EconoMatters

Obama Abandons Allies on China’s Marshall Plan

The United States is looking increasingly left behind as it defies its closest allies in Asia.

Credit: kafka4prez - www.flickr.com

Takeaways


  • The US refuses to play ball with its allies on foreign economic policy in Asia.
  • China’s more intense global engagement has some surprising consequences in the real world.
  • Chinese banks now provide more loans to Latin American governments than the World Bank.
  • Chinese finance could become a 21st century Marshall Plan and couldn’t come at a better time.
  • Obama is passing up an opportunity for the US to take part in a legacy-making Marshall Plan for the 21st Century.

The Obama administration is looking increasingly left behind as it defies its closest allies and the President’s own party on foreign economic policy in Asia.

This week, the administration rebuked the United Kingdom for agreeing to participate in negotiations for the multi-billion dollar Asian Infrastructure Investment Bank (AIIB) – even though the new institution would fill a major gap in Asian infrastructure needs.

At the same time, President Obama abandoned his own party in an attempt to ram through authority to finalize the Trans-Pacific Partnership agreement—a trade deal with Pacific Rim nations that would bring little economic benefit and high economic cost to Asia and the United States alike.

Unable to follow through

In the wake of the global financial crisis of 2008-9, China offered its newly acquired financial prowess to help boost Western-led financial institutions such as the International Monetary Fund and the World Bank.

While the Obama administration backed reforms at these institutions that would have given China more clout, it has done little to counter an intransigent Congress that, under Republican leadership, has failed to pass those critical reforms.

Already stuffed with low-yielding U.S. treasuries in need of a higher return, China has decided to go its own way. That is why China is establishing the AIIB with $50 billion in capital and a Silk Road Fund with $40 billion. Both are aimed at investing in 21st Century infrastructure projects in Asia and beyond.

In 2014, China also established the New Development Bank, along with Brazil, Russia, India and South Africa. This institution has an initial capital of $100 billion.

These moves, intended to diversify the global funding landscape, come on top of financing that China’s own development banks already provide across the world. The China Development Bank holds $100 billion in capital and has over $1 trillion in assets.

Consequences of a more engaged China

China’s more intense global engagement – generally something not just welcomed but demanded by the U.S. government and politicians in Congress alike – does have some surprising consequences in the real world.

The China Development Bank and the Export Import Bank of China now provide more loans to Latin American governments than the World Bank and the Inter-American Development Bank — and more loans to Asia than the World Bank and the Asian Development Bank.

In this light, China-backed finance has the potential to be nothing short of a 21st century Marshall Plan and couldn’t come at a better time.

Western-backed financial institutions have not been able to increase their capital in proportion to the growing needs in the world. According to some estimates, development banks fall short of providing lending for poverty alleviation by $175 billion per year.

The World Economic Forum projects that by 2020 about $5.7 trillion will need to be invested each year into green infrastructure in developing countries. Not only will this require shifting the current $5 trillion into a greener direction, but there will also be need to increase $700 billion more each year to make the shift happen.

Washington can hardly complain about its sideline status. It was invited to take part in the AIIB. Not joining it is a choice made by the U.S. government. But the United States has not only refused to play, it has lobbied Australia, South Korea and Indonesia, as well as Europe — not to join in.

This week, the United Kingdom – and France, Germany and Italy – decided that it would be foolish not to be part of these efforts. Australia is now considering joining in as well.

Laughable excuses?

Obama’s official complaint is that the AIIB will not replicate the transparency and anti-corruption norms found in Western banks, as well as safeguards for social and environmental protection.

This claim doesn’t even pass the laugh test. Negotiations for the AIIB are not even underway yet — and the U.S. move means it is foregoing an active role in the negotiations where these issues will be on the table.

The United States has long demanded that other major countries share in the burden of global initiatives and institution-building.

Now that the Chinese government has stepped up to the plate, President Obama is passing up an opportunity for the United States to take part in a legacy-making Marshall Plan for the 21st Century.

On top of that, he is alienating Asians, Western allies and his own party. The U.S. government should be embracing the AIIB and abandoning the TPP, not the other way around (abandoning the AIIB and ramming through the TPP). Hopefully our global allies and the President’s own party will help him see the light.

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About Kevin P. Gallagher

Kevin P. Gallagher is a professor of international relations at Boston University.

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