Why the U.S. Should Embrace the AIIB

http://thediplomat.com/2016/03/why-the-u-s-should-embrace-the-aiib/

There are compelling reasons for the U.S. to join China’s new development bank.

By Leland Lazarus,  March 02, 2016

China’s new Asian Infrastructure Investment Bank (AIIB) has been the source of considerable debate. While its supporters believe the bank will fill a much needed investment gap in Asia’s economic development, its naysayers worry that China will use it to further its own economic and strategic goals in the region. They say the very structure of the AIIB allows China to use its weighted voting power to exercise a disproportionate amount of influence in the bank. Still others feel that the AIIB is unnecessary because the world has three development banks – the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB) – that already deal one way or another with Asia’s development.

So far the United States has been ambivalent about the AIIB, and several scholars suggest that U.S. officials harbor the same doubts about the bank. Specifically, U.S. officials and academics criticize the bank for two reasons: 1) Its voting structure gives China a disproportionate voting share, which means it can effectively manipulate the bank to further its own economic and strategic goals in the region; 2) The AIIB will not follow the same high standards as existing financial institutions when deciding which projects to fund, forgoing important criteria like environmental protection, human rights, and anti-corruption.

Does the AIIB’s legal structure really give China so much power and influence? Not necessarily. External and internal pressure will cause the AIIB to act independently and give itself powers in order to safeguard its independence from China, and U.S. involvement will expedite that process.

International Pressure 

While China has a 30 percent weighted voting share, its influence in the AIIB can be checked by international pressure. In many ways, China has already altered the AIIB due to pressure from the international community. The AIIB Founding Members were able to use their collective bargaining power to revise the bank’s Articles of Agreement and “enmesh China in a network of international norms and standards.” This forced China to become more flexible and alter the AIIB rules. Suspicion and opposition by the United States and Japan also checked China’s ambitions with the AIIB. The evidence suggests that the AIIB’s member states can “make China play by the rules.”

Currently, China has a poor track record in terms of following high standards when it comes to the projects it funds around the world. From oil and resource extraction projects in Cambodia, Burma, and Mongolia, torailroad and canal construction projects in Brazil, Peru, and Nicaragua, to bridge and other infrastructureprojects in Mali and Ethiopia, the Chinese Development Bank and its Export-Import Bank have given loans to unstable governments, signed construction deals for unnecessary infrastructure, and ignored villagers who have been abruptly uprooted with little compensation. U.S. officials believe that the AIIB will adopt the same low standards as China’s national banks. They point out that, since the AIIB will not have a resident staff involved in the day-to-day project oversight, the bank could not possibly ensure that its clients will follow through on high standards and transparency.

Higher Standards

It is still uncertain which standards the bank will use, since the AIIB has yet to choose which projects it will fund. For example, the bank still has not decided whether it should approve coal-fired power plants, projects that are shunned by existing institutions. However, recent changes in the AIIB’s governance structure may suggest that China is amenable to change. Originally, the Chinese did not want a board of directors to be in charge of projects because they thought a board would just slow down the project with superfluous oversight. After consulting with the British, however, the Chinese changed their minds and added the board. This suggests that, if the U.S. joins the AIIB, it can persuade the bank to adopt higher standards and transparency, just as the British persuaded the bank to form a board of directors.

The AIIB Will Carve Its Own Niche

The AIIB’s Articles of Agreement specifically confer on it an “international character,” as stipulated in Article 31. It cannot receive special outside funds that may jeopardize its independence, and its member states must “refrain from all attempts to influence (the bank’s employees) in the discharge of their duties.” This can provide a legal basis for a member state to bring a claim against China if it is ever seen as influencing AIIB officials.Additionally, Article 2, Section IV gives the AIIB flexibility in its functions, stating that it can “undertake such other activities and provide such other services (to) further these functions.” This clause gives the AIIB leeway to grant itself implied powers in the future for the sake of functionalism; if it needs to form subsidiary bodies or has to take some sort of emergency action, it can do so independently.

Indeed, international organizations tend to grant themselves powers not explicitly expressed in the original charters over time in order to more effectively carry out their functions. In the famous Reparations for Injuriescase in 1949, the International Court of Justice declared gave the United Nations the power to bring a claim against Israel for the assassination of UN envoy Count Bernadotte at the hands of Israeli religious extremists. In the Certain Expenses case of 1962, the ICJ gave the UN General Assembly the authority to force member states to pay for UN peacekeeping operations. In both of these cases, the ICJ used the implied powers doctrine to bestow on the UN more powers in order to enforce its distinct will from its member states.

In this same vein, the AIIB will most likely grant itself more powers as time goes on to ensure its own relevance. Failure to do so would hinder the legitimacy of the AIIB as a whole. Mass withdrawal would leave the bank broke, and its officials unemployed. Excessive control by Beijing would also prevent the AIIB Board of Governors and Board of Directors the freedom to make independent decisions. Such overt control by a member state will deprive the organization of a distinct will, which would in turn hinder its efficiency and impartiality, if a member state like China interfered excessively with the organization’s operation.

Why the United States Should Join the AIIB

Despite all its misgivings about the AIIB, the United States should join the bank to ensure its financial influence in Asia. First, it would limit China’s voting power in the bank by coordinating with like-minded developing member countries such as Great Britain, Australia, and New Zealand, thus prodding China toward pursuing cooperative behavior. Second, the U.S. could help raise the AIIB’s quality of governance, credit and banking culture and environmental and social standards. Third, the U.S. could better integrate the AIIB with existing major multilateral development banks, such as the World Bank and Asian Development Bank, in the form of co-financing and joint project preparation and supervision. Fourth, the U.S. would be in a good position as a reliable partner in Asia’s infrastructure building and economic development. And fifth, it would ensure that American businesses will be well informed about infrastructure projects financed by AIIB.

Finally, if the U.S. continues to dig in its heels about the AIIB, it may miss out on an important chance to put teeth behind its Asian rebalance strategy. Tobias Harris of the Sasakawa Peace Foundation believes that U.S. opposition to the AIIB was a knee-jerk reaction to China’s growing influence in Asia, and missed an opportunity to help China with technical assistance to improve the bank. Specifically, the White House was wary about the AIIB’s standards, and the Treasury Department steadfastly rejected China-led initiative that might rival the existing Bretton Woods system. By shunning the AIIB, the U.S. “disregarded the principles of its own Asia strategy and contributed to the impression that it seeks to contain China.”

AIIB president Jin Liqun had this to say about U.S. opposition to the AIIB: “The U.S. risks forfeiting its international relevance while stuck in its domestic political quagmire.” He warned the U.S. that “history has never set any precedent that an empire is capable of governing the world forever.” If the U.S. is serious about its Asian rebalance strategy, it should work with China to improve the AIIB as a member, instead of opposing the bank altogether.

Leland Lazarus is an MA candidate at The Fletcher School, Tufts University.