[Senate Hearing 112-83]
[From the U.S. Government Printing Office]
S. Hrg. 112-83
NAVIGATING A TURBULENT GLOBAL ECONOMY: IMPLICATIONS FOR THE UNITED
STATES
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MARCH 3, 2011
__________
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COMMITTEE ON FOREIGN RELATIONS
JOHN F. KERRY, Massachusetts, Chairman
BARBARA BOXER, California RICHARD G. LUGAR, Indiana
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania MARCO RUBIO, Florida
JIM WEBB, Virginia JAMES M. INHOFE, Oklahoma
JEANNE SHAHEEN, New Hampshire JIM DeMINT, South Carolina
CHRISTOPHER A. COONS, Delaware JOHNNY ISAKSON, Georgia
RICHARD J. DURBIN, Illinois JOHN BARRASSO, Wyoming
TOM UDALL, New Mexico MIKE LEE, Utah
Frank G. Lowenstein, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
?
C O N T E N T S
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Page
Geithner, Hon. Timothy F., Secretary of the Treasury, U.S.
Department of the Treasury, Washington, DC..................... 5
Prepared statement........................................... 8
Responses to questions submitted for the record by:
Senator Richard G. Lugar................................. 35
Senator Christopher A. Coons............................. 44
Senator Marco Rubio...................................... 45
Senator Robert Menendez.................................. 47
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening
statement...................................................... 1
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 3
(iii)
NAVIGATING A TURBULENT GLOBAL ECONOMY: IMPLICATIONS FOR THE UNITED
STATES
----------
THURSDAY, MARCH 3, 2011
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 2:33 p.m., in
room SD-419, Dirksen Senate Office Building, Hon. John F. Kerry
(chairman of the committee) presiding.
Present: Senators Kerry, Menendez, Shaheen, Coons, Durbin,
Udall, Lugar, Corker, Risch, Rubio, and Isakson.
OPENING STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
The Chairman. The hearing will come to order.
Thank you all for coming today. And thank you very much,
Mr. Secretary.
We are all hugely aware of the economic challenges that
America faces today. I've just come from a caucus meeting in
which we did nothing but discuss the budget and the choices
that we have to face. And I think, hopefully, we'll come
together with a creative and thoughtful way of approaching
these challenges. But, the truth is that the economic
challenges we face today blur the lines between domestic and
foreign affairs. Our economists need to think like diplomats,
and our diplomats, frankly, need to prioritize economics,
because our national security depends on it.
So, it's a pleasure to have before us today the Secretary
of the Treasury, who as an individual, both in his life before
becoming the Secretary of Treasury, and particularly in these
last 2 years, has been thinking in this kind of
interdisciplinary way for many years.
So, we're grateful to you, Mr. Secretary, for coming today
to share your thoughts with us about this important
interconnection.
Two years ago, as we all know, the world faced a financial
crisis of unprecedented magnitude and scope. Fortunately,
governments around the globe came together to devise a
response, including bolstering the IMF to provide support for
faltering countries, coordinating a global economic stimulus,
and harmonizing central bank measures to restore stability in
the global banking system.
I should also mention, in light of the Treasury's budget
request, that at the urging of the G20 the multilateral
development banks played a crucial role in driving the recovery
and providing a safety net across the developing world. Thanks
to this rapid and effective coordination, we avoided collapse,
and today we are seeing a return to growth in many parts of the
world--growth that is slow and tenuous in some parts, and
faster in others, but, nevertheless, a very, very different
picture from what we faced 2 years ago.
The truth is, though, that substantial and serious risks
remain. Some speculate that we may be headed for a double-dip
recession. Instability in European banks and government
finances has the potential to reverberate around the globe. And
the revolutions that are sweeping the Middle East could
challenge the economic growth that we all desperately need by
dramatically increasing oil prices and providing significant
instability in the marketplace.
So, these are foreign policy problems as much as they are
economic problems. In going forward, we will have to juggle our
economic priorities with other national security interests. Let
me be specific. An example: We have to continue to press hard
for adjustment in the valuation of the Chinese yuan and for a
fair and level playing field for our companies, even as we seek
out areas of mutual cooperation on issues like North Korea,
climate change, and unrest in South Asia and Africa.
The events in the Middle East are not only going to have an
immediate effect on world economic growth in the coming years,
as I said, but they are, themselves to some measure, a
consequence of economic dissatisfaction: youth who are
desperate for employment, and families hungry for food or
facing increased prices. The success of our engagement in that
area is going to be driven with how well those nations, with
our help, can meet the economic needs of their people.
At the same time, much of our success, and certainly much
of our power, stems from what we do here at home. Frankly, we
keep slipping in estimates of global competitiveness. Every
American should be deeply concerned about the connecting of the
dots between the choices we make here at home and the impact
that that leaves us with--the leverage it leaves us with, with
respect to our interests abroad. In areas like infrastructure,
for example, the building of America, energy, transportation,
water, sewer treatment, schools, all of those measures.
The most recent World Economic Forum survey ranked us, the
United States of America, at 23rd, behind countries from both
Europe and Asia. America is now 12th worldwide in the
percentage of 25- to 34-year-olds with a college degree,
trailing, among others, Russia, New Zealand, South Korea, and
Israel.
This year, investors have pulled $74 billion out of
domestic stock funds and put $42 billion into foreign stock
funds. High-profile multinational companies, including Applied
Materials and IBM, are already opening major R&D centers in
China. And as we look to the Googles of the future, it is
increasingly possible that they will be founded by students
from Tianjin University rather than MIT or Stanford.
We need to face up to these new challenges and boldly
embrace policies that support U.S. competitiveness. We need to
invest in a modern infrastructure that enhances our ability to
quickly and efficiently deliver goods and services and keep us
competitive with other countries who offer companies faster and
better ways of doing exactly that. We need to invest in schools
so we can continue to produce and attract the brightest young
scientists and engineers. And we need to nurture the spirit of
innovation that has always made this country exceptional and
that will enable us to transcend our current challenges.
We all recognize that this is a time of tight budgets. But,
I believe we must never forget to invest in our future.
Remember that, in the 1990s--I remember those fights, as I know
my colleague sitting to my left, Senator Lugar, does--we didn't
just cut our way to a balanced budget, we grew our way there.
There is nothing less than a matter of national security in
these challenges.
So, we've asked the Secretary here today, in order to
provide insight into these connections--the connectedness of
choices in Europe, choices in the Middle East, the things that
we can do to leverage stability, and the things that we need to
do, recognizing its connection to America's economic power. We
want to provide insight into the implications of the economic
instability at home and abroad. We want the Secretary to share
with us his thoughts about the path to continued coordination
on the international economic arena and the policies that can
ensure competitiveness for the United States in a world of
rising economic powers.
So, it's a great pleasure to have you here today, Mr.
Secretary, to consider these items. And I certainly look
forward to your testimony.
Senator Lugar.
OPENING STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA
Senator Lugar. Mr. Chairman, I join you in welcoming
Secretary Geithner and thank him for appearing again before the
Foreign Relations Committee.
The political upheaval in the Middle East, financial crises
in Europe, continuing global food insecurity, rising demand for
energy and other commodities; the increasing trade deficit with
China; and ballooning foreign ownership of our debt all have
implications for the livelihoods of Americans. Today we have
the opportunity to learn what the administration is doing to
address these global challenges and strengthen our economy.
Given global financial linkages, we cannot achieve a full
economic recovery in isolation from the rest of the world. This
is especially true with regard to trade policy. For example,
currently, the United States exports roughly 15 percent of our
corn production, 45 percent of our soybean production, and 25
percent of our pork production. Exports and investment growth
help to sustain high-paying jobs in both our farms and
factories.
One of the largest employers in Rushville, IN, builds
compressors for commercial refrigeration. Those compressors are
integrated into other products and then sold throughout the
world. They are prized over competing European and Asian
products in places as far flung as Iraq for their dependability
and superior customer service.
Yet few may recognize how the economic health of American
communities, large and small, depends on our ability to compete
for exports. China, Europe, and other competitors are working
aggressively to secure trade and investment partners. In our
hearing yesterday, Secretary of State Clinton twice repeated,
``We are in a competition for influence with China.'' This is
especially true with regard to penetration of foreign markets.
The Chinese see such linkages as essential to their economic
future.
With this in mind, I am especially concerned that the Obama
administration lacks a sufficient commitment to exports and
trade promotion. In the context of a $14 trillion national
debt, trade promotion should be near the top of our economic
agenda, because its job creating benefits occur without
expensive programs that add to the deficit.
I know Secretary Geithner and other officials understand
the importance of trade liberalization. I also recognize that
the administration can point to some ongoing trade initiatives.
But there is no indication that the President is even
considering elevating the type of bold trade vision that could
invigorate our economy and help us compete in world markets.
Although the President has committed to sending the trade
agreement with South Korea to Congress for its approval,
agreements with Colombia and Panama have languished, largely
because of opposition expressed to President Obama by United
States labor unions.
Delay of these agreements has already resulted in
significant loss of United States market share in Panama and
Colombia. In Panama, large-scale projects, such as the $5.25
billion Panama Canal expansion, the $1.5 billion Panama City
Metro, and hundreds of millions of dollars in highway expansion
contracts, have been awarded to non-American firms.
The United States recently lost its position as Colombia's
No. 1 agricultural supplier. Total United States agricultural
exports to Colombia decreased from $1.8 billion in 2008 to $827
million in 2010. United States market share is being lost to
China, Brazil, and other countries in Latin America that
benefit from trade accords with Colombia.
What is most troubling is that these agreements are the
low-hanging fruit of trade expansion opportunities. If the
United States cannot complete trade promotion agreements with
relatively small nations in our own hemisphere and quickly work
through the political issues associated with them, our ability
to execute a grander trade strategy is in serious doubt.
Even if issues over the Colombia and Panama Free Trade
Agreements were resolved, this would represent progress that is
far short of what is needed in a highly competitive world.
The President should be accelerating the priority of much
broader trade initiatives like the Trans-Pacific Partnership
and a revival of the Doha Round. If he does not commit the
prestige of his office to an aggressive and broad campaign to
open markets, he will be weakening chances for sustained
economic growth in this country.
A key test of administration resolve on trade will be the
President's upcoming trip to Brazil. President Obama should
propose that we initiate negotiations on a market access
agreement with MERCOSUL, the Southern Common Market, which is
led by Brazil. The export potential of such a landmark
agreement could create enormous job growth in the United States
and help solidify our political and strategic relations in
South America. In addition, the President should work toward
ratification of a bilateral tax treaty with Brazil that could
greatly expand our economic links with that country.
I thank the chairman for calling this timely hearing. I
very much appreciate conversations that I have enjoyed with
Secretary Geithner on global economic topics, as well as his
willingness to be here today and to give us his testimony.
I thank you, Mr. Chairman.
The Chairman. Well, thank you, Senator Lugar.
As always, very thoughtful comments, and I particularly
appreciate the comments you made about the trade issue, which
is something we need to get on; Congress needs to get that
done. We've got three agreements that are waiting for
ratification, and I think they are ripe, and hopefully we can
come together around them.
But, that said, Mr. Secretary, the floor is yours. We'll
put your full testimony in the record, as if read in full, if
you want, but suit yourself. And we look forward to your
comments.
Thank you.
STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY OF THE
TREASURY, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC
Secretary Geithner. Thank you, Mr. Chairman and Ranking
Member Lugar. And thanks for giving me a change to come and
speak to you today. And I very much appreciated your opening
statements, and look forward to a chance to discuss those
questions.
I want to start, just first, with a quick statement on
Libya. As you know the President, last Friday, took decisive
steps by issuing an executive order to freeze the assets of
Muammar Gaddafi and four of his children, as well as the assets
of the Government of Libya and its agencies, including the
central bank and the Libyan Investment Authority, which is its
sovereign wealth fund. And, thus far, we've found and seized
almost $32 billion in assets; $30 billion initially, and we
found another $1.9 just in the last couple days. And this is
the most effective, and the quickest and the most forceful, use
of our authorities under the Emergency Economic--International
Emergency Powers Act that we've ever done. And I want to just
emphasize our commitment to make sure that we're working with
countries around the world to help make sure this broader
effort has as much force as possible.
I want to outline, today, our priorities on the
international economic front. First and foremost, of course, is
to work to strengthen and sustain the global economic expansion
underway. And this is critically important to the United
States, because the stronger the world is, the stronger will be
our recovery here at home.
Now, the balance of evidence suggests that growth is
getting stronger, both in the United States and around the
world. The price of oil has risen, adding to the pressures
faced by consumers here and around the world. At this point,
however, the impact of higher present and predicted oil prices
are offset by other positive developments reinforcing growth
around the world. Underlying inflation in goods and services in
the United States is still low. And it's very important to note
that there is still considerable spare oil production capacity
globally. And the United States and the other major economic
economies possess substantial strategic reserves of oil. And
those reserves could be mobilized to help mitigate the impact
of a major supply disruption.
Food prices have also risen significantly, adding to the
incomes of farmers, but also having a serious impact on
inflation and living standards, particularly for the lowest
income groups in developing economies. An effective global
response to higher food prices, in low-income countries in
particular, requires increasing investments in agriculture in
those countries to help improve productivity in agriculture and
help improve the quality of infrastructure in those countries.
And this will require more support from the United States and
other countries through programs such as the Global Agriculture
and Food Security Program.
Now, in Europe, as you noted, Mr. Chairman, the leaders of
Europe are undertaking the very difficult task of designing a
financial mechanism to support very challenging financial and
fiscal reform efforts that are underway in several of those
economies. This endeavor is, in many ways, as important, as
difficult, as consequential, as complicated as the initial
moves to monitor a union. Europe is working to build more
effective institutions to discipline budget spending across the
continent and to create a more effective means of dealing with
problems with banks in the future. And they are making
progress. And it's important that they continue to make it
clear that they will do whatever is necessary to make sure that
the affected countries and their banks have the financing they
need to make these reforms work.
Emerging economies, like China, Brazil, and India, are
growing very rapidly. That growth is helping to support rapid
growth in U.S. exports, which, in turn, is raising income and
employment across the United States, in manufacturing, in high-
tech, and in agriculture.
China is now allowing its exchange rate to gradually
appreciate against the United States dollar. Since June of
2010, China has allowed its currency to appreciate against the
dollar at a pace of about 10 percent a year, in real terms.
Nevertheless, China's currency remains substantially
undervalued. And its real effective exchange rate, which is the
measure of its exchange against the value of the exchange rates
of all its trading partners, has not moved materially during
this period.
Now, looking beyond these immediate challenges and
opportunities, we're working to advance four critical policy
objectives globally.
First, we're working in the G20 to help build consensus on
long-term reforms that would provide the foundation for a more
balanced, more sustainable global economy. We've got a
framework for cooperation that includes movement to more
flexible exchange rates by emerging economies; a type of early
warning mechanism, to help reduce the risk that we see the
reemergence of large external trade imbalances; and help for
emerging economies to help manage the challenges that come with
large flows of capital.
A second priority: We're working very hard to build a more
stable international financial system, with better oversight of
the major global financial institutions, the major banks, and
the global financial markets. And here, of course, are
challenges to encourage the world to move to higher standards,
more conservative standards for capital and other things, but
with a level playing field, so that as we tighten standards
here, we don't just see the risk move outside the United States
to take advantage of lower standards in other countries.
Third, we're working to open markets overseas so that our
businesses can compete on a more level playing field there, as
well. As you know, the President's negotiated a very strong
trade agreement with Korea that will help create more
opportunity for American companies in what's the 12th largest
economy in the world, and support tens of thousands of new jobs
here in the United States. And, of course, we want to work with
Congress to move forward on that agreement. And we hope that
deal--approval of that deal to improve export growth will help
set a precedent, help pave the way for agreements with other
countries, including the agreements with Colombia and Panama.
Now, of course, finally, as you all understand, we have a
very strong national security interest, national economic
interest, in supporting growth and development in emerging
markets and developing economies. Developments in Egypt, of
course, underscore the stakes for the United States. As
Secretary Gates has observed, development and security are
inextricably linked in Egypt, Afghanistan, Pakistan, countries
around the world. Our investments in institutions, like the
World Bank, are among the most powerful and cost-effective ways
we have to promote U.S. interests, our economic interests, and
our security interests.
Our contributions to these institutions account for only 5
percent--5 percent of the entire U.S. foreign assistance
budget, but they mobilize funds that total more than one and a
half times the entire U.S. foreign assistance budget.
The financial support these institutions can provide comes
with tough conditions, conditions we could not impose on our
own, that support reforms that help us export more and create
more jobs in the United States. And it's worth emphasizing that
if we cede influence in these institutions, or if we deprive
them of resources, we will cede influence to China and other
countries on the global stage.
Many of you on this committee, after traveling to Africa,
to Asia, to Latin America, have expressed concern about the
dramatic expansion of commercial activity by China in other
countries. For many countries the only alternative to financing
from institutions like the World Bank is to turn to China.
Now, before I close out, I want to emphasize, as you did,
Mr. Chairman, that our ability to protect our national security
interests and to advance our economic interests around the
world depend, of course, on the strength of our economy at
home. This financial crisis caused enormous damage, not just to
the living standards of Americans, but to American credibility
around the world. And we are just now in the process of
repairing that damage, rebuilding confidence among the American
people, among investors, and governments around the world.
We have some way to go, however. And we need to be very
careful that we work to reinforce and not jeopardize that
improvement in confidence in the quality and care and prudence
and competence of American economic policy. And that requires a
relentless focus on the reforms and investments we need to
strengthen our competitiveness over the long run. And it
requires Washington to take the steps necessary to restore
fiscal responsibility.
Thank you very much. I look forward to answering your
questions.
[The prepared statement of Secretary Geithner follows:]
Prepared Statement of Secretary of the Treasury Timothy F. Geithner
Chairman Kerry, Ranking Member Lugar, members of the committee,
thank you for inviting me to testify.
You asked me to talk about the global economic outlook and how we
can advance U.S. economic interests, working through international
institutions such as the multilateral development banks.
The global economy is now expanding after the profound crisis of
the last 3 years, but the recovery is advancing at different speeds.
The IMF forecasts that emerging markets will grow by 6.5 percent this
year, while it expects growth in Europe and Japan to be 1.5 percent.
The U.S. recovery stands in between, with growth gathering momentum
and inflation risks modest, but with unemployment still unacceptably
high. Consumers and businesses are now expressing more optimism about
the future, suggesting momentum that will sustain growth in the coming
months. Private sector analysts have raised their near-term forecasts
and are projecting stronger growth in 2011 and 2012. However, we still
face very substantial economic challenges. Millions of Americans remain
out of work, and families across the country are still struggling to
make up for losses in their savings and in the value of their homes.
The global recovery faces several major challenges and risks in the
near term. A few observations on each:
First, we are witnessing historic changes in North Africa, and we
are engaging with the economic authorities in the region and with the
multilateral development banks to address pressing economic needs and
chart a future that better meets the economic as well as political
aspirations of the citizens in this region. Alongside the measures
announced by Secretary Clinton, we will work closely with the World
Bank, the African Development Bank and other governments to support
investments and economic reforms that will promote private-sector job
creation in North Africa.
Regarding Libya, last Friday, President Obama took decisive steps
to hold the Qadhafi regime accountable for its continued use of
violence against unarmed civilians and its human rights abuses and to
safeguard the assets of the people of Libya. The President issued an
Executive order freezing the assets of Muammar Qadhafi and four of his
children, as well as the Government of Libya and its agencies,
including the Central Bank of Libya and the Libyan Investment
Authority--the country's sovereign wealth fund. Thus far, at least $30
billion in Government of Libya assets under U.S. jurisdiction have been
frozen as a result of the Executive order issued by the President.
Under the International Emergency Powers Act, this is the largest
amount of assets frozen under any U.S. sanctions program to date.
Second, in Europe, leaders are undertaking the difficult task of
designing a financing mechanism that can help support the very
challenging, multiyear programs of fiscal and financial reform that are
underway in several of the member states. They are making progress. It
is important that European leaders continue to make clear that they
will do whatever necessary to make sure that the affected countries and
their banks have the financing they need to enable those programs to
succeed.
Third, the largest emerging market economies are facing the usual
pressures associated with strong growth. Inflation is accelerating. The
prospect of future growth is naturally attracting foreign investment,
putting upward pressure on exchange rates. Emerging market economies
with flexible exchange rates have seen substantial appreciation. The
upward pressure on those exchange rates is being accentuated by the
fact that other major emerging markets are holding their exchange rates
at undervalued levels and tightly limiting capital inflows, which
serves to exacerbate price pressures within their own economies and
shift the burden of adjustment to others.
Fourth, rising global commodity prices--including for food and
oil--are causing hardship in many parts of the world. The IMF estimates
that commodity prices, in the aggregate, increased 25 percent in 2010.
This is having a serious impact on inflation and the living standards
of the lowest income groups in emerging markets, where food and fuel
tend to comprise a larger share of consumption. In the United States,
rising gasoline prices have left consumers with less money to spend,
but underlying inflation across all goods and services is still modest.
Developments in the Middle East have generated concern about
potential disruption to the supply of oil, and this has put upward
pressure on oil prices. We are monitoring this situation closely. But
it is important to note that there is considerable spare oil production
capacity globally, and we and other major economies possess substantial
strategic reserves of oil. If necessary, those reserves could be
mobilized to help mitigate the effect of a severe, sustained supply
disruption.
An effective global response to higher food prices requires
increasing long-term investments in agriculture in low-income
countries, through mechanisms such as the Global Agriculture and Food
Security Program, the multilateral pillar of the President's Feed the
Future Initiative. This program is designed to raise agricultural
productivity and improve rural infrastructure to help farmers connect
to markets.
We also support measures to limit the potential for commodity
market abuse and price manipulation through increased transparency and
oversight of commodity markets and the associated derivatives markets.
And these pressures on global commodity prices will be reduced as the
rapidly growing emerging economies act to tighten policy.
Fifth, the durability of the expansion will depend in part on the
ability of advanced economies, including the United States, to deliver
credible multiyear reforms to restore fiscal sustainability. G20
leaders committed in Toronto last June to halve fiscal deficits by 2013
and to stabilize debt-to-GDP ratios by 2016.
Beyond these immediate challenges, we are working to make global
growth more sustainable in the future, to build the foundations of a
more stable financial system, to expand opportunities for trade, and to
provide the support for reforms in developing and emerging economies
that contribute to our own economic and security interests.
First, we are pursuing a number of reforms to the international
monetary system. The world needs a better set of incentives for
governments to promote external sustainability and reduce the risk of
the reemergence of large trade and current account imbalances. In the
G20, we are moving gradually to build consensus on ways to measure
external imbalances and identify their causes. The IMF will have a key
role in this process, providing independent and public assessments of
the impact of each country's policies on global economic stability and
growth.
A central component of this effort has to be the development of
stronger norms for exchange rate policies that will help accommodate
changes in the global economy. There is broad consensus that the major
economies--not just Europe, Japan, and the United States, but also the
large emerging economies--need to allow their exchange rates to adjust
in response to market forces.
Our bilateral and multilateral discussions with China have already
yielded some progress. Since June 2010, China's authorities have
allowed their currency to appreciate against the dollar at a pace of
about 6 percent a year in nominal terms, and more than 10 percent a
year in real terms, given faster inflation in China than in the United
States.
Nonetheless, China's currency remains substantially undervalued,
and its real effective exchange rate--the best measure to judge its
currency against all of its trading partners--has not moved much in
this latest period of exchange rate reform.
Related to this, we need a stronger consensus on policies that can
help emerging economies manage the risks that can come with large flows
of capital. These economies have considerable investment needs, and
many are seeing substantial inflows of foreign capital.
The challenge is to reduce the risk that these flows contribute to
excess growth in credit or asset prices and leave the domestic
financial system vulnerable to exchange rate risk. This requires
carefully designed prudential measures in the financial sector, as a
complement to the classic mix of monetary and fiscal restraint and
flexibility in the nominal exchange rate.
Second, a more stable international monetary system requires
stronger oversight of the major global financial institutions and
markets. The United States has demonstrated its leadership in this
effort with the enactment of the Dodd-Frank Act and its financial
reform last year. We have agreed with our international counterparts to
impose tougher restraints on financial institutions' risk taking and
leverage, to bring oversight to the derivatives markets, and to improve
our capacity to contain the damage caused by the failure of large
financial institutions.
This is a complicated undertaking, and we need to be very careful
to make sure we create a more level playing field across countries so
that financial activity does not migrate to jurisdictions where
standards are weaker or less rigorously applied. We also need to
provide participants with as much clarity as we can about the reforms
so that the markets have time and opportunity to adjust to them.
Third, to promote growth at home we must continue to open markets
overseas so that U.S. businesses can compete on a level playing field
and U.S. workers can prosper. Working with Congress and with a broad
range of stakeholders, we are pursuing our trade agenda on three
fronts--multilaterally through the Doha Round, regionally through the
innovative Trans-Pacific Partnership negotiations, and bilaterally
through free trade agreements (FTAs) with Korea, Colombia, and Panama.
Our goal is to conclude and implement enforceable, high-standard
agreements that directly benefit our workers, our farmers, and our
businesses.
Our FTA with Korea does just that. It is a good deal. It will
enhance the competitiveness of U.S. businesses in the world's 12th-
largest economy. It will support at least 70,000 American jobs. It will
add an estimated $10-12 billion to U.S. GDP, increase goods exports to
Korea by $10-11 billion annually, and provide access to Korea's growing
$560 billion services market. It sends a strong signal of U.S.
leadership and commitment to the East Asian region. And it serves our
national security interests as the United States and Korea work
together to ensure peace and security in the region.
The administration intends to submit the agreement to Congress soon
for its consideration and will work with you to get it implemented. If
enacted quickly, this agreement can have an immediate impact on opening
markets, stimulating U.S. growth, and supporting jobs here at home. The
President also directed his team to address the outstanding issues
regarding the Colombia and Panama FTAs with the objective of bringing
those agreements to Congress for consideration as soon as the issues
are resolved.
Fourth, we must work to support economic reforms in emerging
markets and developing economies, which contribute not only to our own
long-term economic prosperity but also to our national security. As
Secretary Gates has observed, ``Development and security are
inextricably linked.''
Our investments in the multilateral development banks (MDBs) are a
critical and cost-effective component of the United States global
economic leadership. Our leadership in the MDBs helps ensure that these
institutions support vital U.S. interests around the world--promoting
our national security objectives, preventing and mitigating financial
instability, creating markets for clean energy technology, and
contributing to economic growth here at home. Through their use of open
and fair bidding processes for procurement and investment
opportunities, our investments in the MDBs have a direct impact on jobs
here at home. In exchange for our financial commitment, we leverage our
leadership to advance policy reforms that increase the effectiveness of
the MDBs themselves and that fight corruption and ensure best practices
on the ground. In Africa, for instance, the alternative to MDB
financing is low-cost financing from China--presenting recipient
nations with the choice between MDB funding that makes hard asks of
them for transparency and reform, and Chinese funding that comes with
few conditions except for the enhanced political influence that flows
to the lender.
Our investments must also include supporting a global solution to
the long-term security risks posed by climate change through reduced
emissions, increased resilience, and prevention of economic losses from
climate-related disasters. Population displacement, declines in global
food supply, and major water shortages are all expensive destabilizing
long-term global impacts that can be cost-effectively addressed now
through prudent policies and investments by all countries.
The MDBs leverage the maximum impact for every U.S. taxpayer
dollar. We expect that the MDBs cumulatively will make $95 billion in
financing commitments globally in 2012. In comparison, the entire U.S.
foreign assistance budget request is $61 billion for FY 2012, of which
the Treasury Department has requested $3.3 billion for the MDBs. In
other words, Treasury's $3.3 billion request leverages $95 billion in
MDB activity supportive of U.S. global interests, or over 50 percent
more than the U.S. Government's international affairs budget.
The cuts to Treasury's international programs that we saw in the
House legislation would mark an unprecedented abandonment of U.S.
commitments to institutions that play a critical role in promoting our
national security and economic interests around the world. With these
cuts, we would effectively be ceding the leadership and influence we
have valued in vital institutions like the World Bank for more than 60
years, in Republican and Democratic administrations alike. And we would
be doing it at the very time our leadership matters most.
Ultimately, our capacity to retain our global economic leadership
rests on the strength and stability of the U.S. economy. Most of the
key reforms we need to build a more robust and resilient global economy
are in our own hands.
The President has outlined a broad strategy to help strengthen
economic growth with investments in education, innovation, and the
Nation's infrastructure. Alongside those investments, we must reform
the Nation's finances to restore fiscal responsibility. Our deficits
are too high and they are unsustainable. Left unaddressed, these
deficits will hurt economic growth and make us weaker as a nation.
The President's Budget presents a detailed plan to reduce spending
and deficits, cutting the inherited deficit in half as a share of the
economy by the end of the President's first term. The budget includes
proposals that will shrink deficits by more than $1 trillion over the
next decade, essentially stabilizing the national debt held by the
public as a share of the economy starting in 2013.
Meaningful deficit reduction requires serious cuts to government
spending. The budget proposes a 5-year freeze of nonsecurity
discretionary spending at its 2010 nominal level, reducing the deficit
by more than $400 billion over the next decade, and bringing the level
of nonsecurity discretionary spending to its lowest share of our
economy since the Eisenhower administration.
But it is not enough to spend less; government must also spend more
wisely. The President's Budget sharply restrains overall spending,
while also investing in important areas where the government has a
clear role to provide public goods that promote future economic growth
and competitiveness: education, innovation, and infrastructure.
An educated and skilled workforce is critical for the United
States to compete in the global economy. The need for
additional investment in education is striking: America has
fallen to ninth among advanced countries in the proportion of
young people with a college degree. The budget proposes
targeted investments in education to help us regain our
competitive edge.
Investments in research and development (R&D) produce the
technological advancements that contribute to productivity
growth and improvements in U.S. living standards. The President
believes that government has an important role to play in
promoting technological progress, just as it has historically,
and the budget includes R&D investments for this year to
support basic research and clean energy.
Infrastructure is critical to economic growth and
competitiveness. In addition to a $50 billion up-front
investment in transportation infrastructure to create jobs in
occupations that have been hit hard by the recession, the
budget lays out a long-term plan for sustained, targeted
investments in the most effective infrastructure programs and
projects.
The President's plan provides a balanced strategy for reducing
spending and reducing future deficits while preserving the room for the
investments that are critical for future economic growth.
These are the most important steps we can take today to ensure that
the U.S. economy remains strong and vital in the years and decades
ahead. Fundamentally, a robust economy at home is the single most
important contribution we can make to continued U.S. economic
leadership and to the global economy as a whole.
The Chairman. Well, we look forward to having a good
dialogue with you today, and I thank you for those opening
comments.
As you know, the House budget, passed the other day,
significantly cuts the funding for the Department of Treasury's
international affairs programs, including the funding of the
shares in the Asia Development Bank. I believe that, unlike
other multilateral programs that the United States funds from a
year-to-year basis, that the shares, the ability of the United
States to participate in those shares, is literally a one-time
opportunity: use them or lose them. So, if we don't subscribe
to these shares now in the budget, it's my understanding we
lose them for good. And then China will, by default, end up as
a larger shareholder than the United States for the first time.
Is that accurate?
Secretary Geithner. Yes. It's very important to underscore
that if we are unable to deliver on the commitments we made as
a country, made, of course, with close consultation of Members
of Congress, then we face the following types of consequences
across these institutions. And it's different across the
institutions. In Asia, it means that we fall even further
behind. I think now we're only sixth, in terms of importance
and as we fall further behind, we cede more influence with
China, we lose our capacity to veto core decisions. That would
be hugely damaging to the United States.
But, you need to look beyond that to the costs of further
erosion in our position in the World Bank or of stopping the
Inter-American Development Bank from going forward. And the
ranking member referred to the deep economic stake we have in
Latin America today as their economies expand. Huge economic
stake for us in being part of that expansion.
In many way, these institutions are as effective--they're,
in some ways, more effective than what we do on the trade side.
Some of the most important trade reforms that we've ever seen
across the emerging economies that reduced trade barriers were
put in place as part of World Bank reform programs. So, if
these institutions are not able to operate and we do not have
the capacity, or lose the capacity, to influence what they do,
we face enormous risk, not just in countries like Afghanistan
and Pakistan, where we have American lives at stake directly,
but around the world, where we have many important interests at
stake.
So, we have in the past, and we can today, find a way to
restore a gravity to our fiscal position, reduce our long-term
deficits, and do that in a way that preserves the capacity to
maintain investments of the institutions that have enormous
returns.
The Chairman. Mr. Secretary, let me just share with my
colleagues that this relationship that you've just described
the importance of was addressed by General Petraeus, who
praised the United States, the efforts of the Bank, with
respect to the Afghanistan/Pakistan peace. And he said the
following, ``Strong partnership with the Asian Development Bank
is part of our overall United States purpose and goals in these
areas of critical importance.'' Can I ask you just to share
with us, What are the national security implications of the
other development banks commitments that we need to make, in
terms of the funding for the fiscal year 2012 budget, like the
World Bank and so forth? Could you speak to that, about----
Secretary Geithner. Absolutely. I think--you know, I want
to be careful how I say this--but, I think that it--this is
going to be generally true across these specific cases--but,
whether you look at Afghanistan or Pakistan or looking forward
to Egypt, where we hope to help aid this transition and the
reforms that'll provide more opportunity to those citizens,
throughout Africa and in almost all regions of the world, these
institutions--the World Bank and the Multilateral Development
Banks, the regional banks--are, in most cases, the largest
source of assistance available.
And it's, of course, not just the financial resources, it's
the conditions that come with those resources. And these are
conditions that not just try to reduce corruption, they're
conditions not just to improve transparency, quality of
governance, or have better environmental safeguards for
extractive industries; these are reforms that help open those
economies up, strengthen property rights, make it more likely
that their private sectors can flourish, opportunity spreads.
And our military leaders have spoken eloquently about the
connection to our security interests that these institutions
provide in those countries. And without them, we would have a
much-diminished capacity to help make sure that there is
development alongside our efforts to bring more security in
those countries.
So, it would be deeply damaging to our own interests
directly, where we have lives at risk, and to our long-term
interests, not just to the moral imperative of trying to make
sure that, as a nation, we're making sure that we provide more
support against infectious diseases, that we're doing a better
job of alleviating acute poverty in those countries; enormously
important strategic, economic, and moral imperative. And these
institutions are, again, the most effective means we have to
leverage resources with conditions that work for our interests.
The Chairman. Mr. Secretary, I met, today, with your
nominee to succeed Stuart Levey, David Cohen. And let me just
compliment Mr. Levey's tenure, which I think has been
exceptional. And it's one of the most important tools. We
worked in developing that whole concept. I remember, back when
I was on the Banking Committee, and we were looking at the
difficulties of the flow of money and the lack of transparency
and so forth.
I think your division has done an outstanding job of
helping to track money and understand where it is, the mere
fact that you've been able, so quickly, to identify Gaddafi
assets or Mubarak assets. Incidentally, staggering sums, by any
standard. To learn that there are $31 billion, or something, in
the name Gaddafi in various parts of the world, including in
our country, I think a lot of people are amazed by that.
It struck me, in the conversation I had with his hopeful
successor, David Cohen, that perhaps that's an area where we
even need to do more. I've been struck, for a number of years--
a number of years ago, I did a major investigation on money
laundering, money trafficking, et cetera--it's a scourge to all
of us, in terms of good governance and the standards by which
we operate. And, to the degree that people have places to run
off and hide money in one tax dodge or another, they undermine
the entire democratic system, or even governance system, of a
country; they leave a greater burden to people who don't have
those opportunities, and it lends itself to all kind of--other
kinds of potentially dangerous activities: the support of
Lashkar-e-Taiba, al-Qaeda--run the gamut. And these are the
ways in which they get their weapons, the way they move money,
and so forth.
I wonder if, in light of that reality, and still the
existence of too many of these dodges, do we need a greater
commitment? Do we need more super computer capacity, more
ability to have accountability for the transparency and flow of
these kinds of funds? And wouldn't that aid us, really
significantly even, in knowing ahead of time what kinds of
potential damaging activities are being engaged in?
Secretary Geithner. Mr. Chairman, I welcome your attention
to this issue. And I could not underscore more the importance
of making sure we preserve and sustain a very substantial
capacity to use--to marry intelligence with effective
sanctions, to prevent people from accessing the finance they
need to advance a nuclear program, to finance terrorist
activities, or to finance the whole range of illicit activities
that threaten the fabric of our societies. And this is a
remarkably effective program, and we are going to make sure we
do everything we can to maximize the tools we have to pursue
this.
I would say that, as you know more than anybody,
overwhelmingly, the effectiveness of our efforts depends on our
ability to get other countries to move with us, because it
requires a relentless focus on expanding the net on tracking
down where the money moves, when we're effective. And one of
the most important things we've been able to do is to encourage
countries to adopt similar regimes to ours and to move with us
on going after these flows of funds as quickly as possible.
But, I welcome your support to that. And we'd be happy to talk
more about what we need to do in the future.
The Chairman. Well, I look forward to that. And we, very
much, look forward to working with you. And I hope that the
Congress will not wind up being penny wise and pound foolish in
this process.
Senator Lugar.
Senator Lugar. Secretary Geithner, I mentioned in my
opening statement the President's upcoming trip to Brazil. The
unfortunate fact is that Chinese exports to Brazil have
increased significantly, and thus, China has overtaken the
United States as Brazil's leading trading partner. Now, my
understanding is the new President of Brazil, President
Rousseff, has signaled that she wants to work much more closely
with the United States. Maybe some feel she's more enthusiastic
than her predecessor. With these facts in mind, what are you
advising the President with regard to this trip to Brazil? How
can we forge a significantly better relationship with this very
important friend?
Secretary Geithner. Well, you are absolutely right about
the importance of this and the opportunity we have now with the
new leadership in Brazil. And I was in Brasilia, just a few
weeks ago, and met with the percent, and she made it clear to
the United States, to us, that she is looking for ways to build
a closer relationship, not just economically, but
strategically; and we want to take advantage of that. And we
see enormous opportunity, in a whole range of economic issues,
to build a closer relationship. It's obviously true in energy,
there are some issues on the tax side, that you referred to,
where we may be able to make some progress. They are eager for
U.S. investment, U.S. technology, U.S. capital, and we want to
take advantage of that. So, we're going to be--that's what the
President's going to be talking with, there. And you're right
to remind the Americans of the importance of that relationship.
And we have a lot at stake.
Senator Lugar. Well, I look forward to your report back to
us on steps we might take to work with the administration in
strengthening this relationship after the President returns.
This is very critical given the new President and the
opportunity to forge a stronger relationship.
Now, regarding Colombia, I received a call, unexpectedly,
from the President of Colombia, 2 weeks ago. I suspect he's
been calling a number of people--pleading with us to move on
with our pending bilateral free trade agreement. And my
understanding is that a trade representative mission went to
Colombia recently, and that one may be going to Panama soon.
But, what are the barriers to progress on this issue? Why
doesn't this move?
Secretary Geithner. Senator, I want to just begin by
emphasizing something you said in your opening statement, which
is that unless we are able, as a country, to pass trade
agreements into law that we've committed to in the past,
agreements that work for American companies and American
workers, then we will be unable to make progress on things
where we have even greater interest. For example you referred
to the Trans-Pacific Partnership, with the Doha Round. The
world looks at us and they've seen us unable or unwilling to
legislate these agreements, and that makes them reluctant to
move with us on those other areas. So, a necessary condition
for making progress in Asia and Latin America, in the most
rapidly growing parts of the world, is to demonstrate that
we're able to move these agreements forward.
Now, as you know, we have a very good Korea Agreement we
hope Congress will act on soon. And we are working very hard to
put in place the types of changes and commitments we think
would make it possible to move forward on Colombia and Panama.
And the President believes it's important for us to do that.
And, as you referred to, we're in very close consultation now,
with the Government of Colombia, on ways that might improve the
odds we can bring that to Congress to consider.
Senator Lugar. Are we in close contact with the United
States labor unions that have blocked this for years?
Secretary Geithner. Of course. Of course, because we want
to make sure that, when we bring this to the Congress, that we
can get it done. And so, we are doing what we normally do in
this context, which is to make sure that we have agreements
that will have broad support from all the affected parties, and
could work. So, we're talking to the Government of Colombia to
ways we can move this forward. And again, we're hopeful we can
come to you and find a way to do that.
Senator Lugar. Well, I'm very hopeful. Looking at just one
practical problem the current situations entails from the point
of view of my Indiana constituents, even exporting soybeans to
Brazil or Colombia is inhibited. There is a great market for
soybeans right now----
Secretary Geithner. Right.
Senator Lugar [continuing]. But if you can't export
American goods under current provisions, then it's not very
helpful to American farmers.
Secretary Geithner. And again, the longer we wait--you said
it exactly right--the longer we wait, we just lose more
business. Other countries come in and they take that business
from the United States. It makes no sense for us, as a country.
Senator Lugar. You mentioned in your opening statement
United States efforts to freeze the assets of Muammar Gaddafi
and his family, along with those of the Goverment of Libya.
Could you explain to us and to the American people, what
happens to this money? In other words, these bank accounts are
there and somebody's frozen the assets; but, what happens to
the assets themselves?
Secretary Geithner. We hold them and prevent any transfer
of funds from those accounts until we have a resolution of the
underlying problems that gave rise to the act, to the seizure.
So, they're frozen, in the purest sense of the word.
Senator Lugar. Now, for the sake of argument, say the
United States was to freeze the assets of former Egyptian
President Mubarak and his associates. Meanwhile, let's say that
the Egyptian economy continues to have problems, and that the
income coming into the country continues to sink as world food
prices rise. Such a state of affairs would be especially
difficult for Egypt, as they import 60 percent of their wheat
from the United States, for example, and it's twice as
expensive as it was last year. So, here you have people who are
very hungry in Egypt, and they say, ``Surely there are tens of
billions of dollars out there, albeit acquired in a strange way
by the former government, but regardless this ought to be
Egyptian money. There are human beings that are suffering.''
Now, what sort of action do we take at this point?
Secretary Geithner. Well, you're exactly right. The purpose
of this, of course, is to make sure those assets can be
preserved for the benefit of the people and the legitimate
government of the country.
Now, it's important to recognize, as a complement to those
efforts, the World Bank and the African Development Bank and
other institutions have substantial resources available and in
the pipeline to try to make sure they can help the government
through the transition and help make sure, again, these
governments are pursing reforms that expand opportunity for
their citizens. So, we have other tools available quickly that
can be deployed to help.
Senator Lugar. Let me ask one final question.
As a part of the financial reform bill, a very small
amendment was included, called the Cardin-Lugar amendment,
after my distinguished friend, Senator Cardin, of this
committee. And it's created quite a stir, because it requires
American companies and financial institutions to disclose their
transactions with governments who have sometimes failed to
exercise transparency with regard to their revenue from the
sale of oil, gas, and minerals.
Now, there is some backlash from American oil firms, who
say, ``Well, that's unfair. After all, those that are playing
the game out there are bribing the devil out of these
leaders.'' And Americans are not saying we want the same
privilege, but they're just saying we're at a disadvantage by
being so transparent. Others are ecstatic that there finally
might be some light shed of what has been a terrible
international scandal. Do you have any insight as to what is
going on out there? Or any comment about this?
Secretary Geithner. Well, I'm a long supporter of that
specific initiative, and I think it has a very powerful effect,
again, on, not just improving transparency about the resources
these countries have available, but in improving the odds
they're used for the benefit of their people. Now, you're right
to say that you want this to be done on a global scale. And
again, I just want emphasize again, because you do have the
responsibility of authorizing our commitments to these
multilateral development banks, this is exactly the types of
reforms that these banks are able to bring about. And that
helps to make sure that our efforts, alone, are complemented by
a global effort that can help bring about reforms.
Now, I commend you very much for that initiative. I think
it's enormously promising. I'd be happy to try to give you more
details on what we think is happening on the ground, in
response.
Senator Lugar. Yes. Please keep tracing it for us, if you
will.
Thank you.
The Chairman. Thank you, Senator Lugar.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Secretary, thank you for your service. I think you've
done an extraordinary job in one of the most difficult periods
of time to be the Treasury Secretary, so I appreciate that.
Having said that, let me ask you about an issue that
concerns me. One of the themes of this hearing is addressing
threats to our economic recovery. And, in that context, I think
we have to consider China's continued undervaluation of its
currency and the impact it has on our economy, which is
particularly important as we seek to double our exports by
2015.
Now, I know that the Department, last month, issued a
report that basically said China does not qualify as a currency
manipulator because it had permitted some appreciation of the
renminbi. But, it's also interesting to read, in that same
report, the following, ``A renminbi that is below its
equilibrium value decreases the purchasing power of China's
consumers. Underevaluation increases the pricetag on items such
as imported food, gasoline, new homes built with imported
materials, a foreign automobile; it encourages Chinese firms to
produce for export markets and cater to the preferences of
foreign rather than domestic consumers, placing an additional
damper on the growth of domestic demands.''
China has largely recovered from the global financial
crisis. It expanded its economy by 10.3 percent. However, we're
still struggling here in the United States.
In the Banking Committee, we raised this question with you.
I want to raise it here again, because it seems to me, that in
addition to market access questions, United States firms are at
a price disadvantage because of China's currency policy. Is it
going to take legislation from the Congress to get us to where
we need to be? Because, I think the Chinese have visited Texas,
and learned the Texas two-step--one step forward and two steps
back.
Secretary Geithner. Senator, this is a very important issue
to us. And, of course, as you quoted in your remarks, it's
essential for China that they move, because if they do not
move, they're going to face the risk of much more rapid
inflation, much more risk of future financial crises. And
that's why they're beginning to adjust now. They have not moved
that far yet, but if they were going to continue on the current
pace, which I expect they will, in real terms against the
dollar, the currency's now moving at an annual rate of about 10
percent a year.
And the reason why that's very important is that companies,
of course, have to look forward, they have to look ahead as
they make investments; they decide where to build their
factory, where to buy from. And that competitive landscape is
now moving in our direction definitively. And businesses around
the world can look at China now. They see rising prices, rising
wages, rising costs of doing business. And, with the currency
moving, both in nonreal terms and real terms, it'll shift the
playing field in our direction.
Now, still undervalued substantially. They have not moved
very much yet. They're really only moving against the dollar,
but, of course, we care principally about the dollar. And we
want this to be sustained over time. And we are going to
continue to use every tool of persuasion we have, directly and
multilaterally, to encourage them to move more quickly.
But, it's going to happen. It's inevitable it's going to
happen. And--because, again, if it--if they don't continue to
move--well, let me say it differently. It's either going to
happen through more rapid inflation, in which case, in real
terms, it's still moving in our direction, or it's going to
happen because the exchange rate appreciates more rapidly. But,
the real annual rate of appreciation against the dollar now is
north of 10 percent a year. And if that were sustained, again,
that's a huge shift over time.
Senator Menendez. But, what if, for argument's sake, your
expectation that they will continue to move in this direction
isn't realized?
Secretary Geithner. Well, that would be of enormous concern
to us and, I think, fundamentally unattainable for them. But,
let's just go through that thought experiment.
If they slow the pace of appreciation against the dollar,
inflation is still running substantially above inflation in the
United States, two-some--by some measures, three times the rate
of growth in the United States. So, in real terms, the
competitive landscape is still shifting in our direction. And
the risk for them, if they slowed the pace of appreciation, is
that inflation will accelerate further. That's why it's
inevitable that they continue to move. And, of course, we want
them to move as quickly as possible.
Senator Menendez. Well, I would prefer, both for their
interest and ours that they move more quickly, because it will
result, here at home, in more jobs, and that's what this is all
about.
Secretary Geithner. You're exactly right.
Senator Menendez. Taking China as an example, we continue
to face overseas challenges that would undermine the value of
United States intellectual property, at the expense of United
States innovation and jobs, which is a clear threat to
President's call, in his State of the Union, to grow innovation
here at home. Given the fact that the Trans-Pacific Partnership
is being billed as a regional platform that could potentially
expand to include China and India, why would the United States
sign on to an agreement that would potentially lower IP
standards for the very industries that are at the core of our
community and that we want to ensure have the exportabilities
that would create jobs here at home? What is the administration
going to do to ensure that that Trans-Pacific Partnership
builds on the Corus agreement and provides the highest IP
standards?
Secretary Geithner. Look--and you're raising an enormously
important issue, and you're absolutely right that we're doing
agreements like this, that convey benefits to the participants,
we want to make sure that they contain the highest possible
standards for, not just the market access we get, but for
protection of our intellectual property. So, absolutely, we
share that objective. And we would want to make sure that any
participant is held to the highest standards for protection.
And we are working very, very hard to get China to
strengthen the protections they provide to American innovators.
And we're making a little progress, but not nearly enough yet.
And we need to push very hard on them and others to make sure
that we're getting the same protections that we get in lots of
other countries.
Senator Menendez. Well, I hope that we will take a very
strong position, including on pharmaceuticals, for example, on
this question of intellectual property rights, because
otherwise our export initiatives are going to be undermined
dramatically.
Last, looking at China as it relates to Latin America, it
is negotiating agreements in Latin America to increase its
development fund in Venezuela to $12 billion, to fund $1
billion for hydroelectric plants in Ecuador, to provide
Argentina access to $10 billion in Chinese currency, and to
lend Brazil $10 billion for its national oil company. Right
now, it's the No. 1 trade partner with Argentina, Brazil,
Chile, and Peru, in a hemisphere that we have so much interest
in. We had the Secretary here the other day. What can we do to
provide, in that context, American companies with a competitive
advantage in the hemisphere?
Secretary Geithner. You've got to start with three simple
things that we know how to do. Where we have the chance to
negotiate trade agreements that are in our interest, have
strong protections for American companies and workers, we need
to negotiate them and pass them. We need to make sure that we
have the capacity to--and we do--the will and the capacity to
match countries that provide export credit, to support their
exports in those countries that violate the basic international
commitments, which we do and we will. And it's very important
to emphasize that we need to make sure that we have the
capacity to make it possible for institutions, like the World
Bank or like the IDB, to play a major role in financing
infrastructure and other types to development initiatives in
those countries. Because, again, those come with conditions
that make sure there's a level playing field for everybody.
If we're unable to do those three things--trade agreements,
strong Ex-Im capacity, and active role for the MDBs--we will
lose influence in those regions. And there is no reason for
that to happen. It would be very enormously damaging to us.
Now, these countries, of course, are deeply interested in
strengthening ties with the United States, but we need to
make--we need to give them--we need to make sure that we make
it easier and more compelling for them to do that so they don't
turn to those who are, well, I'll say it starkly, throwing
money at them.
Senator Menendez. Thanks. We look forward to working with
you on that.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Corker.
Senator Corker. Thank you, Mr. Chairman.
And, Mr. Secretary, welcome back. It's good to see you. I
know you've been doing a lot of work around the world, and I
know we have a lot of challenges in a volatile environment.
And I thank the Chairman for having this committee meeting.
It seems to me, in spite of all this volatility and the
many challenges that we have--and you've certainly referenced
many of those--the greatest challenge that we have to our
country is right here. And it's our inability to come together
and solve our budgetary problems. Would you agree that that
probably is a greatest of threat to our economic stability, our
financial stability, our national security, as Admiral Mullen
said in the last couple of weeks?
Secretary Geithner. I would say, overwhelmingly, the
greatest challenge we have is to make sure we're strengthening
this recovery. And, of course, as part of that, a necessary
condition for doing that--but it's not the only condition--is
to find a way to come together, bipartisan basis, and lock in
reforms that'll reduce our long-term deficits over time. If
we're unable to do that, then future growth will be weaker.
But, we have to make sure that we're focused on more job
growth, more rapid economic growth, investments that are
critical to our long-term competitiveness, as we find
consensus, on a bipartisan basis, to reduce our long-term
deficits.
Senator Corker. Well, I'll look forward to talking to you
more about that in the future. And I know, in any of these
kinds of discussions, you're certainly going to be in the
middle of that.
I will say that I think there's a lot work taking place.
Again, I look across the dais and know there's numbers of
people working in various groups to try to solve this problem.
The administration has not quite yet come to the table as a
full partner. And I hope the sign that Joe Biden's going to be
working with us is a first step. But, I would just say that,
you know, of all the things we've talked about, this is the
issue of the day. And I certainly hope, soon, there's going to
be some leadership--real leadership from the White House. I say
that, not critically. I say that it's the only thing that's
going to cause us, of an issue of this size, to really solve
it.
Secretary Geithner. Well, we absolutely recognize, and the
President recognizes--and as you know, we're beginning this
process today--that we have to be part of the process. We, of
course, like you to solve it on terms that make sense for the
country, but we expect that we need to be a part of that
process. And we will be.
Senator Corker. Yes.
There's a lot of discussions about the attractiveness of
the dollar as reserve currency. You know, a lot of discussions
around the world. What's your sense of that attractiveness, or
the loss of attractiveness, of the U.S. dollar being a reserve
currency?
Secretary Geithner. I see no erosion in that, and no
material risk to erosion in that. Unless, of course, over a
long period of time we are unable, as a country, to put in
place reforms, not just on the fiscal side, but more generally,
that sustain confidence in American financial leadership.
That's the only risk to the role of the dollar.
There is no risk to the dollar's role that we do not
completely control, in some sense. And, of course, although, by
all measures, there's very substantial confidence around the
world in the strength, security, liquidity of U.S. financial
assets and the dollar, we have to make sure we work to earn
that over time. It's not something we can count on. It's
something we have to work to earn. And, critically, over time,
it'll depend on, as it has in the past, on us demonstrating
that when we have a problem, we're going to act to fix it.
Senator Corker. You know, leaders of France and other
places, at G20 meetings, are kind of pounding their chest about
creating another type of reserve currency. Do you think that's
more rhetorical, or do you think there's really substance
behind that?
Secretary Geithner. Well again, there is, I think, no
realistic process--prospect of, for example----
Senator Corker. SDRs.
Secretary Geithner [continuing]. Using the SDR as a role to
replace that. It--again, I think, no realistic prospect of that
happening. But, there is actually--beneath that rhetoric you
referred to, there actually is a lot of consensus on things
like the importance of countries like China moving to a more
flexible exchange rate, of trying to make sure we reduce the
risks that you see these large imbalances build up in the
future. And I think those things are very promising, and they
are a necessary condition for a more stable international
financial system.
Senator Corker. You know, you're--the Secretary before you,
a friend of yours, pushed China to consume more at a time when
our American consumers were consuming too much, of course.
You're doing the same thing. How do you go about, with a
country like China, trying to rebalance? I know you've talked
about that a great deal in other forums. How do you cause that
rebalancing really to happen, other than just talking about it?
Secretary Geithner. Well, what we've try to do is to make
sure that China and other countries understand that we are
going to change how we grow, as a country. We're not going base
future growth of the United States on consumption fueled by
borrowing from other countries. Our growth in the United States
is going to come much more from investment and from exports,
not from unsustainable financing of housing booms, excess
consumption.
And that changes the reality those countries face. And they
understand that probably because they're much larger as a share
of the world economy now, China can no longer depend on demand
from the United States to consumption being such a substantial
contributor to growth. So, they have no alternative but to
shift their growth strategies to a growth strategy that relies
more on domestic demand. They recognize that imperative, and
they're moving that direction. But, it can't happen, unless
they let their exchange rate move, too. Because if they don't
let the exchange rate move, the exchange rate will work against
that imperative to rebalancing.
So, the--and, you know, of course, it's not just China. It
requires a bunch of other countries around the world who have
been--traditionally run large surpluses--to make those same
changes. And again, I think we're making some progress in
underscoring that reality. And that reality will force a
judgment, in their interest, that they have to put in place
reforms that'll help make that happen.
Senator Corker. Dodd-Frank passed this last year, and I
know you were highly involved in that. It's a big bill with a
lot of pages and a lot of rules that are being generated.
Secretary Geithner. A lot of Senator Corker in that bill,
too.
Senator Corker. Yes. Not enough.
Secretary Geithner. It seems like a lot. [Laughter.]
Senator Corker. Not enough. But I appreciate the small
involvement.
As you--now, any piece of legislation, no matter who passed
it, who led it, who was involved in it--any piece of
legislation this sweeping and this large has some unintended
consequences or things don't work out exactly the way you
think. Are there provisions in the bill that you've already
seen that might be making us less competitive in other markets?
Secretary Geithner. No, not at this stage.
You're absolutely right that there are some things,
technically, that, over time, you might want to adjust. But, I
have not seen any risk yet in the design of the overall
architecture of that, that would create a risk of us losing
share, losing competitiveness to other countries.
Now, in part because we've been very successful in getting
Europe, in particular, to adopt a very similar framework of
reforms--for example, in derivatives. Now, they're not
completely aligned. And we're working very closely with them to
make sure that, where they've got a slightly different model
with the risk of slightly lower standard, that we encourage
them to come to our standard. And that's going to take a fair
amount of time.
But, I'll give you an example. You know, we negotiated
these new international capital rules, the Fed did, and the
banking supervisors, last fall. And those raised capital
requirements, necessarily, quite substantially, so we're
reducing risk. And that's a global agreement with a simple
measurable set of numbers so that we can make sure they're
enforced evenly across countries.
Senator Corker. Let me just ask one last brief question. I
have a number of them, but I know my time is about up. We talk
a lot about food prices, I know people are concerned about
around the world, as creating havoc in some places. But, when
you look at the demographics of the world and the population
growth that's taking place, and where it's taking place, and
knowing that those standards of livings in the countries that
are growing rapidly is rising. The fact is that there's going
to be tremendous pressure on food prices, ad infinitum. Would
you agree or disagree?
Secretary Geithner. I agree with that. I think that right
now some of that pressure's being exacerbated by the fact that
you had some bad weather, some supply disruptions. But,
overwhelmingly, you're seeing huge growth in demand. As those
countries develop, expand, that's going to continue, I think,
for a long period of time. And the best response to that is to
make sure that they're able to make, and we're able to make
bigger investments to improve productivity in agriculture, in
the large producing regions of the developing world.
Senator Corker. Thank you. I look forward to seeing you
next week.
Secretary Geithner. It does make this a very strong farm
economy in the United States. You know, in some ways, the
strongest parts of the American economy today are farmers and
ranchers, who are big beneficiaries of this.
Senator Corker. Senator Lugar's been smiling a lot over the
last----
[Laughter.]
The Chairman. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman.
And, Secretary Geithner, thank you for being here this
afternoon.
The events in the Middle East have pushed from the front
pages of the paper what has been happening in Europe and
Ireland and Greece--Portugal, Spain in particular--with respect
to their economic situation and the impacts of debt on their
economies. Can you describe in greater detail--I know you
touched on this in your remarks--but whether you think the
steps that the EU and Europeans and the IMF have taken are
sufficient? And what is--if any, is an appropriate role for us,
as we look at how this crisis has unfolded?
Secretary Geithner. Very important question, and thank you
for raising it.
There are three things underway, which--all of which are
necessary to an effective solution. The first are, of course,
those governments you referred to are taking enormously
difficult--incredibly tough, difficult things to fix their
budget situations, fix their financial systems, and make sure
that they're going to have the ability to grow in the future,
be more competitive and grow. For that to work, they need
temporary, conditional financial assistance. There is no reform
program that has any prospects of a success unless, again, the
governments are able to fund and banks can fund, at reasonable
rates. And so, they need some temporary assistance for that,
which is being providing--largely by European institutions, but
the IMF is playing its necessary role alongside those.
But, in addition to that, they need a more permanent
framework that allows them to have better discipline on budget,
to reduce the risk this happens in the future; make sure they
have a more common European framework for handling financial
distress, by their national financial systems. And all those
things now are in train. Very difficult politically, very
complicated technically, to do.
And I think the important thing to recognize is that the
leaders of Europe have said they will do what is necessary to
make sure these reform programs are given a chance to work. And
they're moving forward now to put in place a stronger set of
financial mechanisms, short term and long term, to make that
possible. And, of course, it's important they follow through on
that.
Senator Shaheen. Well, one of the things I've heard from
some of the Europeans who have visited here and talked about
the situation is that some of the austerity measures that have
been demanded by participating countries are actually
counterproductive, that they go too far as they're trying to
recover economically. So, is that our assessment, as well?
Secretary Geithner. Well, you know, ultimately, of course,
that has to be a judgment of the political leaders of those
countries and the Europeans who are providing the assistance
they need. But, I think it's important to recognize, when you
dig yourself that deep a hole, there is no path ahead that
doesn't require a long program--multiyear program of reductions
in the level of benefits, level of commitments they made--they
were unaffordable--and changes to their competitiveness so they
can grow in the future, and, you know, fixing broken financial
system. Those are very difficult. There's no easy way out of
those things. And where you see those reforms, it's important
to recognize that they're the imperative forced on them by the
depth of the hole that their predecessor government's dug for
their country.
Senator Shaheen. Well, as we look--and Senator Corker
raised the concern that I know all of us share, about the
deficit and debt that we're facing in this country--are there
lessons to be learned from the European experience, that we
should be taking to heart?
Secretary Geithner. Well, our situation, again, for--just
for perspective--you know, our fiscal position is
unsustainable, our deficits are way too high and they have to
come down dramatically over time. But, our situation is
fundamentally different.
Our underlying growth rates are much stronger than Europe.
We're a much younger country. The size of our government is
much smaller. The level of the commitments we made in Social
Security and Medicare are much--they're rising too rapidly over
time in health care, but they're much less expensive than those
countries. And we are in a much better position to put in place
a multiyear gradual program of reforms that allows the American
people to adjust to changes ahead.
But, I think the overwhelming imperative you want to
recognize is that you need to put in place commitments now that
allow us to lock in those reforms over time. You can't defer
them indefinitely. And the longer you defer them, the risk is
that investors around the world, and the American people, will
say, ``We're not confident that Washington has the political
will to fix these things.'' If you lock them in over time, you
give--again, you give time to people to adjust, businesses have
the certainty to plan. And the more you put it off, the more
you risk future growth.
Senator Shaheen. Thank you.
Well, apropos that, as we look at the debate that's going
on now in Congress, one of the areas that's being discussed is
whether we should make significant cuts in funding for the SEC,
the CFTC, and some of the other regulatory agencies. And I
wonder if you could comment on that, even though it's not part
of the topic of this hearing. Because, as we look at what's
happening in the commodities markets, as we look at what's
happening with oil, given the situation in the Middle East, I
guess the question I have is whether we don't want those
agencies to have full capacity that they need to be able to
analyze and do everything we can, domestically, to regulate the
situation. So, if you could comment on that.
Secretary Geithner. I welcome your attention to that issue.
And, of course, I completely agree that--you know, look at what
this country went through in this crisis. And this crisis had
many causes. But, the crisis was much worse than it needed to
be; in part, because we did not have an adequate capacity in
the United States to deter and prevent the types of abuses that
cause enormous damage to innocent victims across the country,
as a whole.
And, if we learned any lesson from this crisis, it's that
we need better oversight, better incentives, better constraints
in risktaking, with people who have the sophistication and
capacity to enforce those rules. So, I would be very reluctant
to see Congress cut deeply into those enforcement resources,
because I think the long-term costs would be devastating.
Again, these are very modest costs for us as a country. We can
afford them. And we've seen what the costs are when you
underinvest in those things.
And again, it just underscores, you know, when you approach
a fiscal problem like this, the challenge is not simply to
figure out how to reduce the deficits, it's how to do so in a
way that does not undermine our capacity to grow in the future,
to protect critical priorities. And these are things we can
fundamentally afford.
Senator Shaheen. And, finally, because I'm almost out of
time, but--I know in your remarks you commented on the fact
that we are not yet seeing an impact on inflation as the
result--a dramatic impact on inflation--as a result of what's
going on in the Middle East. But, how long do we think that can
continue? And I guess I'm--I know I share the concerns that
have been expressed in a lot of places about what the future
impact of a continuing crisis is going to be in our economy.
Secretary Geithner. A very important question, but a
fundamentally uncertain question. Not something we can know
with confidence today.
The--you know, the way oil markets work, you can tell from
the futures market what expectations are today about how long
this pressure on prices will endure. And those prices sometimes
are a guide to the future, sometimes they're not. And what they
do show is that most people--most investors regard this as a
temporary increase and price--expect prices to come down
gradually over the rest of this year and beyond. So, you could
say that's somewhat encouraging and that would give us more
confidence; if that was right, that this impact on prices would
have really quite modest effects on growth and no lasting
effects on inflation.
Senator Shaheen. Thank you.
Senator Lugar [presiding]. Thank you very much, Senator
Shaheen.
Senator Rubio.
Senator Rubio. Thank you, Mr. Chairman.
Thank you, Mr. Secretary. I noticed, in your statements--I
apologize for missing those, but I read it before I came--one
of the things you talked about is one of the goals of the G20
summit or the G20 meeting in Toronto was to stabilize debt-to-
GDP ratio. With all this talk going on in these buildings about
the debt, going forward--the debt-to-GDP ratio is really the
one thing that we should be focused on--as far as the debt's
impact on our country, both globally and domestically.
Secretary Geithner. Yes. I think the very important thing
is to make sure that people understand, you have to bring the
deficits down to a level--the deficits down to a level where
our national debt no--is no longer growing as a share of the
economy, no longer taking a greater share of income over time.
And you need to make sure that happens soon enough so that you
stabilize that debt burden as a level--as a share of economy
that's not going to hurt growth. And if we are successful
together, on a bipartisan basis, in locking in reforms that
reduce those deficits to what we call primary balance, or
roughly 3 percent of GDP, over the next 3 to 5 years, then we
will stabilize our debt burden as a share of economy at a level
that is--for a time, is something we can live with. But, we
have to go beyond that, because, even beyond that challenge, we
have to make sure we're bringing health care growth--health
care cost growth down more over time, or those--that debt
burden will start to grow again in the coming decades.
Senator Rubio. But, from a perspective of that summit or
that meeting in Toronto, is there kind of a globally or a,
maybe just in your mind, accepted ratio that we would look at
as a goal that we want to be at? Not necessarily by a date----
Secretary Geithner. Our debt to--debt/GDP or -deficit/GDP?
Senator Rubio. Debt/GDP.
Secretary Geithner. You know, it's very hard to know what a
tolerable level of debt to GDP is. There's a lot of academic
economists studies of history in this case. And one of the most
cited one is one by Ken Rogoff and Carmen Reinhardt. And they
conclude that if you look across countries over time, if you
get north of 90 percent of GDP--and this should be measures as
net debt held by the public, and it should be net of financial
assets--then you get in a situation where, if over time that
were to happen, that would risk threatening a future growth.
We're no close to that, of course. And we expect--and we're
planning not to get there.
Senator Rubio. So are we, yes. But, yesterday we heard
testimony--Secretary Clinton put it this way, but I think we
would all share that view--that the United States is, from a
global perspective, in a competition for influence. There are a
couple of nations that are competing with us. What is the role
of this debt, and the fact that a substantial portion of it is
held overseas, a large percentage of it in one nation--what's
the impact that that's having on this, what she termed, and I
would concur, a competition for influence?
Secretary Geithner. No impact now. You know, again, the
biggest thing that affects our credibility and our influence is
the confidence of Americans and investors around the world that
we are doing things that strengthen our economy over time, make
us more competitive and move innovative, create more
opportunity, and, of course, as part of that, that we can
manage competently our long-term budget problems. So, if we're
unable to do that, the cost of that would be dramatic.
But, at this stage, by all indications, the world is
showing a lot of confidence in our capacity to do that. You
know, they look at America over the decades, and they say that,
``In the end Washington moves, acts, fixes problems.'' In fact,
one of the great strengths of our country, as a whole, is a
record of rising to challenge quickly enough we don't get
behind the curve, in this case. And most countries look at the
United States and they say, ``You're seeing again, and as we
come out of this crisis, that same resilience is
demonstrated.'' But, again, that's something we have to earn
over time. We can't count on it.
And I want emphasize that, you know, as we manage through
this debate of how, on a bipartisan basis, we cut spending and
cut deficits, we have to make sure that we're doing so in a way
that will leave people more confident that we're not going to
put off the problem and we're not cutting things that are
central to how we grow in the future. That's our challenge, as
a whole.
Senator Rubio. But, in your testimony, you don't mean to
suggest that investors and others around the world look to the
United States and are not concerned about what they see are the
trend lines in our spending, and perhaps the inability of our
political process to address them now as they watch the debate
and----
Secretary Geithner. I don't see that concern now, but,
again, we have to be careful we don't give them any excuses to
be concerned. We have to justify that confidence over time. If
you look at the price we pay to borrow, for example, that
reflects--it's a measure, in some sense, of confidence in our
political will to get ahead of these problems. And, so far,
we've been able to sustain relatively modest rates for
borrowing. And that's a reflection of that confidence. But,
again, that's something we have to earn, and people are
watching us now.
And, you know, again, I think it's important that this
expansion, this recovery underway is--it's only 18 months old.
It follows the worst recession in generations. And we want to
make sure the confidence is improving, but we want to sustain
that recovery. And so, we have to make sure we get the right
balance between the near-term imperatives of making sure jobs
are growing more rapidly, the economy is stronger, but also
locking in some reforms that'll restore gravity to our fiscal
position.
Senator Rubio. And, Mr. Secretary, it's generally accepted
that the United States can do things, to a certain point, that
other countries can't, because of our global reserve currency
status, our history, as you've outlined, and so forth. But,
even that has its limits.
Secretary Geithner. It does.
Senator Rubio. And so, I guess the sense I'm trying to get
is that, around the world, global markets and investors are not
concerned about our debt combined with the complexity of our
tax code, combined with our regulatory----
Secretary Geithner. Let me tell you differently. They can't
be more concerned than we are. No one can be more concerned
than we are, and people in the Congress and the executive
branch. And I would say that it is enormously important that we
come together on a bipartisan basis and find a way to lock in
these reforms. It's not something we can put off. And if we
fail to do that, then we'll risk losing that credibility.
Senator Rubio. So, I guess what you're saying is, the best
thing we can do is have a plan and show the world that we've
got a plan to move forward on these----
Secretary Geithner. Exactly, and----
Senator Rubio [continuing]. Issues over a sustained period
of time.
Secretary Geithner [continuing]. And, of course, it can't
be just a plan. You know, it has to be things that people will
believe will be upheld over time, that people will act on them
and they will bring gravity to our fiscal position. They can't
just be promises.
Senator Rubio. I think my last question is that--would you
agree with the idea that the world today--well, that's--let me
rephrase that, because that's an obvious--I was going to say
the world, from a global economic perspective, is much
different than it was just 10 or 15 years ago. For example, 10
or 15 years ago, the number of nations that people would have
the confidence to invest in was much smaller than it is now.
And, as the United States is now increasingly in competition
with other markets to attract capital and investment, and that
certainly we're not living in the same--we're not living with
the same dynamics that were in place just 15 years ago, where
there were only a handful of places around the world that a
serious investor would risk a serious amount of money in.
Secretary Geithner. I agree, but I would use that reality
to underscore another imperative, which is that, in education,
in the quality of our infrastructure, in the quality of
incentives we create in the United States for innovation and
for investment, we need to be better. And if we are not better,
we will fall behind on things that are critical, and that has
very grave damage to our relative competitive position.
As you said, and this is a transformative change in the
world, for a long time we've benefited from the fact that we
were uniquely good at those things. But, what's happened is,
the world has stopped making terrible mistakes in the
protection of property rights. They've gotten dramatically
better at educating their citizens. And you see huge
improvements, relative improvements, relative to what we're
doing in the United States, in things that matter to future
growth. And so, I would underscore the challenge that creates
for us. And that makes it important that people recognize that,
as we restore gravity to our fiscal position, we are preserving
things that we can afford as a country; there's things we can
afford to make sure we're making education better,
infrastructure stronger, incentives for innovation and
investment much more powerful.
Senator Rubio. My last quick question is on the--and I
think it was asked earlier by Senator Menendez, and it has to
do with Colombia and with Panama. What are the impediments to
that deal being consummated? And what are the chances of it--or
the hope--that it will be submitted and passed this year?
Secretary Geithner. Well, we're in the process of working
very closely with the Government of Colombia, in particular, on
some changes in Colombia that we think would make it easier for
us to bring these agreements to the Congress with a better
chance of them getting passed. And there's a variety of people,
not just in the Congress, but in the executive branch, who have
been--are actively working on this. And----
Senator Rubio. Who has a list of those changes?
Secretary Geithner. That's something----
Senator Rubio. How can I see what the proposals are?
Secretary Geithner. Yes, that's something that you'd have
to direct to my colleagues in the executive branch. I think
Ambassador Couric has the lead on this, but he's working with a
coordinated process. But, we share the objective of trying to
bring these to Congress, and we'd like to do so as soon as
possible. But, to do so--again, we want to bring them in with
confidence they're going to move and pass, legislatively--and
so, we have to make sure we're bringing the best agreements we
can.
The Chairman [presiding]. Senator Coons.
Senator Coons. Thank you, Mr. Chairman.
Thank you, Secretary, for your service and for your
appearance here in front of us today.
I know that my home State citizens from Delaware are very
concerned about United States-China economic relations, about
their perception that we are slowly but consistently losing our
competitive edge; in particular, the steady drain of
manufacturing from the United States to China. You reference in
your prepared comments also the relocation of research and
development to China, and the sort of critical competitive edge
they seem to be gaining, not just through currency manipulation
or through low-cost labor, but also through increased
investment in that. But, what can and should we be doing to try
and respond to that change and to regain the edge in innovation
with regards to China?
Secretary Geithner. Well, the things we've all talked
about, which are making sure their currency appreciates, that
they protect intellectual property, in China of United States
firms, that we have better terms for doing business there,
those are all important. But, by far, the most important thing
is what we do in the United States--again, I just want to--just
to make it simple again--in education, in innovation, in
infrastructure, in incentives for investment.
Now, we are--the President's laid out a comprehensive set
of plans, investments, reforms, that are within our capacity to
afford. They are not overwhelmingly expensive, that are
central--we know how to do that. We were remarkably good at
doing it for a century. And there's a variety of specific
things we can do. Your chairman has played a leadership role in
trying to build consensus on things like a national
infrastructure bank. We're in the process of figuring out
whether we can find a consensus on a corporate tax reform
program that would reduce the statuary rate, broaden the base,
and, again, improve incentives for investment here in the
United States. In education, of course, we're involved in a
huge, sweeping effort to improve.
And I think, again, there are--we should look through
everything we do economically in the United States, and we ask
ourselves--one question is: What does it do to the
attractiveness of this place as a place to invest? Because we
want our companies and companies around the world to make sure
they're building that next plant, that next R&D facility here,
not somewhere else. And I am very optimistic that we're going
to have the ability to do that. Because again, even with
China's rise, even with big improvements in competitiveness
around the world, we still have enormously important resources,
enormous advantages. We can't let those erode and we can't
stand still.
Senator Coons. Now, I am concerned about China's projection
of economic power into Africa--and also Iran's, frankly, and
about
the moves that Iran's been making to acquire nuclear weapons.
I'd be interested in some update about Treasury's ongoing
efforts, through the recently enacted sanctions bill, to
dissuade investment in Iran and to oversee the implementation
of sanctions; in particular, to target the Iranian
Revolutionary Guard Corps and investment in the Iranian oil
sector.
Secretary Geithner. We have made enormously important
progress in denying the ability of institutions connected to
their nuclear program and their efforts to finance terror,
denying them access to the finance, the money they need to
conduct those activities. And our programs directly--and our
work with the Europeans and countries around the world--have
been very effective in denying access to finance for a broader
range of Iranian entities that are involved in that behavior.
But, this is the kind of endeavor where you have to be
constantly on it, because you find one entity and you'll--
another one will crop up somewhere else. And you have to
constantly try to expand the net. And it requires a huge
investment and resources to make sure we can identify and
track. But, the biggest improvements we made are the
legislation that Congress enacted last year, CISADA, and what
the Europeans have done, and Russia and China have done, to
help make sure--and countries in the gulf have done--to help
reinforce this broader global effort.
Senator Coons. I was recently on a trip to the Middle East
with Senator Corker. And we had some very illuminating visits
to the Palestinian authority, to Jordan and to Israel. And in
all three countries, where we were predominantly focusing on
security, the issue of economic development as a way to provide
some escape valve for the hopes and aspirations of folks in the
region came up. And I was wondering what role you think either
the United States, through our assistance, or international
financial institutions, should be playing in trying to connect
these three economies? In particular, the entrepreneurial
energy and inventiveness of the Israelis with the dramatic need
for sustained growth in Jordan and the Palestinian authorities.
Secretary Geithner. A very important question. And I
welcome the attention to it.
We have found--you know, experienced over time--that to
make a difference in designing development strategies that help
those objectives, that you need--really three things, working
together--you need a very carefully designed U.S. direct
assistance program through AID and State, which of course we
have. We need the international institutions, like the World
Bank, there with us. And we need the other major donors,
bilateral donors that are interested in these issues, to be
there working alongside us.
If we don't have the direct U.S. assistance, the things are
much less effective. But, it's even more important, in many
ways, that we have the World Bank and other institutions there
with us, because they have the capacity to bring about policy
reforms in governance, corruption, transparency, that we can't
do directly on our own. They're less political, if they do
them. They're likely to be viewed more legitimate. And you need
that--all pieces of that framework, for it to work.
Senator Coons. One last question, then I'll cede to my
colleague to the right.
Both Senator Corker and Senator Durbin and I have been
discussing one piece of the Dodd-Frank regulations that has to
do with capping interchange fees for debit. Australia has
experimented with that in the past. It's something that's
relatively new to me as a topic of some interest or study. I
just wondered if you had any comments on how confident you are
that there will be savings to consumers as a result of that
effort to cap debit interchange fees.
Secretary Geithner. Senator, I do not have the authority,
under Dodd-Frank, as you know, to implement or enforce those
reforms. And I'm not that close, at the moment, to the debate
on this. I know that there's a very active debate about how to
do this, how to make sure that it has those benefits. I'd be
happy, if you like, to respond in writing or to ask my
colleagues from the Fed to respond in writing. And I know
they're working through it. And again, they want to make sure
that they're achieving the intent of the law in a way that
makes sure those benefits go to consumers, go to the intended--
to merchants, go to the intended parties.
Senator Coons. Well, thank you. I will submit something to
you in writing. It's something I'm really wrestling with.
I've gotten some strong input. And Senator Durbin and I
have recently discussed it. And I think it's something that
deserves some study and some really balanced review to make
sure that we understand its impact and whether there are or are
not unintended consequences to it.
But, thank you very much for your testimony today, Mr.
Secretary.
The Chairman. Thank you, Senator Coons.
Mr. Secretary, I have a must-be-at 4 o'clock meeting that
I've got to be at. Senator Lugar will close out. We think we
just have Senator Durbin.
But, I want to thank you for being here today. I think this
has been enormously helpful. I know a lot of people don't
ordinarily think--I mean, they--obviously, they know there's a
connection, but they're not focused necessarily on the
institutions or the choices that we have, and the policy
choices that we have, and how it has a long-term impact.
One of the things, I don't know if you have time, in my
absence, to comment on is perhaps the European condition,
particularly, sort of, Spain and some of the challenges it has,
and the French investment in Spain, and German investment, and
how that cascade might or might not infect us. And I think
people would be interested. Perhaps, just part of the record,
you could do that.
So, thank you very, very much for being part of this. And
we, all of us, look forward to working with you on these
issues.
Senator Durbin.
Senator Durbin. Thank you, Mr. Chairman.
Mr. Secretary, roughly, we have about a third of the
population of China, and we have a gross domestic product that
is about three times their size. An interesting contrast. So,
our production, per person, is dramatically larger than China.
We spend a lot of time talking about China. Within the last
month, I guess, they officially passed Japan, in terms of the
size of their economy. And I wonder, as I overhear people say
things that I've said myself, whether it still holds true that,
when it comes to a market economy, the government can't pick
winners and losers over the long run.
Because it appears to me that, in China, they are making a
lot of selections that appear to have some vision to them, at
least from where I'm sitting. One good example is in solar
electricity. We invented it 50 years ago, Bell Labs, with great
pride. And yet, today in China, as a percentage of GDP, they
are investing 10 times more in renewable energy than the United
States, and they're building a solar panel production facility
in Rockford, IL, 30 or 40 miles away from where these solar
panels were invented. It appears they're picking winners and
losers. Have you seen them pick a lot of losers?
Secretary Geithner. I've seen no successful example--
doesn't mean it won't happen in the future--of a state-run
economy, a state-run financial system allocating capital,
determining what technologies succeed, and have that really
work over time on a meaningful scale. But, I do believe--and
I'm not sure this is where you were going--I do think, in the
United States, even though, in general, we don't embrace that
basic strategy, we do think in some areas there is a very
strong case for targeted investments by the government.
Clean energy is one of those, because, of course, the
overall benefits don't get captured by the innovator or by the
company. Classic case for government support. But, you've seen
in things--you know, for example, technologies supported by
DARPA, by other things, national security things, very good
examples of why there is, in some circumstances, the government
for going beyond just general support for innovation and for
basic science, and targeting specific things that have overall
benefits to growth or society.
Senator Durbin. And so, I spoke at a law school
commencement in Chicago last year. And when we got to the
master's degree program, there weren't many. About 20.
Surprisingly, most of them were women and most of them were
from China. I was a little bit surprised.
Secretary Geithner. In what discipline?
Senator Durbin. In law.
Secretary Geithner. In law.
Senator Durbin. Master's degree in taxation, that was what
they were focusing on. And I thought, now this is an amazing
thing, that China would identify women to come to law school in
the United States for a master's degree in taxation. It seems
that they have some long-term thinking here, and long-term
planning. And I don't want to overstate what they've achieved,
but I am humbled sometimes by their effort, when you look at
the size of their economy compared to ours.
Senator Coons mentioned Africa. When I visited Ethiopia,
with Prime Minister Meles, and said to him, ``Tell me about the
presence of China in Ethiopia,'' we went on for a half an hour.
And he basically said to me, ``You've given up. The United
States has given up the continent of Africa. China comes in
with concessional loans--forgiveness loans--with the
understanding they're going to build our infrastructure and, in
the process, embed engineers and construction companies into
our economy.'' So, it was no surprise Ethiopia just awarded its
major national telecommunications contract to China. That is
thinking ahead, from their point of view.
I'd like to kind of come full circle here. As we focus, as
we have to focus, on reducing spending in the United States,
and raising revenue--those are the only two ways to deal with
the deficit--how can we expect to compete with this aggressive
nation, with a much smaller economy that apparently is picking
new markets, new sources of raw materials and energy that will
feed this growing economy for a long time to come?
Secretary Geithner. Well, of course you're right. I think
it's essential. And you--and it's not important--it's not just
that you want to make sure that we are making the investments
we need to stay competitive--and that's going to require larger
investments, like an infrastructure in education and
innovation, than we have done in the past--but, you also need
to make sure we bring a long-term perspective to our fiscal
problems, because you cannot run a country--expect no business
to have to go year by year, with deep uncertainty about what
the tax regime is, what the consequences are for the
incentives; companies depend on these areas. They need to be
long-term things that the market, the business can count on.
And, just as a complement, you were part of a bipartisan
effort, the Fiscal Commission, that would try to do just that,
which is to lock in the long-term types of changes that will
allow people to plan for the future and know with confidence
that a tax incentive that exists here today will be there
tomorrow. And we don't go year by year--not just 2 weeks to 2
weeks, of course, which would be a crazy way to run a country,
but year by year, in this case. So, I absolutely--I agree with
you. We need to make sure we're bringing the same long-term
approach to the strategy, competitiveness that you see in some
countries around the world.
Senator Durbin. So, let me talk about the short term. I've
worked with this deficit commission, I continue to work with my
Republican colleagues, and I know that they are focused, maybe
some even fixated, on the deficit. And the old cliche, ``If the
only tool you have is a hammer, every problem looks like a
nail,'' the answer to every question is, ``Cut taxes and cut
the deficit.'' And I happen to think it's more complicated than
that.
An example: Would you know where the fasted computer in the
world is located today?
Secretary Geithner. Well, I think it's in China.
Senator Durbin. It's in China. And we are now trying to
create the next fastest computer, at Argonne National
Laboratory. The House Republican budget will reduce the number
of engineers, scientists, and support staff, at that national
laboratory, by one-third for the remainder of this year, and
cut back 50 percent of their efforts to build this new
computer, along with a lot of other things.
What I'm hearing from the administration, I think--I
certainly agree with--but, I think, in the perspective of the
deficit commission, makes sense. We said, ``Get serious about
the deficit after you're out of the woods with the recession.''
You can't reduce this deficit dramatically with 15 million
people out of work and businesses not expanding. So, whether
it's a national laboratory or education and training, it
strikes me that our immediate need is to make certain that we
have a growth plan for this economy. And that's what I'd say to
my conservative friends. Yes, serious about the deficit, but
first serious about putting the recession behind us.
I don't want to put words in your mouth, but I think you
might agree.
Secretary Geithner. Well, I completely agree. But, I think
that you found a way, in the commission, to do both. And I
think the test of a credible fiscal reform/deficit-reduction
program is that, one, it be phased in over time so we're
protecting the expansion; two, that it have multiyear
commitments, so people can plan, they can adjust for the
changes that are going to come; three, that you're preserving
fundamentally critical investments, I think just like you
referred to, so that we're not just cutting spending, but we're
doing so in a way that preserves the capacity for us to finance
things in education that we--are absolutely essential.
And remember that the nondefense discretionary part of the
budget is 12 percent of the budget. It is not a material
contributor to our long-term deficits. And if you want to bring
a credible approach to fiscal responsibility, you have to take
the more comprehensive look across the principal drivers of
those deficits, long term and short term, or you'll end up, as
people have said, eating our future.
Senator Durbin. One last question, and it will be short.
I don't know if you've run across this book, but ``Make It
In America,'' by Andrew Liveris, who's the chairman and the CEO
of Dow, says that--one thing here--I don't know if this--if you
can verify this or whether you can check on it--``According to
the Manufacturing Institute, in 2008 the United States had a
surplus of $21 billion with its free trade partners.'' His
point was that, where we have reached free trade agreements,
we're winning; where we haven't, we're losing. Is that--do you
think that's----
Secretary Geithner. Oh, absolutely. And I'll----
Senator Durbin [continuing]. Accurate?
Secretary Geithner [continuing]. Remember--think about the
world. Our trade barriers are much lower than the average trade
barriers for countries. So, any time we do an agreement, by
definition, those agreements lower their barriers. Ours are
already very low. So, we benefit disproportionally from any
agreement we do. And it's even better or worse than that, you
can say, because when we don't do it, other countries just come
in and they negotiate those concessions we do not always get.
Senator Durbin. In 2010, the European Union had 11 free
trade agreements under negotiation, China had 15. So--we had
one.
Thank you very much. Appreciate your testimony.
Secretary Geithner. Thank you.
Senator Lugar [presiding]. We're delighted that Senator
Durbin has joined our committee. He is a very prominent leader
in the Senate, and has very strong ideas about free trade,
which were expressed in a bipartisan way today, and augmented,
Mr. Secretary, by your counsel.
Secretary Geithner. And fiscal responsibility.
Senator Lugar. Yes. Hear, hear.
Senator Durbin. Good question.
Senator Lugar. There you go.
We really thank you, as I expressed and I know the thoughts
of our chairman, for your availability to be here at this
hearing, and the attention you have given to the committee and
to our individual members.
We believe this is very important and just simply want to
acknowledge your thoughtfulness and your readiness to assist us
as we try to think through the issues discussed at today's
hearing. I think you've understood the sincerity, of our
questions and our testimony, and, likewise, that the trade
agreements are tremendously important. Now, there are domestic
political problems, as well as international ones, but we've
got to surmount those for the good of our country.
We thank you for your leadership and for your testimony.
And, with that, the hearing is adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Responses of Treasury Secretary Timothy F. Geithner to Questions
Submitted by the Following Senators
QUESTIONS SUBMITTED BY SENATOR RICHARD G. LUGAR
Question. I appreciated your expression of strong support for the
Cardin-Lugar amendment to the Dodd-Frank bill which required
transparency of extractive industries payments to governments. What is
the administration, Treasury Department, and State Department doing to
encourage other countries to adopt similar requirements? What are the
MDBs doing to encourage such disclosure?
Answer. The administration, Treasury, and State are working with
our allies around the world to promote more transparency in extractive
industries. One component of this is encouraging our friends and allies
to adopt policies that promote disclosure of extractive industry (EI)
payments.
First, in the United States, we are improving extractive industry
transparency through new disclosure requirements in Dodd Frank, known
as the Cardin amendment. The SEC is currently writing rules to
implement this new disclosure requirement. French and U.K. authorities
have voiced support for stronger European Union-wide transparency
requirements, while the European Commission recently announced it will
table by November a proposal to ask firms to disclose country-by-
country EI payments. Australia voiced similar support for enhancing
transparency requirements in mining-heavy provinces.
Cardin-style requirements, however, provide only half of the data
needed to help expose EI corruption: although they do make firm EI
payment data available, they do not have power to disclose government
EI receipts. The discrepancy between payments and receipts is a primary
source of corruption in many resource-rich countries. This is why
Cardin-style requirements complement but do not substitute for--the
broader implementation and goals of the Extractive Industry
Transparency Initiative (EITI), the second prong of our efforts to
improve extractive industry transparency.
The United States is a strong supporter of the EITI, through our
role on the EITI Board, our bilateral contributions to the multidonor
trust fund, and our outreach and advocacy.
We have urged the IFIs to support the EITI. All of them have
endorsed the EITI and are advancing its principles.
Treasury has promoted the EITI in our bilateral policy
dialogue, such as with Liberia and Indonesia. In addition,
through our Office of Technical Assistance (OTA), Treasury
fields teams of expert advisers in ministries to help countries
build capacity in fiscal management, including in auditing
firms that report EI revenues.
As Under Secretary of State Hormats emphasized in his
address to the recent EITI Global Conference, as a result of
the EITI, almost half a billion people now have access to
information on the revenue their countries receive from their
extractive industries sector.
The third prong of promoting extractive industry transparency is
working with the MDBs to ensure that they are advancing disclosure of
extractive industry (EI) revenues, through their policy, operational,
and diagnostic work.
For example, the World Bank has helped many countries to
implement their EITI revenue transparency commitments, while
supporting institutional development, fiscal management, and
legal and regulatory reform. The Bank also conducts outreach
and advocacy in non-EITI countries. For example, the Bank has
supported efforts to promote transparency and support for the
EITI in Colombia and Ethiopia and to build transparent and
effective fiscal and regulatory frameworks in transit countries
such as Bulgaria impact regulations.
The IFC, the World Bank's private sector arm, is updating
its Social and Environmental Sustainability Policy. The updated
policy, due to be finalized and to enter into force later in
2011, is expected to continue the requirement that clients
disclose material project payments to the host government, and
to strengthen the contract disclosure requirements.
Since the issuance of the SFRC report,\1\ the IDB has
endorsed EITI and strengthened the scrutiny of revenue
transparency in their due diligence process, as was the case
for the proposed investment in the Pueblo Viejo gold mine in
the Dominican Republic in 2010 which was withdrawn.
---------------------------------------------------------------------------
\1\ ``The Petroleum and Poverty Paradox: Assessing U.S. and
International Community Efforts to Fight the Resource Curse,'' Report
by the Minority Staff to the Members of the Senate Foreign Relations
Committee, October 16, 2008.
---------------------------------------------------------------------------
The African Development Bank has supported the efforts of
the Central African Republic (now compliant), Madagascar,
Malawi, Sierra Leone, and Tanzania to become EITI candidate
countries, including by helping to finance their EITI work
plans, establish EITI secretariats, and build internal capacity
to manage EI resources.
The Asian Development Bank has promoted resource revenue
transparency in its policy dialogue related to country
strategies and project preparation with the Governments of
Bangladesh, China, Indonesia, Mongolia, Kazakhstan, Kyrgyzstan,
Pakistan, Papua New Guinea, Timor L'este, Mongolia, Kazakhstan,
Kyrgyzstan, Uzbekistan, and Vietnam. The AsDB is launching a
``Regional Knowledge Sharing Platform on Revenue Management in
Resource Rich Countries,'' to provide a forum for peer-to-peer
learning for policymakers. The launch took place on April 14-
15, 2011, and was organized in conjunction with a seminar on
the same topic which will take place at the annual meeting in
Hanoi (May 3-6, 2011).
Question. As you noted in your written testimony, the
``developments in the Middle East have generated concern about
potential disruption to the supply of oil, and this has put upward
pressure on oil prices.'' Americans send nearly a billion dollars a day
overseas to buy increasingly expensive oil, money that could be better
invested at home. Despite some successes in fuel efficiency and
biofuels, our country is still vulnerable to world oil prices and
threats to oil supply. Would you please describe the financial impact
that high oil prices are having on the American economy. At what point
do high gas prices erode consumer spending and threaten our economic
recovery?
Answer. Oil prices have been trending up since early 2009, largely
reflecting an increase in world oil demand linked to stronger global
economic growth. (From the end of 2009 to the end of 2010 the world
economy grew 4.7 percent.) The benchmark front-month futures price of
West Texas Intermediate crude oil nearly doubled during 2009, from
roughly $40 per barrel at the beginning of the year to about $80 per
barrel at the start of 2010. During 2010, oil traded in a range of $70
to $90 per barrel, ending the year at around $90 per barrel.
Over the past 5 months the price of oil has jumped sharply and is
currently hovering near $100 per barrel. The retail price of regular
unleaded gasoline has risen from just under $3 per gallon to more than
$4 per gallon. Part of the recent rapid escalation in prices is likely
due to concerns about actual and potential supply disruptions resulting
from political unrest in the Middle East and North Africa.
We are monitoring oil prices and developments in world oil markets
very closely. We understand that sudden price increases triggered by
actual or expected supply disruptions tend to increase market
uncertainty. Heightened uncertainty has the potential to change
consumption and investment behavior with negative consequences for
economic activity. As consumers spend more of their income on gasoline,
they have less to spend on other goods and services. Similarly, rising
fuel prices put upward pressure on businesses costs of production and
can affect future hiring and investment plans. Some energy-intensive
industries, such as the chemicals industry, are particularly vulnerable
to sharp increases in energy prices.
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Higher energy prices can be a drag on the economy, to the extent
that they depress aggregate demand for other nonoil goods and services.
However, the U.S. economy is far less vulnerable to sudden oil price
increases now than in the 1970s and early 1980s. Over the past several
decades, the U.S. economy has become much less energy intensive.
Services are a larger share of GDP, and are less energy-intensive than
manufacturing. In addition, businesses have adopted more energy-
efficient technologies.
At present, the U.S. economy is growing at a moderate pace. The
recovery is increasingly being powered by private domestic demand
rather than government stimulus. The recent jump in oil prices is
without a doubt having an impact on households and businesses alike.
However, the underlying components of growth will likely remain in
place in 2011 and will continue to support the ongoing recovery.
Question. Our reliance on foreign oil significantly constrains our
foreign policy options. The Iranian regime, the target of significant
U.S. and international sanctions due to its continuing nuclear program,
reaps tremendous benefits from increased oil prices. Has Treasury, or
other parts of the administration, quantified the impact on the
effectiveness of the sanctions regime when oil is trading at $100 or
$110 a barrel?
Answer. U.S. and international sanctions imposed on Iran are
intended to protect against Iranian abuse of the international
financial and commercial sectors and increase pressure on the Iranian
regime. The impact of these sanctions is difficult to quantify, but in
general terms, given the significant proportion of the Iranian economy
that oil revenues constitute, an increase in oil prices tends to ease
pressure on Iran. However, there are many signs that the sanctions are
having a significant effect and creating the leverage necessary to
support diplomatic efforts.
Targeted actions by the Treasury Department against illicit actors
involved in Iran's WMD proliferation activities and support for
terrorism, along with broad outreach to foreign governments and private
sectors throughout the world, have highlighted the risks of conducting
business with Iran. Recognizing these risks, many governments,
including the EU, Norway, Switzerland, Japan, South Korea, Australia,
and others, have also adopted robust sanctions on Iran, and many
private sector actors have gone beyond strict legal requirements and
terminated all business with Iran. As a result, many banks will no
longer do business with Iranian banks, the international insurance
market has largely stopped providing coverage for Iranian entities, and
many companies have withdrawn investment from Iran. Iran faces not only
a sharply reduced access to international financial services and an
increase in transaction costs, but also a diminishing number of willing
business partners.
Question. For the past several years, the United States has
maintained the world's largest current account deficit which the
combines the balances on trade in goods and services, income, and net
unilateral current transfers. According to the IMF, the U.S. current
account deficit reached $467 billion in 2010 and is predicted to rise
to $602 billion by 2015. Meanwhile, China has maintained the world's
largest current account surplus at $270 billion in 2010, and is
forecasted to reach to $778 billion by 2015. How does China's trade and
investment strategy differ from the U.S. approach? What steps are the
Chinese taking to secure economic partners and commodities? What does
our rising current account deficit mean for our economic growth?
Answer. China, like all other countries, has a strong interest in
pursuing its trade and investment policy objectives, and the prosperity
of its firms and its people, just as we do here in the United States.
What's important to us is that China pursues its objectives in a way
that does not disadvantage American firms and workers in their
competition with Chinese firms here in the United States, in China, and
in global markets. This is a top priority for the administration, and
we will continue to vigorously engage with the Chinese leadership to
bring about a more level playing field for U.S. firms and workers. At
the recently concluded meeting of the Strategic and Economic Dialogue
(S&ED), we secured important commitments from China that should help in
this regard, including in the areas of intellectual property rights
protection and enforcement, government procurement opportunities
unlinked to unfair innovation policies, enhanced regulatory
transparency, and fair and transparent provision of export credits.
The United States-China economic relationship offers great promise
and potential. We are now exporting more than $100 billion a year in
goods and services to China, which supports more than half a million
American jobs. The $45 billion in contracts finalized during President
Hu's visit in January offer a concrete illustration of that growth.
China's economic policies, including its exchange rate policy, are
important to all of China's trading partners, not just the United
States. To support global recovery and ensure strong, sustained, and
more balanced global growth into the future, the United States, China,
and the other members of the G20 group of nations have committed to
policy measures that will strengthen domestic demand-led growth in
major surplus economies, including China, and raise national saving in
major deficit economies, including the United States. China's large
current account surplus is a reflection of China's very high national
saving, by both households and enterprises, and the low share of
household income in total national income. Stronger growth of domestic
demand in China, particularly household consumption, that reduces
China's trade and current account surpluses, would be a powerful
impetus to global growth and create expanded opportunities for American
firms and workers. A stronger RMB is an indispensible part of this
process of reorienting Chinese growth, along with measures to raise
household income and give Chinese citizens greater income security and
more confidence to spend.
At S&ED III, China committed to expand its domestic consumption and
imports in order to promote a more balanced trade relationship with the
United States, and pledged to strengthen efforts in a number of policy
areas critical to promoting domestic consumption-led growth, including:
increasing wages and household income as a share of China's economy;
steadily increasing minimum wages; reducing barriers to private and
foreign investment in the domestic service sector; and implementing
market-based financial sector reforms that will allow China's
households and private firms to more easily access capital and
financial services.
But in any discussion of China, it is important for Americans--
including the administration and Congress--to understand that the
solutions to our challenges in the United States rest first and
foremost here at home and not in China. Fundamentally, how many jobs
and how much wealth we create will be the result of the choices we make
in the United States--not the choices of others.
With respect to the current account deficit of the United States,
it is much smaller today than several years ago. In 2010, the deficit
was $470.2 billion or 3.1 percent of U.S. GDP. That was more than $300
billion smaller than the 2006 current account deficit of $802.6
billion; and less than half the 2006 current account deficit-to-GDP
ratio of 6.5 percent. Recently, the current account deficit has been
widening, which reflects relatively strong final demand growth in the
United States in 2010 compared to our major trading partners, and
rising oil prices.
As noted above, a key international economic objective of the
administration is better balanced global growth, where countries with
external surpluses boost domestic demand at the same time as countries
with external deficits, such as the United States, save more. That is
why the President proposed to the Leaders of the G20 in September 2009
the creation of a Framework for Strong, Sustainable, and Balanced
Growth. Stronger demand growth abroad will boost U.S. exports and
strengthen U.S. growth. The President has emphasized the increasing
role that exports must play in the U.S. economy, and his National
Export Initiative (NEI) sets the goal of doubling U.S. exports by 2015.
The NEI is focused on five priority areas: (1) improving trade advocacy
and export promotion efforts; (2) increasing access to credit,
especially for small and midsize businesses; (3) removing barriers to
the sale of U.S. goods and services abroad; (4) robustly enforcing
trade laws; and (5) pursuing policies at the global level to promote
strong, sustainable, and balanced growth.
Question. In your written testimony, you noted that the
multilateral development banks ``play a critical role in promoting our
national security and economic interests around the world.'' During the
hearing you mentioned some examples of where the MDBs were helpful.
From your perspective, what are the most important roles that the MDBs
play in ensuring our interests?
Answer. The United States depends on MDBs to support our national
security objectives in key frontline states by fostering economic
development and reform and addressing the root causes of conflict and
instability. For example, in Afghanistan, the World Bank and Asian
Development Bank are the second- and third-largest donors after the
United States. These institutions are investing heavily in water,
power, and transportation, sectors that are critical to underpin long
term stability. Only the MDBs have the resources and technical capacity
to finance large infrastructure projects globally, which are often the
key to unlocking growth potential in developing and emerging markets.
As events unfold in the Middle East, the MDBs become even more
important to our national security, as they will be a critical tool in
restoring stability and promoting a return to growth. For example, in
Egypt and Tunisia, the MDBs can support economic reforms that will
promote job creation, particularly for the region's youth.
Promoting peace, security, and stability around the world requires
tackling critical, long-term drivers of volatility and conflict: food
security, environmental degradation, and climate change. Left
unaddressed, these risks will undermine our broader development
efforts, and roll back hard-won gains in poverty reduction and economic
growth, which can lead to desperation, radicalization, and increased
risk of conflict. The recent volatility and spike in food commodity
prices--in some cases exceeding their 2008 highs--lend a particular
urgency to the food security challenge, particularly in poor countries
where higher food prices have dramatic and negative impacts on the
livelihoods of the poor and create social instability
The United States also depends on MDBs to support U.S. economic
objectives. The MDBs are the first responders to financial crisis and
among the most powerful export promotion programs we have. In 2008,
when the global economy faced one of the worst financial crises in
recent history, the MDBs moved swiftly to restore finance and credit
for world trade. At a time when few institutions were lending, the MDBs
provided $222 billion in financing to developing countries, helping
restore economic growth and trade. These resources reached more than
130 countries, representing 44 percent of the world economy, and 31
percent of America's export markets. Their support helped to restore
global growth in key markets that are critical for U.S. businesses and
jobs. The scale of their response illustrates the indispensability of
the MDBs for their leverage, speed, and reach.
U.S. investments in the MDBs help generate new engines of growth
globally that ultimately support more jobs here at home. The developing
world represents the fastest source of growth in U.S. exports. Over the
last 20 years, MDB assistance has helped nurture emerging markets that
have become key export markets for the United States. The World Bank
and regional development banks have provided financing and policy
assistance to reduce trade barriers, improve private sector
development, increase educational access, build infrastructure, and
promote open markets.
Question. Should the United States not fund, or not fully fund, the
MDBs, how exactly will our ``leadership and influence'' in the MDBs be
reduced?
Answer. If the United States fails to purchase the shares that it
agreed to buy in the capital increase negotiations, the relative
shareholding of the United States will become diluted. Voting power is
adjusted to reflect contributions as they come in from shareholders,
such that delayed contributions will have an impact on the United
States current voting power. Any shares allocated to a country that are
not paid for within the allotted subscription period will be moved to
the Bank's unallocated capital, potentially making them available for
other shareholders to acquire.
In the case of the International Bank for Reconstruction and
Development (IBRD), if the GCI request is not funded at all, our
shareholding will fall from 16.8 percent to 11.6 percent, and the
United States will lose the ability to veto changes to the Bank's
Articles of Agreement. In the case of the Asian Development Bank
(AsDB), if the United States fails to make its contributions,
shareholding will fall from 15.6 percent to 5.2 percent and the United
States will lose the ability to exercise a joint veto with Japan.
Because other member countries have already elected to pay for their
subscriptions, China now has a larger voting share than the United
States and is second behind only Japan. If the United States fails to
make its GCI payments on time, China will gain more influence on bank
policy and reforms, which would likely alter the strategic direction of
the Bank. In the case of the African Development Bank (AfDB), United
States shareholding will fall from 6.6 percent to 2.2 percent and the
ability of the United States to have its own Board chair could be
jeopardized if United States does not fulfill its GCI commitment. In
addition, credit rating agencies closely monitor shareholder support
for the AfDB and the United States failure to participate in the GCI
could potentially impact the AfDB's credit rating. In the case of the
Inter-American Development Bank (IDB), without a United States
contribution, no general capital increase is possible.
Question. Why do you think our ``leadership and influence'' at the
MDBs is important?
Answer. The United States has played a leadership role in the MDBs
by developing a policy agenda to ensure that our financial
contributions will be strongly leveraged by other donors and borrowers
and that the MDBs' investments in the developing world directly support
U.S. priorities. By leading with the agenda, we have secured an
unprecedented number of policy commitments from the MDBs and their
shareholders as the basis for U.S. financing commitments. For example,
the United States commitment to IDA leveraged a commitment from China
to prepay outstanding loans to the World Bank, which will generate over
$2 billion in additional resources. At the IDB, the United States was
instrumental in securing a commitment from middle-income countries in
the region to devote $200 million annually to Haiti from interest
earned on Bank lending to these countries. Additionally, U.S.
leadership has also delivered critical support for Afghanistan through
commitments from the Asian Development Bank and the World Bank to
extend extraordinary financing to that country. We have also
successfully improved the ways in which the MDBs do business to ensure
effectiveness, accountability, and transparency. For example, U.S.
leadership has resulted in the use of rigorous performance-based
allocation systems, ensuring that financial support goes to countries
where the banks have a willing partner with a track record of
accountability and good policies.
If we fall behind on our commitments, we will deprive the MDBs of
the resources they need to carry out development priorities that are
critically important to the national and economic security of
Americans. Too often, the only alternative to MDB financing is low-cost
financing from countries like China, who will tie their loans to
conditions that help advance Chinese commercial interests, depriving
American companies of a level playing field in competing for business.
Unlike these countries, the MDBs have strict procurement processes and
rigorous safeguards to strengthen property rights, protect the
environment, and uphold the rights of vulnerable populations. As can be
seen in many regions of the world, such as Latin America, South America
and Africa, there has been a dramatic expansion in the scale and scope
of activities by countries like China and Iran. In this context, it is
vital that our commitments to the MDBs remain firm so that our global
influence in development is sustained.
Question. In addition, how much do the MDBs provide Egypt and for
what types of programs? How does that compare to our bilateral
financing?
Answer. From 2006 through 2010, the World Bank approved $4.9
billion in loans to Egypt. The World Bank reports that 42 percent of
its 5-year cumulative lending to Egypt went toward financial market
development, 27 percent toward energy, 17 percent toward transportation
infrastructure, and 4 to 5 percent toward water and sanitation, public
administration, and health and social services each.
For this period, the African Development Bank (AfDB) approved $2.6
billion in loans for Egypt. The AfDB's active portfolio of projects in
Egypt has the following composition: power sector (60 percent), support
for rural/urban small business and employment (12 percent), private
sector operations (25 percent) and water sector
(3 percent).
Over this same period, US bilateral assistance to Egypt was $13.1
billion. In particular, USAID assistance has concentrated on economic
growth, education, health, democracy and governance.
Question. How will you ensure that the multilateral development
bank reforms negotiated during the general capital increase
negotiations will be implemented before the United States funds are
contributed?
Answer. The reforms negotiated for each of the MDB GCIs will play
an essential role in improving the development effectiveness of these
institutions. We have worked hard to ensure that they will be fully
adopted in several different ways.
At the World Bank, the United States helped secure a robust set of
reforms as part of the GCI. In recent months, a significant number of
these reforms have already been implemented, including: the disclosure
policy agreement, a new financial framework for the Bank and
improvements in operational effectiveness through information
technology. These reforms represent major structural changes to the
Bank and how it does business. Agreements to implement reforms on a new
compensation and benefits framework and a decentralization strategy
will take longer to implement. The strong commitment to these reforms
demonstrated by Bank management gives us confidence that they will be
carried through even after agreement on the GCI.
At the Inter-American Development Bank (IDB), we worked to ensure
that a formal review of the agreed reforms would occur midway through
the 5-year encashment period (in March 2013). This review, to be
conducted by the Bank's independent evaluator, will examine the Bank's
progress on a list of 13 reforms, all of which have specified
implementation deadlines that precede the review completion date. The
IDB has already made strong progress on meeting these deadlines,
including the full implementation of a new financial management process
and introduction of a new methodology to strengthen the development
effectiveness of its operations. Given that this evaluation precedes
the final two encashment payments to the Bank, there is a strong
incentive to complete the reforms on schedule.
As part of the GCI negotiations and similar to the IDB, African
Development Bank (AfDB) management published a detailed matrix of
institutional reform commitments, including ambitious target dates,
against which reform progress can be measured. In addition, AfDB
management agreed that the bank's office of independent evaluation
(OPEV) would undertake an assessment of progress toward GCI-related
institutional reform commitments by the third quarter of 2012. The
explicit purpose of this assessment is to enhance accountability and
demonstrate reform progress to member governments and Parliaments.
Notable reform achievements so far include development of a Bank-wide
results framework, adoption of a comprehensive income model
incorporating transfers to the soft loan window and ongoing
strengthening of risk management systems/capacity.
At the Asian Development Bank (AsDB), the United States was
instrumental in getting agreement on a series of important reforms to
the institutions that represent key priorities for us. These reforms
have either already been implemented or are being implemented
currently. As with the other institutions, we monitor the AsDB's
activities on a regular basis and the AsDB tracks the status of its
reforms through an internal tracking system that is updated quarterly.
Question. What reforms and policies on technology (both the use in
the institutions and in their programs) are Treasury promoting at the
MDBs?
Answer. Each of the MDB's has identified information and
communication technology (ICT) as a key lever to improve the
effectiveness of multilateral development assistance. The banks have
focused on ICT a means of:
Developing human capital and encouraging lifelong learning;
Improving the transparency of local and regional
governments;
Improving the efficiency of businesses and markets by
improving communications infrastructure;
Encouraging citizen participation in democratic processes
and increasing the effectiveness of economic and political
reforms; and
Fostering entrepreneurship and creating new employment
opportunities.
Project examples include: the International Finance Corporation
(IFC) invested $32.7 million in an undersea fiber optic cable that will
help bring high-speed broadband services to millions in Eastern Africa.
The International Bank for Reconstruction and Development lent $33
million to Morocco to roll out various e-government initiatives aimed
at improving government service delivery and simplifying public
procedures. In an International Fund for Agricultural Development
project in Tanzania, SMS technology is being employed by ``market
spies'' who send price information from markets back to the farmer.
This helps to control the behavior of ``middle men'' and begins to
level the playing field for farmers when negotiating with traders and
helps build networks among farmers that can facilitate sustainable
development.
The United States has typically advocated promoting reform in MDB
ICT policies through IT applications, human development, and strategic
alliances. We have also encouraged regional cooperation and networking
to enhance local efforts and promote private sector participation.
Question. The administration is requesting $400 million for the
Clean Technology Fund to encourage clean energy investments in
developing countries. Other agencies in the Federal Government also
work with the private sector in developing new energy technologies for
entrance into the marketplace. To what extent does Treasury work with
other federal agencies to share information on these new technologies?
If Treasury does collaborate with other agencies, what are they, and
what is the mechanism you use for this coordination? Does Treasury
share common program objectives for new technology development? Does
Treasury work with USAID which is implementing ``USAID FORWARD,'' a
$71.8 million effort that includes bringing science and technology
programs forward for investment in developing countries?
Answer. The Clean Technology Fund (CTF) seeks to promote the
demonstration, replication, and scale-up of commercially viable
technologies by working to reduce market challenges currently
preventing widespread investment and uptake of such technologies.
In this effort, Treasury works closely with other agencies--
particularly USAID, State, DOE--both at the strategic level and at the
program and operational level. USAID Forward's focus on leveraging
science and technology and fostering innovation is creating greater
scope for effective collaboration with programs like CTF both
strategically and operationally.
Each CTF program begins with the development of a country-led
strategy. USG country teams--including USAID and, at times, OPIC, Ex-
Im, State, MCC and USTDA--participate in on-the-ground planning
missions alongside the MDBs and other development partners. These
efforts improve the efficacy of our efforts by seeking to harmonize our
multilateral CTF activities with our bilateral assistance work for that
particular country. For example, in Indonesia the U.S. bilaterally
sponsored Indonesia Clean Energy Development Program (ICED) and the
Climate Investment Funds-sponsored Clean Technology Fund Investment
Plan divided the process for developing projects. The CTF program will
focus on the back-end of the project development processes--financing
the renewable and energy efficiency projects. On the other hand ICED is
working on the front end of the project development--from resource
assessment, to supporting the development of bankable project proposals
for funding.
As a related example, last year the CTF provided financing for a
Mexican wind farm that bought 27 Liberty Wind Turbines from Clipper
Windpower, a U.S. company that makes turbines in Iowa. By using the
concessional CTF funds to take a subordinated position, the program
demonstrated to financiers and the market that such projects can be
successfully funded with significantly more debt financing than was
perceived to be the case. As a result, wind projects in Mexico are
generally now able to acquire all commercial debt. This targeted use of
CTF funding is considered to have been a catalyst for market
transformation. Ex-Im provided extended term financing for Clipper as
allowed under the OECD agreement on renewable energy exports.''
Another aspect of interagency collaboration has been the
implementation of a strong interagency process to review investment
plans and projects for the CTF, including USAID, DOE, State, EPA, and
USTDA. Additionally, when these same projects come to the multilateral
development bank (MDB) boards for approval, the full interagency group
that reviews MDB projects also reviews these CIF projects.
This coordination has resulted in the development of common program
objectives for promoting the demonstration, development and scaled-up
deployment clean technology. These include: strengthening enabling
environments, mobilizing sources of clean energy financing, and
promoting knowledge and innovation. Finally, the National Security
Staff has convened an interagency process with Treasury, State, USAID,
and others, as well as with input from civil society and the private
sector, to develop a more formal strategy that will guide investment
choices across USG clean energy assistance activities.
Question. The Treasury Department has provided the committee with
numerous briefings on their work to strengthen global food security
through its Global Agriculture and Food Security Program (GAFSP) while
USAID and the State Department have briefed us on the Feed the Future
Program (FtF). How do these programs differ? How are they the same? Do
program managers from the two programs work together in a coordinated
effort? If so, how?
Answer.
GAFSP strengthens and complements the bilateral components
of FtF. Of the original eight GAFSP grants, half (Ethiopia,
Rwanda, Haiti, and Bangladesh) are FtF focus countries. GAFSP
leverages additional resources to support FtF activities by
supporting complementary activities. For example, GAFSP's
investments in the water management in Bangladesh will support
USAID's investments in agricultural productivity and the rice
sector.
USAID, Treasury, and State have collaborated in the
creation, operations, and diplomatic outreach associated with
the GAFSP. Senior officials from State, Treasury and USAID have
all actively sought funding for GAFSP over the last year. GAFSP
and FtF share a significant number of results indicators in
their monitoring and evaluation frameworks, which will help in
measuring the impact of our investments. While Treasury
represents the United States at GAFSP Steering Committee
meetings, USAID staff has attended each Steering Committee
meeting.
There are also important differences between GAFSP and the
bilateral programs under FtF. For instance, GAFSP allows the
United States to leverage directly the financial resources of
other contributors, including nontraditional donors such as
Korea, and align those resources against the agricultural
development strategies of the poorest countries. With our $67
million contribution in FY 2010--8 percent of the total U.S.
food security resources for that year--we successfully
leveraged an additional $387 in contributions.
As a multilateral mechanism, GAFSP does not earmark funds
for particular countries. Instead GAFSP employs an open,
competitive, and transparent proposal process that awards
grants based on evaluations from independent technical experts.
Countries that have high levels of hunger and poverty but have
also developed evidence-based, comprehensive agricultural
development strategies and robust proposals are prioritized for
GAFSP financing.
GAFSP also leverages the significant technical capacity of
the multilateral development banks to achieve the goal of
measurably reducing hunger and poverty in the poorest countries
of the world. The banks have large agricultural staffs still in
place, which have the expertise and capacity to implement
GAFSP-financed projects in a timely manner.
Question. To follow up on my question about the almost $32 billion
in Government of Libya assets under U.S. jurisdiction have been frozen.
How long will the assets be frozen? What is the process to return or
otherwise resolve those assets? Who will receive the assets? What is
the size of the Mubarak family assets that have been frozen? Would you
list the other assets frozen by leaders and governments in the Middle
East?
Answer. The Libyan assets were blocked pursuant to Executive Order
13566 signed by President Obama on February 25, 2011. The purpose of
the blocking is twofold--to prevent Muammar Qadhafi from accessing them
for use and to preserve them for the Libyan people. At this point, we
are unable to predict how long the assets will be blocked. Assets
blocked under IEEPA authorities generally remain blocked until the
President terminates the underlying National Emergency. There is also a
licensing mechanism in place to unblock funds when it is in the
national interest to do so.
There is currently no sanctions program in the United Sates
targeting the assets of the Mubarak family. In response to events in
Egypt, Treasury issued advisory reminding U.S. financial institutions
of their obligations to monitor closely any financial activity that
could potentially represent misappropriated or diverted state assets,
proceeds of bribery or other illegal payments, or other public
corruption proceeds. The United States does, however, have current
sanctions against Iran and Sudan. Government of Sudan assets within the
possession or controls of a U.S. person are blocked. The property of
persons designated in connection with Iran's proliferation of weapons
of mass destruction and support of terrorism is also blocked.
Question. During the hearing, you noted a study coauthored by
Kenneth Rogoff that indicated when debt/GDP levels had an effect on
economic growth. Is there a similar study that looks at debt/budget
levels? Is there an argument for looking at the budgets and not just
the GDP levels since it is the budget levels that will determine the
sustainability of the debt while GDP could be seen as a proxy for the
budget levels?
Answer. Yes, the annual deficits matter in addition to the debt
level. That is why the FY 2012 budget focuses on reducing deficits as a
share of GDP. The underlying target in the FY 2012 budget is to stop
the growth in the debt to nominal GDP ratio; stabilizing the debt-to-
GDP ratio requires that the national debt grow no faster than nominal
GDP. This is done by targeting the budget deficit in a specific way.
The growth rate of debt depends on the interest rate paid on the
existing debt and the size of the primary deficit (the primary deficit
is the deficit less interest payments). Roughly speaking, if the
primary deficit is zero, the only element that is adding to debt is
interest payments. If interest payments are offset by the growth in
nominal GDP, it is possible to keep the debt to nominal GDP ratio
constant.
In the proposed FY 2012 budget, the deficit as a percentage of GDP
is cut in half from FY 2011 to FY 2013 (from 10.9 percent to 4.6
percent) and it continues to fall to around 3 percent of GDP by 2017.
It can be seen that the primary deficit by 2017 is zero and has a small
surplus thereafter. Furthermore, after 2016 the deficit is accounted
for by interest payments, which are about 3 percent of GDP. These
conditions ensure the debt to GDP ratio stabilizes in 2017 at around 67
to 68 percent of GDP, and it remains there through 2021.
This is a significant start, but more needs to be done to constrain
the growth of entitlement spending, and in the longer term after 2021
it becomes particularly important.
Question. Could you please provide me with an update of the
designations pending or being considered under the ``Kingpin Act'' for
Venezuelan nationals.
Answer. Treasury does not comment on pending or possible
designations or investigations. However South America has been, and
continues to be, a region we carefully scrutinize as we consider
Kingpin Act designations.
Question. What is your understanding of the relationship between
the Government of Iran and Venezuela's Oil Company, PDVSA (Petroleos de
Venezuela)?
Answer. We are aware of the growing relationship between Venezuela
and Iran, including increased business and trade ties, and we are
monitoring this relationship closely. We also understand that the State
Department is reviewing reports that Venezuela has sent refined
petroleum to Iran, which may make the companies involved subject to
possible sanctions under the Comprehensive Iran Sanctions,
Accountability, and Divestment Act of 2010 (CISADA). Under the Iran
Sanctions Act of 1996, as amended by CISADA, the State Department, in
consultation with appropriate agencies, is responsible for determining
whether an individual or entity has engaged in sanctionable activity
involving Iran's energy and refined petroleum sectors, and for
determining any further course of action, including selecting sanctions
that may be imposed. Treasury will continue to cooperate closely with
the State Department and will remain vigilant for any financial
transactions which might be subject to existing U.S. or international
sanctions against Iran.
______
Questions Submitted by Senator Christopher A. Coons
Question. Two weeks ago, Federal Reserve Chairman Ben Bernanke said
that small banks exempted from new limits on interchange fees may be
forced by the marketplace to accept the proposed government-set debit
interchange fee of 12 cents per transaction. This would render
meaningless the exemption and cause small and community banks further
harm.
Considering the tight regulatory timeline for implementation
of debit interchange caps and the concerns of small banks, do
you believe the July 21 effective date is realistic?
Answer. Under section 1075 of the Dodd-Frank Act (the ``Durbin
Amendment''), Congress provided the Federal Reserve Board (``Board'')
with the authority to regulate interchange fees relating to debit
transactions and to implement certain nonexclusivity restrictions that
would provide merchants with greater choice in selecting a debit
network through which to route a transaction. Congress also provided an
exemption for small bank issuers from the standards for debit card
interchange fees established by the Board.
The Board has been striving to meet the statutory deadlines set
under the Dodd-Frank Act. In December 2010, the Board requested comment
on its proposed rules to implement the Durbin Amendment. The Board is
working diligently to review the more than 11,000 comments it received
and to determine what changes it should make in the final rule. And as
Chairman Bernanke stated before the ICBA on March 23, 2011, the Board
understands that Congress intended for small issuers to be exempted
from the standards established by the Board on debit interchange fee
regulation and is committed to using its full authority to ensure that
the exemption is effective.
Many small issuers have expressed concern over the practical effect
of this exemption. In particular, they are concerned that the exemption
will not be effective if networks do not implement a two-tier
interchange fee structure to differentiate between large and small bank
issuers; and (2) that the market pressures resulting from the
nonexclusivity restrictions will over time place downward pressure on
debit interchange fees for small issuers. However, many large debit
networks, including Visa, STAR, and Pulse, have announced that they
will implement a two-tier interchange fee system. And as Chairman
Bernanke noted, to the extent that a two-tier interchange structure
becomes the prevailing network practice, the exemption should have some
real effect.
Question. As you know, Australia has experimented in regulating
interchange fees. According to studies, this regulation has resulted in
increased costs to consumers through higher cardholder fees and reduced
card benefits.
Do you believe there is any guaranteed benefit to consumers
from capping debit interchange fees?
Answer. You are correct to suggest that there is no guarantee that
customers will benefit in any particular way from capping debit
interchange fees. That said, the Board has acknowledged the expectation
that consumers will benefit to the extent merchants pass on their
interchange fee savings in the form of lower prices. It is not
practical, however, to measure the extent to which lower interchange
fees on electronic debit transactions paid by merchants would translate
into lower prices because of the many other factors that influence the
prices which merchants charge their customers.
While you're correct that there is evidence that Australian credit
cardholders have experienced higher card fees and reduced card
benefits, it is not clear that Australia's more recent limits on debit
card interchange has resulted in increased banking fees. Each country's
banking, payments, and regulatory environments are distinct. For
example, under the Australian system, until this month, interchange
fees for PIN debit card transactions were paid by the issuing banks to
the merchants, opposite of the interchange flow in the United States.
Therefore, there is some danger in comparing outcomes from different
countries, even if comparisons appear apt initially.
______
Questions Submitted by Senator Marco Rubio
Question. Approval of the trade agreements with Panama and Colombia
have been delayed for more than 5 years. In the meantime, these
countries are negotiating and implementing similar agreements with our
main competitors in Europe, Canada, and China. The result is that
American workers have lost ground to our main economic competitors.
What has been the economic cost of this delay for American
exporters?
How many jobs could have been created in the United States
if we had these agreements in place today?
Would the administration commit to present these treaties to
Congress before the Easter recess?
Answer. The United States remains a major supplier of goods to
Panama. However, Colombia and Panama have active trade agendas and have
signed trade agreements with some of our main competitors, such as the
EU and Canada. That is why Ambassador Kirk worked so intensively with
Panama and continues to work with Colombia to resolve outstanding
issues of concern to Members of Congress so that those trade agreements
can be presented to Congress. As to the extent of benefits foregone to
date because these agreements have not been ratified, that would be
difficult to estimate as the market liberalization required by the
agreements would only be phased in over time and the trade and
investment flows induced by that liberalization also develop over time.
That said, the U.S. economy clearly stands to benefit from passage
of these agreements. As estimated by the United States International
Trade commission (USITC) in its 2006 study of the impacts of the
Colombia Trade Promotion Agreement (TPA) on the U.S. economy, when
fully phased in the agreement would increase overall U.S. goods exports
by 13.7 percent over the levels they would otherwise have achieved
without the agreement. The USITC's 2007 report on the Panama TPA noted
that the United States has had a trade surplus with Panama since 1989
and showed that U.S. exports to Panama would increase by between 9 and
145 percent in the sectors it analyzed. In the longer term, these
benefits could be magnified by the reduction of impediments in customs
processing, enhanced investor protections, and increased regulatory
transparency in our partner countries, as required by these agreements.
As to when these agreements could be submitted to Congress, I would
refer you to United States Trade Representative, Ambassador Kirk.
Question. As you know, Venezuela is building deep and troubling
ties with Iran, which we have designated as the main State Sponsor of
Terror in the world. I believe these ties are--or will soon begin to
undermine the multilateral sanctions against the Iranian regime's
pursuit of an illicit nuclear weapons program.
How is your Department monitoring violations to multilateral
sanctions on Iran through Venezuela?
Answer. We are aware of the growing relationship between Venezuela
and Iran, including increased business and trade ties, and we are
monitoring this relationship closely. In 2008, the Treasury Department
designated Venezuelan-based Banco Internacional de Desarrollo, a
subsidiary of the Export Development Bank of Iran (EDBI), pursuant to
Executive Order 13382, which targets the WMD proliferators and their
support networks. EDBI was designated for providing or attempting to
provide financial services to Iran's Ministry of Defense for Armed
Forces Logistics (MODAFL), which has ultimate authority over the
Aerospace Industries Organization (AI0), the umbrella group that
controls Iran's ballistic missile research, development, and production
activities and organizations.
The Treasury Department relies upon a number of authorities to
target Iran's illicit activities. Executive Orders 13382 and 13224
allow Treasury to prohibit transactions with, and freeze the assets of,
entities and individuals that engage in or support WMD proliferation
activities or terrorism, respectively. In addition, subsection 104(c)
of the Comprehensive Iran Sanctions, Accountability, and Divestment Act
of 2010 (CISADA) required Treasury to issue regulations (published on
August 16, 2010) to implement the Secretary's authority to prohibit or
impose strict conditions on the opening or maintaining in the United
States of correspondent accounts or payable through accounts for
foreign financial institutions found to knowingly engage in certain
activities involving Iran. Treasury remains vigilant for any
transactions that might be subject to existing U.S. or international
sanctions against Iran and we continue to work with our international
partners on robust implementation of the international sanctions
framework. We expect Venezuela to comply with its international
obligations under UNSCR 1929, and we will take appropriate action
against those found to be engaged in any activities that are
sanctionable under the U.S. or U.N. sanctions frameworks.
Are there any open investigations into these troubling ties?
Answer. Treasury does not comment publicly on possible or pending
investigations.
Question. Tourism in Cuba, including tourism travel, is owned and
operated by the Cuban state and is, in effect, one of the main sources
of revenue of the Castro regime. Therefore, American tourism travel to
Cuba is statutorily prohibited, except for family, religious, cultural
and academic purposes. The Obama administration has recently expanded
the scope of this purposeful travel, and questions have been raised
about what appears lax enforcement of these restrictions by the Office
of Foreign Assets Control (OFAC) within your Department.
What is OFAC doing to ensure robust enforcement of U.S.
restrictions on tourism travel to Cuba?
Answer. In an effort to maximize the impact of our efforts and
resources, OFAC has concentrated its Cuba travel enforcement work on
companies in the travel industry and organizations facilitating group
travel. Given both important resource considerations as well as the
demand of several high-priority sanctions programs that OFAC
administers (including against Iran, terrorism, proliferation of
weapons of mass destruction, and, most recently, Libya), efforts
focusing on travel companies and organizations facilitating group
travel more effectively enforce Cuba related travel restrictions.
Does OFAC's enforcement of the rules include audits of
licensed travel service providers?
Answer. OFAC scrutinizes the transactions and conduct of the Cuba
Service Provider community (the ``SPs'') on an ongoing basis. OFAC
exercises its oversight primarily through specific inquiries made to
SPs. OFAC does not currently conduct regular compliance reviews of all
SPs because OFAC has found that dedicating enforcement resources and
activities toward the activities of select SPs and suspected
unauthorized SPs is a more effective method of insuring that SPs are
conducting their business properly. In addition, OFAC requires detailed
information from each applicant to be an SP, and conducts an
investigation of each applicant before determining whether granting an
SP license is consistent with the Cuban Assets Control Regulations.
If so, what has been the result of such audits?
Answer. In some cases, OFAC has suspended or revoked TSP
authorizations, which effectively puts an entity out of the business of
providing Cuba travel services. OFAC actively monitors the TSPs in
order to better ensure that they operate in compliance with the
applicable rules and regulations. Past reviews have also revealed
issues which OFAC has subsequently used as the basis for training that
OFAC offers to the licensed travel service provider community.
Question. On March 1, 2011, the Treasury Department issued a report
confirming China as the largest foreign holder of U.S. debt, $1.16
trillion in total. As you know, by 2021, interest payments on the
national debt are projected to reach $844 billion a year.
Considering our longstanding concerns with the Chinese
Government's lack of transparency on their military planning
and expenditures, what are the strategic implications of the
United States beholden to China for such sums?
How does this situation affect our interests in multilateral
financing institutions?
Answer. As of March 2011, China's holdings of Treasury securities
totaled $1,144.9 billion, or 8 percent of total public debt
outstanding. More than 68 percent of Treasury securities are held by
U.S. residents. Most of China's financial investments in the United
States are concentrated in Treasury securities, likely because it is an
extremely deep and liquid market. Chinese officials have said publicly
that liquidity and safety are their most important objectives in
managing their official reserves.
With respect to the Treasury security market, Treasury has a very
large and diversified investor base that is not reliant on any
particular investor. This became evident during the financial crisis as
Treasury's investor base grew. Additionally, as the saving rate in the
United States has increased over the past 2 years, so too has the
appetite of domestic investors for Treasuries. The Treasury market is
the deepest and most liquid market in the world. Daily transaction
volumes total approximately $400 billion.
An important tool for promoting U.S. security, economic, and
commercial interests is robust U.S. presence in the MDBs. Every dollar
we provide the MDBs as capital is magnified by the contributions of
other shareholders and the MDB's increased ability to borrow such that
they can provide assistance to rival China's. As the largest
nonregional shareholder in most MDBs, the United States exerts
significant leadership in shaping their policies, including those
related to procurement and combating corruption. U.S. businesses
benefit from the level playing field that results from the strict
procurement processes and anticorruption policies promoted by the MDBs
in its borrowing members. In many of the markets in which the MDBs
operate, a major alternative source of financing comes from China,
which is often low cost, nontransparent, and tied to support for
Chinese firms. If we do not fully fund our contributions under the
GCIs, our leadership position within these institutions will be eroded,
and with it our ability to maintain U.S. priorities such as
nondiscriminatory procurement.
______
Questions Submitted by Senator Robert Menendez
Question. With respect to the regulatory changes made by President
Obama in January with respect to our policy toward Cuba I am
particularly leery of changes that enhance ``people-to-people''
programs. There are a lot of companies that are seeking to make a buck
off the people-to-people programs without considering whether the
program actually provides any benefit to the Cuban people.
For example, one company is offering a trip to Cuba to take classes
on ``Salsa and other popular dances like Mambo, Cha Cha Cha, and Rueda
de Casino.''
The regulations state, however, ``This travel category provides for
specific licenses authorizing educational exchanges--not involving
academic study pursuant to a degree program--when those exchanges take
place under the auspices of an organization that sponsors and organizes
such programs to promote people-to-people contact.''
Has OAFC developed specific criteria to guide decisions with
respect to license applications, beyond the limited guidance
provided by the regulations, that will ensure that licensees
are in serving our stated policy goal of promoting people-to-
people contact?
What assurances or documentation is required of licensees
upon their return to the United States to ensure that their
programs are serving our policy goals?
Answer. OFAC has recently published guidelines addressing this
licensing category: http://www.treasury.gov/resource-center/sanctions/
Programs/Documents/cuba tr_app.pdf.
Question. One of the themes of this hearing is addressing threats
to our economic recovery. In that context I think we must consider
China's continued undervaluation of its currency and its impact on our
economy in terms--particularly as we seek to double our exports by
2015.
On February 4, the Treasury Department concluded in its ``Annual
Report to Congress on International Economic and Exchange Rate
Policies'' that China did not qualify as a currency manipulator because
it had permitted some appreciation of the renminbi (REN-MIN-BI).
China's undervaluation remains an important issue, as the report
points out: ``A renimnbi which is below its equilibrium value decreases
the purchasing power of China's consumers. Undervaluation increases the
price tag on items such as imported food or gasoline, new homes built
with imported materials, or a foreign automobile. It also encourages
Chinese firms to produce for export markets and cater to the
preferences of foreign rather than domestic consumers, placing an
additional damper on the growth of domestic demand.''
The same report points out that China has largely recovered from
the global financial crisis and that in 2010, China's economy expanded
by 10.3 percent in real terms. Meanwhile, the U.S. economy is still
struggling. As a result, in addition to market access issues, U.S.
firms are at a price disadvantage because of China's currency policy.
What will it take for the China to level the playing field
for U.S. companies? Do we need to pass legislation to force the
issue?
Answer. The currency issue remains a top priority for the
administration, and was a focal point of discussion in the Economic
Track of the recently concluded third meeting of the Strategic and
Economic Dialogue (S&ED). China has begun to adjust its nominal
exchange rate in recent months; since June 2010, China's authorities
have allowed their currency to appreciate against the dollar by about 5
percent nominal terms, and at a pace of about 9 percent per year in
real terms, given higher inflation in China than in the United States.
But, despite this, progress thus far is insufficient. China's currency
remains substantially undervalued and more rapid progress is needed. As
was evident in our S&ED discussions, China's leaders recognize
increasingly that exchange rate flexibility needs to be part of China's
efforts to rely more on its own domestic demand to generate growth, a
key objective of China's recently released 12th Five Year Plan.
The United States-China economic relationship offers great promise
and potential, and we are committed to securing the best outcomes for
American workers and businesses. Last year, U.S. exports of goods and
services to China reached $110 billion, growing 50 percent faster than
our exports to the rest of the world, and supporting hundreds of
thousands of U.S. jobs across a range of sectors.
We are using all channels available, including multilateral venues,
to push for progress on China's economic policies, including its
exchange rate policy. To support global recovery and ensure strong,
sustained, and more balanced global growth into the future, the United
States, China, and the other members of the G20 group of nations have
committed to policy measures that will strengthen domestic demand-led
growth in major surplus economies, including China. Stronger growth of
domestic demand in China, particularly household consumption, which
reduces China's trade surplus, will be a powerful impetus to global
growth, creating new opportunities for U.S. firms and workers. A
stronger RMB is an indispensible part of this process of reorienting
Chinese growth.
Although progress has been made on the exchange rate, intellectual
property rights, and other important economic and trade issues, much
remains to be done. As we did during the third Strategic & Economic
Dialogue, the administration will continue to vigorously engage with
the Chinese leadership to make the United States-China economic
relationship more beneficial to the American people.
But in any discussion of China, it is important for Americans--
including the administration and Congress--to understand that the
solutions to our challenges in the United States rest first and
foremost here at home and not in China. Fundamentally, how many jobs
and how much wealth we create will be the result of the choices we make
in the United States--not the choices of others.
That means we must restore fiscal responsibility. This will require
the government to spend less and spend more wisely, so that we can
afford to make the investments that are critical to future growth.
With respect to legislative measures intended to level the playing
field for U.S. companies, I have noted in the past that it is important
that these are both effective and consistent with our international
obligations.
Question. The Treasury Department cochairs the U.S.-China Strategic
and Economic Dialogue (S&ED), whose next meeting is scheduled for May
of this year. While the S&ED is designed to advance bilateral
negotiations on high-level macroeconomic and geopolitical issues, a
major concern is that trade issues relevant to the S&ED agenda are only
addressed under the U.S.-China Joint Committee on Commerce and Trade
(JCCT) framework. The JCCT remains the lone vehicle to address a very
long and growing list of trade and enforcement concerns. This
bottleneck impedes progress on trade issues that are undermining job
creation and economic recovery.
A critical issue confronting nonprofit and commercial publishers in
New Jersey is the online piracy of their scientific, technical and
medical research articles. Libraries with subscriptions to U.S.
journals are providing the copyrighted content to third parties, who
are then reselling the articles on sophisticated online platforms.
China is one of the fastest-growing export markets for U.S. journal
publishers and is now the second-largest source of scholarly research
in the world behind the United States. U.S. publishers have played a
key role in supporting this dynamic growth, working closely with
Chinese researchers to improve the quality of their research through
rigorous peer review and journal management training.
Rampant online piracy of valuable, peer-reviewed scientific,
technical, and medical research harms not only U.S. industry and
investments in innovation but Chinese innovation and development goals
as well. The publishers impacted by these alleged IPR violations
directly and indirectly employ over 50,000 workers in the United States
and maintain extensive operations in the State of New Jersey that
provide more than 3,000 jobs.
How will you ensure that the S&ED framework also addresses
broader trade issues that impact the S&ED agenda, such as the
journal piracy issue?
Answer. The administration strongly shares your concerns, and that
is why trade and investment issues, including intellectual property
rights (IPR) protection and enforcement, are an important component of
the U.S.-China Strategic and Economic (S&ED) Dialogue. The Department
of the Treasury, the Office of the U.S. Trade Representative, the
Department of Commerce, and other agencies, we work together closely to
address strategic trade and investment issues in the S&ED with the
relevant Chinese ministries. The Economic Track of the S&ED is chaired
by Chinese Vice Premier Wang Qishan, who is the Chinese official
responsible for trade issues, including IPR. The S&ED and the Joint
Commission on Commerce and Trade (JCCT) are complementary efforts that
are part of the administration's expansive, coordinated China strategy.
The S&ED tends to focus on systemic, financial sector, and cross-
cutting trade and investment issues, while the JCCT focuses on
resolving specific trade and investment barriers.
At the third S&ED, we achieved important progress on a number of
trade and investment issues, including securing Chinese commitments to
better protect and enforce IPR; eliminate government procurement
indigenous innovation product catalogues and revise Article 9 of the
draft Government Procurement Law Implementing Regulations as part of
China's implementation of President Hu's commitment not to link
innovation policies to the provision of government procurement
preferences; issue a Chinese measure to provide the public with advance
notice and an an opportunity to comment on Chinese regulations and
rules; and undertake discussions on our export financing systems,
recognizing the importance of transparency and fairness in the
provision of export credits. These commitments should lead to more U.S.
jobs and boost U.S. exports to China and the world by contributing to a
more level playing field and expanding the opportunities available to
U.S. workers and firms.
On IPR in particular, China pledged to improve its high-level,
long-term IPR protection and enforcement mechanism, building on the
current Special Campaign Against IPR Infringement and Fake and Shoddy
Products, and to strengthen its government inspection mechanism to make
sure that the software being used by government agencies at all levels
is legitimate. These commitments build on the important bilateral
commitments including those made during President Hu's visit in
January. The administration will continue to engage China vigorously to
ensure their comprehensive implementation.
With regard to the specific issue of journal piracy, during the
JCCT last December, China and the United States agreed to continue
cooperation on strengthening library IPR protection and to continue
consultations with rights holders about library IPR protection efforts.
China's National Copyright Administration (NCAC) described its ongoing
efforts to investigate complaints by academic journal publishers about
Web-based enterprises' piracy of library academic journals, and agreed
to take prompt action at the conclusion of its investigations. We
understand that U.S. stakeholders are engaging NCAC to follow up on the
JCCT outcome. Also, U.S. trade officials met with NCAC in late March to
discuss this and other important copyright issues, and library piracy
issues were also discussed at the JCCT IPR Working Group in April.
Trade and investment issues, including IPR protection and
enforcement, will continue to be an important component of our S&ED
engagement with China.
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