Whose Money Will the World Follow?
President Obama was stymied by Senate Democrats on May 12 on his first attempt to win authority to fast-track the Trans-Pacific Partnership, a massive trade pact that also includes Japan, Vietnam, Canada, and eight other countries. The TPP’s opponents lambaste the pact as yet another giveaway to big business to the detriment of U.S. labor. What they’re forgetting is the broader geopolitical picture. The TPP isn’t just about profits and jobs; it’s an attempt by the White House to maintain U.S. dominance of the global economic order in the face of a rising China.
The People’s Republic, the world’s second-largest economy, is conspicuously absent among America’s TPP partners. There’s a reason for that. The pact aims to redirect trade to the U.S. and solidify America’s economic position in Asia. By doing so, the Obama administration hopes to pressure China into adhering to Washington’s rules and standards for free exchange. “If we don’t write the rules for trade around the world, guess what?” Obama recently warned. “China will.”
While the TPP’s enemies may be oblivious to that new reality, China’s leadership is not. The country is ready to chart its own course in the global economy. In late April, China announced its partners in the Asian Infrastructure Investment Bank (AIIB), an institution that could rival the Washington-based World Bank. Fifty-seven countries signed up to join the AIIB as founding members—many of them America’s closest allies, including the U.K., Germany, and Australia. The U.S. decided to wait on the sidelines.
The TPP and the AIIB are symbols of an historic battle: the contest between the U.S. and China for control of the trade and finance that form the foundation of today’s global economy.
On the surface, the AIIB seems to be the right idea at the right time. It could be a critical source of fresh financing for the trillions of dollars of roads, airports, and other infrastructure so badly needed by Asia’s rapidly emerging economies. That could boost growth in the region and lift the global economy. The Obama administration, however, has treated the AIIB like kryptonite; it sees China’s bank not as another development program, but as a mortal threat to the established global economic order. The scuffle over the AIIB “is about the U.S. trying to retain political power, and it is about the Chinese challenging it,” says Gerald Curtis, an Asia specialist at Columbia University.
The U.S. has a lot to lose in the inevitable shift of power from West to East. Since the end of World War II, America has stood as the world’s unparalleled economic and political juggernaut. The U.S. has also directed the foundational institutions of the modern world economy—the International Monetary Fund and the World Bank—allowing it to promote its own economic agenda.
Washington has admitted gate-crashers to its economic order before. Forty years ago, another Asian nation arose to roil the establishment—Japan. As its economy roared into the ranks of the world’s biggest, Japan’s leaders expected more influence in running the financial system. Generally, the West gave way. Japan was invited to join the Group of Seven leading industrialized countries at its 1975 inception. Washington allowed Japan to take the lead in managing a regional bank—the Manila-based Asian Development Bank (ADB), formed in 1966, with the U.S. as a founding member.
China presents a knottier conundrum. Japan challenged U.S. industrial leadership, but, as a staunch ally, it had no interest in altering the existing system. China’s goals are much less certain. On the one hand, it has an incentive to preserve the current order, because it’s gained so greatly from it. Yet China also has a different vision for its world role than Japan. Its leaders chafe at a Western-dominated global financial and security arrangement they perceive as constraining China’s influence. President Xi Jinping hinted at just that in a speech in late March, when he called for “a regional order that is more favorable to Asia and the world,” in which China plays a vital part. “Being a big country means shouldering greater responsibilities for regional and world peace and development,” Xi said.
The AIIB has come to represent those ambitions. Since the bank would be steered by China, Beijing could use it to draw other emerging nations into its orbit and advance its own political and economic interests. That was made clear when the mainland rejected Taiwan’s application to join, apparently over what to call the island. China still considers it a runaway province.
Washington fears China’s bank will have looser standards—on labor practices and environmental protection, for instance—making its project financing more attractive than funds from the stricter ADB or World Bank. In that way, China could water down American influence. That’s why Nathan Sheets, the U.S. Treasury under secretary for international affairs, insisted recently that new entrants such as the AIIB “should be designed to add value to the system as a whole, and have a clear role alongside of, and complementary to, the existing institutions.”
The AIIB is only part of a larger Chinese agenda to remake the economic order. Beijing has called for an end to U.S. dollar dominance, promoting its own currency, the yuan, as a replacement in international trade. China has been lending money to needy—and sometimes troubled—countries, becoming like the World Bank. While the U.S. pursues the TPP, China has launched its “one belt, one road” agenda—a series of infrastructure projects aimed at linking the Chinese economy more tightly to the rest of Asia and Europe. Organizations such as the AIIB “are going to give considerably more voice to China, and we are going to have no influence over them,” says Benn Steil, director for international economics at the Council on Foreign Relations in New York. “And that’s a problem.”
At least in part, the U.S. can blame itself for China’s actions. Beijing has justly asked for a renovation of IMF governance to give it the sway to match its importance in the global economy. But that’s been stalled by fractious U.S. domestic politics. Washington’s reluctance to make room for China at the table of power may have convinced the leaders of the People’s Republic they are unwelcome at America’s dinner party.
Can China be co-opted into the U.S. establishment? There may be no way, for instance, to dissuade Beijing from promoting the yuan as a rival to the dollar. The No. 1 status of the greenback leaves China’s wealth and economic health reliant on U.S. policy—a predicament Beijing desperately wishes to change. In March, China and Canada launched the first yuan trading hub in the Americas. Such hubs exist in London, Singapore, and elsewhere.
China has a long way to go before it can really challenge the financial order. The AIIB, with initial capital of $50 billion, will have a much smaller impact than the World Bank, which expects to have $278 billion by the time the AIIB raises its funds. And China’s international lending has exposed Beijing to risk. The tens of billions of dollars it has lent to Venezuela have compounded that country’s economic collapse. Only 2 percent of global payments were made in yuan in March, according to clearing system Swift, compared with 45 percent in dollars.
Before China can truly rival the U.S. as the captain of global finance, the country will likely have to undergo a thorough economic, and perhaps even political, transformation. The yuan is not fully convertible, foreign access to Chinese assets is restricted, and capital flows in and out of the country are controlled. The process by which China’s leadership makes its economic decisions is locked tightly inside a black box. Simply put, the country doesn’t yet offer what the world demands of a leader—and probably won’t for a long time.
However, its growing prominence is unavoidable. “The attempt to lock the Chinese out of a bigger role in the international system is going to fail,” says Columbia’s Curtis. If China isn’t offered a seat at the table, it will simply take one.
Schuman is the author of Confucius: And the World He Created.