Molding the AIIB

With the March 31 deadline looming for membership in China’s new Asia Infrastructure Investment Bank (AIIB), Seoul appears to have found its way forward. Trapped between its critical ally the United States, which has discouraged membership in the new bank, and China, which now buys twice as many exports from Korea as America does, the Blue House is poised to advance both security and economic interests.

On the one hand, Korea has chosen to join the AIIB - an easier move after Britain and other close U.S. allies broke ranks and announced their intention to join. On the other hand, the Defense Ministry is signaling that it will likely rebuff Chinese criticism of missile defense by deploying the Terminal High Altitude Air Defense (Thaad) system - a sign of strong security solidarity with the United States. The Park government has emerged a triumphant shrimp, taming the two big whales and their clashing expectations of Seoul.

Or has it? Certainly, Korea must continually find the right balance between its growing economic ties with China and security dependence on the United States. The new path forward on AIIB and Thaad appears to do that. Yet Korea also risks looking reactive and calculating at a time when it should be a leader - shaping rules and norms in Asia instead of just reacting to the big powers.

Choosing America for security and China for economics is a false and dangerous choice in many ways. The reality is that the AIIB issue goes to the heart of whether the economic rules Korea champions will continue to underpin the international relations of Asia. That is not a reason for Seoul to reject the AIIB, but it does mean that Korea’s strategy must go beyond the question of whether to join or not to join.

To be fair, Beijing did not make this an easy choice. Chinese leader Xi Jinping’s AIIB proposal flows in part from the same nationalistic ambition that motivated his proposal in Shanghai last spring for a new security system in Asia without bilateral alliances (or “blocs” as he called them). AIIB therefore evokes suspicion even from countries like Vietnam that are prepared to join in order to receive loans. In addition, the advanced industrial economies are being asked to join AIIB without any indication whether Beijing will adhere to the standards of governance, transparency and accountability for the environment and human rights that are required by the World Bank and other leading international financial institutions.

One major goal of AIIB is to recycle China’s capital surpluses and Beijing is insisting on a 49 percent voting share in order to champion domestic construction firms that are uncompetitive and losing business at home. Given the increase of non-tariff barriers within the Chinese economy, there are reasons to question whether the AIIB might become another tool of Beijing’s mercantilism.

The Obama administration did not make this easy for Korea either. It would have been extremely difficult for the United States to join as a founding member since Congress would not approve funding for the AIIB given all the governance questions that remain unanswered. On the other hand, Washington should have realized that developing countries in Asia would definitely sign on to benefit from loans while countries like Korea and Australia would want to join in order to shape the bank from within. And China was going to spend this money one way or the other. A “my way or the highway” stance was never going to hold, and a U.S. Treasury Secretary with more international experience or senior NSC and State Department leadership with more wisdom about Asia would have known that.

In any case, as embarrassing as the defections to the AIIB appear for the Obama administration, this is hardly a strategic defeat for the president’s pivot to Asia. This is not the first time Washington has been criticized for resisting a new institution in Asia, only to leapfrog to leadership in the next round. After falling behind East Asian institution-building that might have excluded the United States in the late 1980s, the United States took back the lead with the establishment of the APEC leaders meetings in 1993. Slow to respond to the 1997-98 Asian financial crisis (in part because of concerns about whether Congress would support funding), the United States fell behind until squabbling among Japan, China and Korea caused the Changmai Initiative to founder and initiative shifted to trans-Pacific liberalization efforts like the Korea-U.S. free trade agreement.

Hesitant to join the East Asia Summit in 2005 because its purpose was unclear and potentially a threat to APEC, the United States eventually convinced ASEAN to align the timing of the EAS meeting with APEC so that Obama could join in 2010. This first round of AIIB memberships will not be the end of the story either. Indeed, if Obama can work with Congress to pass the Trans-Pacific Partnership (TPP), then the story of Asian economic rules will primarily be a good one for Washington and Seoul.

Nor is China certain where this AIIB project will really go. With the Chinese economy slowing down, Beijing may well find that its ambitions abroad are harder to justify at home. Deeper partnerships and collaboration with the World Bank and Asia Development Bank may look increasingly attractive as Chinese officials discover the “moral hazard” of offering concessional loans without the back-up of other lenders and their established rules.

For all these reasons, Korea should not simply join the AIIB. It must help to shape it.

Seoul should announce the standards it expects the AIIB to meet in terms of governance and establish greater coordination with other leading donor nations and institutions to maintain a united front towards Beijing as the new bank’s governance is debated. The Korean National Assembly should require a regular report on progress in the AIIB so that Korean taxpayers can understand what is happening.

This would be a model of transparency that other donor nations like Australia and Britain should also follow. Shortcomings in governance should not be swept under the rug if developed countries hope to use the AIIB to shape China’s behavior more broadly in Asia. Indeed, China has never done anything like this before and a coordinated program of technical assistance will be welcomed by some Chinese officials.

The bottom line is that Seoul should make it clear that joining the AIIB only marks the beginning of Korean demands for governance and transparency - not the end. A Korea that leads will be respected much more in Beijing and Washington than a Korea that just reacts and calibrates.

*The author is senior vice president for Asia and Japan chair at the Center for Strategic and International Studies and associate professor at Georgetown University in Washington, D.C.

by Michael Green