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Washington’s response to China’s creation of an Asia Infrastructure Investment Bank has been nothing short of lamentable. Its attempt to stymie the initiative by persuading other western nations to boycott the bank has backfired. Britain rightly decided it was better to try to influence the AIIB from the inside. Other countries, from Germany to South Korea, have followed suit.
The reaction in Beijing has been happy, if mildly surprised. The AIIB is about much more than a bank. At stake is nothing less than the future of the global economic system embodied in the Bretton Woods institutions that took shape after 1945. Emerging countries, including China, are woefully under-represented in these bodies. In a world far less dominated by the US and Europe, the postwar financial order is no longer fit for purpose.
If Washington has been caught flat-footed over the AIIB, it has a chance to make amends. Concluding the Trans-Pacific Partnership, a 12-nation “next generation” trade pact, would be a good start. That would show that the US remains committed to Asia and is willing to give better access to its market to countries prepared to sign up to higher standards in areas from state tendering to intellectual property protection. The TPP is not perfect. In too many aspects it looks like a charter for corporate America rather than the high-level trade agreement it purports to be. Still, the pact is better than nothing.
There is one caveat. It must be made clear to Beijing that China is welcome to join so long as it can meet TPP obligations. If the impression is given that the TPP is an “anyone-but-China club” it will exacerbate Sino-US tensions. China’s membership would draw it further into the international system on terms acceptable to Washington. For these reasons, Congress should grant Barack Obama the fast-track authority he needs to conclude a deal.
There are other things the US can do. First, Congress should pass long-stalled reforms of the International Monetary Fund. These would give China and other emerging countries a bigger say. Inability to reform existing institutions is one of the reasons China felt obliged to set up the AIIB and other proto-institutions, including the Brics bank. Second, the IMF should agree to add the renminbi to the basket of four currencies in the Special Drawing Rights, its international reserve asset. Strictly speaking, China’s currency could be excluded on the grounds that it is not fully convertible. Yet to keep it out of the SDR would be a further, unnecessary, slap in the face for Beijing.
The onus is not entirely on Washington. China too must take steps to assure sceptics it wants to complement, not overturn, the existing order. It can start by ensuring good governance of the AIIB. That does not mean aping the Bretton Woods institutions, which have rightly been criticised for tying up lending decisions in too much red tape. China must rather convince doubters its new bank is not a vehicle for brute power that will run roughshod over concerns about the environment, corruption or human rights. Instead, Beijing should establish a governance structure that takes the best of existing institutions but enables lending to be nimble and proactive. It should give genuine oversight to other members.
There are huge infrastructure financing needs in Asia. If China can establish a bank that begins to meet those needs in a transparent manner it will have taken an important step towards becoming the responsible stakeholder the world claims to want. For Beijing, it would also be by far the shrewdest way to further its own regional interests.
Letter in response to this editorial: