By Hitoshi Tanaka, Senior Fellow, Japan Center for International Exchange

A new year has come, but it seems clear that in 2016, the regional order in East Asia will continue to be characterized by a sense of instability. China’s behavior continues to create unease, most prominently through its unilateral construction of artificial landfill islands in the South China Sea, but also through the progress it is making on its regional economic initiatives, the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road infrastructure connectivity plan. Meanwhile, the shadow of Crimea hangs over Russian dealings with Asia, and North Korea has yet again tested a nuclear device.

A key question as 2016 progresses will be a familiar one: How best to focus US-Japan cooperation to address both the challenges and opportunities that accompany the rise of China? The time is ripe for intensive alliance consultations regarding future cooperation with China given the relative improvement of Sino-Japan relations over the last year. At the same time, there are six thorny issues that carry the potential to undermine US-Japan cooperation and thus need to be dealt with. Close, careful US-Japan consultation and cooperation is required to ensure that these issues do not create a wedge in the alliance.

1. The Future of US Global Leadership
The world is watching the US presidential election closely for signs of the foreign policy path the next US president will take. A significant amount of the rhetoric from the primaries is concerning—most notably the xenophobic remarks of Donald Trump, which have captured the media spotlight. While it is still a long road to the White House, the kind of debate we have seen so far—which has taken a hostile tone toward certain nations and groups (such as banning Muslims from entering the United States) and has failed to recognize the vital need for international cooperation—is damaging to the long-term credibility of US global leadership. Continued US leadership is critical to maintain and strengthen liberal and free-market values as well as the stability and prosperity of East Asia. The United States, East Asia, and the world need a US president with the stomach for strong global leadership based on deep cooperation and consultation with US allies and partners, rather than one who advocates unilateralist or isolationist thinking.

2. Regional Trade Deals and Economic Governance
The Trans-Pacific Partnership (TPP) deal reached in October 2015 has rightly been hailed as a major achievement in setting common rules for regional economic governance. Now the agreement must be ratified by the 12 signatory states, including the US Congress. In light of China’s efforts to launch the AIIB, roll out the One Belt, One Road initiative, and reach a Regional Comprehensive Economic Partnership with the ASEAN+6 nations, the TPP is critical to the future credibility of US regional leadership. The TPP is not simply a vehicle to facilitate increased trade, but rather a means to shape 21st-century rules for economic governance and to promote and entrench liberal free-market principles in Asia Pacific.

Indonesia’s decision in September 2015 to choose China over Japan to build a high-speed train line between Jakarta and Bandung is illustrative of what is at stake. The US$5.5 billion Chinese proposal was attractive given that it required neither financing nor a loan guarantee from the Indonesian government; in other words, China is taking on almost all of the financial risk of the project, which most ODA providers are not able to do. Three-quarters of the funding will come from China and the remaining 25 percent from Indonesian companies. Indonesian President Joko Widodo, who campaigned on improving welfare for ordinary Indonesians, was thus able to avoid using the national budget for a project in one of the country’s most prosperous areas. But many questions remain regarding the transparency of the proposal and the ability of China to meet international standards, including on labor and environmental regulations. There is already local criticism of the project for its plans to use Chinese workers at a time when Indonesia’s unemployment rate is rising and there are concerns over China’s safety record in light of the crash of a high-speed train in Wenzhou in 2011.

It is thus critical that the United States, Japan, and the broader international community engage with Chinese-led economic initiatives, including the AIIB and One Belt, One Road project, to help steer China toward a greater embrace of international best practices. In this context, it is important to note that the TPP has an open-accession clause to create a clear and transparent process through which other countries—including China, Indonesia, and South Korea—can join in the future. The United States and Japan should actively promote the expansion of TPP membership, especially to these countries.

3. Demilitarizing the South China Sea
The construction of artificial landfill islands by China in the South China Sea in areas such as the Fiery Cross, Mischief, and Subi Reefs, which are also claimed by ASEAN nations, has set back efforts to peacefully negotiate a diplomatic resolution to these territorial disputes. Moreover, the potential for the future construction of a chain of airports, ports, and other facilities on the artificial islands, as well as high-profile attempts by the People’s Liberation Army (PLA) Navy to enforce no-fly zones, risks further militarizing the South China Sea. Such a scenario would be a serious security concern for the region and should be avoided.

One potentially complicating factor is the recent election in Taiwan, where the Democratic Progressive Party (DPP) won a comprehensive victory, with Tsai Ing-wen winning the presidency and the party gaining the majority in the Legislative Yuan. The DPP is known for its pro-independence stance vis-à-vis Beijing and has in the past suggested negotiations between Taiwan and ASEAN nations over the South China Sea. Tsai has also questioned the “1992 consensus” that there is only “One China” with Beijing and Taipei simply maintaining differing interpretations. For the time being, Tsai seems to have settled for a loosely defined continuation of the status quo. But if the DPP government were to push Taiwan toward a more assertive foreign policy stance and articulate a South China Sea policy different from that of the mainland, it could further complicate the issue.

Further military build-up in the South China Sea will undoubtedly feed regional tensions and increase the risk of accidental conflict. Until a diplomatic resolution can be peacefully negotiated between China and the ASEAN countries, it is vital that all parties be alert to China’s incremental changes. At the same time, in addition to continued US freedom of navigation operations—to ensure free passage, uphold international law, and prevent any further unilateral changes to the status quo—the United States and Japan must coordinate and cooperate to persuade China that freedom of navigation in what is a vital sea route for international commerce and the energy security of East Asia, is a shared interest not just for the United States, Japan, and ASEAN countries but also for China itself.

4. North Korea
Four years since he inherited power from his father, Kim Jong-un appears to be drawing from a diverse toolbox to consolidate his grip on power. First, Kim is continuing the country’s nuclear weapons development program. On January 6, 2016, North Korea tested a nuclear device for the fourth time—the second under Kim Jong-un’s leadership. Such tests and rocket launches are a signal to domestic audiences, especially the Korean People’s Army (KPA), that Kim is capable of continuing the country’s technological progress and bolstering military might against hostile external forces. Second, Kim has also purged a number of high-level officials from his father’s cliques (most infamously his own uncle, Jang Song-thaek), replacing them with his own younger loyalists. Notably, these purges have tended to target military men rather than economic planners. Third, Kim has also shown interest in cementing his legitimacy through economic development. Experiments with reforms have taken place quietly in the background, allowing farmers to retain a fraction of their produce to sell on the market rather than being forced to sell everything to state distributors. Kim is also gearing up for the 7th Congress of the Workers’ Party of Korea (WPK), the first time such a meeting has been held in 36 years. It has been speculated that Kim may use the party congress as a platform to launch more serious economic reform measures and to reassert the primacy of the WPK over the KPA.

The region was rocked by North Korea’s most recent nuclear test. This time, the international community must go beyond business-as-usual measures to deal with the North Korean nuclear program. In order to truly alter North Korea’s behavior, economic sanctions, including financial sanctions, will need to be strengthened. Beijing has a big role to play. Irrespective of its apparent change in attitude after the third North Korean nuclear test in 2013, China has continued to provide substantive assistance to North Korea. For any form of sanctions to be effective, though, the international community as a whole, including China and Russia, must fully back them. South Korea, Japan, and the United States must deepen cooperation and adopt a unified approach on sanctions policy as well as on joint contingency planning. From a coordinated trilateral base, the three nations also need to consult with China and Russia to form a united five-nation front to apply greater pressure on North Korea. An immediate restart of the denuclearization process under the Six-Party Talks may be difficult, but without the right measures to pressure and isolate North Korea, nothing will be achieved and North Korea will continue to develop its nuclear arsenal.

5. Russia Policy
Since Vladimir Putin and Shinzo Abe both returned to power in 2012, the two leaders have built a certain rapport and have shown a willingness to deal with the issue of the Northern Territories (referred to as the Southern Kuril Islands in Russia). Putin was even scheduled to visit Japan. But then Russia annexed Crimea in March 2014 and summit plans were put on hold.

Since then, Japan has stuck to its international obligations and imposed sanctions against Russia in concert with the other G7 nations to punish Russia for its violation of international law. However, if it appears that an acceptable agreement can be reached on the Northern Territories, an issue that has blocked the normalization of Japan-Russia relations since the end of World War II, Japan will have no choice but to seize the opportunity. At the same time, it is important that the United States and Japan maintain very close coordination and not allow Russia to utilize the Northern Territories issue to drive a wedge between them. They must also make clear to Russia that any Russo-Japanese cooperation to resolve the Northern Territories dispute will not translate into an acceptance of the annexation of Crimea or any other violation of international law.

Recently, Prime Minster Abe has reportedly expressed the possibly of making a trip to Russia in his capacity as this year’s chair of the G7. There is also talk of a possible trip by Putin to Tokyo by the end of 2016. While continuing to advocate for a peacefully negotiated resolution to the Crimea crisis, given the possibility that the isolation of Russia could push Putin toward China, it may be wise not to preclude some forms of strategic cooperation with Russia in areas of overlapping interest—including on North Korea and Syria.

6. Reducing Okinawa’s Burden
The battle between the Okinawa prefectural government and the Japanese central government regarding the relocation of the US Marine Corps Futenma Air Station continues to intensify. Each side has launched a series of tit-for-tat court battles centering on the legality of the construction of a new base in Henoko to replace Futenma. Backed by their determined governor, Takashi Onaga, local Okinawan protestors are demanding at a minimum that no new bases be built in the prefecture, with a view to reducing the concentration of bases in Okinawa in the future.

The situation has reached something of an impasse. While the United States might be happy to leave this to the Japanese government to deal with as a domestic issue, ultimately the United States will also have to suffer the consequences of Okinawa’s local opposition. Deep US-Japan consultations must continue, which should be conducted as part of regularized reviews of the US forward deployment structure and how it relates to US-Japan alliance goals. There are two important points to keep in mind here. First, while a continued US forward deployment presence in Okinawa is critical to the maintenance of the alliance’s deterrence posture, if the situation is not handled with due sensitivity for local Okinawan concerns, base protests will continue to be a thorn in the side of alliance relations over the long term. Second, the overall US forward deployment posture in East Asia should be evaluated in light of advances in new military technologies and the need to respond to regional security challenges in a dynamic way. A more evenly rotated distribution of US soldiers across the region—a trend that is underway thanks to increased cooperation with partners such as Australia, India, the Philippines, Singapore, and Vietnam—would not only help reduce the burden on Okinawa over the long term, but also be strategically desirable in responding to a range of new threats.

The choices we make now, during this time of regional flux, about how to deal with these six challenges will go a long way toward determining the future regional order. With deep and regularized consultations across all aspects of the alliance—including on security, economic, and diplomatic strategy—not only can the United States and Japan (in conjunction with other allies and partners) deepen the foundation of their cooperation, but they can also guard more effectively against unilateral changes to the status quo and work together with China to steer its rise in a mutually beneficial direction.

Hitoshi Tanaka is a senior fellow at JCIE and chairman of the Institute for International Strategy at the Japan Research Institute, Ltd. He previously served as Japan's deputy minister for foreign affairs.

Reprinted with the permission of the Japan Center for International Exchange.

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By Thompson Chau, The Asia Scotland Institute

In March 2015, China issued a document entitled “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road”, outlining the blueprint of the One Belt One Road Initiative (OBOR). The initiative not only represents a national and coordinated push to expand China’s influence abroad, but is also coupled with a domestic investment drive, involving almost every Chinese province. China’s ambassadors to countries situated from Africa to Southeast Asia are already securing assurances of collaboration on OBOR. Similarly, Chinese provinces have begun to invest in infrastructural projects and construct logistics centres in anticipation of growing trade and interaction with OBOR countries. Described as “the most significant and far-reaching initiative that China has ever put forward”, OBOR will increase the demand for Scotland’s leading export industries, professional services and universities among the regions involved. Along the five routes (shown in Figure 1), five OBOR goals were proposed: policy coordination; facilities connectivity; unimpeded trade; financial integration; and people to people bonds. While Chinese institutions and SOEs (state-owned enterprises) are expected to take the lead, these five areas of connectivity will offer organisations and individuals in Scotland a whole new spectrum of opportunities to play a role in shaping the economic development and integration across the three continents. OBOR is not a solo performance by China. It is a symphony orchestra in which the Scottish bagpipe is surely going to have its part...

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By HSBC Global Research

Beijing’s publication of a detailed plan of action for the New Silk Road initiative confirms its centrality to Chinese policymakers’ thinking in the short and long run. Following on from our earlier reports Building on China's overseas investment (8 August 2014), and Xi's New Silk New Road plan (18 November 2014), this report looks at how the “One Belt, One Road” strategy is starting to become reality two years after it was first announced.

In the near term, the focus will be on infrastructure investment and promoting cross-border trade to ensure that goods, services and capital can flow easily on land (the “belt” connecting China, Central Asia, Russia and Europe) and sea (the “road” linking China to ASEAN, India and Africa). We estimate that the total could reach RMB1.5 trillion. This should help to support fragile domestic and external demand, the factors behind the downward trends in growth, prices and labour market conditions.

This report provides details on the initial projects, which emphasise upgrading transport links. It also looks at current efforts to make trade easier (e.g. faster customs clearance) and discusses different financing options. Apart from the new Asian Infrastructure Investment Bank and BRICS bank, there are ambitious plans to enable Chinese and foreign companies and governments to raise RMB funds in both China and countries along the ancient trading route.

This initiative is mutually beneficial. Countries with weak infrastructure should benefit from China’s expertise in this area and the new markets will generate demand for China’s exports. But major challenges lie ahead. We believe China’s record of overseas investment needs to improve and it will be important to balance the interests of the many stakeholders, public and private, both at home and abroad.

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By HSBC Global Research

The recent Asia-Pacific Economic Cooperation (APEC) meeting in Beijing resulted in deals that will have long lasting effects. President Xi Jinping pledged USD40bn for infrastructure investment to build a New Silk Road in the spirit of the centuries-old trading route, comprising a land based economic belt and a maritime route. This follows recent agreements to establish the Asian Infrastructure Investment Bank (AIIB) and the BRICS bank and is in line with the rapid growth of China’s outward investment, which is likely to surpass inflows in 2014.

China’s infrastructure sector has the capacity to meet needs in Asia and further abroad. That investment overseas should also generate demand for China’s exports and help reduce economic slack and disinflationary pressure. The New Silk Road plan should also mean more investment for the less developed central and western parts of the country and generate better long-term returns on foreign reserves.

As we pointed out previously, the still-significant infrastructure gaps in Asia can be met by China’s outward direct investment (ODI) push. The region as a whole should also benefit from increased demand and lower trading costs. Our analysis shows that trade in Australia, Indonesia, Japan, and Korea would increase the most as a result of China’s new strategy. So, while the deals on trade, tariffs and emissions made the headlines at APEC, we believe the New Silk Road plan is likely to have a profound impact on the region.

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By HSBC Global Research

China is going global: its consumers are travelling abroad, its companies are buying resources from all over the world, and the government is finding new places to invest the country’s USD4trn of foreign reserves. As these trends continue, we think the “next big thing” will be China’s export of capital, especially to infrastructure investment projects in Asia and further afield.

China’s infrastructure boom in recent years has created an economy well suited to designing, building and servicing large infrastructure projects. Although we have argued that there is still plenty of room for China to keep investing in its domestic infrastructure, the peak may have already passed. As such, it makes sense for China to look to overseas markets to put all that capacity to use.

It may not have to look far. We estimate that Asia needs to invest USD11trn in urban infrastructure by 2030. In this report, we update our Asian Infrastructure Measure, and find that while infrastructure development in the region has increased, it is still far below US levels.

At the same time, funding gaps have emerged, especially in Indonesia, India and Thailand. To fill them, Asia may have to rely more on external funding as domestic sources become scarce. With a proposed USD100bn capital base, the China-led Asian Infrastructure Investment Bank (AIIB) offers an alternative source of funding for infrastructure in the region. Spending on infrastructure is essential for growth, so there is potential for a “win-win” situation: China helps to narrow Asia’s funding gap and in the process achieves its own policy objectives, including the internationalisation of the Renminbi.

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By Meg Utterback, Daisy Mallett, Holly Blackwell, James McKenzie, Josephine Lao, and Ma Xiao

China has been at the forefront of a number of recent developments in the dispute resolution space. One notable development is the announcement by the China International Economic and Trade Arbitration Commission (CIETAC) of its new rules governing the arbitration of international investment disputes (Rules) and the CIETAC Investment Dispute Resolution Centre in Beijing (CIETAC IDRC), the default centre to administer those Rules. According to CIETAC’s Secretary-General, the Rules seek to “fill the gap” in the area of Chinese international investment arbitration and develop and promote the international investment arbitration practice in China.

The Rules are intended to support Chinese companies “going out” in furtherance of China’s Belt and Road initiative and to support the independent and impartial resolution of international investment disputes between investors and host countries. The Rules are also intended to provide an alternative for Chinese investors who may be concerned about potential bias against them in offshore forums due to a lack of understanding of Chinese law and practice. The Rules retain traditional arbitration characteristics such as flexibility, efficiency, and economy but incorporate elements of both Chinese and international arbitration law and practice.

How the Rules will be adopted in practice, however, remains to be seen. The Rules could be included in investment contracts between Chinese investors and host country governments. They could also be incorporated into China’s investment treaty regime. Currently, China has more than 130 bilateral and multilateral investment treaties in place, including 56 bilateral investment treaties with countries on the Belt and Road. Many of these treaties were negotiated at a time when China’s role was largely that of host country to foreign investment and provide limited options for investor recourse to arbitration. In many treaties, only claims for compensation for expropriation can be referred to arbitration, and the majority of China’s earlier investment treaties only provide for ad hoc arbitration. Applicable procedural rules vary by treaty and many treaties allow the tribunal the discretion to determine its own procedural rules. 
 
The Rules will be a unique addition to China’s choice of potential procedural rules, should it decide to pursue more expansive protections in either negotiating new investment treaties, or renegotiating old ones. In the nearer term, the Rules are an option (subject to party consent and/or tribunal discretion) in ad hoc arbitrations if disputes arise under China’s existing treaties. The Rules may also provide an alternative for non-Chinese investors and host countries attracted to international arbitration with Chinese or civil law characteristics.

The Rules became effective on Chinese National Day, 1 October 2017. The Rules are designated as subject to “trial implementation”. According to Chinese practice, this means that the Rules are effective but may yet be revised.

Concluding remarks

To date, there have been few China-related investor-state arbitrations, as historically these types of disputes have been resolved diplomatically or by settlement between the parties. This is likely to change, with growing outbound Chinese investment and increased Chinese investor awareness of investment treaty rights. Like other recent developments in arbitration in China, the intent behind the Rules is to provide dispute resolution options that may be more even-handed toward Chinese parties.

The Rules presage China taking its own, distinct role in the resolution of international investment disputes, particularly those involving Chinese investors; a role that has historically been assumed by foreign arbitration institutions and ad hoc tribunals. However, it remains to be seen what gap exactly the Rules will fill. Matters arising on Belt and Road projects may provide opportunities to observe how the Rules might play a role in China-related investor-state arbitrations. In the meanwhile, the Rules are a welcome addition to Chinese international arbitration practice.

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By King & Wood Mallesons

How many Belt and Road (“BAR”) tenderers study and make detailed comments on the draft contract’s dispute resolution clause? Not very many. And yet this clause is one of the most important components of the contract, because claims are bound to arise on BAR projects, not least because many of the projects occur in countries with high political, operational, and legal risk. If the parties cannot settle them, they will need to rely upon the dispute resolution clause to resolve their disputes.

All too often, parties automatically draft in “laws of England and Wales”, “arbitration in England”, “arbitration in Singapore”, “Singapore law”, as this is what they are used to doing. In BAR projects, it is important to give proper thought as to the logic of whether these are really the most suitable provisions to include.

It is worthwhile for BAR tenderers to pause and consider the dispute resolution clause very carefully, and decide whether they need to go back to the Employer and / or the Lenders to explain why more thought about the dispute resolution clause might be beneficial to all parties concerned. Some Employers/Lenders will say: “no, we are not changing this clause”. But others can be persuaded, perhaps as a trade-off for other concessions.

There is no doubt that dispute resolution clauses on BAR projects should utilise arbitration as the principal mode for resolving disputes. International parties prefer arbitration because it is: private and confidential; less formal than court proceedings; and easier to enforce in different jurisdictions. But arbitrate where? And according to the laws of which jurisdiction?

A good dispute resolution clause should contain the following components

Where is the arbitration to be held?

On a BAR project, it will often be thought that CIETAC arbitration in the People’s Republic of China (PRC), or arbitration in the BAR host country, will not be sufficiently neutral to be acceptable to at least one party. That is partly why parties often draft in London or Singapore (sometimes Stockholm or Paris). But what about arbitration in Hong Kong? Hong Kong benefits from the “one country, two systems” legal regime, such that it is still a common law jurisdiction, with very efficient, independent common law judges and one of the world’s foremost courts of final appeal.

But the BAR host often says “we are worried about Hong Kong, because it is not sufficiently independent of the PRC”. That is a serious error by the host. It demonstrates that the host does not actually understand that selecting Hong Kong as the arbitration forum is actually of great benefit to the host BAR participant itself. Why? Because of the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and Hong Kong (the “Arrangement”)”, the special agreement which the Mainland Government has with the Government of Hong Kong. In accordance with the Arrangement, where a party fails to comply with an arbitral award made in Hong Kong, the other party may apply to the relevant People’s Court to enforce the Hong Kong award.

The Supreme People’s Court has directed that where any lower court is minded to refuse enforcement of a Hong Kong award under the Arrangement, the lower court must first consult with the Supreme People’s Court, and the Supreme People’s Court itself will decide whether or not to grant the enforcement. Anecdotally, there have been no reported refusals to grant the enforcement of a Hong Kong award under this Arrangement.

In other words, it is for the host’s benefit that Hong Kong should be selected as the forum for arbitration, because of the enhanced enforcement rights that this will give over awards made in London, Singapore, Stockholm or Paris.

For the PRC participant, Hong Kong has obvious attractions, not only as the “brother” of the Mainland, but through its impeccable rule of law, efficiency in processing matters, wide range of arbitration institutions and arbitral rules on offer, plus its cultural proximity.

Governing law

A neutral law can be chosen to govern the substantive disputes, for example, that of Hong Kong, England and Wales or Singapore. There is no difficulty in considering any of these laws while at the same time specifying Hong Kong as the forum. For example, one can have a dispute resolution clause which prescribes Hong Kong arbitration, with the governing law being that of England and Wales…

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By Organisation for Economic Cooperation and Development

Summary

Achieving a growth path that is resilient, inclusive and sustainable is one of the top policy priorities of our time. Governments around the world are facing the triple imperatives of re-invigorating growth while improving livelihoods and urgently tackling climate change, in line with the goals of the Paris Agreement. This report argues that boosting economic growth, improving productivity and reducing inequalities need not come at the expense of locking the world into a high-emissions future. It is the quality of growth that matters.

With the right policies and incentives in place – notably strong fiscal and structural reform combined with coherent climate policy – governments can generate growth that will significantly reduce the risks of climate change, while also providing near-term economic, employment and health benefits. Such a climate-compatible policy package can increase longrun GDP by up to 2.8% on average across the G20 in 2050 relative to a continuation of current policies. If the positive impacts of avoiding climate damage are also taken into account, the net effect on GDP in 2050 rises to nearly 5% across developed and emerging economies of the G20.

Investment in modern, smart and clean infrastructure in the next decade is a critical factor for sustainable economic growth, especially as infrastructure generally has suffered from chronic underinvestment since before the financial crisis. The report estimates that USD 6.3 trillion of investment in infrastructure is required annually on average between 2016 and 2030 to meet development needs globally. An additional USD 0.6 trillion a year over the same period will make these investments climate compatible, a relatively small increase considering the short and long-term gains in terms of growth, productivity and well-being. The additional investment cost is likely to be offset over time by fuel savings resulting from low-emission technologies and infrastructure.

Furthermore, the current fiscal environment provides a window of opportunity to take action now. Low interest rates have increased fiscal space in many countries and, where there is less fiscal space, opportunities exist to optimise the tax and spending mix to align stronger economic growth with inclusive, low-emission, resilient development. Wellaligned climate, fiscal and investment policies will further maximise the impact of public spending to leverage private investment.

Finance will be a key factor: capital must be mobilised from both public and private sources, supported by a variety of financial instruments tuned for low-emission, climateresilient infrastructure. Public financial institutions need to be geared for the transition, while the financial system itself should take greater steps to correctly value and incorporate climate-related risks. Development banks and finance institutions – multilateral, bilateral and national – all have a critical role to play here too, not only using their balance sheets to amplify available resources, but also developing green finance in partner countries, including through policy and capacity building support.

Getting the fundamental climate policies right is essential to aligning incentives. There is a need to accelerate the reform of inefficient fossil-fuel subsidies and broaden the carbon pricing base, focusing on tracking the impact and sharing policy experiences. Making greater use of public procurement to invest in low-emission infrastructure can trigger industrial and business model innovation through the creation of lead markets.

At the same time, we must recognise that sustainable growth also means inclusive growth. Coherent climate and investment policies, effective fiscal and structural policy settings and reforms must work together to facilitate the transition of exposed businesses and households, particularly in vulnerable regions and communities. Early planning for the transition is essential if societies are to avoid stranded assets in fossil-fuel-intensive industries and stranded communities alongside them.

Looking beyond energy production and use, developments in agriculture, forestry and other land-use sectors will enable scaling up the pace of the transformation needed elsewhere in the economy. Current stocks of carbon in tropical forests and other ecosystems need to be protected and their ability to act as carbon sinks enhanced wherever possible. Research and development needs to be significantly strengthened and followed by rapid demonstration and diffusion of technological breakthroughs that will reduce and eliminate greenhouse gas emissions from energy, industry and transport, and improve agricultural yields and crop resilience. In addition, the feasibility to deploy “negative emissions” at scale remains a major uncertainty, despite being an important feature of most scenarios consistent with the Paris Agreement’s goals.

Finally, international co-operation remains fundamental to managing climate risks. Countries’ current contributions to emissions reduction beyond 2020 are not consistent with the Paris temperature goal, and need to be scaled up rapidly. Support for action in developing countries will be important, not just for mitigation but also to improve the resilience and adaptive capacity of countries facing the greatest climate challenges. Climate impacts will grow, even if we achieve the Paris temperature goal. We need flexible and forward-looking decision-making to increase resilience in the face of these risks. Managing the interdependences between climate, food security and biodiversity goals will be critical to achieving the Sustainable Development Goals and long-term robust growth.

Investing in Climate, Investing in Growth, ©OECD, 2017. Please click to read the full report.

By Fleur Huijskens, Richard Tucsanyi and Balazs Ujvari

EU member states can use the China-initiated organization to promote their standards for development financing and perhaps even to pursue geopolitical interests in Asia. This blogpost is a product of the MERICS European China Talent Program in April 2017.

When the Asian Infrastructure Investment Bank (AIIB) was taking shape on China’s initiative, many Western observers feared that the new institution would become a vehicle for China to further its own interests. They warned that China (whose voting share of 27.5 percent would give it veto power within the organization) would use the bank to finance infrastructure projects with the aim of creating international markets for China’s state-owned companies without having to abide by the standards or transparency requirements of established Multilateral Development Banks (MDBs).

Today most would agree that, so far at least, this scenario has not materialized. On the contrary, the AIIB can be seen as complementing, not rivalling, institutions like the Asian Development Bank (ADB) or the World Bank. As of 15 June, the AIIB had approved 16 infrastructure projects, most of which are to be co-financed with other MDBs (e.g. World Bank, Asian Development Bank, European Bank for Reconstruction and Development). And there have been complaints from other members of the bank about Chinese attempts to wield its governance influence or dominate board meetings.

There is an increasingly broad agreement across Western capitals on the AIIB’s close alignment with the policies and standards of established MDBs. In the case of jointly financed projects, the AIIB often relies on partners’ safeguard policies on procurement, disbursements, environmental and social compliance, as well as project monitoring and reporting. The AIIB itself made notable commitments on environmental and social standards, but also on transparency, information disclosure and public participation. This has even triggered hopes that China will use the AIIB as a learning experience and transpose its approaches to its own national development banks.

EU countries have chance to shape standards and practices

European governments played a substantial role in shaping the new organization’s standards and decisions from the outset – and they are in a good position to keep doing so in the future. EU countries currently make up 14 out of 56 official AIIB member states. Most of these countries were also involved in the negotiations that led to the AIIB charter, which was approved in May 2015 in Singapore. The bank officially started its operations on January 1, 2016.

Three of the Bank’s five vice-presidents are from EU countries (Germany, France and the UK), and the German national Joachim von Amsberg, who previously served as vice-president of the World Bank, has assumed responsibility for the AIIB’s policies on procurement, financial management, and social and environmental safeguards. In contrast to the World Bank and the IMF, EU member states are not scattered across the board but are grouped into just two constituencies on the Board of Directors. The constituency grouping Eurozone members is currently presided by Germany, whereas the group comprising the remaining EU countries is led by the UK.

The AIIB’s alignment with established MDBs does not mean that EU member states should not strive for even higher standards. Drawing on the practices of the European Investment Bank (EIB), EU member states could, for example, advocate for an even stronger alignment of the bank’s activities with international agendas such as the 2015 Paris Agreement on Climate Change and the Agenda 2030 for Sustainable Development. They could push for the formulation of strategies on gender and sustainable development or for the incorporation of climate action indicators into lending decisions. The AIIB’s current performance indicators focus on annual lending volume ambitions and the expected contribution of AIIB-financed projects to the GDP growth of beneficiary countries. The EIB on the other hand is also bound to dedicate a minimum of 25 percent of its annual lending to climate action.

Using the AIIB as a vehicle to shape the Belt and Road Initiative

In addition to standards, EU member states might also be able to pursue common geopolitical interests collectively through the AIIB. The AIIB is the main organization that finances China’s Belt and Road Initiative (BRI), whose main objective is to boost connectivity between East Asia and Europe. It could therefore become the vehicle through which the EU can make sure that its own geopolitical interests are taken into account in the BRI. Should EU-China trade shift gradually to land routes as a result of BRI, it may be critical for the EU to ensure that not all of these railway routes and roads cross Russia to not give Moscow additional leverage over the EU (or over China, for that matter). It will be critical for the EU to work with Central Asian governments and business actors on the ground to identify and propose connectivity projects consistent with the objective of creating land connections between Europe and Asia that bypass Russia.

To maximize their influence and successfully promote their agenda within the bank, EU member states will have to speak with one voice. Co-ordination on AIIB matters is already taking place among EU member states in Brussels and Beijing. One entity that appears to have been absent from such gatherings is the EIB, which also has a field office in Beijing embedded in the EU delegation. EU member states could try to pave the way for the EIB’s presence in the AIIB by calling for an observer status for international financial institutions. Finally, with the UK currently presiding one of the two constituencies comprising EU member states and providing one of the bank’s five vice-presidents, the country will remain a crucial partner for the EU in shaping the AIIB. Firmly involving London in the co-ordination of EU countries in the run-up to, but also after Brexit will therefore be essential.

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By Institute of World Economics and Politics Chinese Academy of Social Sciences

This paper attempts to establish a theoretical framework on the relationship between national power and influence to response to the current debate on evaluating China’s national influence. This framework includes three aspects in assessing nation’s influence, that is the strategic resources and measures from influencer; state power of influencer; and the national interests of influence. At the same time, this paper holds that range; weight and dominance can decide state power. Based on this theoretical argument, it uses the data from Asian Barometer to analyze the relation between B&R strategic aim on a new Asian order and Asian countries’ response. First, it argues China’s range and weight is higher than its dominance in Asia; while its economic and diplomatic influence performs better than political, cultural and military influence in this region. Second, its strategic measure of prestige, induce is more effective than defense and coercion; its influence works better on shared culture countries and relatively developed economy. In the short time, China’s strategic aim relies on Asian countries’ response; while in the long run, it will decide by to what extent China could overcome its flaws on influence comparing to US.

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