The Asian Infrastructure Investment Bank (AIIB): Tensions Between China and the U.S.?

57 signees of AIIB in Beijing

57 signees of AIIB in Beijing

The week-long state visit of Chinese President Xi Jinping taking place as I write this blog is a lavish affair. But the festivities and fanfare mask underlying tensions between the two economies. One of the sources of tension is the AIIB.

The number 1 and number 2 economies of the world – the U.S. and China – have very different economic systems. As I elaborate upon in my book – Waves of Global Change: A Holistic World History (with a forthcoming release of the 2nd edition) – the U.S. has a neoliberal form of capitalism, in which markets have a central role and the government is secondary, while China follows a state capitalist economic form in which the government takes an active role in the marketplace. State capitalism is a powerful economic system since the 2000s.

BRICS leaders in 2014

BRICS leaders in 2014

For over a century, the West and later Japan have been the cheerleaders of capitalism, and have forged global institutions, such as the World Bank, International Monetary Fund (IMF) and World Trade Organization (WTO), to enhance their dominance. But China and the middle and periphery countries of the world have not been standing idly by as the core countries (U.S., Europe, Canada, Australia, and Japan) wield their historic global economic control. For example, in 2013, China proposed a government-supported bank, the Asian Infrastructure Investment Bank (AIIB), to compete with the U.S.-led World Bank and IMF. The AIIB is a good example of the tensions between the two powers and the different economic policies they are promoting.

AIIB, an ambitious project even by Chinese standards, will lend cash for infrastructure and development projects across Asia. Member nations will make individual contributions to the bank’s resource pool, helping back those projects. However, since 1966 the U.S. and Japan have sponsored the Asian Development Bank, which essentially serves the same purpose. Some see the AIIB as a move by China to increase its economic influence in the region.

But the U.S. government has helped to fuel the creation of China’s latest economic tool. In 2010, the U.S. Congress failed to pass reforms proposed by the Obama administration to the IMF—the global financial union of 188 member nations. The reforms would reduce U.S. power within the IMF—which holds 16.74 percent of the votes and veto power—giving more voice to member nations such as Brazil, Russia India, China, and South Africa (BRICS). Despite the reforms, the U.S. would ultimately retain its dominant status and veto power. But of the 188 countries in the IMF, the U.S. is the only world economy that hasn’t signed on, since Congress refuses to pass the bill.

Signing ceremony of the AIIB, June 2015

Signing ceremony of the AIIB, June 2015

The IMF has actually threatened to completely bypass the U.S. and proceed with reforms, undermining U.S. authority. In the meantime, China—whose say in the IMF is currently dwarfed by smaller economies like the UK, France, Germany and Japan—appears to resent being marginalized. Enter the AIIB. Through it, China gains more influence and power. Initially, China and India will have significant voting rights and all Asian member countries will have over 50 percent of the total votes. China will also command a leading role in the New Development Bank, an institution similar to the IMF that the BRICS will spearhead. Through these new institutions and its investment of $40 billion into a Silk Road infrastructure project, China will be able to increasingly flex its economic muscle without the restrictions placed on it by the IMF and World Bank.

With 57 signees and counting, many EU nations, under U.S. protest, have joined the AIIB.[1] To the chagrin of the U.S., even its closest allies, the United Kingdom (UK), France, and Germany signed on, although Canada and Japan have not.

Surely the world is changing. The U.S. is still the leading economy in the world by almost all measures, but there are many other global players, including China, who cannot be overlooked. Are there any insights that can be gleaned for the U.S. from China’s strategic move? Let’s examine four.

Global Insights:

  1. It behooves the U.S. to transition from being the director of the world economy to being a participator. The U.S. Congress, especially, needs to make this mental and political shift or suffer economic consequences and global ostracizing.
  2. Although the U.S. advances neoliberalism, it is not the only version of capitalism; state capitalism is appealing to many countries. The U.S. can’t assume that all nations want to emulate the U.S. economy, especially in the aftermath of the global economic crisis of 2008 in which the U.S. had a major hand in creating.
  3. The global economic institutions that the U.S. helped to create and finance are not about to crumble before our eyes, but these institutions need to reflect the contribution of emerging economies to the global marketplace. It is not a sign of U.S. weakness but strength to accommodate these shifting realities. The U.S. risks increasing irrelevance if it fails to make these accommodations.
  4. The U.S democracy operates at a snail’s pace, especially since it is gridlocked because of partisan divide, compared to the quick decisions wielded by the President of China, who is not hampered by a “cumbersome” democracy. In response to this, Americans will see more independent and quicker decisions made by the U.S. President that need immediate global attention. I see this as more of a necessity than a subversion of democracy, although the long-term consequences could be dire.questions-to-consider
  1. What do you think are the most serious tensions between the U.S. and China?
  2. How should the U.S. respond to these tensions? How should China respond?

[1]Andrew Soergel, U.S. News, June 20, 2015. Ret. 6/23/15.

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