Step one in a new China policy: Join the Asian Infrastructure Investment Bank

by Hugh Stephens

Embassy
November 25, 2015

With the election of Justin Trudeau and the Liberals, much of the policy framework that has defined the last decade or so of Stephen Harper’s government will be subjected to close scrutiny—none more so than Canada’s China policy.

Now that Mr. Trudeau has met Chinese President Xi Jinping, where at the Antalya Summit in Turkey he is reported to have said that Canada now has an opportunity to set a fresh approach in the relationship and to work together with China on economic, political and cultural ties, it is time to turn to specifics.

One of those specifics is the issue of Canada’s membership in Beijing’s new multilateral development institution, the Asian Infrastructure Investment Bank.

Despite the presence in Toronto of pandas happily munching their way through half a million dollars’ worth of imported bamboo shoots annually, relations between Canada and China over the past decade have hardly been smooth. After a rocky start, initial snubs were corrected and progress was made in some areas; Mr. Harper finally visited China and Canada was accorded approved destination status by China in 2009.

Canada and China signed and ratified a Foreign Investment Protection Agreement in 2014, and Canada was selected as a renminbi clearance hub earlier this year.

But progress in other areas has not been consistent. A Canada-China Complementarities Study completed in 2012 has sat on the shelf ever since, despite Chinese offers to move forward to negotiate a bilateral trade deal with Canada, and Canada missed the opportunity to become a permanent founding member of the AIIB.

Canada’s failure to join the AIIB was a classic “own goal” in soccer parlance, all the more so since 57 countries globally, including such countries as the United Kingdom, Germany, France, Australia, New Zealand, Republic of Korea, India and Russia took the opportunity to become founding permanent members. Notable exceptions among developed countries, besides Canada, were the US, Japan and Mexico, plus some central and eastern European states. 

US position against AIIB not convincing

The US leaned heavily on its friends not to join and scolded the UK government for its decision, but the US reasons for shunning the new institution are not convincing. The US stated it had concerns that the new bank would divert funding away from existing institutions like the World Bank and the Asian Development Bank, that its governance would be less than transparent, and that it would not adhere to stringent environmental and social standards.

One way to address these concerns, of course, would be to become a founding member and have the opportunity to influence the rule-setting of the new bank. However Canada, like the US, opted to sit out this opportunity and instead to criticize from the sidelines, with the real reason for opposition being the fact that the AIIB is a Chinese-led institution, with China being the prime funder (providing 30 per cent of capital leading to 26 per cent of voting shares).

Interestingly, while the US had not so far had second thoughts about joining the AIIB, it has moderated its criticism considerably in recent months. While China will clearly have a dominant influence within the AIIB (its share of voting rights will allow it a veto), nonetheless it appears that the institution is being established according to international standards.

Voting power within the organization will be based on a contributed capital share (with 75 per cent of shares to be allocated to Asian economies), combined with basic share votes and founding member share votes. More important, the new bank will provide an additional $100 billion in development funding to address the severe infrastructure deficit facing Asia.

Procurement will be global, and not restricted to AIIB members. In June of this year, 50 of the 57 permanent members signed the Articles of Agreement. Most of the other seven countries cited technical reasons for non-signature and plan to sign by the end of the year when the bank is formally expected to come into being. 

China and Chinese companies will clearly play a huge role in addressing Asia’s infrastructure needs, from new ports to rail links to power developments. But China cannot, and will not, do it all. There are great opportunities for Canadian companies in areas where Canada has a proven track record of expertise.

Technically, Canadian companies can still qualify for AIIB contracts, even though Canada is not a member. In reality, Canadian membership will provide that extra edge in bidding for contracts where we are truly competitive. But Canada should not just join the AIIB to improve the procurement chances for Canadian companies. We should join because it is in our overall strategic interest to do so, and to demonstrate that we are serious about recalibrating the Canada-China relationship. 

We missed the opportunity to join as a permanent founding member despite calls at the time to do so, and thus, in theory, we lost the ability to help set the rules of the institution. In reality that influence may not have made a huge difference. The Chinese were determined to demonstrate that they could establish a world-class institution and the governance structure of the organization has so far proven this to be the case.

That said, any institution where about a third of the capital comes from just one country, and where the institution is based in the capital of that country, will naturally reflect the influence of its major shareholder. Just look at the World Bank. So it is no surprise that Jin Luqun, a former Chinese deputy minister of finance, has been voted as the first president of the AIIB.

While Canada can no longer join as a founding member, ordinary membership is open, and China is reported to have said that Canada would be welcome to join at any time. 

As Mr. Trudeau and his ministers examine how to reshape Canada’s China policy, they will need to take many factors into account, from the history of the bilateral relationship (which marked its 45th anniversary on Oct. 12 of this year) to the current trade imbalance, from investment policies and commitments to security and cyber-espionage, from regional security issues to the Arctic to human rights.

All this will take time. But one significant step—one that will signal a new approach to China-Canada relations—can be taken quickly; an announcement that Canada will join 57 other nations as a member of the AIIB. Better late than never. 

Hugh Stephens is executive fellow in the School of Public Policy of the University of Calgary, and senior fellow with the Asia Pacific Foundation of Canada. [email protected]