China’s economic power proves to be a strong drawcard

The story of the Asian Infrastructure Investment Bank (AIIB) is turning into a diplomatic debacle for the United States. By setting up and then losing a power struggle with Beijing, Washington has sent an unintended signal about the drift of power and influence in the 21st century.

As soon as China made clear back in 2013 that it intended to establish the bank, the US set about persuading its allies to boycott the institution.

The Americans argued that the Beijing-backed bank might follow less scrupulous lending standards than the World Bank on issues such as clean government and environmental standards.

But it was also pretty clear that this was a power struggle. The World Bank is based in Washington and its president has always been an American. The AIIB, a potential rival, will be based in Shanghai and China is the leading shareholder.

Initially, Japan, South Korea and Australia decided to stand aside from the AIIB, as did all the big European nations. But the news that Britain intends to join the bank as a founder member looks like opening a decisive crack in the anti-AIIB front. I spent last week in South Korea and most analysts there believe it is only a matter of time before the Seoul government signs up. Australia is already reconsidering its position and other large European Union states are likely to follow Britain’s lead. (France, Germany and Italy have said they will join the AIIB.)

At that point, the only significant holdouts would be Japan and the US. That would look very bad for America. Rather than rallying its friends in a principled opposition to a flawed venture, the AIIB episode will make the US look isolated and petulant.

The story will be all the sweeter for China because it has had a bad couple of years in its developing struggle with America for power and influence in Asia. By taking an increasingly aggressive stance in territorial disputes with its neighbours, it had inadvertently managed to strengthen America’s position as a series of countries — including the Philippines, Japan, Australia and India — moved to bolster diplomatic and security ties with the US.

But China seems to have learnt from this experience. In recent months, it has been less overtly confrontational towards its neighbours and instead stressed its desire to build economic ties, including a new Silk Road of trade and infrastructure through Central Asia, matched by a “maritime silk road” across the seas of South-east Asia. The AIIB could play a big role in financing these initiatives.

The hope is to persuade Asian nations that, rather than facing a threat from the rise of China, they stand to benefit from its growing wealth. Most of China’s neighbours — as well as the British, who have their own hopes for attracting Chinese investment — seem to have concluded that it would be foolish to miss out.

FACE-OFF BETWEEN U.S. AND CHINA

The AIIB episode demonstrates that, in the struggle for influence in Asia, China’s strongest card is its growing economic power.

America’s strongest card, by contrast, is its military might and network of security treaties. The countries caught in between face a dilemma. Japan, Australia, the Philippines and South Korea all have security treaties with the US. But every one of them does considerably more trade with China than the US.

South Korea, for example, relies on American power to ward off North Korea and perhaps, one day, as a hedge against China itself. But China takes more than a quarter of South Korean exports, compared with about 12 per cent that go to America.

As a result, the South Koreans are frequently pulled in two directions. The AIIB is one example. Another is the fierce debate in the country about whether to accede to a US request to install an anti-missile system that may be useful in defending against North Korea, but which the Chinese see as a threat to their own security.

The AIIB episode will only increase American and Japanese incentives to conclude negotiations on the Trans-Pacific Partnership, a trade agreement that would bring together 12 Pacific nations, but which rather pointedly does not include China.

Once again, the Americans argue that this is a question of maintaining standards of economic openness rather than any effort to build an anti-Chinese bloc. But even some of their allies do not wholly buy this argument and some mutter that it is a bit peculiar to build a new trade agreement that excludes China, the leading trading power in the Asia-Pacific region.

The big question in this Asian arm-wrestling match between Washington and Beijing is whether America’s military muscle will ultimately matter more than China’s economic might.

The answer will vary issue by issue. But, in general, the more a country feels threatened by China, the more it is likely to lean towards America. That is why Japan is likely to be the last big Asian holdout against the AIIB.

By contrast, if China is sensible enough not to show its fists too often, it has a good chance of seeing its economic might gradually translate into increasing political and diplomatic weight — even with close allies of America.

There was a time when the world was said to bow down before the mighty dollar. But the story of the AIIB suggests that, these days, even many of America’s closest allies have yuan signs in their eyes.

FINANCIAL TIMES

ABOUT THE AUTHOR:

Gideon Rachman is chief foreign affairs commentator at the Financial Times.