Why the U.S. should support the AIIB

Why the U.S. should support the AIIB

While many fear China’s rise and emerging power in international institutions, the AIIB represents a unique opportunity for the United States.

While it’s currently difficult to predict the impact of China’s proposed Asian Infrastructure Investment Bank, its broad outlines have taken shape. Moreover, the support of 57 nations and offers of coordination with the Asian Development Bank, the World Bank and the IMF afford the new institution relevant expertise.

The founding prospective members have recently entered into a series of meetings to negotiate the details of the bank’s operations. Since the bank will finance infrastructure in one of the most active areas of the global economy, and became controversial when the U.S. tried to block its allies from joining, its rise holds lessons for both the U.S and China.

This article will question the relevance of the power transition framework in this case. A subsequent article will deal with the likely operations and possible investment opportunities afforded by this institution.

The AIIB and the U.S. -China Power Transition

Some have written about China’s economic rise overturning the existing the multilateral institutions set up by the U.S. at Bretton Woods.

There has been a parallel concern about China’s strategic rise and the security of Asian states at odds with China in the East and South China Seas disputes.

Analysts have invoked the theory of power transition, drawn from peace research, to look at any potential U.S.-China rivalry. A classic example of a power transition leading to war was Germany’s capability growth compared with that of Britain’s prior to the onset of WWI. However, the rise of a new power in relation to the lead power needn’t always result in war.

We saw this when the U.S. surpassed Britain after WWII. In fact, Japan’s economic growth in the 1980s led to joint global governance, as well. But, there were even those who predicted a coming war with Japan.

Framing the China-U.S. relationship in power transition terms is pernicious and self-fulfilling. Identifying a rivalry for global hegemony fuels nationalistic angst in both countries. Pessimists in the U.S. see China’s participation in the AIIB and BRICS development bank as a first step in trying to displace the U.S. from global financial leadership.

Their counterparts in China see the U.S. and Japanese coordination in the Asian Development Bank, the IMF, the World Bank, and the new Trans Pacific Partnership as an effort to contain China in a Cold War fashion.

It may be more accurate and productive to draw from the political integration literature instead. The development of the EU demonstrates how instrumental economic integration was in restructuring the bitter German-French rivalry after two world wars.

Since the U.S. and Japan constitute the first and third largest economies in the world, and since some estimates currently show the Japanese Air Force and Navy to be more capable than the PRC’s even without U.S. help, there is no immediate reason to fear competition with China. Indeed, the U.S. and Japan are among China’s top 5 trading partners.

The U.S. accounts for 8% of China’s imports and 19% of China’s exports. Japan accounts for 8.4 %. and 10%. China could not easily afford to lose nearly a third of its exports.

Moreover, a new multilateral investment bank in a region that will require $800 billion in infrastructure projects over the next ten years can only supplement much needed funding. Since the bank’s focus will be on loans that cut across national borders and enhance international connectivity in support of trade and production networks, these investments should have a positive impact on U.S. allies in ASEAN like the Philippines.

This explains why India, often a rival of China’s, is the bank’s second largest shareholder.

Lessons from miscalculation: US and Japanese dominance in the IMF and ADB

One positive aspect of the global system is that nations that miscalculate will soon be snapped back to reality. Such was the case with the U.S. opposition to the AIIB and China’s recent provocations in the South and East China Seas.

One reason that China initiated the AIIB was U.S. intransigence in reforming the IMF to reflect the growth of the Chinese economy.

Each nation’s quota dictates the size of its subscription or financial contribution, and the weight of its voting power. This is based on the relative size of its economy. The U.S. Congress resisted these reforms despite their support by our allies and has done so since 2010. The numbers are instructive:

China’s interests in the Japan-led Asian Development Bank were served poorly, as well. With Japan holding 15.7% of the shares, and the U.S. holding 15.6%, China’s 5.47% share was negligible.

Redressing the Century of Humiliationwith a new Chinese hegemony?

Of course, U.S. and Japanese resistance to China’s expanding influence reflects some basis for concern.

China’s current foreign policy seems to draw as much from the rules of the Imperial Chinese state system as from the rules of the modern global system. This is not surprising, since the Party has used the “Century of Humiliation” to secure mass support since the 1989 events in Tiananmen Square.

National restoration from this perspective would not only include the successful repatriation of Taiwan, but also the restoration of China at the center with neighboring states serving as “little brothers.” China’s economic projects like the AIIB and the Silk Road project reflect some of this sentiment.

Since these states are no longer tributaries, they can accept China’s largesse and also retain alliances and trade with each other, Japan, and the U.S. The restoration of Imperial hegemony is now impossible.

A more realistic goal would be comparable to U.S. influence in the Americas.  China will simply have to accept U.S. and Japanese influence in Asia in the same way that the U.S. has accepted Chinese influence in Latin America.

China’s recent quiescence in the South and East China Seas may reflect a “lesson learned,” or may simply reflect China’s enduring patience in obtaining its goals. One would hope for the former.

Really new China?

Amitai Etzioni has argued that the U.S. should strongly counter Chinese coercive acts like those in the Senkaku/ Diaoyu Islands, while supporting Chinese contributions to international governance, including the AIIB. Others have taken similar positions.

He correctly notes that the international system has often been modified by state interactions and that this is just another example. Still, others have held that China’s growth has outpaced its diplomatic skills. These will only be acquired by an actively engaged China.

It’s in the United States’ interest to help shape China’s development as a collaborator and challenge its hegemonic tendencies, since the result will be profitable for both parties.

Categories: Asia Pacific, Economics
Tags: ADB, AIIB, China, IMF, Japan, Loans, US

About Author

Lawrence Katzenstein

Lawrence Katzenstein has taught at the University of New Orleans and the University of Minnesota. Through an affiliation with the Humphrey Institute he was one of the trainers for the initial Chinese WTO delegation. He has been an exchange professor at the Consolidated Universities of Shandong Province and an embedded social scientist with the U.S. Army in Iraq. He earned a B.A. in political science from CCNY and an M.A. and Ph.D in political science from Rutgers University. While at the University of Minnesota he also completed a teaching post doc in International Business.