China’s New Development Bank: How Obama Blew It in the Pacific (Again)

When China launched a new multilateral lending institution last October amid fanfare in the Great Hall of the People, the Obama administration had already spent many months opposing it. It urged Beijing not to go forward; then it lobbied allies across both oceans not to join it.

The U.S. policy was radically wrong from the first, and now it’s comeuppance time. With one nation after another taking up membership in the Asian Infrastructure Investment Bank, Obama’s Treasury and State Department have swiftly pushed a vexing new reality into every American’s face. In a phrase, this is the reality of creeping isolation in world affairs.

Related: Top South Korea, Japan, China Envoys Agree to Work for a Summit Soon

China had little trouble recruiting members into the AIIB as soon as it chartered the $50 billion institution. Until last week there were 21, all of them Pacific nations and few possessing much global clout. Strong U.S. allies such as South Korea, Japan, and Australia, obliging to a fault in their dealings with Washington, refrained even amid heated domestic debates.

The game’s up. Early last week none other than Britain announced above American objections that it will throw its lot in with China. Germany, France, and Italy quickly followed . A day later the Abe administration issued a classically ambiguous statement indicating that Japan, too, will soon sign on. Over the weekend, my sources at the other end of the Pacific, citing contacts in Canberra, said via e-mail notes that Australia is to announce its intent to join the AIIB early this week.

One doesn’t want to over-interpret events, but it would be hard to read too much into this turn. Long-simmering but resolvable tensions between Washington and Beijing are now read as open antagonism. Across the pond, Europe’s leading nations now have another reason to step back from an already weakening trans-Atlantic alliance.

Given President Obama has less than two years left in office, this extensive damage is likely to count among his legacies. Both setbacks are major and both could have been avoided.

Related: China to Keep Prudent Monetary Policy to Support Structural Reforms 

If you hear the wind whistling past your ears these days, it’s the sound of an astonishingly rapid shift in power—political, diplomatic, industrial, financial—toward China and other rising economies. Obama’s biggest mistake—and in fairness it isn’t this administration’s alone—has been to miss this inevitable turn of history’s wheel and oppose it rather than ride it.

The official American argument is that the AIIB, which will rival the International Monetary Fund, the World Bank, and the Asian Development Bank in various of its functions, will not uphold those institutions’ standards by way of “good governance,” fiscal discipline, open markets, liberalized corporate prerogatives, environmental policy, and so on. There may be a few souls somewhere who accept this as Washington’s true concern, if only on Lincoln’s principle that one can fool some of the people all the time.

More or less transparently, Washington’s genuine intent is as it has been for years amid rising clamor: It refuses to countenance any dilution of its influence as exercised through the Bretton Woods multilaterals.

The casualties in this respect are two. One, Washington’s de facto veto power in these post-1945 institutions is as pervasive as critics have long charged; an overweening dominance is embarrassingly exposed. Two, Obama has just signaled—confirmed, critics would say—that geopolitics trumps all in U.S. policy, the pressing needs of others notwithstanding.

To elaborate briefly, Asia now suffers a radical shortfall in its infrastructure inventory. Against this background Washington has a shrill “No!” not only to the AIIB but also to any thought of increasing the ADB’s capital base? It’s hard to find the logic.

Related: U.S. Urges Allies to Think Twice Before Joining China-Led Bank

This is the context in which Asians and others judge the U.S. position. “Many Asians see this petulant refusal to deal with reality as another sign that if it doesn’t involve smart bombs, drones, and big orders for the arms industry, the U.S. isn’t interested,” a source in Tokyo wrote Sunday. “Asia needs a lot of infrastructure. Who better at the helm of [the AIIB] than the country that has over the last 30 years produced the most impressive infrastructure build-out since the U.S. in the 1950s?”

The AIIB now gets the headlines, but behind it lies an extensive campaign on China’s part to increase its global influence. In the past two years it has also launched a new development bank commonly known as the BRICS Bank after the leaders among emerging economies, and its $40 billion Silk Road infrastructure fund, which is intended to connect China to the Mediterranean.

Beijing is perfectly clear as to its intent, providing one knows how to listen. It isn’t to abandon regulation and standards of governance. It’s to replace them with standards based on an alternative economic model—one that borrows liberally from Washington’s neoliberalism but maintains social welfare policies and positions the state to take an active role in advancing development.

China’s most aggressive initiative—and the bedrock cause of Washington’s anxieties—is its campaign to internationalize the renminbi in a challenge to the dollar’s dominance. In effect, the AIIB or Beijing’s other new institutions are dimensions of this larger goal.

Related: IMF Happy to Cooperate with China on AIIB: Lagarde

The RMB is already traded on currency markets in Singapore, London, and elsewhere. Many Asian central banks already include it in their reserves. China now has currency swap agreements with virtually every nation in the Pacific region, most in Europe, and many elsewhere. These provide for direct trade in RMB, skipping the long-established passage through dollars.

There’s much more. Last week China formally asked the IMF to adjust the basket of currencies with which it operates—special drawing rights, or SDRs—to include renminbi.

Here’s an especially big one: A Shanghai free-trade zone now opening will include spot and futures markets for crude oil trading—trading in RMB, of course. How big is especially big? Recall: When American troops occupied Iraq in 2003, they immediately secured the petroleum ministry—and on the spot obliged Iraqi officials to rescind Saddam’s two-year-old law mandating that Iraq conduct its oil trade in euros.

There’s no question anywhere—and certainly not in Washington—that the AIIB and the other institutions Beijing now sponsors will accelerate the advance of the RMB as a reserve currency.

Obama’s people have refused to initiate a rethink of U.S. policy in the Pacific for years. And now the fallout spreads across the other ocean. Pointless. Washington’s now further back in its ties with China than it would’ve been had it simply remained silent when Beijing unveiled the AIIB.

Why can’t Obama see this? This mystery will be among the president’s legacies, too.