The Asian Infrastructure Investment Bank: lessons for an Australia China strategy?

The Australia China relationship prospered while it required no real strategy apart from making hay. Both countries benefited enormously from the expansion of economic and people-to-people ties over the last few decades, with Australia running massive trade surpluses. But China has changed and is seeking a bigger role in global politics, while the US is resisting. How will China act, now that it is a peer competitor to the US? The Morrison Government has made up its mind, campaigning against China in the Pacific, in 5G technology, claims about foreign interference and even harnessing rising anti-China sentiment to imply blame for Covid-19. China is fighting back with economic coercion and it is difficult to discern a strategy for the relationship. Meanwhile, the US has been stepping back from international institutions and China has been stepping up, including creating new ones. Even if trust has declined, is there anything we can learn from our experience in international institutions about how to channel our relationship with China into more productive purposes than mutual slanging matches? The Asian Infrastructure Investment Bank provides one interesting case study in how countries have quietly and professionally cooperated with China for productive outcomes, while conceding that the world is changing.

Meeting AIIB President Jin Liqun

At around the time of the collapse in US confidence after the so-called Global Financial Crisis, the authoritarian leadership in China began to dismantle its previous apparent passive strategy of rising quietly and humbly, and adopted a more proactive and assertive role as a major power. China began to get the attention it craved, after its long isolation and earlier century of humiliation. It was the first time that a developing country had become a major rival to the US. After the ascension to the leadership of Xi Jinping, China began to outline a bold vision for new institutions to drive the next phase of globalisation, promising to spread the benefits of development across the world through its Belt and Road Initiative, with new global value chains, infrastructure connectivity and patterns of economic activity that would make China, not the US, the hub of the future international economy. China became a self-styled champion of multilateralism, taking a leading role in UN organisations at the very time the US was stepping back from international organisations. No wonder the US reacted badly when China proposed the Asian Infrastructure Investment Bank (AIIB), and was surprised when only Japan followed its pleas to boycott the new institution. Fifty seven countries signed up on its establishment in 2016. Even Australia, the most unquestioningly loyal US ally of all, decided to join the AIIB. So how has that worked out?

After decades of strong growth in Asia, a massive infrastructure deficit had developed in the region by the last decade. From the experience of East Asia, countries in the region knew investment in better infrastructure for trade connectivity would not only drive continued growth in those economies that had successfully integrated into global supply chains, but would also help those that had not yet been able to emulate the successes of their neighbours. Like Japan before it with its Asian Development Bank, China established the AIIB to address this gaping infrastructure deficit in the region. The US-led Bretton Woods institutions had manifestly failed to address the problem, directed in recent decades to impose neo-liberal policy prescriptions and political conditions, which had been deeply unpopular across the developing world but especially in Asia after the 1997 Asian Financial Crisis.

It was a bold move from China, and one that sent shock waves through Washington. In joining the AIIB, countries across the region signalled that they welcomed China taking a lead in providing financing for development and that US narratives that China’s initiatives were a threat to international order were perhaps over-blown. Nevertheless, the AIIB did indeed represent a number of normative challenges to the old US-led order.

First, its creation by rising China represents a demand for multipolarity in global economic governance, after China was long denied a proportionate voice in the Bretton Woods institutions. Second, its structure reflects a more equitable representation of the developing world, whose members have a majority share of voting rights. Third, its focus is on developing world priorities, infrastructure and trade-driven development over geopolitics. Fourth, and finally, it imposes no political conditions, indeed it is bound in its charter not to interfere in the political affairs of members.

In signing up to the AIIB, Australia, too, has signalled that it can work with China in the region even if the normative challenges of the institution gravely disturb its alliance partner.

In those normative challenges by China are four key lessons from the AIIB case that are worth bearing in mind in developing a strategy to work with China more broadly, if indeed that is what Australia wishes to do. While there will inevitably be red lines based on our values and interests, on which Australia will never be likely to compromise, here are four areas in which Australia could signal that it can work with rather than against China:

First, China’s push for multipolarity and multilateralism in global economic governance is actually in Australia’s interests. It may be resisted hard by the US, but Australia would be better advised to encourage the US to help it and others work with China within the rules of multilateralism, rather than dismantle those rules as some previous US administrations had begun to do.

Second, China’s demand for a structure of decision making that reflects a more equitable representation of the developing world can also be in Australia’s interests. When it comes to globalization, Australia is firmly in the camp of the beneficiaries, as are its neighbours in Asia, as evidenced by the fifteen partners in the recently-signed Regional Comprehensive Economic Partnership. The future battles for free trade and global supply chains are likely to pit these open economies against a more protectionist US and Europe. Australia will need to think hard about where its interests lie. Even more broadly, if the UN ever gets around to reforming its Security Council, it will be in Australia’s interests to be on the side of bringing in Japan and India, rather than resisting them. Where China will stand on that is, of course, another matter.

Third, China’s focus on developing world priorities also makes good sense for Australia. Given our geography and our internationalism, Australia can only benefit by putting a little more effort into understanding the big shifts that will occur this century as the middle class of Asia overtakes the middle class of the US and Europe combined. Expanding the Asian middle class and shrinking the proportion living in poverty is the great development story of our time. Big structural changes are therefore coming in the global economy and Australia can be well placed to benefit, if we take care not to look out of step with our neighbourhood.

Fourth, China’s approach of placing no political conditions on finance is worth reflecting on. This one is particularly complicated. It is by no means clear that China does not in fact enforce conditions in its relationships with other countries. It is certainly in Australia’s interests, though, to hold China to account on its language of non-interference in other countries more generally. We might also walk the talk, if we do not want to be ignored due to perceived double standards.

Overall, the AIIB experience to date has been a positive one. While it has challenged some of the principles upon which the IMF and World Bank operate, it has generally been considered to have adopted best practices with zero tolerance for corruption, open public procurement and transparent tendering. It now has more than one hundred members and has begun to deliver finance for major projects across the region. The leading destination has been India, otherwise a strategic rival of China, underscoring the value of such institutions for building regional cooperation. Rather than representing “China First”, the AIIB has actively partnered with other multilateral development banks, co-funding most of its projects and attracting international staff. It is also seeking to catalyse more private sector finance for infrastructure, although progress on that front has been delayed by the Covid crisis. In response to the pandemic, the AIIB provided emergency liquidity and crisis recovery funds to members. The bank has brought a particular focus to sustainable infrastructure, aligning its operations with achieving the UN 2030 Sustainable Development Goals. All in all, Australia appears to have made a good investment in joining rather than snubbing the initiative.

The AIIB represents two new tests for the international order: whether that order can incorporate a new leading power and, at the same time, whether the new power’s attempts to reform the international order will undermine or strengthen that order. The US allies like Australia that joined the AIIB essentially voted with their feet on the first question, welcoming China into the business of institution-building, just as China had been welcomed into the UN system after 1971 and the WTO in 2001. The second question is more difficult to answer conclusively in this period of geopolitical transition. The creation of the AIIB is likely to be followed by further initiatives from China to shift the international system away from US leadership, towards a multipolar system. China’s impact on the international order is therefore a work in progress.

The AIIB may be a “best case” of Chinese leadership in international affairs and certainly may not prove to be a template for Chinese actions across other global issues. Nevertheless, it is useful to learn from a “best case” of cooperation if we are to avoid the “worst case” expectations that appear to be driving policy making at present, creating confrontation and risking conflict. The transition from a unipolar world dominated by the US to a multipolar world featuring a stronger China is axiomatically uncertain but it is certainly likely that Australia will need to work with China (and others) through international institutions to secure our interests. A strategy for more than trading insults will be required sooner or later. Committing to common ground and common interests in sustainable development for Asia, through accountable multilateral institutions like the AIIB, can only help.

Originally published by The Mandarin, December 9, 2020

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