Soft balancing through multilateralism dictates transition — neither the US nor China will respond with military action.

The classical idea of balancing involves military alliances and implies a group of states that work in unison towards constraining the ambitions of a great power.1 Although a high degree of economic interdependence2 progressively emerged amidst the American-centred liberal order that arose in the aftermath of World War II, and which the end of the Cold War consolidated, the international system nevertheless remained hierarchal3 by virtue of the hegemon’s potential weaponisation of economic institutions4 and the concentration of military resources at Washington’s disposal.5 As, in such a scenario, projecting power through warfare was too costly, rising powers like Beijing became more likely to engage in soft balancing than hard balancing.6

Indeed, China’s preference for engaging with the developing world through economic statecraft,7 that is to say, the art of advancing foreign policy goals through a diplomacy focused on market-related matters, is partially born of such structural constraints. Examples of Beijing’s strategy for enhancing its collective financial statecraft8—the subfield of economic statecraft associated with the provision of finance to potential allies through intergovernmental organisations (IGOs)—proceed from the availability of bilateral development finance and the creation of the Asian Infrastructure Investment Bank (AIIB). The seeds of this international developmental organisation (IDO) were sown in 2013, with the support of only 21 Asian states. By the time of its foundation in June 2015, however, the AIIB’s membership had expanded to 56 states, including key American allies (like Germany, France, and the UK, not to mention Australia, New Zealand, and South Korea).9 As expected, the USA has not joined the bank, which Washington initially perceived as a competitor of both the World Bank and the American- and Japanese-sponsored Asian Development Bank (ADB).10

Has, then, the USA reacted to the rise of Chinese financial statecraft, in particular the creation of the AIIB, which constitutes a clear case of contested multilateralism?11 And if so, how is this reaction apparent? In this article, we argue that the USA has engaged with what we classify as dispositional balancing within IDOs such as the World Bank and the ADB, both of which compete with the AIIB in the provision of development finance. We define dispositional balancing as the process whereby a hegemon uses non-military diplomatic ties and the institutions it sponsors—in particular economic organisations like IDOs—and its hegemonic position to signal to potential allies its sustained ability to match the quantity and quality of global public goods that an emerging power offers and, hence, to preserve the established order. Apart from economic organisations, dispositional balancing can also be deployed through bilateral diplomacy on the part of the hegemon and its closest allies. More than engaging in a strategy wherein the entity that expends the most economically wins the lion’s share of states at their disposal, the USA of dispositional balancing constitutes a display of status, that is, a medium whereby the hegemon signals retention, despite the growing clout of an emerging power, of its ability, and hence status, as the main sponsor within the international order.

Through dispositional balancing, therefore, the hegemon does not aim to craft a coherent coalition against the rising state; nor does it risk expending material resources that bring no returns in placing itself at the mercy of free riders that exploit the benefits to be gained from not committing to either side. Instead, under a scenario where the emerging power’s actual intentions regarding the future of the international order are uncertain, the hegemon sets out to ensure that medium and small powers continue to recognise both its status and the order as a whole. Institutional balancing, therefore, prevents revisionist pretensions on the part of the emerging power at a relatively low cost. The twofold goal of preserving order and hegemonic status is achieved when the hegemon engages in a demonstration of power by signalling its commitment to the continued provision of public goods—in this case, development finance—to states that have joined IGOs that the emerging power has sponsored and/or strengthened bilateral ties with.

With the purpose of theory building,12 we exemplify how dispositional balancing operates by assessing, through logit and linear models, whether or not the USA favours recipients of bilateral development finance from China and from AIIB members through votes in American-sponsored IDOs—including multilateral development banks (MDBs), environmental funds, and the International Monetary Fund (IMF). Results suggest that Washington favours developing states that have joined the AIIB by increasing its approvals of projects targeting such nations that also participate in US-sponsored IDOs. We have moreover identified that this strategy is also deployed towards AIIB members in receipt of relatively high degrees of bilateral aid from Beijing compared with the funds provided by the advanced industrial democracies and long-standing American allies of the Development Assistance Committee (DAC).

In addition, the USA tends to favour disbursements of IDO funding to those developing nations that are highly dependent on Chinese developmental finance. Considering that AIIB membership may be endogenous to American voting patterns in IDOs, this article’s statistical models employ an instrumental variable (IV) strategy. Results remain aligned with our theoretical expectations and proposed mechanism. Using dispositional balancing, therefore, the USA aims to constrain China’s ultimate capture of potential allies through collective financial statecraft13 tools while also retaining the relative power of DAC members over the developing world, thus contributing to maintenance of the West’s global status14 and of the international order as a whole, Beijing’s growing power notwithstanding.

Although the relevant literature thus far indicates that various forms of institutional balancing have been particularly evident since the end of the Cold War, there remains a lack of clarity about the specific strategies, other than military alliances, that the established hegemon and the main emerging power deploy in their quest to attract allies within the international system. Dispositional balancing certainly falls under the category of soft balancing15 yet differs from its most likely form, namely, institutional balancing, in that it does not imply either including or excluding states from such IGOs as IDOs, or bilateral ties. Also, unlike structural balancing,16 dispositional balancing does not entail the forming of an alliance—even a loose one—in order to tackle an opponent. All a hegemon needs to do to deploy dispositional balancing is signal to potential allies the ongoing permanence of its status. In such a scenario, such allies can still remain members of IGOs sponsored by the emerging power, or deepen bilateral ties with it, because the rising country’s statecrafting endeavours do not explicitly challenge the established order.

The behaviour of the USA within the field of financial statecraft, therefore, is that whereby offence through established multilateralism is considered the best defence against contested multilateralism. Hence, understanding whether or not and how the USA uses IDOs to leverage its position in relation to China’s financial statecraft initiatives is crucial to making sense of the future of the post-war Western-led liberal international order17 and Washington’s prospects of retaining its hegemonic status. As the USA is still the major sponsor18 of the 12 IDOs that we use in our sample, it is plausible to expect that those institutions are employed to react in a way that tames the potentially counter-hegemonic character of Chinese initiatives through the provision of such global public goods as development finance.

Previous research has shown that, following the financial statecraft toolkit, the USA biases allocations of World Bank funds according to its best interests.19 In this paper, however, we go beyond those findings in adding evidence, and a theoretical contribution to the literature, that sheds light on what Ikenberry and Dexon define as “hegemonic-order theory”20 and the absence of traditional hard balancing between the USA and China. We also present new data that contribute to a better understanding of the AIIB’s place in the liberal international order beyond the motifs of its formation21 and early operations. The discussion on that bank’s interactions with US-sponsored IDOs unfolds the prospect of cooperation between them in specific fields and/or development projects, while also making sense of the context that generated growing tensions between Washington and Beijing.

The paper is organised as follows. We first review the literature that falls in the intersection of hegemonic transitions and soft balancing, of which dispositional balancing is a subtype. This is essential for detailing in our analytical framework the hypotheses, which are outlined in the subsequent section, it implies in the case of financial statecraft. We then explain the data and methods employed and report the results obtained through linear and logit models. Robustness tests with an IV are reported in the Online Appendix and confirm our predictions. The conclusion outlines a potential research agenda on dispositional balancing, covering the current contest for power between the USA and China in issue areas other than financial statecraft but which are nevertheless likely to be tackled under the logic of dispositional balancing.

Preserving Order and Hegemony through Soft Means

Owing to its growing economic clout and provision of the public goods necessary for global stability, Beijing has, since the aftermath of the 2008 crisis, posed a challenge to Washington’s dominant role in sponsoring the world order.22 Like the Western powers under American leadership, China has engaged in development finance both bilaterally23 and multilaterally.24 In both modalities of resource provision to potential allies, Chinese diplomacy cooperates with traditional donors while competing with them for political influence. What remains to be elucidated is whether and how the USA reacts to those trends. Indeed, the American response to China’s rise is anything but a straightforward outcome of Beijing’s growing clout in the US-led order. That is the case because “China was rising within that order rather than challenging it, and the contemporary order, unlike previous ones, had a remarkable capacity to accommodate rising powers.”25 Yet, as Cooley and Nexon argue, Beijing has already changed the “ecology of the international order” by creating new IGOs,26 which supports the view that “alternative order-building does not have to produce actual exit to shift international order and weaken hegemonic ordering.”27 From a hegemonic standpoint, the emerging power’s behaviour in regard to the established order is viewed, at the very least, as dubious and in need of containment.

Hence, considering that China may be perceived as becoming excessively powerful by virtue of actions related to contested multilateralism, such as the creation of the AIIB, the USA tends not to be tolerant of Beijing’s potential “selective embrace of the liberal order.”28 The AIIB was not just a consequence of functionalist shortcomings in the existing mechanisms of multilateral financing; it also reflects power disputes.29 As Cooley and Nexon contend, it remains unclear whether the AIIB will challenge or complement Western counterparts.30 For now, the “…AIIB stands in a relationship of partial accommodation and partial challenge”31 to the liberal international order. For instance, the bank cooperates with the US-sponsored ADB and International Bank for Reconstruction and Development (IBRD) by providing co-finance32 and sharing technical expertise. Yet, from a Western perspective, China is usually perceived as having abandoned the principle of peaceful rise since Xi Jinping’s ascent to power in 2013,33 the year of the launch of the memorandum of understanding that established the AIIB.34

Therefore, we must explore how the emerging power can challenge the hegemon because this may help to identify which tools the latter prefers to deploy in hindering or at least delaying the opponent’s rise. Perhaps, balance of power is the main concept linking the analysis of an unstable international system. It implies “a particular distribution of power among states of that system such that no single state and no existing alliance have an ‘overwhelming’ or ‘preponderant’ amount of power.”35 In a highly interdependent and institutionalised order such as that in the post–Cold War context, contested multilateralism would appear to be a viable method of soft balancing. Contested multilateralism happens whenever a group of states dissatisfied with the status quo emerges and coalesces around one or more institutional alternatives at the global level.36

However, that supporters of Beijing’s initiatives in the provision of public goods do not necessarily break away from Washington preferences37 constitutes a nuance in the concept of contested multilateralism. As Ikenberry argues, China has too much to lose by challenging the liberal international order,38 adding that “In the absence of war or economic calamity, the old liberal order is not likely to completely breakdown or disappear.”39 These assumptions call into the question whether institutional balancing has the potential both to trigger and to constrain hegemonic decline and order erosion. Institutional balancing consists in “initiating, utilising, and dominating multilateral institutions” to counter potential threats40 and is a type of soft balancing. Institutions certainly reduce the transaction costs that a state faces when assembling a coalition to constrain an opposing power. However, in its original formulation, institutional balancing means either the inclusion or exclusion of states. The inclusive modality of institutional balancing consists in “binding the target states in the institution,” while the exclusive tactic lies in “keeping the target states out.”41 The exclusive modality also determines the so-called inter-institutional balancing, whereby a “state that is excluded by a particular institution can support another or initiate a similar institution to counter-balance pressure from the one that has excluded it.”42

At times of uncertainty about the systemic configuration, institutional balancing may not suffice to constrain contested multilateralism. That is the case because exclusion is not a feasible strategy—uncertainty leads states to refrain from bandwagoning with any side, simply, because exactly how many poles of power exist and the costs and benefits of joining each of them are unclear. Moreover, China may, even without proclaiming and conquering hegemony, undermine the US-led order. In such circumstances, institutional balancing does not properly happen. Instead, smaller power and second-tier states in general have the incentive to align either with the emerging power or the hegemon because there are no appropriately opposed blocs of states coalescing around either one of them. The rise of the AIIB, in regard to Western-led IDOs, represents a context wherein “competition among international institutions affects the context of interstate bargaining among members, shaping the trajectory of institutional change.”43

In such a context, the hegemon may then prefer to follow in the footsteps of the emerging power and emphasise soft mechanisms for retaining its allies. Unlike Cooley and Nexon, we do not assume that “[o]nce the hegemon enters relative decline, its fate—and that of its order—depends on the attitudes of other powers.”44 As we theorise, the hegemon has agency over its fate through dispositional balancing without incurring excessive costs analogous to what happens under “imperial overstretch.”45 Financial statecraft arises as the most promising field for deploying dispositional balancing, given China’s expanded bilateral provision of development finance to the Global South,46 and more recently, through MDBs created under Beijing’s leadership. The New Development Bank (NDB) is as much an example of collective financial statecraft as is the AIIB, yet, other than China, it has only four founding members (Brazil, India, Russia, and South Africa), having welcomed in 2021 Bangladesh, United Arab Emirates, and Uruguay as new members, thus limiting its applicability to developing and testing the logic of dispositional balancing. As all BRICS (Brazil, India, Russia, and South Africa, which together form the BRICS Group) countries have clear soft balancing stances against the USA,47 the variance necessary to allow for analysing whether and how Washington punishes those countries for supporting Beijing’s contested multilateralism does not exist in this case.

Moreover, a focus on financial statecraft in developing and testing the argument on dispositional balancing reflects how development aid contributes to achievement of security goals. Donations, grants, and loans, for instance, buy support at the United Nations wherein such backup on crucial diplomatic themes48 may be crucial to a state seeking to increase its international clout.49 In addition, developmental finance targeting developing, commodity-exporting nations may provide assurance that the supply of raw materials will remain constant as a power advances its political–economic interests.50

Conceptualising Dispositional Balancing through IDOs

We now turn the focus of our analysis on how the USA reacts to China’s bilateral and collective financial statecraft, as exemplified by the AIIB. Before outlining our empirical expectations, however, we must first conceptualise why and how Washington reacts, through development finance, to Beijing’s potential impact on US hegemonic status and the American-led order. IDOs are part of both the infrastructure and architecture of the American hegemonic order. Here, we follow Ikenberry and Dexon’s definition of hegemonic orders as those having an architecture that is “manifest in the rules, norms, and arrangements stressed in traditional hegemony studies,” as well as “an infrastructure made up of interpersonal, interorganisational, and interstate political interactions.”51

Therefore, one can expect that the greater a state’s political influence within a given infrastructure (that is, a set of IDOs), the higher the leverage of that state in relation to its peers within the same institution. Yet, as IDOs are embedded in the international order, this architecture also has impact on a state’s influence within those banks. Given its hegemonic status, the USA is arguably among the main sponsors—states able to set the international agenda on a given issue area52—of all Western-led IDOs.53

Beyond the literature on IDOs and the impact of American hegemony on IGOs, we depart from the concepts of contested multilateralism, as detailed in the previous section, and of institutional balancing. Both echo previous developments in the literature on power and institutions. Most notorious among them is Barnett and Duvall’s typology of power. According to them, direct forms of power are either compulsory or structural, whereas indirect ones are institutional and productive.54 The compulsory and institutional forms stem from the interactions of specific actors, namely, states that are leaders and states that are followers. The structural and productive types of power, in turn, reflect socially constitutive relationships.

The hegemon and the order that it sustains being perceived as in decline, deployment of compulsory power generates higher costs than does the institutional modality of balancing. Although both are diffuse and, hence, most appropriate for soft balancing strategies, institutional power is the least costly of the two. That is the case because IGOs may act as laundry55 mechanisms for their sponsor, thus diluting the transactions and reputational costs that states—including the hegemon—would face both domestically and internationally by acting bilaterally. The hegemon, however, can still enforce its authority amid times of relative decline through “reminding” allies of its structural position in the established order.

If, however, as the hegemon’s structural power backslides, there should occur a widespread perception that the international system is in a state of flux (as has been the case since the 2008 Global Financial Crisis),56 the leading state can act through the institutions it sponsors to retain ground through its competition with the rising state in a given issue area, such as development finance. As Schweller argues, any international order depends on “predictability and stability.”57 IDOs, therefore, are a medium for signalling that, even if China crosses the red line and establishes its own order through contested multilateralism, the US-centred order will nevertheless endure. Moreover, when considering that multilateralism has been a tool of US self-restraint,58 reaffirming the relevance of Western-led IDOs also signifies commitment to the order that the hegemon itself created.