The success of the new China-led development bank has caught the US off guard, after it fought the project and now finds itself increasingly isolated.
Britain, Germany, France... The US has watched, helpless and dumbfounded, as its European allies flocked to join the Asian Infrastructure Investment Bank (AIIB), seen as a potential rival to the World Bank and the Asian Development Bank, both institutions under powerful US influence.
The list does not stop there. Other US allies, like Australia and South Korea, are considering joining the AIIB, which already has about 30 member nations and the blessing of IMF managing director Christine Lagarde.
“The US has been caught flat-footed by the rush of countries, including its close economic and political allies, that are lining up to join the China-led AIIB,” said Eswar Prasad, a former head of the IMF’s China division, pointing to the “declining power of the US in driving the global economic policy agenda.”
US President Barack Obama’s administration has been waging an intense, but low-profile lobbying campaign against rival China’s US$50 billion bank project, which was unveiled in October last year. Officials have insinuated that the AIIB would lower international development standards.
“Will it adhere to the kinds of high standards that the international financial institutions have developed? Will it protect the rights of workers, the environment, deal with corruption issues appropriately?” US Secretary of the Treasury Jack Lew said last week in testimony to the US Congress.
The upfront opposition, which is fed by a climate of mistrust between the world’s leading economic superpower and its fast-growing rival, has proved ineffective.
“The US became isolated on the issue relatively early because they were so vocally critical. As a result, the US lost the opportunity to have more of an open discussion with countries who were considering joining,” former US Treasury official Scott Morris said in an interview.
That failure has its consequences. In a rarity since the end of World War II, the US must prepare to cope with a multilateral institution over which it will have no direct influence.
Accustomed to constructing the world’s financial architecture, the US may be overconfident and underestimated the powerful attraction of China and its colossal cash reserves.
“The United States has only known its status as a leader and it has psychologically not adjusted to the real emergence of other countries, including China. Their mentality is a bit behind the reality,” said Wang Hongying (王宏英), an expert on US-China relations at the Centre for International Governance Innovation, a Canadian think tank.
According to experts, Washington also underestimated the weariness of certain countries, including its allies, with its lack of enthusiasm for multilateral economics.
The US is blocking 2010 reforms of the IMF that would raise the voting rights of emerging powers and is sometimes accused of neglecting the World Bank. Washington is the major stakeholder in both institutions.
“These countries have more ambition for larger multilateral institutions and they become frustrated with the position of the United States, which is not terribly ambitious,” Morris said of the countries that are joining the AIIB.
Growing aware of its isolation, the US has begun to relax its position by opening the door to cooperation with the China-led bank, which is expected to be open for business by the end of the year.
“The United States would welcome new multilateral institutions that strengthen the international financial architecture,” US Undersecretary of the Treasury for International Affairs Nathan Sheet said on Monday.
In a recent blog post, the US Treasury said that it will continue to “engage directly” with China and coordinate with other international partners “to provide concrete suggestions on how the AIIB can best adopt and implement high-quality standards.”
The US may find it difficult to go further. An attempt to join the AIIB would certainly raise hackles in Congress and could be seen as an acknowledgement of weakness.
“This would be politically very difficult,” Morris said.
The episode in any case has shifted the landscape. By rallying a number of countries to its project, Beijing has proven that it is “finally maturing” and that it can provide “constructive leadership” in the international community, Prasad said.
That is “making it harder for the US to counter China’s increasing international influence,” he said.
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