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If you can’t beat them, join them

27th March 2015

By: Keith Campbell

Creamer Media Senior Deputy Editor

  

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China’s emergence – or, more accurately, re-emergence – as one of the world’s most important economies and influential States received a powerful endorsement earlier this month. In a move that surprised nearly everyone, the British government announced that the UK would become a founder member of the Asian Infrastructure Investment Bank (AIIB), a very major Chinese initiative.

Many see the AIIB, formally set up under Chinese leadership in October last year by 21 countries, as a rival (or, less alarmingly, an alternative, or, encouragingly, as a complement) to the major established international financial bodies – the World Bank (dominated by the US), the International Monetary Fund (IMF – dominated jointly by the US and Europe) and the Asian Development Bank (ADB – dominated by Japan). All these agencies have found it very difficult to adjust to the dramatic rise of China and give that country the weight it deserves in their counsels. (Reform of the IMF has been agreed by all the major members, including the US administration, but has been blocked by the US Congress largely, it seems, for domestic reasons.) China has huge foreign reserves and the creation of the AIIB will allow Beijing to put some of them to productive work.

The AIIB will have about $50-billion in capital initially, which would make it smaller than the ADB and much smaller (about 20%) than the World Bank. However, its authorised capital is $100-billion. And it is intended to focus on investment in infrastructure in Asia, whereas the other agencies are concerned with development in general. It should be noted that the head of the World Bank, Jim Yong Kim (an American) has welcomed the creation of the AIIB and has stated that his institution is cooperating closely with the Chinese on the setting up of the governance system for the AIIB. ADB head Takehiko Nakao recently affirmed that his institution was talking to the AIIB and would cooperate with it.

Foolishly, however, the US has shown hostility to the AIIB. Officially, this is about concerns over its governance and whether loans will take labour and environmental issues into account. But it is widely –nay, pretty much generally – believed that Washington’s objections are political, that the AIIB is seen as a challenge to the dominant position the US has held in Asia since 1945. After all, if America’s concern was with governance and suchlike issues, surely the best way to address them would be to become a founder member of the bank?

Instead, not only has the US not joined the AIIB, it has been reported that Washington pressured Australia, Japan and South Korea into not joining the AIIB. New Zealand did join; but that was hardly significant. More importantly, so did India. Other economically important countries that have joined include Indonesia, Malaysia, Singapore and Thailand.

Of course, at an important level, the AIIB is a challenge to the US. But Washington’s opposition was not and is not going to stop it. The world balance of economic and financial power has shifted and although America remains number one, it no longer has the unchallengeably dominant position that it enjoyed even just ten years ago. The US government is simply refusing to face reality. If Washington had welcomed the new bank and offered to join it (Beijing couldn’t have refused), it would have completely disarmed the widespread perception of the AIIB as a challenge to America. Instead, the US administration set itself up for, sooner or later, a fall.

As it turned out, that fall happened a lot faster than anyone expected. The British decision seems to have come like a bolt from the blue for most observers (although London did forewarn Washington about it; the White House seems not to have registered it). The Americans were so shaken that senior officials publicly (and foolishly – it only made America look bad and seem weak) admonished the UK for its decision. London, home to what is probably still the world’s single most important financial centre, had blown Washington’s anti-AIIB policy out of the water. Under the political cover created by the British, France, Germany and Italy then also decided to join the AIIB.

Britain is behaving perfectly in line with long-standing national precedents. The UK is a trading country and has depended on international commerce since the late Middle Ages. Since the eighteenth century London has been a major (for a long time, the major) world financial centre. The British have long sought trading and investment opportunities wherever and whenever they could. And they still do. The emergence of a new strong economic power has almost always been seen as an opportunity, not a threat. It would only become a threat if that wealth were turned into great military power and that power were aimed (directly or indirectly) at Britain.

Thus, the UK welcomed the unification and rise of Imperial Germany in the late nineteenth century. It was Germany, after the accession of Kaiser Wilhelm II, that turned hostile to Britain and drove the British into the arms of their hitherto traditional rivals, France and Imperial Russia. The British also welcomed the rise of the US and invested heavily in that country. That relationship turned out to be a much happier one. And Britain also was enthused by the rise of Japan and eagerly embraced the opportunities presented. In fact, the first peacetime alliance ever concluded by the UK was with Japan, in 1902. (It was subsequently renewed but later allowed to lapse, as a result of pressure from Commonwealth countries and the US: in retrospect, a serious mistake! To digress, the UK and Japan re-established formal defence cooperation ties in 2013.)

UK Chancellor of the Exchequer George Osborne summed up the advantages for his country. “Joining the AIIB at the founding stage will create an unrivalled opportunity for the UK and Asia to invest and grow together.” It will, for example, allow British companies to participate in AIIB-funded projects. The British are happy, the Chinese are happy. To get to win-win situations, you have to be realistic.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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