Japan and the U.S. Stay Out of AIIB; Taiwan Wants In

March 31st marked the deadline to become a founding member of the soon-to-be-established Asian Infrastructure Investment Bank (), an initiative planned by China to counter the U.S.-dominated international finance structure. Despite U.S. protestations, 42 countries applied to become founding members, with 30 accepted by the deadline. A full list of founding members will be released by April 15.

The bank is part of an effort by China to proactively guide development throughout and more broadly. Last week at the Boao Forum, Xi Jinping outlined China’s plans for the Silk Road Economic Belt and Maritime Silk Road, collectively known as the “Belt and Road,” which aims to increase trade and infrastructure development throughout Asia and into Europe and Africa, and which will be largely funded by the AIIB. Mandy Zuo and Kwong Man-ki report for the South China Morning Post:

Addressing the annual Boao Forum for Asia in Hainan province, Xi said China welcomed all countries to join the Beijing-led “One Belt, One Road” initiative, which aims to improve regional connectivity in a project inspired by the ancient Silk Road. He stressed the project was not meant to replace existing economic partnerships.

“The programmes of development will be open and inclusive, not exclusive. They will be a real chorus comprising all countries along the routes, not a solo [effort] for China,” Xi said.

Xi’s comments came as China released a blueprint outlining its vision for linking infrastructure, finance and telecommunications, and removing trade barriers, along the route.

The “One Belt, One Road” initiative has various threads. The Silk Road Economic Belt focuses on linking China, Central Asia, Russia and the Baltic states; linking China to the Gulf and Mediterranean through Central Asia and West Asia; and connecting China with Southeast Asia, South Asia and the Indian Ocean. The 21st-Century Maritime Silk Road will stretch from China to Europe through the South China Sea and the Indian Ocean in one route, and from China to the South Pacific in the other. [Source]

Shannon Tiezzi at the Diplomat explains that, “there’s more to the Belt and Road than simply the construction of roads, railways, and ports”:

Infrastructure construction is the easy part, as many countries along the planned route are hungry for investment and funding. China’s more ambitious goal is to have countries coordinate their policies to ensure that each individual country’s economic development plan feeds into a larger regional vision. That includes free trade areas, both bilaterally and regionally, as well as broad financial integration. On the financial front, Beijing wants expanded bilateral currency swap deals. Funding for the Belt and Road projects will be carried out through the new Asian Infrastructure Investment Bank (AIIB), China’s own Silk Road Fund, and eventually through a hoped-for financing mechanism administered by the Shanghai Cooperation Organization.

The Belt and Road has political overtones as well, with China using the project as a vehicle to promote its own key tenets, the Five Principles of Peaceful Coexistence. The Five Principles are “mutual respect for each other’s sovereignty and territorial integrity, mutual non-aggression, mutual non-interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence.” Those principles, laid out in a 1954 treaty with India and Myanmar, celebrated their official 60th anniversary last July.

China envisions the Five Principles as the basis for a uniquely Asian regional foreign policy, one that frowns upon Western-style “interference” in other countries over human rights concerns. Xi was also quite clear in his remarks that the Asian security architecture should leave behind the “Cold War mentality” to explore “new security concepts” — echoing China’s previous calls for a shift away from the U.S.-led alliance structure that currently lynchpins regional security. [Source]

Despite concerns from the U.S., many American allies are signing onto the AIIB, including the United Kingdom, Germany, France, Australia, and Brazil. American officials have expressed concerns that the new bank could undermine the World Bank and international standards on human rights, labor, transparency, and the environment that have been put in place there. However, critics of the have argued that it doesn’t do enough to implement those standards in their work around the world. In the New Yorker earlier this month, John Cassidy provided the context for the development of the AIIB and the decision by many countries to turn away from the U.S. in order to join:

In June of last year, China announced that it was expanding its plans for a new international-development bank, which would be based in Beijing and would lend money for infrastructure investments across Asia. This happened after the Chinese were repeatedly rebuffed in their efforts to play a larger role in the World Bank and the International Monetary Fund, the two big Washington-based lending institutions that were set up after the Second World War, and in the Manila-based , which was founded in 1966.

Since their establishment seventy years ago, the World Bank and the I.M.F. have played an important role in stabilizing and legitimizing the U.S.-dominated global economy, directly furthering U.S. interests in the process. In many other countries, indeed, they have long been viewed as conduits for the Treasury Department and the White House. At least a decade ago, as Asia’s importance to the world economy increased, smart officials in Washington came to realize that this situation couldn’t continue indefinitely, and that if the Bank and the I.M.F. were to maintain their influence they would have to be reformed, with China, India, and other Asian countries playing bigger roles. In November, 2010, after years of tortuous negotiations, a package to reform the I.M.F. was agreed upon: the Fund’s resources would be doubled, and China, in particular, would get more of a say in its internal deliberations.

That seemed like a step in the right direction, but Congress refused to go along with it. Following the 2010 midterm elections, the Republicans repeatedly sidelined legislation approving the I.M.F. reforms, and early last year they blocked them again, seemingly for good. This provided the Chinese the perfect backdrop against which to pursue their own initiative, the Asian Infrastructure Investment Bank, and market it to other Western countries, who are themselves keen to attract Chinese business deals and inward investment. Now, despite objections from the Obama Administration, four of the U.S.’s closest allies have agreed to join the new institution as founding members. Speaking on Capitol Hill on Tuesday, the Treasury Secretary, , seemed resigned to the new reality. “It’s not an accident that emerging economies are looking at other places because they are frustrated that, frankly, the United States has stalled a very mild and reasonable set of reforms in the I.M.F.,” he said. [Source]

At Quartz, Lily Kuo looks at the current political dynamic at the World Bank, IMF, and Asian Development Bank, which led China to strike out on its own:

Unable to increase its voice in the current institutions—China commands just 6.47% of the vote in the Asian Development Bank, 5.17% in the World Bank, and 3.81% in the International Monetary Fund—China is building its own alternative. The bank is intended to make up for the gap in funding the region needs—about $800 billion a year in infrastructure investment, according to the Asian Development Bank. It is expected to launch later this year.

So far, just over 40 countries have joined AIIB, with one day left before the deadline to join as a founding member expires. The United States and only one of its main allies, Japan, remain absent from that list. The US and other critics question whether the Beijing-led institution will uphold international standards of transparency, debt sustainability, and environmental and social protections, or just turn into an arm of Chinese foreign policy. Last week, Japan’s finance minister said, “Unless [China] clarifies these matters, which are not clear at all, Japan remains cautious.” [Source]

Stephen Groff, vice-president of the ADB, has said that his bank “looks forward to cooperation and coordination” with China on both the AIIB and the “Belt and Road” project.

The U.S. and Japan so far are the most notable absences from the list of AIIB applicants, while Taiwan made a last minute decision to apply. After Taiwan’s government announced plans to join, which Beijing said would only be possible under the “one China” policy, protesters took to the streets of Taipei. Relations with the mainland have been an especially sensitive subject for Taiwanese citizens over the past year, as the ruling KMT Party has forged closer ties with Beijing; a recent protest opposed a new flight path planned by China over the Taiwan Strait. J. Michael Cole writes for the Diplomat:

After Taipei expressed its interest in joining the AIIB, Beijing said it would welcome Taiwan as long as it joined under the “one China” principle. Beijing’s terms also stipulated that Taiwan must apply through the Taiwan Affairs Office (TAO), the agency under the State Council that handles relations with Taiwan. Beijing does not recognize Taiwan’s sovereignty and regards Taiwan as a province, to be “re-united” by force if necessary. At this writing, the name under which Taiwan applied to join the AIIB remains unknown.

Taiwan’s Mainland Affairs Council (MAC), the government agency in charge of relations with China, faxed the Letter of Intent to the TAO at 7 pm on March 31. The TAO will then transmit Taiwan’s application to the Interim Secretariat of the AIIB.

Critics say that by agreeing to apply with the TAO rather than via the normal channels used to join international organizations, Taipei appeared to be conceding that Taiwan is part of China. The “One China” framework, a precondition for cross-strait exchanges that Chinese President Xi Jinping has vehemently reaffirmed in recent months, enjoys little support among the Taiwanese population, which cherishes its de facto status as an independent country. [Source]

Taiwan’s exact status as a member has not yet been made clear, as even the name it chooses to join under has far-reaching political implications. From Aries Poon at the Wall Street Journal:

Earlier Tuesday, Premier Mao Chi-kuo told lawmakers that Taiwan would rather not join the AIIB if Taiwan isn’t respected or doesn’t enjoy the same rights as other members.

“Our [membership] name has to be reviewed and accepted by all our people,” Mr. Mao said. “Our bottom line is the ones that are already widely used internationally.”

Nomenclature is a sensitive issue in Taiwan. The island of 23 million people has been competing in international sporting events as “Chinese Taipei” and joined the World Trade Organization as “the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu.”

In 1986, after China joined Asian Development Bank, the institution changed Taiwan’s membership name to “Taipei, China,” from “Chinese Taipei.” The change met with protest from Taiwan’s government, which said the name suggested Taiwan was under China’s jurisdiction. But the change went into effect, and Taiwan is still a member of the ADB. [Source]

For its part, Japan has indicated it will not become a founding member of AIIB. From Martin Fackler at the New York Times:

“The United States now knows that Japan is trustworthy,” [Prime Minister Shinzo] Abe was quoted by Kyodo News as telling a meeting of his governing Liberal Democratic Party.

President Xi Jinping of China met with government officials on Friday to sign a memorandum to start the Asian Infrastructure Investment Bank.Deal Set on China-Led Infrastructure BankOCT. 24, 2014

The finance minister, Taro Aso, told a news conference that Japan would not contemplate joining until the new bank demonstrated that it had strict lending standards, including assessments of the environmental and social impacts of development projects.

“We have no choice but to be very cautious about participation,” Mr. Aso said. [Source]

U.S. Treasury Secretary Jacob Lew made a trip to Beijing on March 30, and subsequently showed a more conciliatory approach toward the AIIB upon his return, though the U.S. still did not agree to join the bank before the deadline. In a speech at the Asia Society in San Francisco, he said:

I was encouraged by my conversations in Beijing in which China’s leaders made clear that they aspire to meet high standards and welcome partnership. Our consistent focus on standards has already had an impact and, as lending begins, the test will be the character of the projects funded and their impact on the people and country they serve. Having the AIIB co-finance projects with existing institutions will help demonstrate a commitment to the highest standards of governance, environmental and social safeguards, and debt-sustainability.

The United States recognizes that it bears a special responsibility for the sound functioning of the international financial system given the significant impact of the U.S. economy on global economic conditions and the dollar’s role in international finance system. That responsibility begins at home, through sound fiscal, monetary, and regulatory policies. But our responsibility also extends abroad, including the need to embrace the increased role of emerging markets to reinforce multilateral rules of the road and international cooperation.

To be clear, China and other emerging markets deserve to have their voices heard. They will have an important role in setting rules and standards for the multilateral system in the future. But it is also true that the slate is not blank. There is accumulated experience and knowledge — developed multilaterally and internationally — that should be preserved and built upon. China is much more likely to succeed, and the rest of the world with it, by aiming high. [Source]