Chinese Cash Versus American Might
If you’d never heard the acronym AIIB until this week, don’t blame yourself. Strictly speaking, the Asian Infrastructure Investment Bank doesn't even exist yet. But the Chinese-created alternative to the World Bank and International Monetary Fund is turning out to be extremely important. More than 40 countries have applied to join, almost all of them close U.S. allies -- and they've applied despite aggressive American efforts to discourage them.
The upstart bank is already emerging as a major foreign policy victory for China, one all the sweeter because it's a direct diplomatic win over the U.S. It raises a very basic question: What's going on here? How can nations that depend on the American superpower for their security -- including protection against China -- so cavalierly ignore U.S. interests in favor of the only global state that can credibly challenge U.S. superpower status?
The answer begins with the Chinese gambit of creating a new international financial institution to fund infrastructure projects in Asia. China's most salient explanation for creating the bank is that it doesn't exercise power in the existing international financial institutions commensurate with its global importance and economic heft. In 2010, IMF members reached an agreement to give more governance authority to China and Brazil, but Congress has never ratified it. World Bank reform that would enhance China’s governance role is no more apparent.
That explanation functions as a useful proxy for an underlying geo-economic reality. The architecture of the international economic and financial order was crafted in an era before China's epochal rise. It reflects an older distribution of economic and financial power, one that heavily favors the U.S. and western Europe. That, of course, is why the U.S. would like to preserve it.
As China was rising, it found it advantageous to join international economic institutions, especially the World Trade Organization, and to adhere, for the most part, to their rules -- even if those rules were stacked against China. Now that China has become more economically powerful, it naturally wants to change the rules of the game.
The founding of the AIIB is important because it represents an overt Chinese effort to gain leverage in the arena of international financial institutions -- by creating an alternative institution that it would dominate in much the way the U.S. dominates the World Bank and IMF. The message from China to the U.S. is clear: either conceed to us the place we deserve in existing international institutions, or we will go around you and start our own.
Given that the AIIB is functioning as a direct threat to American hegemony in international financial institutions, it's no surprise that the U.S. would try to discourage its allies from joining. Yet those efforts have been spectacularly unsuccessful.
It's not just that staunch U.S. allies such as the U.K. and Germany have applied to join, which would bad enough from the American perspective. Countries that rely wholly on bilateral security treaties with the U.S. to protect themselves against China have applied, too. These include Australia, South Korea and, perhaps most remarkably, Taiwan, which China considers to be a natural part of its own country. Japan, which is so concerned about the Chinese security threat that it's considering amending its pacifist constitution, hasn't applied yet -- but one of its ambassadors recently said that it expected to apply in the future.
In the past, countries whose security depended on a superpower didn't run headlong into the economic arms of the country they feared. During the Cold War, for example, America's western European allies didn't enjoy close trade ties with the Soviet Union. Similarly, eastern bloc countries didn't form economic bonds with the U.S. Seen through the Cold War lens, it would be almost impossible to picture the kind of institutional embrace of China that has taken place in connection with the AIIB.
But the new era of Cool War operates on very different rules from the Cold War. The essence of the new Cool War is precisely that countries that are geopolitical opponents are simultaneously economic cooperators. China and the U.S. are the prime exemplars. One is the rising power and the other is the status quo power, so they are locked in a struggle for geopolitical dominance. Yet the U.S. is China's most important export partner, and China owns a higher percentage of U.S. government debt than any entity other than the U.S. government itself.
Other countries, including Asian tigers that fear Chinese security dominance, follow suit. South Korea and Taiwan trade extensively with China, as does Japan, not to mention Australia and the Philippines. These countries participate in the so-called hub-and-spokes Pacific security system, with the U.S. at the center and bilateral security arrangements reaching out to each. And somehow all this is compatible, notwithstanding the appearance of contradiction.
The flight to join the AIIB over U.S. protest is the latest manifestation of the contradiction of Cool War. U.S. security allies feel comfortable deepening their international economic relationship with China, because the U.S. itself has led the way. We're now learning that, under the new rules of the game, there's not much the U.S. can do to discourage them.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Noah Feldman at firstname.lastname@example.org
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