European Affairs

Perspective: U.S. Loses in Attempt to Isolate New Chinese Development Bank     Print Email
By Alex Privitera, Director Business & Economics at American Institute for Contemporary German Studies

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The recent spat between the U.S. administration and the UK government over the UK decision to join, over U.S. opposition, the Chinese led Asian Infrastructure Investment Bank (AIIB) as a founding member has triggered much public noise.

Initial reactions on the U.S. side went from surprise to outrage, with Washington accusing British cousins of jeopardizing the global order and the “special relationship,” in the name of short sighted commercial interests. U.S. officials conceded that the lack of progress in implementing the long overdue reform of the governance structure of the big Washington based international organizations, the World Bank and, primarily, the International Monetary Fund, had complicated matters. However, the reaction in Washington to London's decision to ignore U.S. concerns was one of ill concealed anger. When Germany, France and Italy chose to join ranks with the UK, the failure of the US approach, centered around a strategy of increasing containment, was complete.

Does this mean that China successfully managed to drive a wedge between the U.S. and some of its closest European allies? Perhaps, but much will simply depend on how the allies handle the fallout of the ill timed spat from now on. And the U.S. is now wisely trying to walk back some of its petulant opposition.

Talks between various Europeans and the U.S. on how to deal with the AIIB had taken place over many months. It was already clear that London, Berlin, Paris and Rome did not fully share the U.S. arguments about maintaining high standards for development loans as concern about increasing Chinese clout in international monetary issues. With the U.S. Congress torpedoing the mild reform of the IMF which, if fully implemented, would have given emerging economies more political weight in the fund, the fate of the U.S. strategy to isolate the AIIB was sealed. Against this background any lecturing of close allies ended up sounding suspiciously petulant.

It is true that the sudden decision announced by the Chancellor of the Exchequer George Osborne was driven by purely domestic considerations rather than a strategic vision of Britain's place in the twenty first's century's world. Ultimately, the UK government is in campaign mode and London wants to profit from the Chinese push to turn its currency into one of the leading reserve currencies. But by now everybody should have realized that the government of David Cameron governs by making headline grabbing announcements. This was one of those, and should not have come as a complete surprise.

Yet, dismissing Cameron's decision as merely campaign driven, would do no justice to his government. The prime minister genuinely acts in the belief that he is emulating the German Chancellor Angela Merkel whom, he thinks, is repeatedly visiting Beijing simply in order to promote German economic interests. Who can blame him for thinking that?

However, even this explanation falls short of what is really at play here. The Europeans have concluded that is more beneficial to have a say, albeit limited, in a new international body, than to opt for an adversarial approach, one they very much doubt can be sustained over the long term.

And even for the Chinese, establishing the AIIB is not only a reflection of their desire to challenge the U.S. or prepare the renmimbi for its future role as one of the leading reserve currencies. In other words, Beijing is not only acting out of a position of strength. In fact, just as Beijing will increasingly need to attract foreign capital into mainland China to manage funding for its domestic economy, it also needs a more international approach towards its own investments abroad. The eurozone's own debt crisis has shown how quickly and easily the creditor debtor relationship can go sour. The Chinese leadership seems to have recognized that perhaps in the long run it is best to dilute their own footprint, at least to some degree.

The Europeans have decided that it is worthwhile to explore this multilateral path. Unlike the U.S. they don't seem to be sure that it will necessarily lead to unfettered Chinese pre-dominance. They still act in the belief that international institution building is an effective way to manage potential conflict. In that respect, despite some tactical mistakes, the European approach is very consistent. It would have been much better if the decision would have been taken by Europeans in concert. But increasingly, that appears not to be David Cameron’s way.

 
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The University of Maryland has received a Jean Monnet grant from the EU to conduct a series of policy exchanges between Europe and the US on filling infrastructure needs and the utility of public/private partnerships as the financing mechanism. If interested in participating in or receiving more information about these exchanges, please contact Rye McKenzie (rmckenzi@umd.edu).

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