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Australia can only influence the AIIB if it joins

Australia can only influence the AIIB if it joins
Published 29 Oct 2014 

America's second-most senior diplomat, Deputy Secretary of State William Burns, is retiring, and this week he penned some parting words of advice for his colleagues. While his wisdom is worth reading in its entirety, one point is particularly germane to Australia's foreign policy choices: 'connect leverage to strategy'. This means 'effective strategy requires leverage, connecting concepts and goals to available instruments of national power'.

The Australian Government is facing a tricky strategic decision: whether or not to sign up as a founding member of the recently launched Asian Infrastructure Investment Bank (AIIB). The economic demand for such an institution is widely recognised and reform of existing architecture is stalled in the US Congress. But as an initiative of the Chinese Government, it is opposed by the US on the basis that there is no guarantee the new institution will adhere to international lending norms.

Washington's strategic concerns are obvious: the new institution will give China an added mechanism to advance its broader interests, likely at the expense of the US.

Canberra is caught in the middle. China is Australia's largest trading partner and the Abbott Government is trying to conclude a free trade agreement with Beijing. Snubbing the AIIB risks harming those delicate negotiations. Moreover, the creation of the bank is an inevitability and, as argued here recently by Philippa Brant, without a seat at the negotiating table Australia has no hope of ensuring that the bank will be designed according to best practices.

On the other hand, the US is Australia's closest ally, and Secretary of State John Kerry allegedly made a personal request to Prime Minister Abbott not to join. Thus, whatever its decision, Australia is going to disappoint one of its major partners. [fold]

Cabinet is reportedly divided on the issue, and no Australian representative attended the launch ceremony last week, a move criticised by former Ambassador Geoff Raby. Beijing responded with flexibility, its Ministry of Finance stating that any country ratifying the (still to be drafted) Articles of Agreement before the end of 2015 can still officially become a 'founding' member. 

What is the optimal strategy? Burns' dictum prompts a question: where can Australia achieve the greatest leverage? Consider three scenarios.

In Scenario 1, Australia declines to join the AIIB. The Bank will be established anyway, but Australia will have zero leverage over its structure and operations. Moreover, if the refusal is interpreted as evidence of Canberra simply doing Washington's bidding, it will reduce perceptions that Australia can offer an independent voice on regional issues.

In Scenario 2, Australia expresses a willingness to be involved in (or at least observe) negotiations for the AIIB's Articles of Agreement over the next 12 months. Let's assume these Articles of Agreement offer weak protections on matters like environmental protection, procurement and governance, or it is clear from the drafting that Beijing will be unconstrained in using the Bank to pursue its strategic interests. In this situation Australia would have some leverage: it could refuse to ratify the final agreement, making a statement such as 'having witnessed the drafting process, we conclude that the AIIB fails to meet international norms'. Such a public withdrawal would undermine the Bank's credibility before it even began, and thus is a scenario Beijing would want to avoid. The threat of withdrawal would accordingly provide Australia with leverage during the drafting process.

In Scenario 3, the Articles of Agreement are sufficiently robust and Australia officially becomes a founding member. But what if, over the succeeding years, China uses its outsized voting power (or some other tactic) to circumvent the rules, and AIIB-sponsored projects end up falling well short of international standards, or are used perversely to advance Chinese interests?

Even then, Canberra would retain some leverage. Participating in the Bank's operations would give Australian officials insight into how decisions are made, as well as the capacity to monitor projects on the ground. If the creation or running of a project sparked grave concern, Australia could again threaten to withdraw from the Bank. After all, no international agreement is permanent; countries always retain the ability to pull out. But again, an Australian withdrawal would undermine the Bank's credibility, especially if Australia chose to make its knowledge of impropriety public. As in Scenario 2, the potential for withdrawal offers Australia ongoing leverage in the Bank's operations.

To be clear, I am not suggesting that China (or any other country) will necessarily seek to use the AIIB for nakedly strategic purposes. Rather, this post is a thought experiment to determine where Australia's leverage is greatest. As William Burns counsels, Canberra should connect that leverage to strategy. In this case, leverage comes from participation. Strategy should accordingly follow.

Photo courtesy of Flickr user Pedro Moura Pinheiro.

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