China's rise confounds a splintered West- BY PHILIP STEPHENS (THE FINANCIAL TIMES)

China's rise confounds a splintered West

PUBLISHED ON MAR 28, 2015 6:02 AM

Pedestrians walking in the central business district of Beijing, China, on March 4, 2015. Britain's decision to join the China-led AIIB provoked an unusually sharp response from the White House. -- PHOTO: BLOOMBERG

BY PHILIP STEPHENS

The transatlantic spat about China's new Asian investment bank tells a cautionary tale. This latest collision between geoeconomics and geopolitics is a harbinger of battles to come. The toughest question facing the post-post-cold war world is whether a globally integrated economic and financial system can survive rising competition between the great powers, most notably the United States and China. On present trends, the answer is probably not.

The divisions within advanced nations on how to handle China's bid to increase its international economic influence were revealed when Britain announced unilaterally that it would become a founding member of Beijing's proposed Asian Infrastructure Investment Bank (AIIB). The move provoked an unusually sharp response from the White House, which accused its ally of kowtowing to China in pursuit of commercial benefit - something for which the government in London has a record.

It would be nice to think that the falling-out followed a spirited discussion about the strategic merits or otherwise of western participation in international financial institutions sponsored by Beijing. There is no doubt China wants to bolster its weight in global affairs. Do such initiatives subvert or complement the existing rules of global finance? Can the West veto such enterprises? Is it more sensible to join than to boycott? Where should the old powers draw the balance between engaging with, and hedging against, Chinese power?

There was no such debate.

The British move was driven by economic opportunism rather than geostrategic calculation; and the angry reaction in Washington was as much a reflection of bureaucratic muddle as carefully considered judgment. Geoeconomics has been driving geopolitics, but there has been little recognition of the fact in the structure of decision-making on either side of the Atlantic. Policy is still made in silos.

The moving force behind Britain's announcement was Mr George Osborne. The Chancellor takes a mercantilist view of the relationship with Beijing. The US may be Britain's most important ally, but the UK economy is in a hole and, in Mr Osborne's mind, China in the new economic force in the world. The government's goal is to become a privileged partner, above all in making sure London is China's destination of choice for financial services.

Mr Osborne is a powerful political player, so the broader geostrategic implications went undiscussed in the government's National Security Council. A paper was dispatched to interested departments and the Foreign Office is said to have raised an eyebrow about the lack of consultation with allies. China has a reputation for playing divide and rule. The Chancellor was having none of it. A quick decision would allow him to convey the good news personally to his Chinese counterpart at a gathering of finance ministers.

British opportunism met with US fumbling. The US Treasury and the White House economic team knew that the Europeans took a different view of the AIIB (Germany, France and Italy followed Britain's lead), but the debate had not reached the national security team.

Discussion within the G-7 advanced nations had been technical rather than strategic. The case that China could use the bank to undercut US power in the region went by default.

Washington was anyway on shaky ground. Attempts to give greater weight to rising states in the Bretton Woods institutions have been stalled by the US Congress. China cannot be expected to sit on its hands.

An optimist would say that European influence in the AIIB will ensure that it does not become a political tool for Beijing, though past experience suggests Britain will do as it is told. The dispute, though, promises to be the first among many. Bluntly put, US interests are embedded in the post-1945 settlement, while China wants institutions and arrangements of its own to project its international agenda.

Such fragmentation is already visible in the trade arena, where multilateralism has made way for competitive bilateralism and plurilateralism.

The real and present danger to the integrity of a liberal, open trading regime is set out in an excellent set of essays published by the International Institute for Strategic Studies.

New US-backed arrangements, such as the proposed Trans Pacific Partnership and Transatlantic Trade and Investment Pact, or China's plan for a Brics bank and its New Silk Road project, could be seen as building blocks for broader international cooperation. In reality, they more closely resemble geopolitical power plays.

In the short term, the result may well be a mixed economy of international governance as the multilateral arrangements of the post-war era coexist uneasily with a range of more exclusive institutions mirroring great power rivalry between the US and China. In the medium to long term, all sides will be losers as global financial and economic integration falls prey to narrower definitions of national interest and competing rules and norms.

Whatever the precise trajectory, the US and its allies need to start making the connections between economics and politics at once to support the international rules-based order, while offering China and others due influence in its governance. Neither Britain nor the US come out well from the AIIB spat. Nor, I suspect, will the global system.

THE FINANCIAL TIMES