US-Japan dilemma over China-led AIIB

March 31 was the deadline for countries to join as founding members of the Asian Infrastructure Investment Bank (AIIB), initiated by China. As of now, over 40 countries are expected to endorse the AIIB. They include India, Russia, Britain, Germany, Italy, South Korea, Australia and ASEAN countries. These countries are quite anxious not to miss the bus.

However, the AIIB initiative appears to have created fissure among the allies of the US – in Asia as well as Europe. While many of its allies like Germany, Britain and South Korea have decided to join the AIIB, the US and Japan have decided to remain out of it.

In fact, China’s decision to establish the AIIB was one of the most significant diplomatic initiatives in the region and expectedly, it generated a great deal of interest as well as concerns among the major countries of the Asia-Pacific region. When it was launched in October 2014 with a proposed capital of $ 50 billion, many feared that it could pose a challenge to the Asian Development Bank (ADB) and the World Bank.

There has been, however, a perception in Asia and other regions that these institutions, which have been the major fund-giving bodies of the world for well over 50 years, have been dominated for a long time by the US and its allies like Japan, Germany and others. As the need for developing infrastructure facilities has grown massively across the Asian continent, there emerged a funding gap which the old funding agencies alone cannot fill. In this sense, China’s initiative is timely and given its present economic and political clout, one can understand the rationale for its ambitious project. China also argues that the AIIB will focus only on infrastructure projects whereas the World Bank and the ADB have distributed their funds in a wide variety of economic and social sectors.

Further, China also complains that even though it is the largest economy in Asia, its power is not reflected in the actual operations of the ADB. It is true, Japan, the founder of the ADB, does not enjoy veto power, but in combination with the US, it controls about one fourth of the votes whereas China’s voting share is only about 6%. Japan has also always managed to keep a Japanese national as the Bank’s president ever since its inception. Further, attempts to increase the vote shares of other countries have proved unsuccessful and this feeling of alienation is also one reason that has driven China to float the AIIB.

Driven by its suspicion of western domination as well as its own growing self-confidence following its remarkable economic growth in the last several decades, China has been keen to expand its economic influence in the region. Its proposal to promote economic cooperation with Eurasian countries by contributing $40 billion to the Silk Road Fund is another of Beijing’s regional initiatives to bolster its influence.

When China launched the AIIB in October 2014, it was attended by 21 countries, mostly from Asia. They included India, Thailand and Malaysia. However, conspicuous by their absence were countries like Japan, Australia and South Korea, close to the US. Washington had lobbied quite hard to dissuade its allies and friendly partners from supporting the AIIB, because it thought the AIIB would undermine its preponderance in the region.

One could see some major differences in the attitudes of the US and China. The US State Department says that the new infrastructure bank should fulfil certain international standards of governance and transparency in its lending policies. Many in the US and Japan fear that China might use the new bank as an instrument for leveraging its own political and economic objectives. They have expressed their concerns about certain ambiguous aspects of the AIIB proposal.

In a bid to dispel these doubts and suspicions, China has assured that it will not insist on exercising any veto power in the bank. China’s stress on no-veto position was obviously meant to entice countries like South Korea, Japan and Australia to support the AIIB. Chinese President Xi Jinping in a moderate tone admitted that the AIIB in its multilateral rules, procedures and operations has to learn from the World Bank, the ADB and other such institutions. Jim Liqun, the official picked by the Chinese government to set up the bank, also stressed, “China will not bully other members, but will work together with them to reach consensus in all the decisions we make. China will not brandish its majority status.”

Since 31 March has been set as the deadline for countries to join as founding members, they are quite anxious not to miss the bus. Though they can join the bank as ordinary members after that date, the difference is that only founding members can play a role in determining the rules and regulations of the bank. There is a strong feeling among the Western allies that they, as founding members, can exercise a great deal of restraint and moderation on China at the time of framing the rules and regulations of the bank and that it would be an advantage to be “insiders” at the time of framing the rules.

Important US allies like Britain, Germany, Italy, South Korea and Australia have decided to join the AIIB. UK’s decision join the bank on March 12 triggered a trend on the part of many European countries to follow suit. George Osborne, British Chancellor of Exchequer, even stated that the AIIB would fill a major gap in the infrastructure investment in Asia. He said that joining the AIIB at this stage would create “an unparalleled opportunity for the UK and Asia to invest and grow together.” As one of the founding members of the new bank, Britain will participate in important discussions concerning issues on governance and accountability arrangements of the new institution.

In the meantime, several highly placed officials of the IMF, World Bank and the ADB have expressed their support for the new institution. ADB President Takehiko Nakao met with China’s Finance Minister Lou JIwei on March 24 and expressed his hope to work with the AIIB as there was great room for cooperation in building infrastructure. Similar hopes were also expressed by Christine Lagarde , IMF’s director.

Despite all these strong pro-AIIB trends, both the US and Japan have decided to opt out of joining the AIIB as they still have serious reservations. Opinion in Japan is quite divided on the issue. Though Japanese Finance Minister Taro Aso indicated on March 20 that Japan could still ease its position, the Abe administration, because of its strong commitment to the US as well as its strained relations with Beijing, decided not to join the Bank. Foreign Minister Fumio Kishida commented on March 30 that Japan has not received any clear assurances dispelling its concerns on the bank’s governance. Strong business groups in Japan, however, worry that they might miss many investment opportunities which could now go to many developed Western countries. Having opted out of the AIIB, it will be interesting to watch what strategies both the US and Japan will adopt in the coming months.

(Prof K.V. Kesavan is a Distinguished Fellow at Observer Research Foundation, Delhi )

(courtesy: ORF)

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