The UK’s decision to become a founder member of the Asian Infrastructure Investment Bank (AIIB) is a major historical event. Until then no Western country, with the exception of New Zealand, had signed up to join, not least because of intense American pressure. The UK, moreover, cannot be counted as any old Western nation; on the contrary, ever since 1945, it has been the US’s closest ally. For British politicians, Conservative and Labour alike, the ‘special relationship’, as it has been known, was sacrosanct. A decade ago, the UK stood shoulder to shoulder with the US in the disastrous invasions of Iraq and Afghanistan.
So how do we explain Britain’s about-turn?
The UK is certainly not what it was. Along with the other major European nations, its relative strength in the world has declined precipitously, accelerated in the recent period by the western financial crisis. Today its economy is barely bigger than it was in 2007. Unsurprisingly in such circumstances, economic and commercial considerations have loomed ever larger in the public mind while foreign policy concerns have come to be seen as something of a luxury. This shift in priorities has been accentuated by the dismal failure of the military adventures in Iraq and Afghanistan, not to mention the more recent one in Libya.
Previously the United States could rely on the UK always being by its side, forever prepared to do its bidding; America’s poodle, as it has often been described. But recently little cracks have begun to appear. The US has been arguing that its European allies should agree to spend not less than 2% of their GDP on defence. The UK has refused to commit. Strikingly it has played virtually no role in the Russia-Ukraine conflict, leaving Germany and France to take the lead. None of these events, however, taken singularly or together, can be compared with, or prepared us for, the UK’s seismic decision to ignore American pressure and join the AIIB.
The game-changer is China. There is not a single European country – the same can be said of virtually every country in the world – that has not been affected and challenged by China’s rise and what attitude to adopt towards it. This has been a constantly moving process: starting with disbelief and scepticism, followed by growing interest and curiosity, and finally arriving at recognition, engagement and enthusiasm. Britain was a laggard, way behind Germany, for example, Europe’s pioneer in its relationship with China. The present coalition government spent the first two years playing the same old game of lecturing China on its shortcomings. Then David Cameron, the prime minister, met the Dalai Lama and in response China gave the UK the deep freeze treatment. Britain finally got the message. If it was going to be serious about pursuing a positive relationship with China, it had to show the latter due respect and be wholly committed.
Britain came to recognise that China was an enormous opportunity – a potential source of much-needed investment and the renminbi as crucial to the future of the City of London. All the old reservations, quibbles, complaints and misgivings were pushed aside as the UK sought to make up for a great deal of lost time. But even this does not quite explain its willingness to join the AIIB. After all, no major Western nation had made such a move, not even Germany. Britain, furthermore, has hitherto had little presence in East Asia. And, most crucially of all, its godfather, the United States, was pushing hard against the AIIB. In other words, Britain’s decision to join went entirely against the grain, an unpredicted and spectacular event, which took everyone by surprise. If Britain wanted to show China and the world how serious it now was about its relationship with China then this was exactly the way to do it. As the first major Western country to join, it reaped all the goodwill that went with that as far as the Chinese were concerned; and by doing so in the face of US opposition, it demonstrated its determination and intent.
It was already clear when the launch of the AIIB took place in October that, with 21 countries already signed up, and only Japan, South Korea, Australia and New Zealand choosing to remain on the sidelines, that the AIIB, by virtue of its reach and inclusivity, especially given such determined American opposition, would have the effect of transforming the arguments in the Asia Pacific about its future trading and financial arrangements. Indeed, I would argue that the AIIB, at the moment of its launch, served to redraw the balance of forces in the region and largely undermined the American ‘rebalancing’ or ‘pivot’. As a result, the fallout from the success of the AIIB is bound to affect negotiations over the TPP and RCEP and their respective fortunes. Not least, it will surely make American efforts to exclude China, as in the case of the TPP, hugely more difficult if not impossible.
If this was true before the UK’s decision to join, the latter has only served to ratchet up the effect. New Zealand has already joined the AIIB negotiations. Australia has announced its attention to do so. South Korea now seems likely to join before the March 31st deadline. Most unexpectedly, even the Japanese are said to be divided about what to do. Which threatens to leave the United States – and probably still Japan – in a position of pretty much splendid isolation in Asia . The Americans have boxed themselves into a corner, increasingly deserted by all and sundry. As has been pointed out, they would have been better off joining the AIIB, but this was never a serious option because such a move would have been rejected by the US Congress.
The ramifications of the UK’s decision to join the AIIB go far beyond East Asia, Asia Pacific or Asia. Germany, France and Italy have announced their intention to join, and it seems likely that others, for example Luxembourg and Switzerland, will sign up. Where once the only Western countries that involved themselves in such Asia-Pacific institutions were, as a rule, the United States, Australia and New Zealand, the AIIB is drawing in a growing number of European countries. A Chinese-inspired and led multilateral institution is fast achieving a global membership, exactly the opposite of what the United States wants, a rival not only to the Asia Development Bank, but in some respects the World Bank itself. At the same time the debate over the AIIB has served to sow major divisions between the US on the one hand and a growing number of European nations on the other.
I conclude with two general thoughts concerning the United States. Ever since the 1990s, if not earlier, the US has been a declining economic power in East Asia: in trading terms, for example, China and the US have more or less swapped places with China now occupying the position that the United States once did. There is no sign whatsoever that this situation will be reversed. The AIIB is a classic manifestation of China’s economic power in the region and the kind of influence that it now exercises. The United States cannot compete with this: its offer in the region is military strength. But in the longer run, economic power trumps military strength, as we have seen so clearly demonstrated over the last two decades. Furthermore, the fact that China, like the other 20 countries that first signed up to the AIIB, is a developing country gives it a unique insight, into and affinity with, the problems they face and the kind of things they need.
My second thought concerns the dilemmas that the United States faces as a declining power. It seeks to preserve the position and authority of the International Monetary Fund and the World Bank, the two major institutions of the post-1945 international economic order. But as Western-made institutions they are creatures of the West, above all the United States. As the centre of economic gravity moves from the developed world to the developing countries, they are threatened with becoming an anachronism. To survive they must reinvent themselves, so they are no longer the preserve of the West but are representative, above all, of the developing countries. But how to do that without losing control: this is the American dilemma. This is why, five years on, the modest structural reforms agreed by the IMF in 2010 are still waiting for approval by the US Congress. Similarly the US Congress would not countenance the US joining the AIIB because they perceive it as a threat to the position of the IMF and the World Bank.
However, the longer reform of the IMF and World Bank is delayed, the more their influence and credibility will decline and crumble. At the same time, if the United States refuses to join Chinese-inspired institutions like the AIIB, the more isolated it will find itself. With each day that passes, it becomes more likely that the old institutional structure will decline and decay, to be increasingly replaced by institutions like the AIIB.
Martin Jacques is the author of the global best-seller ‘When China Rules the World: the End of the Western World and the Birth of a New Global Order’ and a Senior Fellow at Cambridge University.