Bretton Woods With Chinese Characteristics
How is Beijing creating its own network of global institutions to extend its influence in foreign affairs?
“The supreme art of war is to subdue the enemy without fighting”. China’s global ascendancy as the preeminent hegemon is the result of decades of a curated usurpation of the United States. However, living in a globalized world after the 20th-century with nuclear arms means orthodox approaches to supremacy became obsolete. Instead, economic power is the new modus operandi of aspiring empires; or as they are called now, Superpowers.
Policymakers and intellectuals frequently refer to Asia’s growing influence as a new rise to power. However, given the deep history of the region, it would be more accurate to refer to it as a reemergence. The distinction is crucial: the latter suggests that a pre-colonial dynamic existed, and therefore a fortress of identity through shared history politically, economically, and socially. It is through this multifaceted dimension that China’s President, Xi Jinping, has skillfully tapped into, and is using to build the arteries of commerce through the region - with China at the heart.
In The Silk Roads, Peter Frankopan rightfully observed that we think of globalization as a uniquely modern phenomenon, yet 2,000 years ago too, it was a fact of life. China’s role as the purveyor of highly sought-after goods such as silk - a product so ubiquitously desired it became a de facto currency - cemented it as an indispensable force of Eastern-Western fusion. The region was dynamic with the expansion of trade, technology, and religion, while the West floundered in the Dark Ages. Far from awaiting the Promethean touch of modernity, Asia was thriving, and an underlying, pan-Asian identity - despite the intra-regional violence - was formed. However, this was doomed to disturbance. Christopher Columbus’ voyage in 1492 catalyzed a chain of events that would shift the heart of the world from Asia to Europe.
Fast forward a few hundred years, and the United Kingdom is a world power, where the “cheap prices of commodities [were] the heavy artillery with which it batter[ed] down all Chinese walls”. The humiliation of the Opium Wars and the subsequent conflicts that it birthed - Taiping and Boxer Rebellions - were instrumental in shaping Chinese history in the 20th-century. The humiliation from foreign interference became the bedrock of resentment that fueled a civil war over two different visions for China, and ended with Mao Zedong’s triumph. Paranoia from foreign influence was a symptom of 19th-century wounds that have bled from Mao to Xi Jinping. Now, as he consolidates more power and a cult of personality akin to the founder of the Chinese Communist Party (CCP), Xi’s vision for the future rests in the past: the rebirth of a new silk road for a new age of Asia.
The Future is in the Past
The Belt and Road Initiative (BRI) is the hallmark geoeconomic initiative set forth by Xi Jinping, and arguably poses the biggest challenge to Western preeminence. The multi-decade project aims to use trade promotion, infrastructure development, and regional connectivity, to boost economic linkages between China and dozens of countries along a land route (the Silk Road Economic Belt) and a sea route (the 21st Century Maritime Silk Road). It is designed to encompass most of Afro-Eurasia, and is expected to boost global GDP by $7.1 trillion in the next two decades. Approximately 146 of the 195 globally-recognized states are involved in the multi-continental project; Put another way, 70 percent of the world has signed on with the Chinese-led initiative.
Washington’s concern, naturally, is the financial, economic, and political leverage Beijing can wield against its “partners”, should they fall out of line or are unable to make payments to any debt they incurred. The latter has come to be known as debt-trap diplomacy. This is when a state extends large sums of credit to a debtor country with the “intention of extracting economic or political concessions when the debtor country becomes unable to meet its repayment obligations”. China’s acquisition of the Hambantota Port in Sri Lanka for a 99-year lease is the quintessential example of this geo-financial strategy. After incurring an enormous amount of debt under former president Mahinda Rajapaksa, the subsequent government struggled to make payments and ultimately had to relinquish the port to a foreign entity. The irony of leasing a strategic, coastland entrepôt by using a state-owned, economic entity echoes the East India Company’s imperialistic adventurism in Asia and the leasing of Hong Kong for 99 years to the British. Indeed, perhaps Marx was correct when he said history repeats itself in two phases: first as tragedy, second as farce.
Pakistan is also facing a similar predicament, with many of its infrastructure projects being financed almost exclusively by Chinese banks. China also ratified a 25-year strategic cooperation agreement with Iran, and capitalized on their internationally-ostracized circumstances to extract asymmetrical concessions. In return for cheap Chinese goods to an economically-starved populace, Iranian officials agreed to export oil at a deep discount. China’s key advantage is they now have a cheap source of energy in a region they are building ground in - literally.
It is not only developing-economies that are vulnerable to Beijing’s leverage. The deterioration in Chinese-Australian relations over the origins of the COVID-19 outbreak in 2020 led to punitive measures against the island economy. The results were tariffs as high as 218 percent for goods like wine, and approximately 80 percent for Barley. China accounts for one third of Australia’s global exports, including key products such as iron ore and coal. Their strong reliance on the Asian giant’s appetite puts them somewhat at the mercy of Beijing. The premonitions of dependence on Eastern, illiberal rivals is not exclusive to China. As we are seeing now with the Ukraine war and sanctions against Russia, Germany is facing high inflation and demanding energy needs. It is not unrealistic to think that European involvement in BRI could put them in a similar position, should they fall out of the good graces of the CCP.
Having said that, Beijing has to be careful and not overextend its hand. Should prospective partners be turned off by China’s predatory financial/economic incursions, the appetite for Sino-based capital may wilt. This chilling effect in turn may create an opening for Washington and the West as a whole to offer an alternative to Chinese credit. It is therefore imperative for the US to reform its geo-financial strategies and make itself competitive, especially in Asia.
Oh, Were You Not Invited?
The world’s largest trade agreement on record silently moved history, with much of the West asleep to the magnitude of its ratification. The Regional Comprehensive Economic Partnership (RCEP), involves Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. Together, these 15 countries in the free trade area would cover “2.3 billion people or 30% of the world’s population, contribute US$ 25.8 trillion about 30% of global GDP, and account for US$ 12.7 trillion, over a quarter of global trade in goods and services, and 31% of global FDI inflows”.
The omission of the United States from RCEP was a tactical move, similar to the way China was intentionally excluded from the now-scrapped Trans-Pacific Partnership (TPP). The successor to this initiative is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed and launched in 2018. It contains many of the original provisions in TPP, and is still geared towards functioning as a counterweight to China’s growing influence. Beijing has submitted an application to join the multilateral trade agreement, but certain regulatory provisions (such as banning data localisation and prohibiting the forced transfer of source code) are obstacles to their admission. Furthermore, China’s admission could undermine the central objective of CPTPP: to interlock Asian economies with the US and to gradually decouple from China.
A crucial difference between RCEP and the CPTPP is the relatively more comprehensive set of regulatory protocols embedded in the latter relative to the former. Unlike CPTPP, RCEP does not include protocols for addressing the asymmetry of state-owned-enterprises (SOEs). It also fails to critically address regulations about labor and the environment, both of which are deeply embedded in the CPTPP framework (as well as Washington’s recently unveiled Indo-Pacific Economic Framework).
TPP (and now CPTPP) is designed to create a moat of political-economic connectivity around China but not to include it, despite some members being open to the Asian giant’s admission. As a result, in order to trade with certain members, Beijing would be compelled to comply with international laws or make concessions to the West to gain access to markets in its own backyard. RCEP is a mirror image, with the US as the outsider; history is not without a sense of irony.
The ostracisation of the US means China will be at the helm and will reinforce itself as the economic center of gravity in an increasingly dynamic region. Without a Dollar-centric trading paradigm, US influence in Asia is now severely curtailed, and no number of bilateral trade relationships could replace the comprehensive structure of RCEP. Having said that, political-economic coquetry is not out of the question. Washington still wields significant global influence with both soft and hard power that it can use to gently coax states in the region from fully devoting themselves to the Asian giant. Furthermore, the US can capitalize on rifts between China and its neighbors exempli gratia: India.
New Delhi declined to sign RCEP out of concern that cheap Chinese goods would flood the market and displace millions of domestic businesses. This exacerbated what had already been escalating tensions between China and India over the so-called Line of Actual Control (LAC) in the Himalayan Mountains. Over the past few years, soldiers from both sides have engaged in skirmishes as the nationalistic rhetoric between Xi and India’s prime minister, Narendra Modi, jump from phrases to firearms. Washington can support its allies in the region, but it will have to compete with the increasingly well-structured financial system China is setting up and leveraging to advance Beijing’s agenda.
Mirror, Mirror on the Wall, Who’s the Best Financier of Them All?
The Asian Infrastructure Investment Bank (AIIB) was first proposed in 2013 and formally established in 2015 with 57 founding members. It was initially created as a ‘regional financing mechanism’ for BRI, with a starting capital of $100 billion. Being a China-led initiative, Beijing contributed $50 billion and retains the largest voting share at 28.7 percent. This is a mirror image of the creation of the International Monetary Fund (IMF) in the 20th century, only, then it was the US with the largest capital contributions and veto power. Xi appears to be taking more than just one leaf from the sage Sun Tzu: “To know your enemy, you must become your enemy”.
The second-largest contributor to the AIIB is India, with a capital contribution of $8.4 billion, and a voting share of less than 10 percent. The AIIB also gives more decision-making power to regional states, particularly those with the largest shares. The democracy deficit is China’s authoritarian surplus. It is therefore not surprising to learn that China is already leveraging its asymmetrical power to exert political influence on the AIIB. A key example is China’s rejection of Taiwan’s bid for membership as a founding member. This comes despite its full association in many other international organizations.
Officially, the Articles of Agreement state that the purpose of the AIIB is to:
(i) foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors; and (ii) promote regional cooperation and partnership in addressing development challenges by working in close collaboration with other multilateral and bilateral development institutions.
In this “Age of Choice”, when the West and its institutions are no longer the default, the AIIB serves as an alternative for accessing financial aid and the means for economic development. It is political-economy evolution: when a species’ (institution) genes (structures and rules) are no longer optimized for the current environment, they either adapt or face supplantation.
This shift has been catapulted in part by the IMF’s operations. A growing body of literature has been dedicated to criticizing the institution’s lending practices, including austerity measures and stringent terms and conditions applied to loans to countries in financial distress. As a (former) monopoly in this institutional landscape, the IMF was able to weather these criticisms with no pressure to change because where else would these countries go? However, the creation of the AIIB, has put pressure on the IMF to either reform its lending practices or risk obsolescence.
Measures the institution could implement include shortening the time needed to approve loans and adjusting loan conditionality. In addition, adjusting the strategy from being a lender of last resort to a more proactive (rather than reactive) role could incentivize more countries to participate in the network – and, by extension, reject the AIIB and strengthen their respective relationships with Washington and the West as a whole.
Make no mistake, reforming the IMF and parallel institutions is as much a financial endeavor as it is a political one. Washington and the West emerged victorious in the Cold War, but did so through mechanisms such as the Marshall Plan and Bretton Woods institutions. It needs to do so again.