Australia has snubbed China’s invitation to become a foundation member of the Asian Infrastructure Bank, at least for the time being. Washington has allegedly put significant pressure on its key allies in the region including Australia and South Korea to shun the Chinese-backed initiative.
The US Treasury Department has criticised the Chinese-backed bank, which has an initial capital of more than $US50 billion, as a deliberate effort to undermine other multilateral financial institutions such as the World Bank and the Asian Development Bank. US Secretary of State John Kerry has reportedly personally asked Prime Minister Tony Abbott not to back the Chinese project.
It is understood that senior cabinet ministers are divided over whether Australia should become a member of the Chinese-sponsored regional financial institution with a mandate to fund the chronic deficit in infrastructure financing in Asia.
Treasurer Joe Hockey and trade minister Andrew Robb are reportedly in favour of the idea of signing up, while the foreign minister Julie Bishop is concerned the new bank is simply a stalking horse for Chinese interests in the region.
Should Australia welcome the Chinese-backed Asian Infrastructure Investment Bank? The answer is yes. Let me explain why.
For years, the United States and its allies have urged China to become a responsible stakeholder in the current international system. With the emergence of China as the world’s largest economy, its cooperation and contribution are needed for a range of issues from climate change to nuclear proliferation.
It is crucial to draw Beijing into the current rule-based international system. However, we must remember, as former US Secretary of State Henry Kissinger reminds us in his new book World Order, that China is suspicious of the Western-dominated international order.
“When urged to adhere to the international system’s 'rules of the game' and 'responsibilities', the visceral reaction of many Chinese -- including senior leaders -- has been profoundly affected by the awareness that China has not participated in making the rules of the system.
“But they [the Chinese] expect -- and sooner or later will act on this expectation -- the international order to evolve in a way that enables China to become centrally involved in further international rule making, even to the point of revising some of the rules that prevail.”
The case in point is the Asian Infrastructure Investment Bank. Since the end of the World War II, America and its allies have dominated key international multilateral institutions such as the International Monetary Fund, the World Bank and the Asian Development Bank.
The head of the IMF is always a European, the head of the World Bank an American and a Japanese national has run the Asian Development Bank since its establishment. Despite many mooted efforts to offer China a bigger role at these international institutions, the country is still relatively marginalised within these institutions with a voting power that does not compare to its international economic standing.
So understandably, China wants to create regional institutions that it can influence. It is important for countries like Australia to get involved early on to prevent the institution from being dominated by China completely.
As Dr Philippa Brant, a Chinese foreign aid expert from the Lowy Institute argues, “as we know from the history of the Bretton Woods institutions, it is easier to shape these institutions by getting involved early. They prove challenging to change down the track.”
To Beijing’s credit, it was made clear from the beginning that any other government would be welcome to be a founding member and help to ensure that the new bank adopts best practices available. As a result, twenty-two countries have signed on to the project including regional giant India.
China could in fact go alone and rely on its gigantic policy banks like China Development Bank or the Export and Import Bank to finance projects in Southeast Asia to promote intra-region connectivity. These banks have larger balance sheets than the World Bank and have been actively funding projects around the world including Africa, Latin America and Southeast Asia.
The US and its key allies like Australia should welcome the opportunity to shape this nascent institution. It is much easier and effective to address American concerns of lax governance and environmental standards inside the tent than to boycott it completely.
Andrew Elek, a development expert from the Australian National University, has urged Canberra to play a constructive role in setting up the new bank. “Australia, among others, can help the US to perceive the new bank as an opportunity to add a new constructive component to its pivot to Asia,” he argues in an article on East Asia Forum.
Economically, the new bank could play an important role in addressing the yawning gap in infrastructure funds in the Asia Pacific region, which is estimated to be around about $US8 trillion according to the Asian Development Bank. Diplomatically, it is in the US and Australia’s interest to engage China constructively on worthy and less controversial issues such as infrastructure building.
Most importantly for Australia, the issue around the Asian Infrastructure Investment Bank is an example where Australia and the US’s interests are potentially different. While the Americans seem to be doing their best to thwart China’s regional ambitions, it is not necessarily the best course of action for Canberra to shun China at a time when we want to pursue closer economic relations.