The US Needs to Change the Way it Deals With the Rest of the World–or it Risks Being Left Behind

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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.

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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.

china_papersover_us 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.

BRICS come together in Brazil as they seek to challenge the West

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Just days after the end of the World Cup, Brazil was the gathering place for another international meeting: the annual BRICS summit.  BRICS (Brazil, Russia, India, China, South Africa) is an association of five emerging national economies.  It represents 3 billion people around the world, 21 percent of global economic output, and has contributed more than 50% of the world’s economic growth in the past decade.

However, it remains to be seen whether it can be a real force on the world stage or whether it will remain a nominal association without any real clout.  The West remains critical.  Nevertheless the BRICS remain determined to change the world order as it exists under American financial hegemony.  Their 3-day summit came with the announcement of the creation of a New Development Bank, to challenge the World Bank (WB) and the Contingent Reserve Fund, to challenge the International Monetary Fund (IMF).  India stressed they want to make sure all members (which could eventually include non-BRICS nations) have equal voting rights unlike in the Western-run WB and IMF.

The question I have is will the BRICS always be an economic association?  Or will it become a political one as well?  It is telling that these five nations with different political systems could come together, recognizing they have a lot to gain from each other, knowing they could change the world.  But if they gain economic clout, given 3 of the 5 BRICS are countries that have historically challenged the status quo, adding a political element to their association could add a further challenge to the US and the West that is neither hostile nor belligerent, but that simply tells the US, that it is not calling the shots anymore.

However plausible this is, it is a long ways off.  For one, it remains to be seen if the BRICS can be an economic force.  Second the BRICS focusing on economics effectively allows them to focus on what can benefit their national economic needs, and avoid political differences that could tear them apart.

Although China and Russia are getting close, it is not a marriage of love.  Russia needs allies and China wants to buy Russia’s gas.  China’s foreign policy is based on noninterventionism for its own self-interest.  India’s foreign policy under Narendra Modi remains to be seen but he is pragmatic like Xi Jinping and is focused on improving India’s economic situation.  Historically India has been non-aligned, thus it would not be surprising for India to have a similar foreign policy to China’s.

On the other hand, Russia could give them no choice.  The BRICS have been largely silent during the Ukraine-Russia conflict but the recent plane crash of Malaysia Airlines Flight 17 could force them to step away from Russia.  India wants more responsibility on the world stage and is making a case to be a permanent member on the United Nations Security Council. However lukewarm Britain and France’s political response is, it is unlikely they will allow India veto power if it seems ‘too close’ to Russia.