as concerns about whether the AIIB will adhere to strict environmental and labor standards in its operations. It is clear, however, that U.S. opposition also derives from fears that the AIIB — spearheaded by China and part of China’s “New Silk Road” strategy — will diminish U.S. leadership in the region.

But if the AIIB jeopardizes U.S. leadership in Asia, it will be a result of the manner in which American authorities have responded to the organization. Through its intransigence, the United States continues to push Asian countries — including certain key allies — away. By refusing to participate in this new institution, the United States gives up a vital role in shaping the Asian regional development agenda. And by goading other bilateral and multilateral donors to resist the AIIB, the U.S. government may end up cutting American investors off from the potential benefits of private investment in Asian infrastructure.

Despite its efforts, the United States has been unable to keep its allies from joining the AIIB. Earlier this year, Saudi Arabia applied for membership. Last week, the United Kingdom announced that it would join as a founding member — a move that received a rare, public rebuke from the White House. Now a trio of European powers — France, Germany and Italy — have also applied for membership.

Ironically, the founding of the AIIB is partly a result of the United States’ unwillingness to reform the Bretton Woods institutions. Since 2010, the U.S. Senate has refused to ratify an agreement on governance reform that would have doubled resources available to the International Monetary Fund (IMF) by increasing capital contributions from emerging market countries, which would proportionately expand their voting power on the IMF Executive Board — where current quotas treat France as though it were more economically dominant than China, and Belgium more dominant than Brazil.

Nevertheless, the United States has used its blocking vote at the IMF to keep countries such as China, India and Brazil underrepresented. Late last year, IMF Managing Director Christine Lagarde warned that governments would be forced to look for “alternative options” by which development financing could be provided. Not surprisingly, the New Development Bank — the so-called “BRICS Bank” — was launched by Brazil, Russia, India, China and South Africa to fund development projects in member countries outside of the traditional multilateral channels. As we have pointed out, the BRICS bank will be managed by governments with little in common beyond their dissatisfaction with the Bretton-Woods institutions.