Europe Ditches US? Brits & PRC's Infrastructure Bank

"GEORGE OSBORNE - United Kingdom": your seat is reserved at the next AIIB gathering.

[See breaking news at this post's end on France, Germany and Italy also ignoring US calls for them to stay away from China's new development bank and joining it after the UK.] The premise behind the US-UK "special relationship" has always struck me as risible. Supposedly, the UK, wary of its declining global influence after the demise of its empire, has sought to remain a major player on the world stage by allying with its former colony. Sure there have been spats during the postwar era--worst among them the Suez canal fracas--but the hoary term is still brought up again and again. Me? I simply refer to the "five eyes" arrangement encompassing more comprehensive information-sharing among not only between the US and UK but also including Canada, Australia and New Zealand.

However, an interesting side story has been the relative rise of China. If prognostications hold true and it becomes the world's largest economy outright by 2021--no PPP sleights-of-hand involved--then shouldn't the UK be aiming for closer relations instead with the future #1 instead of the soon-to-be-past one? Few would argue that the "special relationship" was premised as much if not more on the US being top dog as on shared historical ties.

This story has been playing out over China seeking charter membership of other countries in its so-called Asian Infrastructure Investment Bank (AIIB) since the sign-up sheet will be collected at month's end. As with a lot of multilateral lending institutions, there are a lot of politics going on backstage. Although the US adopts an outwardly amiable position towards the AIIB, in private it is strongly urging its allies not to get on board:

Beijing launched the AIIB in October with the backing of 20 other countries but Japan, South Korea and Australia —US allies in the region — did not become founding members. There has been a strong debate within the Australian cabinet about whether to join, after US pressure to stay on the sidelines.

A decision by the major economies to join now would give up leverage they might have over the AIIB as it was being set up, the US official said. “Large economies can have more influence by staying on the outside and trying to shape the standards it adopts than by getting on the inside at a time when they can have no confidence that China will not retain veto powers.”

Given their reliance on protection from US armed forces, getting South Korea and Japan to stay away was not difficult. Additionally, the Japanese already are the leading shareholder at the Asian Development Bank (ADB), so they would gain little playing second fiddle to the Chinese at the AIIB. Australia, then, is the really notable country to have turned down AIIB founding membership. What's more notable is the whining from the Yanks over the UK still being receptive at the current time to Beijing. Not being in the region and having divested itself of governing Hong Kong nearly two decades now, China is not an immediate security threat to it. What's more, the UK seeks a jump start on other European nations in availing of offshore RMB markets. Hence, it's understandable if the UK is not exactly receptive to Washington's pleas to toe the line:

The Obama administration accused the UK of a “constant accommodation” of China after Britain decided to join a new China-led financial institution that could rival the World Bank. The rare rebuke of one of the US’s closest allies came as Britain prepared to announce that it will become a founding member of the $50bn Asian Infrastructure Investment Bank, making it the first country in the G7 group of leading economies to join an institution launched by China last October...

Thursday’s reprimand was a rare breach in the “special relationship” that has been a backbone of western policy for decades. It also underlined US concerns over China’s efforts to establish a new generation of international development banks that could challenge Washington-based global institutions. The US has been lobbying other allies not to join the AIIB...

A senior US administration official told the Financial Times that the British decision was taken after “virtually no consultation with the US” and at a time when the G7 had been discussing how to approach the new bank. “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power,” the US official said.

So the mud is flying around as the UK attends to its interests first; what else is new?

The UK Treasury denied that Britain had acted out of the blue, saying there had been “at least a month of extensive consultation” at a G7 level, including with Jack Lew, US Treasury secretary. George Osborne, UK chancellor of the exchequer, was unrepentant, arguing that Britain should be in at the start of the new bank, ensuring that it operates in a transparent way. He believes it fills an important gap in providing finance for infrastructure for Asia.

“Joining the AIIB at the founding stage will create an unrivalled opportunity for the UK and Asia to invest and grow together,” Mr Osborne said. He expects other western countries, which have been making positive noises privately about the new bank, to become involved.

In large part this outcome could easily have been avoided. Sure the US would like to maintain dominance over multilateral lending institutions, but not acting on any sort of reforms at the IMF and elsewhere was always going to further encourage China to venture more into the multilateral lending business. It's certainly not lacking in cash to buy friends abroad, and American unwillingness to give in a little regarding the IMF, World Bank and Asian Development Bank's governance merely speeds up the process.

Linda Yueh at the BBC sees it as a "pragmatic" move on the part of the UK. Sorry, America, but others have their own interests to look after, too, and your case for staying the course isn't all that compelling. It's all about the money, Sammy--I hope you can understand.

3/16 UPDATE: Is Australia looking to change course and sign up again after the UK broke ranks? The rumor mill is in overtime.

3/17 UPDATE: Now here comes the kicker - France, Germany and Italy are reportedly joining the AIIB bandwagon after the UK broke ranks with the Yanks. The US is even less persuasive than I thought. From having no G7 nations on board, the AIIB now has a majority of them among its charter members, including all the Europeans [!]

France, Germany and Italy have all agreed to follow Britain’s lead and join a China-led international development bank, according to European officials, delivering a blow to US efforts to keep leading western countries out of the new institution.

The European decisions represent a significant setback for the Obama administration, which has argued that western countries could have more influence over the workings of the new bank if they stayed together on the outside and pushed for higher lending standards.