China Challenges America’s Financial Leadership

On March 20, Japanese Finance Minister Taro Aso told reporters that under the right circumstances, his government might become a member of the Chinese-led Asian Infrastructure Investment Bank (AIIB). In Washington, which has urged allies to steer clear of the AIIB, jaws dropped. Tokyo, Washington’s closest Asian ally, is disregarding U.S. concerns and considering membership in an investment bank led by Japan’s primary rival.

There’s a bigger story here. Now that most U.S. troops are home from Iraq and Afghanistan, President Barack Obama knows there’s little domestic support for military operations that might demand another costly long-term commitment. That’s why he’s relied on sanctions, surveillance, drones, international institutions and willing, capable, like-minded allies to fight his foreign policy battles.

Yet it’s increasingly clear that none of those assets can solve some of Washington’s most pressing security problems. Sanctions can combine with lower oil prices to drive Russia into a deep recession, but they won’t force President Vladimir Putin to relax his grip on Ukraine’s throat. They can draw Iran to the bargaining table, but they can’t force Tehran to give up its nuclear program.

Surveillance has likewise proved a double-edged sword. American allies want access to the information Washington collects, but revelations that the National Security Agency has listened in on Germany’s Chancellor and other U.S. partners hardened attitudes in those countries toward Washington. And drones can take down groups of bad guys, but they won’t eliminate an enormous threat like ISIS–and they often kill innocents.

Now there’s the AIIB. For decades, Washington has used its dominant influence in the World Bank, International Monetary Fund (IMF) and Asian Development Bank to strengthen relations with European and Asian partners and guide developing countries toward Western values by conditioning aid on U.S.-backed reforms. Those countries had no choice: there was no credible alternative to the U.S.-led system.

That’s changing. Chinese President Xi Jinping launched the $50 billion AIIB in October; Beijing will probably hold a stake of up to 50% in the new institution. By providing project loans to developing countries in Asia, the bank will extend China’s reach and diminish U.S. negotiating leverage. That’s why the Obama Administration is so worried.

On March 13, Britain applied to become a member of China’s new bank, and in a rare fit of public anger toward its closest ally, the White House accused London of “constant accommodation” of China. Then France, Germany, Italy and Switzerland announced plans to follow Britain’s lead. The Saudis have signed on. Australia and South Korea, key U.S. allies that initially balked at joining the AIIB, are now reconsidering. The IMF and the World Bank have both recently said they would cooperate with the AIIB. It’s been a long time since Washington has looked so isolated.

Some will blame the Obama Administration, but Britain’s decision to sign up for China’s bank reflects its need to attract new volumes of Chinese investment. Australia already counts China as its top trade partner. South Korea now enjoys higher trade volume with China than with the U.S. and Japan combined. The Saudis understand that America will become less dependent on its oil over time. Even Japan must protect its relations with both America and China.

U.S. allies are not shunning Washington. They’re hedging their bets to adapt to a world where economic power is more widely distributed. Shared values still matter, and all these countries will continue to count on strong relations with the world’s only superpower. But Obama and his successors will face a difficult question: In a world that needs America less, how can Washington protect and maintain its dominant influence?

Foreign-affairs columnist Bremmer is the president of Eurasia Group, a political-risk consultancy

Read next: 8 Surprising Economic Trends That Will Shape the Next Century

Listen to the most important stories of the day.