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Asia Games: Not Zero-Sum

May 14 , 2015
  • Jeffrey Frankel

    Professor, Harvard University's Kennedy School of Government

Two hostesses are rivals in a popularity contest throughout the social season.  When they hold soirees on the same night invitees must choose which one to go to. The hostesses guard their social ranking jealously, and may even punish a guest who goes to the rival’s party by withholding an invitation next time.

To read about the roles of China and the U.S. over the past month, one would think that Asia/Pacific relations are a zero-sum game like that of these two hostesses in some fictional time and place. Are countries signing up for China’s Asian Infrastructure Investment Bank? Or for America’s Trans Pacific Partnership? Will China’s currency be admitted to the SDR club, or will it be kept humiliatingly waiting at the entrance? Is the United States still number one globally in economic size, or did China pass it in 2014?

To phrase interesting economic questions in this way — “who’s on top?” — is a very strong temptation. But it is the wrong way to think about them. There is no reason, for example, why some countries should not join both China’s AIIB and America’s TPP; nor why the membership overlaps should not expand over time; nor, indeed, why the hostesses should not eventually attend each other’s parties. The more the merrier. Let’s run through the list of current issues. Apologies in advance: my score-card lacks the satisfying simplicity of declaring who is up and who is down.

  • When Britain, Germany, Korea and Australia and others unexpectedly decided in March to join the Chinese-led Asian Infrastructure Investment Bank (AIIB), it was widely reported as a mass defection of U.S. allies to a rival party. That it came across this way did indeed represent a misstep of Obama Administration foreign policy. But there is in fact nothing wrong with this development. Asia does need more help with infrastructure investment than the World Bank and Asian Development Bank can provide; China can play a useful leadership role; and the participation of the UK and other countries with high governance standards can assist in avoiding the sort of cronyism, corruption, and environmental damage to which road-building and other infrastructure projects are sometimes prone.
  • The Obama Administration is finally making some progress getting authorization from Congress to pursue the Trans Pacific Partnership.  Negotiations for TPP are sometimes characterized as a U.S. attempt to isolate China. But high volumes of trade in Asia and the Pacific and a dense set of regional trading arrangements running in every direction show that neither China nor anyone else is about to be isolated. It would be best if trade negotiations could make progress through the World Trade Organization, so that everybody can participate, without the dangers of inefficient trade-diversion or the messy complications of rules of origin. But WTO negotiations have been stalled for years. In the meantime, TPP and other regional initiatives like APEC and various intra-Asia free trade areas are better than nothing.
  • On April 9th, the U.S. Treasury released the bi-annual report mandated by Congress to point the finger at countries engaging in “currency manipulation.” Neither China nor anyone else was found guilty this time. But, as in every administration, the Treasury feels it has to keep up the pressure, or else Congress may follow through on threats to pass currency manipulation legislation and so derail TPP and other trade agreements.
  • Every five years the IMF re-considers the composition of the SDR, its special currency unit, currently defined in terms of the dollar, euro, yen and pound. We are told that China wants its currency, the renminbi, included in the basket this year, as a matter of prestige. I don’t think this will happen now. The renminbi does not yet qualify, because it is not “freely usable.” (Maybe next time.) This would be reported as a defeat for China. It should not be. The issue is of very little importance.
  • It might seem that lack of clarity regarding the proper role of country rankings in international politics could be shrugged off as a harmless media spectator sport. But it can do real damage, as a barrier to sensible policy. Such is the case with the stalled IMF quota reform, an issue where the rankings in fact are of some importance — but not in a zero-sum way. By any measure of their economic importance, China and other big Emerging Market economies have long since merited much larger quota shares at the IMF, implying greater financial contributions and commensurately greater voting weights. Their increases in shares do not need to come at the expense of the U.S. It is the European countries that are greatly over-represented. Despite European reluctance to cede ground, President Obama succeeded in brokering such a reallocation of IMF quota shares at the G20 summit in Seoul in November 2010. Five years later, however the U.S. Congress is still holding up IMF quota reform – not because it would imply a loss of power or a cost to the taxpayer, but rather because many members view it as a matter of principle not to give the President anything he asks for.

Thirty years ago, we wanted nothing better than for China to become a capitalist economy. It has done so, with spectacular success. The rules of the game now require that it be given a bigger share in the governance of the international institutions. That does not hurt the rest of us, not in the only “game” that matters most, which is world peace and prosperity.  If the Congress does not pass the IMF quota reform, we can hardly blame the Chinese for undertaking initiatives such as the AIIB on their own. We often hear about hard power (military) and soft power (the attractiveness of a country’s idea, culture, economic system, etc.). But there is another kind of power. Ever since Bretton Woods, the United States has had the power of global leadership. The symphony needs a conductor.

Americans had been unprepared during the interwar period to assume the mantle, but learned the cost of that in World War II and so rose to the challenge in 1944. Seventy years later, even after the foreign policy mistakes we have made, even after the erosion of soft power, even after the Chinese economy has supposedly caught up with the U.S. in size of GDP (evaluated at PPP, that is), the world is still ready to be led by the United States, in ways such as brokering IMF reform. If we refuse to lead, then we abdicate power willfully.

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