On March 17 the Asian Infrastructure Investment Bank (AIIB) received a significant boost in international credibility when European nations, France, Germany and Italy followed the United Kingdom in joining the AIIB, despite stern criticism from the United States. These four countries are not only leading players in the European Union, but they comprise the 4th, 5th & 6th largest economies in the world (Italy is ranked 8th) and are among the US’ closest allies. More European countries are likely to follow suit as Switzerland and Luxembourg are preparing to do. Asian countries such as New Zealand, Thailand and Singapore have already joined, and staunch US allies South Korea and Australia seem likely also. The AIIB is a China-led international infrastructure bank, part of China’s challenge to the global financial monopoly enjoyed by the US, since the dollar is its reserve currency.
China’s reasons for creating it’s own version of the World Bank (WB) are straight forward. The BRICS (Brazil, Russia, India, China, South Africa) have long resented the financial monopoly that western countries, particularly the US have in the WB and International Monetary Fund (IMF). The status quo was birthed by Bretton Woods system established in 1944. Critics point out it is no longer the 1940s and the system needs to reflect the changing balance of power in the 21st century.
Before the creation of AIIB the BRICS tried to work within the system by demanding a greater say in the IMF. In 2010 a deal was introduced to give emerging economies more power. But the US is the largest IMF stakeholder and US lawmakers must approve any such deal. Republicans consistently block its approval. American reluctance to reform led China to attempt to create a financial system not dominated by the West.
American criticism against the AIIB are concerns that the institution will not meet western standards on transparency, the environment and other issues. However BRICS leaders fire back that the US and Europe no longer have credibility to dictate such standards given their mishandling of the 2008 global financial crisis which caused economic chaos throughout the entire world.
In hindsight this development could prove pivotal for the future of the global economic system not only because it evidences China’s commitment to dismantle the dollar as the reserve currency, but given United States Treasury Secretary Jacob Lew’s public criticism of European countries joining the AIIB, it is increasingly evident, that the world is changing. Non-western countries are increasingly vying for a share of the geopolitical pie. If the world’s lone superpower wishes to retain considerable influence, American leaders would do well to recognize this and act accordingly. The longer it takes for the US to wake up to this new reality, the harder the fall will be and the less influence the US will be able to retain as global power continues to shift Eastward.
If the US continues to block necessary reforms to the IMF and WB while criticizing European allies who join (for their own financial self-preservation), the fallout could potentially be momentous. At worst, the US creates a new layer to the developing geopolitical rivalry between the US-China and forces even the closest American allies to choose sides against the US. At best, the US jeopardizes the strength of the Trans-Atlantic alliance and being left behind as a new international system emerges, trapped in its web of denial.