This is a big deal.
On Monday, we published Larry Summers’ latest op-ed from The Washington Post, which opened with the former Treasury Secretary and Harvard president writing, “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”
What Summers is referring to is the creation of the Asian Infrastructure Investment Bank, a new banking consortium led by China that will back investment Asian and emerging market economies. This bank serves as a direct challenge to the World Bank and the IMF, the traditional sources of international funding, and organisations in which US economic interests have a strong voice.
The AIIB’s founding members include Russia, Brazil, and India, as well as major European economies like France, Germany, and the UK.
Last week, Business Insider’s Mike Bird outlined how the formation of the AIIB has been an embarrassment for the US government all along.
Here’s the key point from Bird:
“The infrastructure bank isn’t going to be a massive boom for the UK economy, or even for nearer nations like Japan, and the US will not retaliate. The point is that the UK is willing to take a very modest improvement in economic and political ties with China in exchange for a small deterioration in ties with the US. Pretty much every country has decided that this is the right move.”
And so while the US has been the dominant global economic power of the last 50 years, the point is that now countries all across the globe are seemingly falling over themselves to be more closely aligned with China.
In his piece Monday, Summers continues:
…I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.
This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the U.S. approach to global economics. With China’s economic size rivaling that of the United States and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the United States have rendered the architecture increasingly dysfunctional.
In his post, Summers has some policy prescriptions for US lawmakers. Among which is a suggestion that US leaders have a “bipartisan foundation,” which is the kind of thing you can write when you’re not an elected official but which few people in and around US politics likely believe is anywhere near possible.
But the point of Summers’ commentary is clear and significant: the global economic tide has started receding from the US and moving towards China.