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Economy

Philip Calvert: Canada's move to join the AIIB is smart politics and economics

During his first visit to China as Canada's new prime minister on Sept. 2, Justin Trudeau announced, among other initiatives, that his country would apply to join the Asian Infrastructure Investment Bank, making Canada the first North American member of the China-backed institution. Along with Trudeau's commitment to make climate change a government priority and to "reset" the relationship with China, this departure from the approach of the previous Canadian government has generated both support and skepticism at home.

Some wonder if Canada is moving too early on its membership. But for the most part, the skepticism has less to do with the AIIB itself and more about what Canada had received from China in exchange for this decision -- and whether it has been shortchanged.

Leaving aside the bilateral context, Canada's decision to join the AIIB is in many ways an astute strategic move. Canada identifies itself as an Asia-Pacific country and both the Liberal government and the preceding Conservative one have focused on raising the country's presence in the region and investing in trade and economic initiatives of the Association of Southeast Asian Nations.

The sticking point had always been China and suspicions within Canada's previous Conservative government of Beijing's motives in establishing the AIIB, which led to Ottawa's decision to side with the U.S. in refusing to become a founding member. Joining the AIIB is not as much of a game-changer as the decision by Trudeau's late father, Prime Minister Pierre Trudeau, to establish diplomatic relations with China in 1970. But in joining 57 other countries that were AIIB founding members, Canada will become part of an institution with real potential to make an important contribution in Asia.

China's announcement in 2013 of its plan to form the AIIB was met with caution and skepticism among advanced economies.

The U.S. raised concerns about how the AIIB would be governed and the possibility of potential conflicts with the World Bank and the Asian Development Bank. Japan was also suspicious of the AIIB as an expression of China's regional agenda. Many were simply uneasy about China establishing an institution outside the Bretton Woods system, with the AIIB seen as little more than a vehicle for expanding Chinese influence in the region.

NEW REALITY These are reasonable concerns, particularly given China's own domestic issues with governance, transparency and the rule of law, and its increasingly assertive claims in the South China Sea. Despite these misgivings, many countries committed themselves to becoming founding members of the AIIB. They included India and all the ASEAN countries, but also a number of U.S. allies and democratic countries such as the U.K., France, Australia, New Zealand, the Netherlands, Norway and Sweden. The World Bank itself welcomed the establishment of the AIIB as a complementary source of badly needed funds to build infrastructure in the region.

AIIB members may have joined for bilateral reasons, but they are also aware that the AIIB is one element of a broader Chinese global strategy. The AIIB appears to be about much more than increasing China's direct influence.

China does not need the AIIB to expand its economic influence in the region. Its companies are investing heavily and visibly in manufacturing, energy, mines and construction. Its political influence can consequently be seen in the agonized debates within ASEAN over the wording of public statements on the South China Sea issue. The AIIB is no more a product of altruism than any other development bank. China needs sustained economic growth for its own stability and, ultimately, survival. This will eventually come from prosperity in the region.

The AIIB is part of Beijing's longer-term approach for sustaining its growth, and that of other economies in the region, by creating markets through the "One Belt, One Road" strategy, while raising China's global profile as a responsible global player. Infrastructure investment in Asia will support economic growth, particularly if coupled with investments in education and governance, which are the provenance of the established international financial institutions.

The AIIB has been in operation since January and appears to be taking a long-term, sophisticated and cautious approach. It has approved five loans, four of which have been co-funded with other institutions: the World Bank, the ADB and the European Bank for Reconstruction and Development. These loans include hydroelectric projects in Pakistan, roads in Pakistan and Tajikistan, an electricity grid in Bangladesh and urban renewal in Indonesia. The co-financing approach is also reassuring that the governance of these facilities will also have to meet the standards of other institutions involved in the loans.

While these indications are positive, it is still early days for the AIIB. It will be up to the various members to ensure that the institution lives up to its commitment to transparency, zero tolerance for corrupt practices, and objective and fair tendering and procurement practices. They will also want to hold the AIIB to its promise to review all project proposals solely on their worth, without political factors coming into play. At the same time, it is also in the AIIB's interest to ensure that these standards are met, and that the institution be accepted as a reliable, complementary source of financing and as a viable co-financing partner.

What will AIIB membership mean for Canada? Critics have pointed out that because of the AIIB's commitment to opening up procurement to companies from all countries, membership does not give Canadian companies an inside track on development projects funded by the institution. On the other hand, if membership did come with these privileges, it would likely have raised suspicions about preferential treatment of Chinese companies.

What AIIB membership should do is raise awareness among Canadian companies and stimulate better information flow about projects in the pipeline as the loans are approved by the AIIB. It will be up to Canadian companies to position themselves to participate competitively in the procurement processes. Membership will also give Canada a voice in the governance of the institution to help ensure that the AIIB adheres to its espoused principles as it takes on more projects and spreads its influence.

COLLECTIVE RESPONSIBILITY This may not be much on its own, but in concert with other members, this influence could be significant. Neither is joining the AIIB likely to damage relations with the U.S. since so many other U.S. allies are founding members.

Finally, AIIB membership means participating in a key shift in global power dynamics.

Global governance is in transition. Postwar international financial institutions like the Bretton Woods system -- the International Monetary Fund and the World Bank -- set the framework for global governance based on principles and practices rooted in European culture. Canada participated actively in this process. These institutions continue to be important and have been instrumental in promoting fundamental principles such as the rule of law and open economic exchange. But they have their limits. As economic power shifts increasingly to Asia, institutions seen as more in tune with Asia's needs and governance culture have emerged. As a post-Bretton Woods institution, the AIIB is a good example of this shift and underscores Asia's growing economic power.

It is unquestionably in Canada's interest to be part of this and to promote the Bretton Woods principles of transparency and rule of law within this emerging framework. And this is the right time to do it. Canada hesitated about joining discussions on the U.S.-led Trans-Pacific Partnership at its formative stage and ended up with much tougher negotiations when it did pursue membership. Joining the AIIB now is an important move that will help position Canada for a more effective role in shaping the 21st century global economic agenda.

Philip Calvert is a senior fellow at the China Institute at the University of Alberta and a former Canadian ambassador who earlier served as director general for North Asia for Global Affairs Canada.

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