Countries shunning the AIIB

The previous chapter argued that the decision of European countries to join the AIIB is based on a tradeoff between strategic and economic calculations. Countries with deep strategic concerns or limited economic opportunities have generally chosen not to participate in the AIIB. This chapter will focus on countries, especially regional powers, that share similar concerns. Nevertheless, this chapter differs in that these countries possess greater strategic concerns than then- European counterparts. The power competition between these countries and China is an ongoing issue. In addition, all of these countries are developed countries with advanced national infrastructures. They do not need external funding agencies such as the AIIB to help then- economic development. Instead, they are important global exporters of capital, expertise and experience in development finance. Some of them are currently engaging in heated global financial competition with China. Although the US is not eligible to become a regional AIIB member, it has had a strong presence in Asia since World War II. Japan has been a firm ally of the US economically and militarily and has assisted the US in responding to the region’s changing power distribution. As an informal middle-power partner of both Japan and the US. Taiwan is forced to confront China’s threat to its national survival. Therefore, great vigilance is needed when initiating China-related policies in these three countries. In general, these three countries have important but slightly different strategic concerns regarding the emergence of the AIIB, and their expected economic interests are unclear. As a result, all of them have avoided involvement with the AIIB since the bank was founded.

As for the rest of this chapter, the next section will discuss the dimensions of the strategic concerns involved in more detail, particularly changes in the powerdistribution structure. Empirical analyses will follow, lurking the economic and strategic aspects to the decision of the US. Japan and Taiwan not to participate in the AIIB. The last section concludes the chapter.

Imminent strategic concerns and ambiguous economic interests

Instead of considering the trade-off between strategic concerns and potential economic benefits as their European counterparts have. China’s main geopolitical competitors in the region perceive the China-led international institution as a potential threat. Even though joining the AIIB may not necessarily result in economic harm, China’s rivals have been very circumspect about their interactions with China and the Beijing-led AIIB. In addition, most of them are developed and wealthy countries. Rather than being borrowers, they usually play the role of creditors in the region. They do not need financial assistance from China and can afford to ignore any possible gains that might result from their involvement with China. Moreover, these countries have been engaging in the region for a long time and have already created tight interdependent relationships with their regional counterparts. They have secured access channels to pursue their- own interests in the region without the need for cooperation with China. As a result, the creation of the AIIB brings more strategic threats than opportunities to these countries.

The perception of such a threat may come from three dimensions. The first dimension pertains to the change in international structures. The concent here results from a fear that the emergence of the AIIB will further China's relative power globally at the expense of other regional players. The AIIB will become Beijing's financial instrument to fillfill its political agenda in the global arena. The AIIB can help China improve its relative power through both internal and external balancing strategies. Internally, exporting excessive factors of production will continue to drive the growth of China’s large state-owned enterprises (SOEs), which constitute an important source of domestic economic growth (Xing, 2016). Searciting additional investment markets for SOEs allows China to continue to accumulate wealth rapidly to sustain the momentum of its economic growth and subsequently advance its military capabilities. Externally, China can use financial incentives to undermine established alliances and create new alliances in its favor. In addition, exporting infrastructure can be beneficial for better aligning other countries’ standards and governance with China. Should the AIIB emerge as the most attractive international financial institution (IFI) in the region, traditional great powers, such as the US and Japan as well as the US hub-and-spoke system, may lose influence in the region. Even though China and the AIIB have not yet demonstrated a fervent ambition to change the international system, these other great powers suspect that the evolution of the AIIB will fuel China’s national capability and confidence. If the aforementioned powers do not check the AIIB now, it will be hard to restrain the bank and China’s ambition in the future. This kind of thinking does not hold that participating in the AIIB will prevent the bank from going astray. In contrast, as long as the AIIB allows China to accumulate sufficient momentum and arrange its regional geopolitical deployment freely, the profits from changing the international system will soon exceed the costs. Therefore, the AIIB should be contained at the beginning before China becomes intractable.

The second dimension relates to the effect on the international financial system and governance. For Western powers, if the AIIB emerges further, the Bret-ton Woods system the West built and controls will confront the challenges that arise. Although the findings in previous chapters suggest that the AIIB does not majorly impact the leading financial institutions, other great powers may fear that tolerance of the bank will lead to changes in the distribution of power in the

Countries shunning the AIIB 153 international financial system that would be beneficial for China and the AIIB. The established best practices will gradually be substituted by China’s way of governance. Western powers worry that if this situation happens, the quality of development financing will deteriorate and financial power may start shifting to China. In addition, a “race to the bottom" will follow shortly thereafter. Unlike the World Bank and the ADB, the AIIB is likely to ignore the best practices in regional infrastructure projects. To compete with the AIIB, other international financial institutions may also lower their development finance standards. The outcome will become harmful not only to the cunent system but also to the environment and the society within the debtors’ countries. Due to such concerns, although nonAIIB participants recognize the insufficiency of funding for regional infrastructure, they place greater emphasis on increasing then financial commitments than on relying on China’s generous donations. To them, permitting the emergence of the AIIB would jeopardize the more acceptable international financial system.

The third dimension relates to national security; the threat comes from the perception of the AIIB as an instrument of power for China. Tire AIIB may provide loans for infrastructure projects in strategic locations, especially in countries that are financially too fragile to pay back outstanding debts. Thus, the debt may turn into a debt-for-equity swap, which would allow Beijing to take control of strategic locations (Parker & Chefitz, 2018). Other great powers’ overseas strategic deployments may be affected by China’s ambitious regional engagement. In addition, the AIIB may become China’s financial arm used for rewarding its political and diplomatic allies. Past studies have shown that the World Batik and the ADB have been susceptible to the political influence of their major shareholders (Dreher, Sturm, & Vreeland, 2009; Lim & Vreeland, 2013). The AIIB may be no less predisposed to political manipulation because China’s voting power in the bank is greater than that of the US and Japan in the World Bank and the ADB. China can finance more loans or bankrolls with more favorable terms in exchange for debtors’ cooperation on occasions of international concent. As a consequence, the AIIB may result in a closer strategic relationship between China and the bank’s borrowers at the expense of other great powers’ interests. Moreover, batik participants may unconsciously be involved in complex strategic interactions that will ultimately harm their national interests. In the case of Taiwan (Taiwan and ROC will be used interchangeably), joining the bank would result in sovereignty costs and demote Taiwan’s international status. Beijing and Taipei disagree on the membership name to be used. Taiwan is not allowed to participate under the name Taiwan, given its sovereignty implications. In other cases, countries will have to disclose the substantial economic and financial data that is required for applying for AIIB membership. International creditors of the AIIB will need enough data and information to evaluate each country’s national repayment capacity. However, this may be unacceptable to totalitarian coimtries, where it may endanger a dictator’s political survival. For dictators, the political costs incurred by revealing the national situation can be much higher than the possible economic opportunities. North Korea is such a case (Babson, 2015). The abovementioned political.

diplomatic and sovereign costs have divergent effects on different non-participants of the bank, who, in general, fear that participation in the AIIB will help fuel China’s geopolitical ambitions that are detrimental to their own national interests.

By the end of 2019, 17 out of 67 countries in the Asia and Oceania regions remained non-AIIB members. Of those non-participants, the Solomon Islands, Micronesia, Palau, Kiribati, the Marshall Islands, Nauru and Tuvalu are Oceanian microstates located in the Pacific Ocean. Most of them have not joined the bank because of their diplomatic relations with Taiwan. Bhutan, Iraq, Macau, North Korea, Palestine, Syria, Turkmenistan and Yemen are eight prospective AIIB regional members that have not joined the AIIB because of domestic political considerations - they are either too financially fragile to provide the necessary capital shares, too politically chaotic to engage in external affairs or too externally disinterested to participate in international affairs. Despite not joining the AIIB, they do not tightly associate the emergence of the AIIB with China's geopolitical ambition. The remaining two non-AIIB members in the region are Japan and Taiwan. These two countries, along with the US, are the most worried about the looming strategic threats caused by the AIIB. Despite Beijing’s constant requests to Japan and the US to join the bank when it began, Washington and Tokyo refused to apply for founding membership. Even though both of these governments sometimes claim to perceive the AIIB positively, they remained non-members at the end of 2019. Then- decisions come from the strong sense of changes in power distribution.

Table 7.1 illustrates that since 2000. China has grown a great deal both economically and militarily, hi terms of national capability, China has surpassed Japan to become the most powerfill country in the region. The power gap between the two has started to widen since the late 2000s. Without external support from Washington, Tokyo is not powerfill enough to compete with Beijing if conflicts occur. From a macro perspective, China and the US are compatible rivals, and the former’s GDP can be expected to surpass the latter’s soon. In the military realm, the US remains a global hegemon, but not all of its military deployments are focused in the Asia-Pacific region. Consequently, Washington should logically be alert to

Table 7.1 Comparing power dimensions of China, Japan and the US

Year

Country’

2000

2005

2010

2015

2018

GDP

(USS billion)

China

1,211

2,286

6,087

11.016

13.608

Japan

4,888

4,755

5,700

4,390

4.971

US

10.252

13.037

14,992

18.219

20.544

Military budget (USS billion)

China

41

77

138

204

239

Japan

44

45

45

46

45

US

430

632

785

617

634

Total reserves

(USS billion)

China

172

831

2,914

3,405

3.168

Japan

362

847

1,105

1.233

1.271

US

128

188

489

384

450

Note: Data comes from the World Bank and SIPRI.

Beijing’s surging military power. As a result. China's global engagement in the form of the AIIB, for example, should be dealt with carefully. In addition, both Tokyo and Washington control the most important development finance agency in the region, the ADB. They have reason to worry that the growth of the AIIB could undermine the ADB's influence in the region. Taiwan is another country that has paid close attention to strategic issues when considering whether to join the bank. Beijing attempted to undermine Taiwan’s sovereignty by placing unacceptable conditions on Taipei. If Taiwan agrees to China's membership requirements, its sovereignty will be eroded. As a consequence, China’s ulterior strategic agenda behind inviting Taiwan to the AIIB is a major obstacle for Taiwan's choice to join the bank.

Next, I will present three cases specific to countries that face imminent strategic concerns regarding the AIIB. They are the US, Japan and Taiwan. Although at some point in time, each of these countries thought about applying for membership, they each chose to refrain from joining the AIIB.

 
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