Shortly after arriving at the G20 economic summit in Hangzhou China last week, Canadian Prime Minister Justin Trudeau announced that Canada would join a long list of U.S. allies who have joined the Asian Infrastructure Investment Bank (AIIB), despite behind-the-scenes warnings from the Obama administration. Today, Japan is the sole remaining U.S. ally that has not sought to join the organization.
Tensions between China and the U.S. stretch from diplomatic furor over Chinese expansionism in the South China Sea to the negotiation of competing free trade areas such as the U.S.-led Trans Pacific Partnership (TPP). However, the AIIB has been a particularly strong and persistent point of contention for U.S. policymakers. As demand for infrastructure financing in Asia rises to record highs, what is it about this new bank that draws America’s ire?
There can be no doubt that the funding provided by the AIIB is necessary. Most studies estimate that Asia will need roughly 8 trillion U.S. dollars in new infrastructure financing by 2030, while the global infrastructure spending gap is around $1 trillion per year. According to Jan Zilinsky, former analyst at the Peterson Institute and Cipher Brief expert, “private and official institutions are in agreement that massive infrastructure gaps warrant new investment.” To many, it is unclear how the current financing architecture for global infrastructure spending could possibly rise to cover this desperate need.
Image: Government of Singapore
Enter the AIIB. First proposed by China in 2014, the bank’s charter went into force in December of 2015, and it has attracted 57 “founding member” states with a simple and seductive message: that current multilateral institutions – the World Bank, the IMF, and the Asian Development Bank (ADB) in particular – are incapable of providing capital at the scale and pace necessary to meet Asian demand for infrastructure financing. The AIIB, on the other hand, promises to begin reversing the funding gap, supported in no small part by massive commitments from Beijing. The bank has already pledged to approve an initial $150 billion in infrastructure projects across the region and says that it will announce new projects on a quarterly basis.
However, critics remain wary of the new institution. Perhaps the most common argument against the AIIB centers around the bank’s governance structure and cooperation with international norms. These concerns are not without merit. As the largest shareholder by far (26 percent), China will enjoy wide scope to influence the AIIB’s operations. Based in Beijing and led by a Chinese director, some worry that the bank may succumb to corruption and fund poorly planned projects or grant unfair construction contracts to Chinese State Owned Enterprises (SOEs).
There is an undeniable precedent for such behavior by Chinese-backed projects. Just last year, Sri Lanka suspended the $1.4 billion Colombo Port City project – funded by a Chinese company – citing concerns over bid-rigging. Yet, although it is the largest stakeholder, Beijing is hardly the only voice on the bank’s board of directors, and a clear abuse of its influence would likely alienate the AIIB’s 56 other members. Furthermore, notes author of Connectography and Cipher Brief expert, Parag Khanna, “most of the AIIB’s staff actually comes from the Asian Development Bank and the World Bank. You’re not going to take people who have decades of experience in implementing high standard projects and just throw all that out the window.”
In reality, it seems the backlash against the AIIB in Washington policy circles is a reaction to geopolitical, rather than operational, concerns. For many, the AIIB is just one component of a Chinese foreign policy focused on achieving regional economic hegemony. Joined by the New Development Bank (formerly known as the “BRICS Development Bank”), the Silk Road Fund, and the “One Belt, One Road” regional development initiative, the AIIB is seen as yet another tool in China’s expanding arsenal of economic weapons, designed to make dependents of its neighbors.
At the same time, massive overcapacity in China – especially in the production of goods like steel and aluminum – has led the country to create infrastructure projects abroad in order to consume some of this capacity and prop up ailing SOEs. As Sean Miner, China Program Manager at the Peterson Institute, noted in an interview with The Cipher Brief, “China is just looking to build as many infrastructure projects as possible… They have even admitted that some of these projects won’t be profitable, they’re more for strategic reasons.” Many see the AIIB as a possible extension of this policy to artificially prop up the Chinese economy by funding major projects abroad.
These criticisms of the AIIB, and the motivation behind its creation, are at least partially correct. However, despite a behind-the-scenes effort by U.S. diplomats and policymakers to limit the bank’s membership, almost every American ally has joined, or intends to join, the new multilateral institution.
Thus, in Khanna’s opinion, Washington is left with little choice but to “drop the act and join the AIIB, because you will never be able to influence its policies unless you’re a member.” That is probably sound advice but, as anti-China rhetoric in the presidential race reaches new heights, Congress looks unlikely to pass the bill necessary to approve capital for the bank.
Excluding a sudden change of heart, the chance of American participation remains slim. Meanwhile, the AIIB marches on.
Fritz Lodge is an international producer at The Cipher Brief.
