AIIB and the US – China Competition for Influence

The world economy has long been dominated by institutions heavily influenced by the West and its allies. However, a new player in the form of the Asian Infrastructure Investment Bank (AIIB) has arrived at the scene, causing a stir and sparking debates and discussions on its implications for the world economy and global order in general.

AIIB was first proposed by Chinese President Xi Jinping in 2013 during a series of visits to Southeast Asian countries. This Chinese-led financial institution has the main goal of providing loans to finance infrastructure development that would facilitate economic growth.

AIIB has claimed that it seeks to complement existing financial institutions such as the International Monetary Fund, World Bank, and the ADB, all of which are US- or Japan-dominated. However, analysts can’t help but see the institution as pursuing goals beyond its declared intentions. Moreover, the dominant players themselves are not likely to just move aside and let the new kid rule the block.

US concerns

Following the launch of the AIIB, US was vocal in its opposition to the bank. It had been consistent in saying that it acknowledges the need for a new source of financing, but was nonetheless reluctant to welcome the AIIB due to concerns regarding China’s ability to manage it on the basis of good governance and transparency. It also raised the flag about the prospective lending standards of the bank especially when it comes to environmental safeguards. Another argument was that the creation of the AIIB would be redundant because institutions with the same mission and functions had long been in place since after World War II.

The mere fact that AIIB was a Chinese initiative also has political implications. China has been a member of the World Bank, International Monetary Fund, and the Asian Development Bank for decades already, so why still create the AIIB?

Gaps in the system

To begin with, the current institutions have been criticized as declining in effectiveness in addressing global problems, compared to their performance a decade ago. Each of them has repeatedly run against financial problems, and recipient states have been complaining about very slow bureaucracies. Moreover, the high standards they impose when it comes to social and environmental obligations have made application for financing such an arduous process.

The AIIB is on a mission to excel in those areas where its predecessors are said to be failing. President-designate Jin Liqun said the Chinese-led bank is going to be “lean, clean and green” with lean meaning cost-effective, clean as in having zero tolerance for corruption, and green meaning promotion of the environment. He gives assurances that the bank will not be run politically,1 and that among other measures, it will set up an ethics integrity department to encourage employees to report on corrupt activities. Jin reiterated his vow for “zero tolerance” for corruption at a conference held in London by the Boao Forum for Asia in November.2

A grand strategy?

More than the issues of lending safeguards and redundancy, analysts can’t help but extrapolate political implications of China’s AIIB and US hesitation in supporting the institution. For starters, it is a fact that China is one of the world’s largest economies and has been growing in terms of its influence not just in Southeast Asia and East Asia, but also in the whole world. With growing economic clout, China feels that its position in the existing financial institutions is hampered by not having enough voice to influence the actions of these institutions. But this is all about to change in AIIB, where China will be the largest stakeholder at 30.34%, translating into 26.06% voting power or enough to steer the whole of AIIB towards its interests.

The creation of the AIIB is also viewed by some analysts as a strategic move by China to weaken US dominance and bolster its own ties with Asian countries. With the number of states (including non-Asians) signing up to become founding members, it seems like this move is producing results for China. 57 countries have already joined the AIIB, including major US allies such as Britain, Germany, France, Australia, and South Korea. US and Japan have decided to decline the invitation for now.

Aware of these concerns, China has given assurances that it is not going to use the AIIB as a strategic tool for dominance. Chen Yonglong, Director of China Foundation for International Studies has stated in a published article that even if China provides a huge chunk of the fund, the Chinese government has already made it clear that decision making in AIIB is primarily going to be based on consensus building. AIIB was also designed not to give “any country de facto power like in the World Bank or IMF.“3

US takes a milder tone but foists TPP

Things got heated in early March of this year when the United Kingdom, a close ally of the United States, declared that it would be applying to join AIIB. This move was criticized by the Obama administration as constant accommodation of the rising power. The US National Security Council issued a similar statement, and Washington lobbied its allies to stay clear of the new bank. Nonetheless, Germany, France and Italy immediately followed UK and decided to join the AIIB within the same month.

The IMF and ADB, on the other hand, welcomed the establishment of AIIB. They acknowledged that infrastructure gaps exist where financing is needed and said that they are willing to accommodate and cooperate with other lending institutions to help fill in those gaps. ADB President Takehiko Nakao said that AIIB could help meet the infrastructure demands in Asia.

Eventually, US rhetoric adjusted to a milder tone. A report from the Wall Street Journal says that the US is now proposing that AIIB work in partnership with the World Bank. Nathan Sheets, US Treasury Undersecretary for International Affairs said that co-financing projects with preexisting financial institutions will “ensure that high quality, time-tested standards are maintained.”

This can be regarded as a move by the United States to “save face” after suffering embarrassment when its allies decided to join the Chinese-led bank and be among its founding members. US must realize it cannot stop states from pursuing their national interests by joining AIIB, so to prevent further damage to its reputation, it needed to find a way to project AIIB to be palatable after all. By partnering the IMF, WB and ADB with China’s AIIB, the US can moreover create an opportunity to exert a certain degree of influence on the activities of the AIIB without it being a member. As of this writing, AIIB has not yet provided any statement on partnering arrangements.

On the other hand, in early October of this year, the US along with 11 other countries announced that they have finally concluded another trade deal in the form of the Trans Pacific Partnership after five years of grueling negotiations. China is, not surprisingly, not a member of the TPP. TPP is seen as a move by the US to mitigate the influence of China. What better way is there for the US to try to undercut AIIB’s attraction than to come up with another multilateral economic deal that would not include China.

However, the TPP deal is encountering hurdles as it still needs to be ratified by the individual governments of each member state. It was also criticized for having the public and media excluded all throughout the process of negotiations.

Permanent Interests

AIIB is expected to be operational by the end of this year. 57 countries have already signed up to be founding members and it seems like several others are poised to join. Even Taiwan is planning to apply again early next year.

Even if AIIB may be just another financial institution providing loans for infrastructure, we cannot simply ignore its political implications. AIIB is part of China’s new grand strategy in its inevitable rise as a major player in the international system. And it seems that the competition has narrowed down to only two major powers – US and China.

The Philippines has deferred from joining the infrastructure bank but made it clear that it only wants to exhaust the time available before the deadline to consider membership. Last September, it participated in the crafting of the laws and lending rules and regulations of the AIIB. The Philippines is a long-time ally of US and maintains strong diplomatic ties with it. Both have concerns in terms of AIIB’s governance but given their close relationship, Philippine reservations can also be attributed to the fact US declined to become a member. As of this moment, the Philippines is the only country left in Southeast Asia that is not a member of AIIB.

The Philippines must play this well as it might miss out on the opportunity to develop more amicable relations with China. At the same time, the Philippines does not wish to antagonize or be misinterpreted by the US, resulting in a cooling off in their current cooperation, especially on maritime security in the South China Sea. Getting too close to China and its AIIB might lead to losing benefits from our ties with the US; whereas staying too close to the US may mean foregoing opportunities that China (and Asian networks more broadly) could bring in the future. Neither outcome is favorable for the Philippines’ development objectives.

Indeed, for countries throughout the world, deciding to sign up or not to be a member of the AIIB has become a political statement in itself. It has the connotation of either being pro-China or pro-America. It can also be argued that signing up is either seizing an opportunity to promote one’s own development, or taking the risk of becoming enmeshed in China’s economic influence. With all the facts laid down and even major US allies signing up, it seems like states want to explore the Chinese offer after all - proof that there really are no permanent allies, only permanent interests.