Pivotal Moments – United States’ lessons from the AIIB episode

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The New Economic World Order

Since the post-war era, growth in United States has often been perceived as a rising tide that raises all boats and when US sneezes, the world catches a cold. The 2008 financial crisis and the global recession it triggered is testimony to US hegemony over the world economy. And yet, according to the US Department of Agriculture’s latest macroeconomic projections, US will barely remain the global leader. The recent International Monetary Fund’s (IMF) "World Economic Outlook” report also hinted global economic disappointment in the foreseeable future whereby countries need to “adjust to a new reality” of stagnant living standards. The IMF and World Bank, collectively known as the Bretton Woods Institutions, were established as twin intergovernmental pillars to support the world’s economic and financial order. The rise of Asia, most noticeably China and to a lesser extent India has inexorably shifted the global economy’s centre of gravity away from Europe and the United States. As the world ushers in an era of new economic order, Asia’s massive infrastructure funding gap far exceeds whatever global financial institutions can support. A new pillar of support in the form of the Asian Infrastructure Investment Bank needs to be established.

Left out in the cold, Obama-self

Despite US recognizing the need for such institutions and Catherine Novelli, US Under Secretary for Economic Growth stating in an interview with CNBC that US supports the AIIB’s goal in infrastructure development, the US government has been lobbying her western allies against being part of the new initiatives. Much to Washington’s dismay, some of her closes allies, including the United Kingdom, Germany, France and Italy have already expressed interest in becoming founding members of the AIIB. The defiance of her closest European allies seemed to have left US out in the cold alone. The entire episode clearly highlights how dysfunctional Washington has become, especially in her foreign policies, as well as the extent of Washington’s influence over her western allies. As the list of countries eager to sign up for the AIIB grows ever longer, maintaining her stance will make US seem ever more insular. As US Secretary of Defence Ashton Carter began a tour of Asia in an attempt to breather new life into US’s “pacific pivot”, the US has clearly encountered a fresh stumbling block. This embarassing diplomatic blow may yet catalyze Washington’s much needed reforms through the many lessons US stands to learn from this episode.


Former US Treasury Secretary, Lawrence Summers, had clearly singled out the root of the problem. “They can quite legitimately ask, ‘excuse me, you guys have had 5 ½ years to support a reasonable role for us in the IMF, and you have not done it,’” he said as a campus forum in Cambridge. To understand China’s motive behind the new initiative, one need only look at the allocation of voting rights in the US-led IMF. China has merely 3.81% of voting rights in the IMF. In contrast, US and Japan have 16.8% and 6.23% respectively. An 85% majority is needed for any resolution to be passed. With US congress continuously blocking the much needed IMF reforms and depriving emerging economies of stronger voices, US lawmakers’ inaction had landed her country somewhere between a hard place and a rock. Washington’s current state of bipartisanship is clearly dysfunctional. Barely two years ago, the US Federal Government shutdown of 2013 clearly exposed the free country’s flawed political system on the international stage. More recently, 47 Republican senators wrote an open letter to Iran, blindsiding their own President with regards to Iran’s nuclear deal. Until US lawmakers can muster sufficient political will to push through reforms for such structural failures in Washington, we may yet expect further erosion of US influence and, along with it, any chance of success in her pacific pivot.

Tackling the political gridlock may be a long shot. However, establishing proper frameworks to reduce impact of political gridlocks in Washington from affecting IMF and World Bank may be more plausible. Infrastructure development should not be politicized. While US lawmakers play armchair politics, citizens across continental Asia do not have access to basic necessities such as clean water, proper sanitation and healthcare. The continuous lack of US lawmakers’ approval to IMF reforms undermines the IMF and its ability to instill confidence when there are substantial uncertainties surrounding emerging markets. This has to change.

Integrating China

Much of the attention of US’ pacific pivot has been focused on the use of deterrence. While this is a crucial component of maintaining peace and stability in the pacific region, a two-pronged approach, which includes diplomacy in the mix, may prove to be more sustainable. US must not lose sight of the importance of diplomacy and recognize that the rise of China is inevitable. Instead of swimming against the tide, US should seek to integrate China into the international community. US’ stance on the AIIB makes herself to be perceived by the international community as insular, overly paranoid and, to some extent, small-minded. While the issue of governance raised by Washington in the AIIB may be legitimate and well grounded, US cannot simply urge Beijing to play a greater role when it is in US interest to do so (as in the case of dealing with Russia and North Korea) and then view her through lens of suspicion when otherwise.

Harvard’s Allison Graham also noted that the odds of war due to transition of superpowers, since the 1500s, are about 3 to 1. Integrating China to the global community can help prevent the 2 countries from falling into the Thucydides trap. That should be the top priority of US foreign policy. Through integration, China, along with any other countries, will be so economically entangled that the cost of conflict would outweigh any benefits an aggressor can hope to achieve.

The wrong part of Asia

As Singapore’s late founding father Lee Kuan Yew often said, “America will remain the world’s dominant power in the 21st Century only if it is the dominant pacific power.” The future will neither rest on the success of Iran’s nuclear deals nor the outcome of the Yemen conflict. It will be shaped by how existing powers handle the rise of another superpower. With US up in her neck trying (but failing) to broker peace in the Middle East, US does not have sufficient resource for her pacific pivot. The Middle East has had at least 65 conflicts since the end of World War 2 and Yemen has been in a state of constant conflict for the better part of the century. Perhaps it is time for Washington to consider the option of letting the Middle Eastern countries continue their feuds and civil wars, while redirecting her focus to the Asia Pacific region.

The best way to win the game

US official response to opposing the AIIB relates to the issues of governance. However, fear of China’s expanding geopolitical influence may be closer to the truth. Even if the official response do hold water, excluding herself in shaping policy, and hence the governance of the AIIB, sounds like a poor move. Besides, given that the bank will be under close scrutiny, the AIIB is likely to adopt international best practices. By resisting the AIIB, US had missed an excellent opportunity to help shape policies in the AIIB. What US lawmakers failed to understand was that the best way to influence the game is to play, instead of sitting along the sidelines.

US may have missed an opportunity in shaping the future of AIIB, but it is definitely still has game, if she plays her cards right. Going forward, it is important that US seeks to use diplomacy in addition to the use of deterrence in shaping her pacific pivot. It may also be timely to fast track the Trans-Pacific Partnership (TPP) treaty which may help US gain some political capital from participating countries, especially those who are also founding members of the AIIB.

Survival of the fittest

It is naïve to believe that China’s initiative to establish the AIIB is completely auturistic and we certainly can expect China to use the AIIB as a foothold in expanding her influence at the expense of established powers. However, there may be intrinsic benefits developing countries seek to gain from increased competition between AIIB and exisiting institutions.

From the entire AIIB morass, the greatest lesson for US is probably what history has taught us: the rise and fall of superpowers throughout history proved that no country has a right to dominance forever. As US continues on her pivot, she needs to adapt, else, she may find her dominance diminishing in the new economic world order. Afterall, it is a dog-eat-dog world and only the strongest survive.