WASHINGTON: The success of the new China-led development bank has caught the United States off guard, after it fought the project and now finds itself increasingly isolated.

Britain, Germany, France... the United States has watched, helpless and dumbfounded, as its European allies flocked to join the Asian Infrastructure Investment Bank, seen as a potential rival to the World Bank and the Asian Development Bank, both institutions under powerful US influence.

The list does not stop there. Other US allies, like Australia and South Korea, are considering joining the AIIB, which already has about 30 member nations and the blessing of International Monetary Fund chief Christine Lagarde.

“The US has been caught flat-footed by the rush of countries, including its close economic and political allies, that are lining up to join the China-led AIIB,” Eswar Prasad, a former head of the IMF’s China division, told AFP, pointing to the “declining power of the US in driving the global economic policy agenda.”

The Obama administration has been waging an intense but low-profile lobbying campaign against rival China’s $50 billion bank project unveiled in October. Officials have insinuated that the AIIB would lower international development standards.

“Will it adhere to the kinds of high standards that the international financial institutions have developed? Will it protect the rights of workers, the environment, deal with corruption issues appropriately?” Treasury Secretary Jacob Lew said last week in testimony in Congress.

The upfront opposition, which is fed by a climate of mistrust between the world’s leading economic superpower and its fast-growing rival, has proved ineffective.

“The US became isolated on the issue relatively early because they were so vocally critical. As a result the US lost the opportunity to have more of an open discussion with countries who were considering joining,” said Scott Morris, a former Treasury official, in an interview.

That failure has its consequences. In a rarity since the end of World War II, the United States must prepare to cope with a multilateral institution on which it will have no direct influence.

Accustomed to constructing the world’s financial architecture, the United States may be overconfident and underestimated the powerful attraction of China and its colossal cash reserves.

“The United States has only known its status as a leader and it has psychologically not adjusted to the real emergence of other countries including China. Their mentality is a bit behind the reality,” said Hongying Wang, an expert on US-China relations at the Centre for International Governance Innovation, a Canadian think tank.

According to experts, Washington also underestimated the weariness of certain countries, including its allies, with its lack of enthusiasm for multilateral economics.

The United States is blocking 2010 reforms of the IMF that would raise the voting rights of emerging powers and sometimes is accused of neglecting the World Bank. Washington is the major stakeholder in both institutions.

“These countries have more ambition for larger multilateral institutions and they become frustrated with the position of the United States, which is not terribly ambitious,” Morris, the former Treasury official, said of the countries that are joining the AIIB.

Published in Dawn, March 27th, 2015

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