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U.S. Department of State

Diplomacy in Action

21st Century Economic Statecraft

Robert D. Hormats
Under Secretary for Economic Growth, Energy, and the Environment 

New York, NY
March 29, 2012

Date: 03/29/2012 Location: New York, NY Description: Robert Hormats, Under Secretary of State for Economic Growth, Energy and Environment, briefs at the New York Foreign Press Center as part of a foreign media tour on ''The U.S. Economy and Its Global Role: Perspectives from Wall Street and Main Street.'' - State Dept Image

12:00 P.M., EST


NOTE:  This briefing was part of a NYFPC Reporting Tour on "The U.S. Economy and Its Global Role: Perspective from Wall Street and Main Street"

MODERATOR: Welcome back, everyone. We're very happy to have Under Secretary Robert Hormats here with us today. He’s been at the Press Center a few times before --


MODERATOR: -- and we’re really pleased whenever he comes.

UNDER SECRETARY HORMATS: Well, thank you very much. It’s a real pleasure to be here back in the Big Apple, where I come from, actually. Now, I’m temporarily, at least, in Washington for the last three years, but it’s good to be back here.

And I thought this would be a useful opportunity to talk to you about a number of things, but particularly to focus on the Secretary of State’s economic statecraft agenda because this is something that has been very much on her mind and very much on my mind since I’m in charge of implementing the kinds of things that she has laid out – the visions that she laid out. So, let me – while all the microphones are being put up here, let me start out – there’s another one? Okay. You have two? (Laughter.)

Okay. The vision that she laid out essentially is aimed at strengthening America’s economic statecraft in several ways. And let me just try to describe them and give you a little bit of background. If you look at the emphasis of foreign policy today, there are obviously a number of traditional strategic issues and traditional kinds of foreign policy issues. But what is increasingly clear is that international economic issues are more important on the international agenda than ever before. And for many countries, they’re probably the most significant aspects of foreign policy.

If you go back to the period of the Cold War, the emphasis of a lot of countries essentially was about accumulating and projecting military power. What’s increasingly true today is that for most countries, there is at least as much, and in most cases, more attention placed on the internal development and projection of economic power around the world. And if you look at some of the rapidly emerging economies, their main focus is on strengthening their domestic economies and strengthening growth and addressing their development challenges, but also projecting their global influence in areas such as trade or investment or technology relationships with other countries so that other countries are playing a very active role in projecting their global economic influence.

And so economic issues are assuming a greater role on the global agenda. You can see this in the UN, you can see this in the Group of Twenty, you can see this in APEC, in discussions in the IMF and the World Bank. So on the list of topics on the global agenda, international economics has risen very dramatically, and for some countries, this is the top of the list. In other countries, if it’s not at the top of the list, it’s very close. So that’s one thing that’s important as background.

The second is from an American point of view it’s increasingly clear that international economic policy is a very important part of our attempts to strengthen our own domestic economic recovery and achieve sustained growth and competiveness, but it’s also important in terms of our global economic leadership. For instance, playing a leadership role in helping to deal with the financial crisis of 2008-2009 was a very important part, not only of our international economic policy, but of our foreign policy as well. Taking leadership on environmental issues is obviously important from an environmental point of view, but also a way of strengthening our broader leadership in the global economy.

We were chair last year of APEC, and we were utilizing that as a way of strengthening APEC and strengthening trade relations across the Pacific. But it also enabled the United States to play a greater role in the Pacific in a broader sense to demonstrate to countries of the region that the United States was asserting a constructive role in the region – constructive in the sense of pulling together and enhancing cooperation in the area, enhancing our political presence in the region to demonstrate that we were committed to the Pacific and we’re going to play a proactive role in the region.

So in many of these cases, international economic policy is very important from the domestic American point of view in strengthening our economy, boosting exports, attracting foreign investment to the United States, supporting American companies that have invested in other parts of the world, but it’s also important in demonstrating that we’re playing a proactive role in global economic institutions as part of broader American leadership.

The key element in the world of the 21st century, though, is that leadership has to be exercised in a somewhat different way from much of the 20th century. And that is it has to be done in collaboration with and in cooperation with other countries, particularly the large emerging economies, but also with traditional partners and allies like Europe and Japan. So we need to continue to work with them as we do in groups like the G-8, in which Russia is also, of course, a very important participant. But we also need to reach out and engage with the emerging economies of the world who are playing a greater role in the global economic system and correctly expect to have a stronger voice in that system.

And we need to work with them to do two things: one, to ensure that they have the kind of voice that is commensurate with their economic influence; and two, that they assume responsibilities for the system that are also commensurate with their economic influence from the point of view of trade and finance and other things.

So shaping the rules of the 21st century in a variety of areas is going to require collaboration between the U.S. and its traditional friends and allies, but also, increasingly, the newer emerging economies that are playing a greater role and want to have a voice in this.

And we have a number of challenges before us that we need to address. We need to address issues like the greater role of state enterprises, for instance. State enterprises, state-owned enterprises or state-supported enterprises, are playing a greater role in the system. Intellectual property protection is a very important priority for the United States. How do we work together on environmental issues? How do we work together on natural resource issues? This is a very big challenge, because as world populations increase and world growth increases, particularly among emerging economies, so does demand for food, demand for raw materials, demand for energy, demand for arable land. How do we work out rules and understandings to prevent this being seen as a zero-sum game or sources of conflict? And I think this is a very important area for collaboration and for development of global norms and global cooperation.

Just as a footnote, one of the things that I’ve been trying to do is go to various parts of the world and talk to them about this broader statecraft issue and what we can do together. Just last week, in fact, I was in Vietnam and Thailand and just discussing a lot of environmental issues, environmental cooperation. But also, as many of you know, there are energy shortages throughout Asia. How do we develop cooperation in that region?

One of the things we’re talking about is an initiative on interconnectivity or smart grids among the ASEAN countries so that they can develop energy in a collaborative way. How do we deal with issues like water, which is a big challenge in that region? They depend very heavily on the Mekong River for both hydropower and for water. How do we work out cooperative arrangements? What about freedom of navigation? What about conflicts or perceived conflicts over oil drilling rights or territorial issues or fishing rights in the South China Sea or the Eastern Sea, as some call it also?

These are very new kinds of issues. It’s not that the issues have not been there for a while. They’ve been there for a while, but as demand for raw materials grows and for food grows, some of these things that have been latent issues could become more prominent issues. How do we work to resolve them? So there are a number of very important challenges on the horizon, and these are the kind of things we’re quite interested in.

Also, I had the opportunity there to discuss some supply chain issues, particularly counterfeit drugs. As the world becomes more interactive and intertwined, we depend more and more in the United States, but also almost every other country in the world depends more and more for imports of food, imports of raw materials, imports of pharmaceuticals. In the area of pharmaceuticals, how do we make sure that the pharmaceutical products that we import are not counterfeit or not substandard, that meet the requirements of – that are on the label for curing or treating diseases? These are the kind of sort of new 21st century issues that we’re trying to address. So this is just a quick overview of what we’re trying to do and what the major issues are.

You cover a lot of these things so you know a lot about these issues already, but it’s an increasing challenge to pull all these things together and develop some sense of coherence among the policies of a variety of countries in the world to make sure that we’re all working at least along the same wavelength. We’re not always going to agree. Big countries, the U.S. and Canada – we’re the two closest trading partners in the world – don’t always agree. There are always little issues. So the goal is not to reach agreement on everything overnight. That’s not reasonable. But the goal is to find ways of addressing challenges, ways of addressing differences, and ways of developing some sort of common sense of direction in which we can move to deal with these challenges.

And the last point is that many of these challenges today are not acute. Let’s take the environment. The environmental issues today may not be causing the East River to rise 10 feet and flood the FDR Drive, or cause flooding in the Mekong River Delta or in Bangladesh, or in some other low-lying areas of the world. But if we don’t address them today, if we don’t deal with them today – environmental issues being one, but there are others – I use that as a good example – address them today, then 10 years down the road, 15 years down the road, the consequences of not addressing them will be very severe. So the objective is to get a sense of urgency among political leaders today to address problems, lest failure to address them means that we are going to confront more difficult problems down the road.

So we have to bear the costs of doing this in some cases today to make sure the world is not inundated 15, 20 years from now. And one of the things we’re trying to do – and I’ll use the environment because it’s one of the areas that is discussed a lot up here. It was discussed in Durban recently, it’s going to be discussed in the Rio+20 meeting. A lot of talk about that – is that we’re increasingly finding – if you look at the way the world works, that a lot of companies now – if you go back, say, to the 1980s, 1990s, most of the 20th – late 20th century, the goal of a lot of companies was to improve productivity by introducing new technologies that, in turn, reduced the amount of labor required to produce a unit of output, or in some cases, outsourcing the products or the production somewhere else to lower wages.

I think what we’re going to see in the 21st century is that efforts to improve productivity will focus to a much larger degree on utilizing raw materials, energy, water, land more efficiently so that you can get an increase in your output with a decrease in the units of input that you apply to the production process by utilizing energy more efficiently, raw materials more efficiently, water more efficiently. Over a period of time, companies that want to be competitive, that want to be profitable, will focus a lot more on that then they did in the 20th century, when people sort of took abundance of these things for granted. They’re no longer abundant. There’s a lot of demand for them as economies grow and as wealth increases.

So profitability, competiveness by governments and by companies is going to depend more and more on businesses and governments utilizing these raw materials more efficiently. Even if they don’t want to do it for environmental reasons, they’re going to have to do it for competitive reasons. So this is another change that I think is going on in the system that’s part of our effort to work with the business community in economic statecraft.

So this is sort of a quick introduction. I’m happy to answer any questions.

MODERATOR: Before you ask your question, just please wait for the microphone and then state your name and your media organization. Thank you.

QUESTION: Hi. My name is Angela Hennersdorf, Business Week Germany. Mr. Under Secretary, thank you that you’re here.


QUESTION: (In German.) Very good.

UNDER SECRETARY HORMATS: I met (Inaudible) last night.

QUESTION: Ah, really?


QUESTION: In Washington. Ah, he’s relatively new, yeah. Yeah. (Inaudible.)


QUESTION: Yeah. I have a question in regarding the emerging new economies you were mentioning, that they’re growing and getting stronger. Where do you see the U.S. main focus? Is it mainly a shift to deal with these countries bilaterally and to talk about free trade together with them with – between the U.S. and directly the country? Or do you see the strengths more in the World Trade Organization? Where is the focus? I observe the other way, that you are more – doing more bilateral contacts.

UNDER SECRETARY HORMATS: It’s a very interesting question. Let me make a couple points. One, this notion that we use of "a pivot to Asia," which you’ve heard about, I’m sure, that does not by any means imply or suggest that Europe – the role of Europe or our traditional friends and allies is diminished. In fact, I gave a speech in Brussels just a couple days ago at the Brussels Forum, where I made a very clear point that our – and I testified actually – was it yesterday or the day before – I’ve lost track, but recently – to the House Foreign Affairs Committee that Europe remains an enormous priority for the United States. It’s our biggest trading partner. It’s our strongest ally on Afghanistan, Iran, Syria, you name it. The U.S. and Europe are closer together than any two areas of the world. So that concern that I know some Europeans feel is something that they should not lose sleep over, because we know we need Europe and the whole history of American foreign policy from the late 1940s on has been to strengthen relations with Europe and strengthen and support a united, unified, free, whole Europe. So this is critical to us, and remains so.

The second point is the broader point you’ve addressed, and that is do we want to do these things multilaterally or regionally or bilaterally. We would have liked to have seen the WTO Doha Round succeed. There are a lot of impediments to success, and for the moment it is sort of (inaudible) and is not likely to move very far anytime soon. So the goal of the United States now – and I think other countries as well – is to make as much progress on trade liberalization where the opportunities present themselves. And where do the opportunities at the moment present themselves? One is the bilateral agreements that we made with Colombia, Panama, and South Korea. The other, for the moment, is to develop the Trans-Pacific Partnership further. We’ve just had negotiations in Melbourne. It’s an ongoing process. We would like to see that conclude by the end of the year. There are nine countries participating in this process, as you know. And we have a very ambitious 21st century trade agenda, as we call it, with intellectual property protection, efforts to deal with state enterprises, things of that nature.

There are three other countries that would like to join, although we’re still talking to them about this. Canada, Mexico, and Japan would like to participate, but we’re still in the process of working out whether and how that’s possible, although we welcome their interest. Just a question of whether it’s feasible and at what point its feasible for them to start getting into this process. But we obviously welcome their interest and are talking to them in a very active way. And so as a result of this, we think we can move on that.

We also – just to add another element, we also would like to strengthen our trade relations with the countries that are engaged in what’s known as the Arab Spring to improve trade relations with them in as many practical ways as we can to help them to become a greater part of the international trading system. Europe’s doing the same thing through what it calls its deep and comprehensive trade negotiations. We’re trying to figure out ways of facilitating exports from these countries. Many of them in the Arab world, particularly in the Middle East, North Africa, have not – leaving oil and gas aside – have not been as active in exporting other things in the global system. We’d like to be constructive and work with them on these things. We’re having conversations right now with Tunisia. We’ve had some conversations with Egypt. So identifying practical ways of helping them to gain greater access to global markets is another opportunity for trade expansion.

So we’re looking for any and all ways in which we can expand trade. If there’s a basis for moving forward on the WTO, again, we’d like to pursue it. But for the moment, it doesn’t look like it’s moving very far, so we’d like to find other ways of expanding trade. And those, for the moment, have been, in some cases bilateral, in other cases regional.

So we believe in trade expansion. The one thing we don’t want for ourselves or for other countries is for these economic difficulties that we face, or the world faces, to cause countries to turn inward. We know what happens when that happens. We know. We’ve seen the 1920s and the 1930s. It was a disaster for everyone. So the expectation, from our point of view, is we’re going to try to continue to look outward. Not everyone agrees with that. There are people who say, well, the answer is turn inward. Our goal is to look outward and try to expand opportunities for our companies and for our workers. We would like other countries not to turn inward through nationalistic measures or protectionist measures, which only weaken the global system and, in the end, cause retaliation or people to think of trade as a zero-sum game. If we start thinking of trade as a zero-sum game and adopting nationalistic standards or protectionist measures or restrictive measures against other countries – and countries are doing this now – that’s – that leads to exactly the kind of problems the global system had in the 1920s and 1930s. And anyone who reads chapter one of that period knows it was a disaster for them and for everyone else.

QUESTION: Fei with Shanghai’s newspaper, Jiefang Daily. You just talked about trade barriers. I have a question about this. The U.S. Department of Commerce last week announced a ruling against China’s solar cells importing to the United States. And one article in Wall Street Journal argued that it’s bad for both the United States and China, because it will raise the price of the U.S. energy and also reduce jobs in the United States. So do you think raising trade barriers is a feasible way --

UNDER SECRETARY HORMATS: This is the dumping. You’re talking about the dumping case. Is that what you’re talking about?



QUESTION: Is there a feasible way to solve the disputes against --

UNDER SECRETARY HORMATS: Well, here’s what – there are rules under the WTO whereby cases that are – where there is perceived evidence of dumping or subsidies – this is dumping – would be susceptible to the rules of the WTO, and that suggests that there could be a violation of the rules of the WTO, and the Department of Commerce has identified these products as potentially – the imports of these products as potentially violating WTO rules, so it’s conducting an investigation to determine if that’s the case under the rules of the WTO.

The goal of the United States is not to impose barriers in a wholesale way, but the goal of the United States – as with other countries – is to be sure that the rules of the World Trade Organization are adhered to. And if we perceive or an American company – in this case, an American company brought the case – if an American company perceives or believes that rules of the WTO were violated, it brings the case to the Commerce Department; the Commerce Department investigates this. If the Department of Commerce concludes that there is dumping, it imposes duties to offset the dumping margin, or if it’s a countervailing duty or a subsidy case, the subsidy margin.

So we want to proceed on the basis of the rules of the WTO. We’ve had relatively few WTO cases, but where we feel that rules of the WTO were violated, we bring these cases – first, we ask for consultations under the WTO to resolve this through consultation with the country in question. If those consultations don’t work, then what we do is we bring it before a dispute settlement panel in the WTO. The WTO dispute settlement panel then makes a ruling against – on the basis of that. Or if we identify certain dumping, we have internal procedures in the United States that are consistent with the WTO, and if we determine under those internal procedures, which are, as I say, consistent with the WTO, that there’s a violation, then we impose barriers to offset that violation. So there are cases like that. But I think you’ll find that given the overall amount of trade we have, those cases are not – they’re not very large in number.

There’s no point in having international rules if they’re not adhered to, and we think that not every country adheres to them, and where we feel they’re not adhering to them we take action.

QUESTION: Hello. My name is Jostein Loevaas. I’m with the Norwegian Business Daily. I really wanted to ask the same question, but I’ll go a little further, because this is not only about, like, dumping. There’s a lot of pressure in the Congress for imposing sanctions on China. And I think even the Republican frontrunner has said that he’s going to, like, name China as a currency manipulator on his first day in office.


QUESTION: So I just wanted to know, like --


QUESTION: -- what do you think? What’s going to happen? And is China a currency manipulator?

UNDER SECRETARY HORMATS: Well, we have not – this Administration has not found them to be a currency manipulator. If you read the statements that the Secretary of the Treasury has made, he has not said that. So that’s a political candidate. If you went around trying to answer everything that every political candidate says, you’d spend all your time doing that. But I think it’s important to read what the Administration has said, and the Administration has not made that finding. So that, I think, speaks for itself.

In terms of sanctions against China, that’s not our policy either to have sanctions against China. Nor is it our policy to isolate China or even to tell China that we object to state-owned enterprises, which gets in the Chinese newspapers from time to time incorrectly. If China wants to have state enterprises, that is purely China’s business. It is not our business at all. Our concern is if the state enterprises receive certain benefits that give it – give them an artificial competitive capability, then we get concerned. But we would get concerned if a private enterprise were given a number of benefits like subsidized credit, subsidized export credit, discounted factor inputs like cheaper energy, cheaper land, or exemption from antitrust laws. We would go after those whether it was a state enterprise or not, because those things distort the global competitive environment.

Coming from Norway, I think you know very well the difference between state enterprises that act like market companies and state enterprises that don’t. I mean, Norway has state enterprises, but they run themselves just like normal private enterprises do, and no one has any problems with them. The United States has never criticized Norway’s state enterprises at all because they’re run in a very efficient, market-oriented way.

So we have no qualms at all with whether China or Norway or any other country wants to have state enterprises. It’s whether it distorts the playing field, whether it distorts trade. And the interesting thing on China is that some of them do and some don’t. Some state enterprises are very distortive because they get all these benefits. Some are not. And the other thing is – what’s interesting is when you go to China, you find that there are a lot of Chinese companies that themselves are concerned that state enterprises get a large portion of the bank loans and some of the private enterprises or smaller enterprises that could create a lot of jobs find it harder to get bank loans.

So we have no quarrel with the Chinese on whether they want to have state enterprises or not. It’s whether it distorts trade and investment or it doesn’t. And it’s not just China. There are other countries where we have issues with – and it’s not just us. Other countries have similar qualms, and that’s one of the reasons we’re trying to address this in the TPP. I was just in Vietnam. They have state enterprises, but I think they also realize that over a period of time, if there are going to be international rules, those state enterprises are going to have to gradually conform to those international rules. And they’re in the TPP process, so it indicates that – not that we agree with them on everything; I don’t want to imply that the U.S. and Vietnam agreed on all these issues. But at least there’s a dialogue with them on the question of how you treat government support for state enterprises.

QUESTION: Stephane Bussard with Swiss daily Le Temps. Actually, it was very high on the Obama Administration’s agenda to help Russia join the WTO.


QUESTION: And I also remember a document published by the – well, not published, but elaborated by the Russian foreign ministry presenting a new kind of foreign policy doctrine focusing a lot on the economy and things like that, and also focusing on a possible rapprochement with the U.S., with the Western world, and things like that. But it was actually elaborated under the Medvedev presidency. How do you see now the economic relations, actually, with Russia under Putin?

UNDER SECRETARY HORMATS: Well, I’m not going to speculate on that exactly because the Russians will have to sort out their policy, but I really don’t think there’s going to be a big difference. There may be differences on certain things, but I think there is a – we just had – I mean, we were very supportive of Russia joining the WTO. And thank you to Switzerland, because the Swiss played a very important role in one aspect of this, as you doubtless know, and very constructive. A senior Swiss diplomat was very helpful in dealing with a certain part of this, so – Heidi Grau was very good and very able. The Swiss have superb diplomats and are very good at mediating things or finding solutions.

So I would say that the way I look at it, we want and were very happy to have Russia in the WTO, just as we were very happy to have China in the WTO. We were big advocators of that. When Zhu Rongji was premier, there was a lot of conversation about China, and we were always eager to negotiate with China to find a way of encouraging them to be in the WTO because it brought them into a system of global rules, it gave them benefits in the global system, but they also utilized membership in the global system to move toward more market-oriented policies internally in China, so very positive.


Now, going forward with Russia. I think there’s a broad understanding in Russia, and I’ve been very actively involved in this process on several things. First of all, we just had a meeting of – we have this U.S.-Russian presidential – bilateral presidential commission, and we have these committees, 20 committees, under it. I’m the the American co-chair, of one on innovation with Arkady Dvorkovich, and there’s another one on environment – and we don’t have a Russian co-chair yet, but we will because it’s a relatively new committee.

But the innovation one is the one I wanted to focus on. We just had a meeting in Palo Alto – at Stanford, where we brought Russian innovators and American innovators together. It was wonderful because bringing Russian scientists – and Russia has some really superb scientists and engineers – and working with Americans, we think there are a lot of opportunities for collaboration. And very importantly, what we also think is that Russia wants to diversify its economy. It has Skolkovo city, this new city that it’s putting up. MIT is playing a very important role in this. Craig Barrett, who is a former chairman of Intel, has been very actively involved. A number of other very senior businesspeople, including the chairman of Cisco Systems, John Chambers – there are a number of companies that are involved here, working with the Russians.

And so we think that they want to diversify their economy so that they’re not as heavily dependent – their budget isn’t as heavily dependent on oil and gas. And we think the membership in the WTO will help in that area, and all these kinds of collaborative efforts that we’re working with them on will help in that area. So I think the general direction of more diversification is one that is widely shared by the leadership of Russia today.

QUESTION: I’m Nishimura from Japan’s Nikkei. My question is: How do you integrate trade, economic policy with security issues, and specifically with the case of the TPP? Some people say this is aimed at containing if not deterring China, which is trying to expand militarily. Some people say the U.S. policy is not yet that sophisticated at that point, and I would like to know what the reality is.

UNDER SECRETARY HORMATS: Well, the one thing it definitely is not is an attempt to contain China. The goal of this is to try to develop across the Pacific some common rules and norms and practices to expand trade and investment opportunities. And the idea behind it is if you look at the world after World War II, many of the rules of the system were developed between the United States and in Europe – IMF, World Bank, OECD, GATT, et cetera. Now, the biggest area of economic growth and commercial growth is across the Pacific. So what we’re trying to do is to identify some common sets of rules and norms across the Pacific, and they’re countries in – they’re in Latin America, they’re countries in Southeast Asia, Australia and New Zealand, they’re – Vietnam is in there, the United States. And Brunei. So we’re trying to figure out ways in which we can develop some common sets of rules.

It’s not a trade block. It’s meant to expand trading – trade opportunities. If you look at China, I mean, the last thing we want to do – first of all, if we wanted to contain China, we couldn’t do it, and second, we don’t want to. It’s not in our interests. In fact, our goal is quite the contrary. Our goal is to expand mutual opportunity with China. We have the Strategic and Economic Dialogue. You asked a moment ago – and how do you relate foreign policy to security issues? We have this Strategic and Economic Dialogue. It’s going to meet in May again, in Beijing this time. It alternates. And we’re going to talk about strategic issues and economic issues together.

But our goal is to have China be a greater part of the global system, to participate in the rules of the global system. We have issues, no question – issues relating to intellectual property, to state enterprises, issues relating to the fact that many companies are forced to transfer technology to Chinese companies as a precondition for investing there. There are certainly issues, but the idea is not to contain China. It’s the opposite. The idea is to try to work out with China differences between ourselves on these kinds of issues, and that’s really what we’re trying to do. And we’ve made progress. We haven’t made as much progress in some areas as we would like, but we’ve made progress in some areas as well. So it’s not – people sort of transpose the sort of Cold War analogy and put it – translate it into the Pacific and think, well, we’ll use the same analogy, but it’s not at all.

We’ve been encouraging China to join the WTO. We want to work with China on a wide range of these issues, and the visit of Vice President Xi Jinping here was a very good visit, very constructive. A number of issues were discussed. We think there are great opportunities for the U.S. to deal with China in a constructive way over the next weeks, months, and years. So it’s exactly the opposite of containing China. It’s to have closer collaboration with China. That was totally different from the Cold War analogy on the other side of the Euro-Asian landmass.

QUESTION: Tim Schaefer, Finanzen Verlag in Germany. I’m interested in your long-term outlook. How do you see the world, let’s say, in 40 years, 2050, in regards to the population, the borders, immigration, in regards to the economy? Does the world get better overall, or can we deal with all these problems?

UNDER SECRETARY HORMATS: Well, I don’t know. I’ll pull out my crystal ball. It’s a good question. I mean, there are certain things you have to just assume are going to happen unless some terrible calamity or some very disruptive event occurs. One of which is populations increasing dramatically; second, more and more people are moving to the middle class throughout the world; third, more and more people are moving to the cities; fourth, there’s more and more demand for food. As a result of these things, as people become – more people and more prosperous people around the world and more demand for energy and water and arable land and all these things. So – and it’s also more than likely the case that the emerging economies – not just the BRICs, but other emerging economies are going to become more and more important – South Korea, Turkey, Indonesia, Mexico – are going to play a greater and greater role. South Africa, Nigeria, and others are going to play a greater and greater role in the system – Vietnam.

So increasingly, the answers to environmental problems which come from the higher CO2 emissions and greater demand for energy, for one, international health issues, pandemics can spread around the world very quickly, issues of water management that I mentioned earlier – all these issues have to be dealt with in a way that’s collaborative. One country can’t do it; two countries can’t do it. People come to me and talk about a G-2, the U.S. and China. I think the leaders of the U.S. and China would be the first to say that they can’t do this alone; they need to have other countries engaged in the process. So these are the great challenges of our century, or at least the first half of our century. So we have to figure out how to deal with those challenges. And I would say that there are no easy answers, but we have more and more collaborative efforts.

And let me just make one point on governance. Governance is not just about government. Governance is going to involve NGOs; governance is going to involve collaborative efforts by environmentalists around the world to identify challenges like overfishing of fishing areas or overlogging or poaching or things like that. More and more we’re in participatory world where people want to play a greater role in their own governance, but they also want to play because they now have the ability to communicate using the internet and social media around the world.

So increasingly, we’re getting a lot of people around the world who have an interest in good environmental policy, who have an interest in protection of the forest, who have an interest in monitoring corruption in their countries and identifying corruption and broadcasting it over the internet or through tweeting. So there is – the world’s changing in part because of those things and part because the new technologies enable more people to participate in the solutions.

QUESTION: Massimo Gaggi from the Italian Corriere della Sera. In the past, the role – the international role of United States, the world policemen – in a bit of expression – came with a huge economic cost, but gave also to America huge economic advantages on top of the political advantages. Now, the situation seems a little bit different. The costs are still there; the economic advantages are eroding as several countries try to reduce, for instance, the role of – the international role of the dollar. Is this a problem? There’s a strategy? Or you see an inevitable shift of the balance of power in the economic area?

UNDER SECRETARY HORMATS: Well, we’ve thought a lot about that kind of question. There are two elements in the answer. One is we certainly see other countries growing in economic influence, as you correctly point out in your question. And in fact, I could argue that that was a positive thing for the world.

And I’ll go – you can go back in history. We were far better off in the 1950s, ’60s, ’70s, and ’80s when Europe and Japan recovered from World War II and became stronger economies, stronger markets, and enabled them to be stronger allies. The U.S. would have been the most – would have been a very prominent economy relative to other countries if those countries had not recovered, because the margin of difference would have been greater. But we would have been worse off if Europe had not recovered. We would have been far worse off if Europe and Japan had not recovered. So it was in our interest to support their growth, their recovery, the Marshall Plan, the OECD, all those things. We benefited from the recovery of those countries after World War II enormously. We would have been a much poorer country had those countries not recovered.

Now, we have a different world where you have the emerging economies playing a greater role. That’s a plus in terms of it creates new markets for our products, it creates new trade opportunities, new investment opportunities. It creates new opportunities for scientific collaboration. More and more you have people in NIH in Washington working with researchers in Beijing or Shanghai or New Delhi or Brasilia, places like that. So you’re getting these brilliant minds – as I mentioned, collaboration with Russia on Skolkovo and through this innovation working group. So we see there are enormous opportunities in the emergence of these countries.

Now, the thing that we want to make sure of is that, as they become more prominent in the global system, they participate in the rules of the global system and don’t try to carve out exceptions, because that will do two things. One, it will undermine the benefits of the global system. And over a period of time, if that continues to happen, then the system that was very beneficial – China’s benefited enormously from being in the WTO. So has Brazil, so has India, so have a lot of other countries. I think it’s important that because they benefited, they also have a sort of we call full-throated support for these rules and don’t try to carve out exceptions or identify gray areas that may not be violations, but are inconsistent with the principles and practices.

But I think they’re also – what’s really encouraging to me is that there are a lot of groups in China that are reform-minded. And if you look at the 12th Five-Year Plan, a lot of what is in the 12th Five-Year Plan in China is very consistent with the kind of things we would like China to do in the interest of the global system. China wants to have better distribution of income, for instance. China wants to depend less on exports and more on domestic demand, domestic consumption. China wants to address its environmental problems. It wants to deal with issues of corruption. All these things are big pluses. China lowered taxes very recently, which will help increase demand, but it’s also good to boost consumption in China. So I think what’s interesting is that – sure there are issues with China that I’ve mentioned, but I think a lot of the reform procedures that are going on in China are consistent with the kind of things that we think will be good for China and for the global system.

So sometimes it’s frustrating because you can’t always reach agreement on issues like intellectual property or forced transfer of technology. But sometimes when you read the 12th five-year plan, you read the work program that was announced recently by Premier Wen Jiabao, many of these things have very constructive elements that are very consistent with what we think will be helpful to China in the medium and long-term, and also make the system more balanced and prosperous.

QUESTION: Okay, from People’s Daily, I remember that one of Obama Administration’s international economic policy is try to increase – even double – export, and trying to make return of the manufacturing industry – try to make it back to the U.S.


QUESTION: So my question is that, what’s your opinion on this then? Is this successful or not? Easy or difficult? And in the future, how would you do and something like that? Yeah.

UNDER SECRETARY HORMATS: Good question. Yes. Thank you. First of all, you’re exactly right. The goal is to double exports over five years, which we think will help to support 2 million jobs in the United States. And we think, first of all, we’re on track to achieve this. Although, you have to keep up the momentum, but I think we’re doing a good job and moving in that direction already. So – and its industrial products and its services as well.

Our goal, essentially, is to do this by encouraging or supporting American companies that want to sell abroad. If you look around the world, other governments are very proactive at supporting their companies; we want to support our companies. State Department, Commerce Department, Secretary of State does this, Secretary of Commerce, but also the President of the United States advocates for American companies.

The second thing we want to do is to make sure, as I say, the rules are fair so that our companies have a competitive opportunity to win business just like companies from other countries, too. We want a level playing field.

The other thing we’re trying to do, which is not directly related to this but is partially related, is to encourage more foreign investment in the United States from all over the world because foreign investors create jobs in the United States, but many of them also export from the United States. So it’s helpful in that respect, too. So this is what we’re trying to do. But it’s a very high priority for the President, certainly for the Secretary of State, for the State Department.

QUESTION: Alf Ask from Aftenposten, Norway. When I talk to European politicians and diplomats, they point at China and the U.S. that it’s their responsibility for this standstill in the WTO negotiations. Who do you blame for it?

UNDER SECRETARY HORMATS: Who would I blame for it? Well, I don’t blame China and the United States. (Laughter.) I think there are a lot of reasons for this reaching an impasse. I would say that we have some differences with China on this issue, but because China, in many areas, still looks at itself as a developing country and is not willing to undertake some of the obligations that we think a country that is as commercially powerful as China should undertake.

But it’s not the only country. And I think there are others as well who have a view that’s similar to China. We would like to see China take a more forthcoming position, for sure. But I would not put all the blame on China, and I certainly would not put all the blame on us. We would like to see this move ahead.

We think a good trading system, an open trading system, is a good system. But I think there are a lot of issues and for the moment at least, since we’re probably not going to move very far on this, we’re, as I say, we’re looking for other areas in which we can make trade progress. But singling out China, I wouldn’t want to do. I think there are other problems as well.

QUESTION: There’s been talk of bringing in manufacturing jobs back to the U.S., and the President has talked of tax incentives to do that. But I think I read an Apple executive saying something about that they didn’t have any responsibility to create jobs in the U.S. What is your take on that?

UNDER SECRETARY HORMATS: Well, I don’t know what the Apple executive said, but I think there are several things. One, the answer is yes; we’d like to create more manufacturing jobs in the U.S. Two, we think that American companies now have a lot of cash, and it’s not up to the United States to tell companies where to invest. They have to make their own decisions. But I think that it is increasingly clear to me at least that as the American economy recovers, and as we address some of our economic challenges, the United States will be a better place for them to invest than perhaps they perceive at the moment. In other words, instead of outsourcing a lot things, they will see opportunities in the United States for putting more investment into this country.

Now I should also say, I don’t think all foreign investment from the United States is a bad thing. A lot of – some of it is outsourcing of jobs, but a large portion is vitally important if American companies are to sell abroad. It’s very hard to sell abroad today if you don’t have a presence abroad. So a lot of the foreign investment of American companies will help them export abroad. So I don’t think there is a – I don’t want to make the argument that in all investment, or even a large part of the investment is negative, a lot of it is critical so that companies can sell abroad. You have to have a presence abroad to sell abroad.

But my point on – and the answer to the question is that it may well turn out over the next several years that companies who want shorter supply chains will decide investing in the United States is a good thing. Companies that see wages going up in other countries will find it more attractive to invest here or reinvest here. And also, one of the things that’s a big plus for us is the cost of natural gas has gone down substantially. And I think that will make certain investments in the United States and energy intensive products or products that utilize natural gas as a throughput – as an input feel more inclined to invest here.

So I think there are number of things that are working in the direction of encouraging some additional investment in the United States. This is not to say there won’t still be investment abroad, but I think some companies may decide that instead of investing abroad, they will find it more attractive to invest here.

QUESTION: My name is van der Marel from the Dutch Financial Daily. You are good friends with Europe. You just said [inaudible] biggest trading partner. European leaders asked the United States to participate more through the IMF to support Europe. What’s your reaction on that? And what’s your biggest worry about Europe, because some countries – Spain, but also the Netherlands – are actually not meeting their deficit targets? So there might be a recession and new problems.

UNDER SECRETARY HORMATS: Well, you ask a complicated question. First of all, let me just make a couple of points. One, the Treasury, which takes a lead in this area, has been very supportive of Europe and has had numerous visits, conversations with Europe, with European Government officials, with the European Central Bank, with the IMF, and we want Europe to succeed in, first of all, achieving financial, fiscal stabilization, financial stabilization, but also to move back on the path to economic and jobs recovery, which is important. We both share this concern about jobs – jobs in Europe, jobs here, every country’s concerned about jobs in this environment. So we’ve been very supportive of Europe.

Our basic view is that the IMF should play a supporting role. We’ve always supported the IMF to play a supporting role, but our view also is that the largest portion of the resources needed to help Europe get through this, through the firewall or the FSF, and other mechanisms that are about to be put in place, would – should rely primarily on European financing, rather than financing from the IMF.

But, having said that, we think IMF financing and support should play a supportive or complementary role but subsidiary to – or less than the role that European resources themselves play.

The second point, though, is this: that we clearly want to see European countries that are getting benefits take advantage of the opportunity in order to to restructure to address their competitiveness challenges, which a number of countries have, and southern Europe in particular. So we see the large sums of money that some of them are getting as buying time for them to undertake reforms themselves. So that’s our hope.

But we’ve worked with these countries. I would say – I mean, look, leadership’s important, and economic reforms are very important. I’ll give you an example. One example that comes to mind is Mario Monti, who has done a remarkable job in addressing both the financial issues that Italy has but also addressing some of the underlying structural competitiveness issues that Italy has and has managed to keep a large amount of domestic support in Italy because people know that reforms were needed. I think he’s done dramatic things that are very, very constructive in Italy, but it’s also helped in all of Europe, because Italy now has someone who’s addressing these, and it can be a good example for other countries as well.

The new government in Spain has undertaken a number of reforms. The Government of Portugal has undertaken a number of reforms, so – and the Government of Ireland, and even – and the Greeks have made some changes as well under Prime Minister Papademos. So these countries are moving in the right direction, but no one underestimates the difficulty of maintaining popular support for a number of these measures, but the fact is that over a period of time, they have to take tough measures because many of them were in severe difficulty, and they have to find ways of getting out of this. It’s not just the fiscal measures; it’s improving competiveness, improving the labor market, improving the regulatory environment.

If you look at Germany, Germany took a lot of these reforms in labor market reforms, competitiveness reforms over a decade ago, and they have weathered the storm quite well relative to other countries. So it’s possible to do this. If you look at some of the Baltic states, they were in deep crisis just a few years ago, and they undertook major reforms, and they’re booming now. So it’s doable. If you look at these little countries in the Baltics, where they had these major problems. Now they’re very competitive, so --

QUESTION: Biggest worry?


QUESTION: Your biggest worry on Europe?

UNDER SECRETARY HORMATS: My biggest worry – yes. My biggest worry is that some of these countries won’t take full advantage of the time that has been bought by these measures to do these reforms or the kind of reforms that I’ve just described, or that they won’t have – or that they won’t get as much domestic support as they need to do it. And I think part of this is to continue to explain to people why these things are needed and to maintain the support that’s required to follow them through. It’s not an easy challenge. I think no one can – no one should underestimate the significance of the challenge they’re facing. But other countries have come through these kinds of challenges and thrived after several years.

Look at Korea. Korea had a major problem during – Thailand – during the Asian financial crisis. And you go to South Korea now and Thailand, they’re doing quite well. But they went through very tough times. Indonesia – very tough times. Poland, Estonia, Turkey. Turkey, the economy is booming now. It went through a very tough period. So countries have been through this, have done tough things, have maintained support from their people, and have come away better. Not that it’s easy, but a) it’s necessary, and b) if you do it right, you’re better off in the two or three years down the road or four or five years down the road than you were.

Okay. One more question. Okay. You can choose. Do you want to choose?

QUESTION: Thank you. I’m Qian from Sina, China internet media. I have one more question. It’s about the U.S. economy here.


QUESTION: What’s your view on the current situation? How comfortable about the situation? Because, you know, the unemployment rate is still high and as the gas price is increasing and is – I interviewed some citizens here in New York last week, and they complained that maybe the Washington should do something like release the reserve or reduce the tax. Thank you.

UNDER SECRETARY HORMATS: Well, the reserve issue is, as you know, discussed on a regular basis in Washington. The Strategic Reserve issue is discussed on a regular basis, but no new decisions have been made on that. But I think certainly oil prices, gasoline prices are high, and that does cut into people’s disposal incomes, as you correctly point out.

But I think what’s interesting is that this economy has bounced back from the worst of 2008-2009 and is now on a – is now in a stronger position. Jobs are being created at a more rapid rate. Investment is picking up. Housing is not perfect, but is at least stabilizing and improving in certain parts of the country.

So the one thing about the American economy is it’s quite a resilient economy and has demonstrated that repeatedly. But we still have challenges. We still have a lot of houses that are underwater, where the amount of the mortgage is higher than the value of the house. We still have an unemployment rate that is higher than we want it to be. We still have kids that can’t get jobs when they get out of school. So there are still major, major challenges. But by and large, I think the American economy is strengthening. I think confidence is beginning to pick up, confidence among investors is beginning to pick up, and all those signs are encouraging.

But we’ve got to keep working at it and we’ve got to do things like build out – improve our infrastructure, which is very important. I mean, you go to China, China has done remarkably well on building infrastructure, which creates jobs and makes the economy more efficient as well. So we’ve got to do that. We’ve got to keep up our level of education for kids. Not just kids – in New York you have great schools like Bronx Science and Stuyvesant, but then you have schools that are not quite as good or nearly as good, so you really have to broaden the benefits of education to lower income kids and disadvantaged kids. Those are the kinds of things we have to do. And of course we have to, over a period of time, as the President’s pointed out repeatedly, get control of our fiscal situation so we flatten out the curve for borrowing.

Well, thank you very much. I appreciate your doing this. Thanks.

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