Two society hostesses are rivals. Both guard their social standing jealously ― and may even punish a guest who attends the other’s party by withholding future invitations.
China and the United States seem to regard Asia-Pacific relations similarly: as a zero-sum game. Are countries signing up for China’s Asian Infrastructure Investment Bank, or for America’s Trans-Pacific Partnership? Will China be welcomed, or humiliatingly rebuffed, in its effort to persuade the International Monetary Fund to include the renminbi in its unit of account, Special Drawing Rights? Is the U.S. still the world’s largest economy, or did China surpass it in 2014?
However tempting it may be to focus on such questions, they are the wrong way to think about the global economy. There is no reason why some countries should not join both China’s AIIB and America’s TPP, or why overlapping memberships should not expand over time ― or, indeed, why the hostesses should not eventually attend each other’s parties.
Unfortunately, that is not how current issues of global economic governance are being framed. When the United Kingdom, Germany, South Korea, Australia, and others unexpectedly decided in March to join the AIIB, it was widely reported (partly because of missteps by U.S. policymakers) as a mass defection of U.S. allies to a rival’s party.
But there is nothing wrong with joining the AIIB. Asia needs more help with infrastructure investment than the World Bank and the Asian Development Bank can provide; China can play a useful leadership role; and the participation of countries with high governance standards can help prevent the cronyism, corruption, and environmental damage to which large-scale infrastructure projects are prone.
Likewise, the TPP negotiations are sometimes characterized as a U.S. attempt to isolate China. But, given the Asia-Pacific region’s high trade volumes, and its dense set of trading arrangements running in every direction, no one, including China, is about to be isolated. And, with World Trade Organization negotiations, in which all countries could participate, stalled for years, the TPP and other regional initiatives (like Asia-Pacific Economic Cooperation and various intra-Asia free-trade areas) are better than nothing.
Exchange rates are another area where zero-sum thinking prevails. On April 9, the U.S. Treasury released the biannual report mandated by Congress to identify countries engaging in “currency manipulation.” Neither China nor anyone else was found guilty this time. But Treasury officials believe that they must keep up the pressure, lest Congress follow through on threats to punish supposed currency manipulators, derailing the TPP and other trade agreements.
Then there is the SDR. Every five years, the IMF reconsiders its composition, which currently is defined in terms of the dollar, euro, yen, and pound. China’s renminbi is unlikely to be included in the basket now, because it is not “freely usable.” And, though this will likely be reported as a defeat for China, it should not be. The issue is of little importance.
It might seem that all of this could be shrugged off as a harmless media spectator sport. But, to the extent that a misplaced focus on country rankings becomes a barrier to sensible policy, it can do real damage.
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 economic importance, China and other major emerging economies have long since merited much larger IMF quota shares, implying greater financial contributions and greater voting weights.
But their increase in shares need not come at the expense of the U.S. It is the European countries that are greatly over-represented. Despite European reluctance to cede ground, U.S. President Barack Obama succeeded in brokering such a reallocation of IMF quota shares at the G-20 summit in Seoul in November 2010. Five years later, the U.S. Congress is still holding up IMF quota reform ― not because it would imply any loss of power or cost to U.S. taxpayers, but because many members do not want to give Obama anything he asks for.
Thirty years ago, the West wanted nothing more than for China to become a capitalist economy. It has done so, with spectacular success. The rules of the game now require that China be given a bigger share in the governance of international institutions.
Making room at the table will help the rest of us in the “game” that matters most: world peace and prosperity. If the Congress does not pass the IMF quota reform, the US 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 ideas, culture, economic system, and so forth). But there is another kind of power. Ever since Bretton Woods, the U.S. has had the power of global leadership. During the interwar period (1919-1939), Americans were unprepared to assume that mantle; but World War II taught them the cost of isolationism, and they rose to the challenge in 1944.
Seventy years later, even after America’s massive foreign-policy mistakes in Iraq and elsewhere, and even after Chinese GDP has supposedly caught up with America’s (at least in terms of purchasing power parity), the world remains ready to be led by the U.S., including on the crucial subjects of trade and IMF reform. If those who insist on scorekeeping have their way, the U.S. will be unable to exercise the leadership that the world needs. And the world will look elsewhere.
By Jeffrey Frankel
Jeffrey Frankel is professor of capital formation and growth at Harvard University. ― Ed.