Banking on America’s Asian choices
Author: Peter Drysdale, East Asia Forum
The US–China relationship is undoubtedly the single most important bilateral relationship in the world today. More hinges on the successful management of that relationship, not only for Asian but also for global peace and prosperity, than on any other single relationship in the world.
For all the anxieties about whether it will inevitably turn to dust, the objective judgment would have to be that, on balance, Sino–US relations have been managed remarkably well. The profound difficulties that are part and parcel of a relationship between the world’s pre-eminent economy and democracy and the world’s largest emerging single-party state have been handled deftly. Be it the response to the Bo Xilai affair or the Chen Guangcheng defection, sure-footedness distinguishes the outcomes, if not perhaps the nail-biting drama of getting things sorted behind the scenes. Seizing the strategic opportunity — on climate change, in managing the balance between America’s complex Asian alliances and China’s core security interests in Asia — has dominated the management style. That’s the score so far.
The Xi–Li leadership took a big step in elevating the relationship with Washington to a new level of strategic importance with the Obama–Xi meeting in California in June 2013, taking the intimacy of the relationship to a new height. These may be only the first steps towards thickening the processes of engagement but they signal intent and facilitate getting things right and getting things done.
There is a huge amount at stake, both economically and strategically, in their bilateral relationship for both the United States and China. For both countries, it is the most important of their bilateral relationships. And while it is certainly premature to frame the emergence of a more and more tightly-structured and managed bilateral relationship between the two countries as an alliance relationship (particularly absent close military ties, as is still the case), it is not in any way fanciful to see the relationship already developing many of the key characteristics of an alliance partnership. Certainly the current Chinese leadership is still telling itself that the relationship with the United States is its top priority and that to make it so has been its most important external achievement thus far.
How, then, should we interpret the clumsy US response to China’s Asian Infrastructure Investment Bank (AIIB) initiative, with its under-the-table arm-twisting of allies not to participate? Is it just a hapless and exceptional set of accidents or is it a harbinger of how things will be done down the track in US management of China relations?
Promoting infrastructure investment is seen as a particular priority in Asia and the Pacific. Meeting the US$8 trillion deficit that the Asian Development Bank (ADB) estimates in regional infrastructure demand is critical to the continuing growth and development of regional economies through deeper integration and connectivity and the role of these economies as the major engine of global growth for years to come.
As is widely recognised, finance is not the only constraint. But the scale of funding through the multilateral development banks such as the World Bank and the ADB, small relative to the size of demand, has shrunk in recent years, and there is clear scope for intermediating Asian savings to cope with the huge shortfall in infrastructure investment. In effect, to this point China has been locked out of increasing the capitalisation of existing global financial institutions to help fill the gap.
In this context, the AIIB — which was mooted around the APEC Summit in Indonesia in 2013 and formally launched by China around the APEC Summit in China last year — is an entirely welcome initiative. The existing multilateral development banks were created to reduce the transaction costs of assessing development projects, as well as to reduce the risks of these investments. At present, they are not making a significant contribution to the commercial financing of investment to upgrade or extend essential economic infrastructure, partly due to their limited financial capacity.
China already has large bilateral development financing programs. It can carry on with these, as other countries do, at will. The Chinese can do whatever infrastructure financing they wish unilaterally, but they have chosen to offer multilateral partnership in this initiative. The AIIB proposal is totally different from bilateral development funding: it is open to shareholding by any government and by private investors; participants will shape its governance and operations; it is designed to narrow gaps in the region’s economic infrastructure; and it represents a timely contribution to the provision of this class of international public goods. The idea that China’s global partners should stand back from participating in this process makes no sense: the Europeans have signed on; Australia should announce that it has imminently; and there is every reason why Japan and the United States should do the same.
In our lead essay this week, Evan Feigenbaum suggests that while the rise of new regional institutions and agreements in Asia will pose a growing and competitive challenge to US leadership in the Pacific, opposing all of them because of their origins is pointless and counterproductive. ‘For one, India and China are unwilling to live in perpetuity without changes to the Western-built architecture that prevailed a decade ago,’ he explains. ‘Nor is China the only driver of the new pan-Asianism. In the 1990s, it was Japanese bureaucrats who pushed for an Asian Monetary Union. And today, New Delhi’s involvement with the Beijing-backed Asian Infrastructure Investment Bank (AIIB) and BRICS institutions has taken place despite growing Indian ambivalence about China and even as India’s pursues enhanced quotas and shares in the Bretton Woods institutions’.
Feigenbaum proposes three tests that need to be applied in consideration of American national interests when determining how the US should respond to Asian initiatives. Which pan-Asian groups or pacts can Washington live with and which will undermine vital US interests? Which pan-Asian ideas supplement US-preferred approaches and which aim to supplant them? Can Washington propose an alternative that will better serve whatever purpose the initiative is meant to serve?
On all three tests, Feigenbaum finds no good cause for the US’s ham-fisted attempt to derail the AIIB.
So why has US-China (and US alliance) diplomacy gone so wrong over this issue?
For one thing, as the New York Times points out: ‘In significant ways, this is a problem of America’s own making. The United States has urged China to exercise more leadership, but the top posts at the International Monetary Fund, the World Bank and the Asian Development Bank have been restricted to Europeans, Americans and the Japanese. Congress bears considerable blame for refusing to pass legislation to shift voting power more fairly among IMF member states, including China. China’s move to create the new development bank is part of the price being paid for that obstruction’.
For another, there appears to have been dysfunctional and incomplete consideration of all the issues involved, with those without an expert background making and determining the play at an early stage — not only in the US but also slavishly and even more haplessly in Australia. This was too important an issue to be determined by security functionaries, outside its full strategic context, and far too important an issue to dissemble about along the way.
Hopefully this episode will not disturb good management of the US–China relationship in the long term and the United States will swing its weight in the right direction behind China’s effort to contribute through the AIIB to establishing an international public good, as it did in an earlier time when Japan moved to set up the Asian Development Bank.
Peter Drysdale is Editor of the East Asia Forum.
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