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US risks epic blunder by treating China as an economic enemy
The United States has handled its economic diplomacy with shocking myopia.
The US Treasury's attempt to cripple the Asian Infrastructure Investment Bank (AIIB) before it gets off the ground is clearly intended to head off China's ascendancy as a rival financial superpower, whatever the faux-pieties from Washington about standards of "governance".
Such a policy is misguided at every level, evidence of what can go wrong when a lame-duck president defers to posturing amateurs in Congress on delicate matters of global geostrategy.
Washington has enraged Britain by trying to browbeat Downing Street into boycotting the project. It has forced allies and friendly countries across the Far East to make a fatal choice between the US and China that none wished to make, and has ended up losing almost everybody. Germany, France, and Italy are joining. Australia and South Korea may follow soon.
The AIIB is exactly what the world needs. China must recycle its trade surpluses and its $3.8 trillion reserves by one means or another. It can buy US Treasuries, Bunds, or Gilts, perpetuating a global bond bubble. It can make surgical investments abroad to acquire technology for its champions and pursue a narrow national interest.
Or it can recycle the money in concert with other members of the AIIB - with a start-up capital of $50bn - for sewage projects, clean energy, ports, roads, and railways in Asia, helping to plug a $700bn shortfall in infrastructure investment that the World Bank is too small to cover and which is of collective benefit to the world.
Britain recycled its surpluses in the 19th Century by building the world's railways. America did so in the 1950s through the Marshall Plan. China must do likewise, and it is hard to see why the AIIB is considered such a villainous variant.
American officials castigated Britain for breaking ranks and embracing the project, as if it were kowtowing to an enemy. “We are wary about a trend of constant accommodation of China, which is not the best way to engage a rising power,” one US official told the Financial Times.
One is left breathless at the historical folly of such a view in any case. As Henry Kissinger told Caixin magazine this week, the greater danger is that the US fails to accommodate the rise of China in an enlightened fashion, repeating errors made by the status quo powers faced with a prickly Germany before the First World War.
There are echoes of the Korean War in this Atlantic spat, though thankfully the stakes are less violent today. Britain tried to restrain General Douglas MacArthur and Washington's hawks as they sent US forces charging through North Korea to the Yalu River and the Manchurian border in 1950, warning that it would force China to respond.
MacArthur's contemptuous riposte was to liken British reflexes to the betrayal of Czechoslovakia at Munich, of "desiring to appease the Chinese Communists by giving them a strip of Northern Korea." The British experts were right. China threw four armies across the Yalu. America had arrogantly stumbled into a shooting war with the Chinese revolution, a cataclysmic mistake.
There is no doubt that the AIIB is a direct challenge to the World Bank, just as the new 'BRICS bank' takes aim at the International Monetary Fund. The two China-led bodies are intended to break Western control over global finance through the Bretton Woods institutions.
Yet whose fault is that? Under the Bretton Woods carve-up over the last seventy years, World Bank chiefs are always American by droit de seigneur, and all IMF chiefs are European. The US clings steadfastly to its IMF veto. Capitol Hill has yet to ratify a reform of the IMF quota system that currently gives the US four times as much power as China, or approve a badly-needed expansion of IMF funding.
Jacob Lew, the US Treasury Secretary, admits that this foot-dragging has been costly. “It's not an accident that emerging economies are looking at other places because they are frustrated that the US has stalled a very mild and reasonable set of reforms in the IMF,” he said.
As for the Europeans, they hijacked the IMF for an internal rescue of four eurozone countries, even though EMU is amply rich enough to sort out its own self-created mess. Every emerging market member of the IMF board opposed the original Troika plan for Greece in 2010 on the grounds that it was a rescue for North European banks and for the euro, not a rescue for Greece. They complained that Greece needed immediate debt relief rather than bail-out loans and therefore more debt, and events have proved them entirely right.
It would be a miracle if China were meekly to accept this outdated mockery of world financial governance, and nobody has yet paired the word meek with president Xi Jinping. The most powerful Chinese leader since Mao Zedong - described this week by one party survivor as a "needle wrapped in silk" - will have his way.
Those in Washington who think that China can be pushed around on such matters seem blind to the shifting strategic landscape, as if they still cling to Bush-era illusions of hegemonic power. Mr Obama knows better. It is a mystery why he has wasted so much capital on a debacle.
The only hope for the world in the 21st Century is for the US and China to govern together in G2 condominium. The West must pick its quarrels with care, always going with the grain of its Asian alliance system.
There was pervasive alarm across the Pacific Rim three years ago when China began to flex its muscles: over the Diaoyu/Senkaku islands in the East China Sea, and the Spratlys in the South China Sea. The US was fully justified in acting to stiffen a ring of states from Vietnam, to the Philippines, Japan and South Korea, even if this inevitably had a whiff of military encirclement.
But blocking everything reflexively because it threatens US dominance is stale statecraft, damaging the nexus of alliances on which all else depends.
It is possible that the AIIB will fizzle. China's economy has come off the boil, struggling by an incipient debt crisis. The work force is contracting by three million a year. Productivity growth has failed to keep pace with rising wages. Capital outflows are eating into foreign reserves. The central bank has become a net seller of bonds. The Asian Development Bank said this week that the yuan is now "overvalued".
David Shambaugh, a veteran sinologist at George Washington University, says the Communist Party is in danger of disintegrating. Riddled with corruption, it is relying on naked repression and systemic purges to make up for lost legitimacy. He has even begun to talk of a coup against President Xi.
Mr Shambaugh's warnings have set off a particular storm among China-watchers, since he is not habitually a member of China's doom brigade. He is probably wrong, but authoritarian regimes are brittle, and inherently non-linear.
Robert Kahn from the US Council on Foreign Relations says the White House would be well-advised to stop trying to sabotage the AIIB, allow any country to joins if it wishes, and let the bank "rise or fall on its own merits."
Or Washington might heed the proper lesson from the Florentines. We all know about Niccolo Macchiaveli's compulsive urge to pre-empt all possible threats. He deemed people immutably wicked by nature and therefore prone to be hostile, a bias that brought his princes endless grief.
Less remembered is his peer, Francesco Guicciardini, a man more willing to discern virtue. He regarded such dark views as bad counsel. Most threats fade away of their own accord, or turn out to be harmless. Guicciardini advised "discrezione". Much wiser.
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