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How a Chinese infrastructure bank turned into a diplomatic fiasco for America

Xi won this round.
Xi won this round.
Getty Images

Last fall, China rolled out a new regional economic initiative — the Asian Infrastructure and Investment Bank — on which it was partnering with India and a range of smaller Asian countries. The United States swiftly announced its opposition to the plan, which it said would undermine the existing global financial architecture, and began leaning on allies around the world to give the bank the cold shoulder.

This March, America's AIIB diplomacy suddenly and dramatically collapsed, as the United Kingdom — over the objections of the UK's own Foreign Office — said it would join the bank. And that opened the floodgates. Germany, France, Italy, Australia, New Zealand, Spain, Korea, and Brazil are now all on board. The US is isolated, America is sniping at its closest foreign allies, and the Obama administration has been dealt a humiliating diplomatic defeat.

The practical impact of the debacle is as of yet unclear, but it offers a telling window into 21st-century geopolitical anxieties — congressional dysfunction undermining American grand strategy, European Union disunity causing the world's largest trading bloc to punch under its weight, UK foreign policy adrift, and global thirst for hypothetical Chinese riches.

What kind of bank is this, exactly?

One of the tragicomic elements of this story is that the AIIB does not exist and Chinese authorities have not been very clear about what it is supposed to look like. Broadly, though, the idea is that there will be a bank that is owned by a range of sovereign states and that it will have the mission of making loans to support infrastructure projects in Asia. This is similar to what the World Bank already does.

But while China controls just 5.71 percent of the voting stock in the World Bank, the AIIB is being structured so that China will have the largest voice by far in its affairs. The bank will raise somewhere between $50 billion and $100 billion in initial capital, but with non-Asian contributions capped in a way that essentially ensures a dominant role for China.

That contrasts with the World Bank and the IMF, which were set up by the USA and Western European countries in the wake of World War II and were designed to give the US and Europe dominant roles. By informal agreement, the US and Europe coordinate to ensure that the World Bank is always led by an American and the IMF is always led by a European. The United States regards the AIIB as an effort to undermine the World Bank, and takes the view that issues with the Bank — both lack of funds and underrepresentation of newer economic powers such as China — should be tackled through a reform process.

But the official position of World Bank President Jim Yong Kim is to welcome the AIIB: "From the perspective simply of the need for more infrastructure spending, there's no doubt that from our perspective, we welcome the entry of the Asian Infrastructure Investment Bank."

Why are America's allies signing on to the AIIB?

Interest in joining the AIIB comes down to a hazy and unconfirmed belief that China will provide unspecified commercial benefits to countries that participate. America's allies have to weigh this hazy notion against their commitment to the US-led alliance system. With each new defection from the American camp, the benefits of holding out seem scarcer, so the hazy economic argument seems more compelling.

Consider Japan.

With the exception of the United States, the country most opposed to the AIIB was Japan. Japan is a regional rival of China's. And much as the US dominates the World Bank and Europe dominates the IMF, there is a Japan-dominated legacy institution called the Asian Development Bank that the AIIB would in some sense undermine. But on March 30, Japan's ambassador to China told the Financial Times that Japan will likely join. Masato Kitera told the FT, "The business community woke up late, but now they have mounted a big campaign for the AIIB which appears to be very effective."

After all, the economic upside to AIIB membership may be small. But it's something. The idea of boycotting the AIIB was that countries shouldn't give legitimacy to a Chinese pet project. But once Korea, Australia, Germany, and the UK had all signed on, the legitimacy horse was out of the stable. One domino fell after another, meaning the UK's decision to sign on very rapidly made the American position untenable.

So is this all David Cameron's fault?

That's more or less how it looks from Washington. The Obama administration's pique is re-enforced by the fact that, as Jamil Anderlini and Kiran Stacey reported for the Financial Times, the United Kingdom's decision to join the bank was made over the objections of the UK Foreign Office. As Thomas Wright of the Brookings Institution writes, "It appears as if David Cameron's government took this decision because it wanted to be the first to join and to get the credit from China for doing so."

This haste to obtain nonspecific commercial advantages at the expense of following America's lead on grand strategy is seen by many in DC as crass and opportunistic.

From a British viewpoint it looks more like common sense. Accommodating China's rise is a reasonable strategy for a midsize country on the other side of the planet. The American alliance is important, but snubbing China just because America wants it to offers no upside.

Wouldn't the EU have had more leverage if they'd negotiated as a bloc?

Yes. For precisely this reason, in theory the European Union is always working to present more of a united front in foreign affairs — especially when it comes to commercial matters. In practice, despite the considerable concentration of authority in Brussels, European politics still happens on a national basis. Each incumbent party or politician needs to try to deliver prosperity to its national population to retain popularity and electoral support.

What's more, institutionally speaking European Union members jealously guard their ability to be individually represented in multinational institutions. The IMF is always run by "a European" but the IMF shares that lay the groundwork for European dominance are held by individual European states. The AIIB was also structured along these lines, with European countries being individually invited to participate or not. In theory, it might have made sense to approach the situation collectively — but the default mode is to handle it individually, and the Chinese were able to take advantage of that.

How does congressional dysfunction play into this?

The Obama administration more or less foresaw this problem years ago. That's why back in 2010 it negotiated a deal to increase China's role in the IMF and World Bank. This plan, if approved, would lift China from number six to number three at the IMF while also enhancing the positions of India and Brazil and giving the IMF more overall resources. The proposal has secured the support of most of the IMF's 188 members, including all the major powers.

The problem is that Congress keeps blocking the plan at the behest of conservative activist groups.

As former Treasury Secretary Lawrence Summers says, this creates a situation in which the Chinese "can quite legitimately ask, ‘excuse me, you guys have had 5½ years to support a reasonable role for us in the IMF, and you have not done it.'"

So basically Chinese diplomats are running circles around the West?

It sure looks that way in this case. But Chinese diplomacy in general tends toward clumsiness and incompetence. This particular coup required a very particular nexus of American gridlock, European incoordination, and British cravenness that is not present at every issue.

What's more, the actual stakes here are not so clear. Had the Obama administration not chosen to pick this fight, it's far from obvious that the creation of a Chinese-dominated multilateral bank capable of financing a modest number of Asian infrastructure projects would be a blow to American interests. Conversely, it's far from obvious what kind of commercial bonanza Cameron and other European leaders think they are going to reap from currying favor from China in this regard.

One clear moral of the story, however, is that the United States and its traditional European allies simply see the east Asian situation differently. European countries — including our special friends in Britain — simply aren't interested in sacrificing economic opportunities for the sake of American ideas about how the region should be structured.

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