Why the US needs a new approach to China’s development bank

The founder of modern Singapore, Lee Kwan Yew, who passed away recently, had a rather pointed assessment of what’s known as the U.S. “Asia pivot” policy: Americans think of international relations like a movie, imagining that we can hit the pause button when we need to and then push play when we want to return. No doubt, there has been much for the U.S. to focus on elsewhere in the world recently, from Russia to Iran. But in past weeks, it seems that the movie in Asia has been on fast-forward around global development and financing. And once again, the U.S. is scrambling to catch up.

Here is a brief synopsis of what we missed: Under Chinese stewardship, a new and potentially disruptive player in the development banking landscape, the Asian Infrastructure Investment Bank (AIIB), which was initially proposed in 2013 by President Xi Jingping, gathered steam. It’s stated mission is to “focus on the development of infrastructure and other productive sectors in Asia.” It has attracted 57 founding member countries. This group includes some of America’s closest allies – first the UK, followed by Germany, France, South Korea, and Israel, among others. The U.S. and Japan are two of the most prominent players to decline membership.

The AIIB has working capital of $50 billion with potential to go as high as $100 billion – so it is, as yet, smaller than the U.S.-led World Bank ($2223.2 billion of subscribed capital) or the Asian Development Bank ($162.8 billion of subscribed capital). But with so many major countries on board, the AIIB poses a credible alternative to incumbent development banking systems like the World Bank, International Monetary Fund, and others that have been in place, largely unchallenged, for 70 years. It’s a big shake-up for the development world.

The global rush to join the new bank, despite American protestations, is the latest chapter in the larger story of China’s emergence as a prime challenger to the U.S. as the world’s leading economic force. China keeps crossing one milestone after the next – lifting 680 million out of extreme poverty in 30 years; becoming the largest owner of U.S. Treasury securities; the world’s largest trading nation; the world’s largest e-commerce market; and the world’s largest economy in purchasing-power-parity terms. So while China surges ahead in the global economic order, now with the AIIB, the U.S. is following a classic incumbent’s sequence: mounting a defensive campaign, instead of staying ahead of these bursts of change and shaping them. After having failed to stop its allies from joining the AIIB, the U.S. is reinforcing its defensive strategy by pursuing the Trans-Pacific Partnership, a 12-nation trade pact, without China.

The argument for U.S. resistance to the AIIB is founded on rational principles. There are legitimate concerns about China’s poor track record with regard to the transparency and governance of its institutions, not to mention its history of corruption and nepotism along with its lack of a commitment to human rights, intellectual property rights protection, and environmental quality. This new bank raises many questions. For example, will state-owned Chinese enterprises gain preferential access to infrastructure development contracts? Will the leverage that the AIIB gives China over its Asian neighbors embolden its territorial moves, particularly in the South China Sea?

Still, the U.S. policy in Asia has become a “pivot away from China” and this position presents several key risks.

Losing economic and geopolitical leverage in Asia. The AIIB is poised to have disproportionate access to fast growing investment and development funding opportunities in Asia. The opportunity costs of not participating could be quite high, with both economic and geopolitical dimensions.

The evolution of Asian infrastructure will be a critical enabler of growth in the region. Taking part in strengthening the region’s fundamentals, like infrastructure, presents opportunities; this is, after all, widely considered to be the Asian century. Consider that three out of the four largest economies in the world in 2030 are expected to be in Asia; by 2050, half of the global GDP will come from Asia; three of the top six trading partners for the U.S. are in Asia and a fourth Asian country, India, has the potential to become the fastest-growing large emerging market in the world.

Helping to build the region’s infrastructure is also a powerful way of building political capital. Six of the nine known nuclear powers are in Asia and two, Pakistan and North Korea, are highly unstable states. Further west, the stretch from South Asia to West Asia poses an ongoing security challenge for the U.S. and NATO forces. A potential diplomatic breakthrough with Iran could shift the geo-political and economic dynamics not only in West Asia, but across the Middle East as well. Key U.S. allies along the Pacific rim and in the Indian Ocean would like to see the U.S. play a stronger role in counter-balancing China’s growing maritime ambitions. The ability to help craft investments in ports and shipping along with a robust naval presence would have been important signals of commitment to such a counter-balancing role.

Undermining U.S. business interests in China. According to the U.S.-China Business Council, China represents, at least, a $300 billion market for American companies. According to some estimates, U.S. firms have already invested around $70 billion dollars in China since the early 1980s.

Nearly 50% of companies surveyed by the U.S.-China Business Council report that they anticipate double-digit revenue expansion in China, when the study was done in 2014. For a staggering 93% of businesses surveyed, China was among the top five priorities – the top priority for 22%. Another 70% report that their China operations are performing better or the same as their global operations.

American businesses place such a high priority on China despite several challenges including competition with Chinese companies, IPR enforcement, and foreign investment restrictions. Two-thirds of U.S. companies believe that the playing field is uneven and tilted in favor of state owned Chinese companies.

Some companies, such as Facebook, do not even have a formal presence in China and most U.S. tech firms that do have enormous challenges. Companies like Apple and Cisco were dropped from the Chinese government’s approved technology vendors list, after the Edward Snowden leaks about the NSA accessing data from U.S. technology and communications companies. Besides, to quote a former head of the NSA, Mike McConnell: “The Chinese have penetrated every major corporation of any consequence in the United States and taken information.” A weaker U.S. policy apparatus limits the capacity of the U.S. government to negotiate with Chinese authorities to help American businesses do business on better terms.

Missing opportunities to partner with China. The AIIB is just the latest signal that China is ready to collaborate with other world powers to address broad global issues. Beijing has started playing an active role in applying international treaties on issues such as arms and nuclear control – China is part of the international group negotiating with Iran – and climate change. China has also begun to modestly contribute to peacekeeping and humanitarian campaigns. It has joined international anti-piracy naval patrols off the Horn of Africa and has even begun to offer the use of its naval vessels in rescue missions involving non-Chinese citizens.

China is still far from participating in global issues in a manner proportionate to its economic heft. For example, in the recent campaign against Ebola in West Africa, China contributed a meager $120 million in aid and doctors, despite its outsize economic and business interests in Africa. In comparison, the U.S. spent more than $1 billion on Ebola. It is essential for the U.S. to find new ways to collaborate with China on multiple fronts and use its influence to encourage Beijing to become its partner in the face of global crises. The recent U.S.-China climate deal is a step in the right direction – but it’s not enough.

Is it wise to pivot away from China? I would say an emphatic no. As Henry Kissinger warned, if a Cold War were to develop between the countries, it “would arrest progress for a generation on both sides of the Pacific.”

The AIIB deadline has passed. It is time to think about it differently and for the U.S. and organizations like the World Bank and others to work out how to play with it.

This article is published in collaboration with Harvard Business Review. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Bhaskar Chakravorti is the Senior Associate Dean of International Business & Finance at The Fletcher School at Tufts University and founding Executive Director of Fletcher’s Institute for Business in the Global Context. He is the author of The Slow Pace of Fast Change.