[Senate Hearing 115-621]
[From the U.S. Government Publishing Office]
S. Hrg. 115-621
INSERT TITLE HEREMULTILATERAL ECONOMIC INSTITUTIONS
AND U.S. FOREIGN POLICY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MULTILATERAL
INTERNATIONAL DEVELOPMENT,
MULTILATERAL INSTITUTIONS AND
INTERNATIONAL ECONOMIC, ENERGY,
AND ENVIRONMENTAL POLICY
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 27, 2018
__________
Printed for the use of the Committee on Foreign Relations
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web:
http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
36-503 PDF WASHINGTON : 2019
--------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
COMMITTEE ON FOREIGN RELATIONS
BOB CORKER, Tennessee, Chairman
JAMES E. RISCH, Idaho ROBERT MENENDEZ, New Jersey
MARCO RUBIO, Florida BENJAMIN L. CARDIN, Maryland
RON JOHNSON, Wisconsin JEANNE SHAHEEN, New Hampshire
JEFF FLAKE, Arizona CHRISTOPHER A. COONS, Delaware
CORY GARDNER, Colorado TOM UDALL, New Mexico
TODD, YOUNG, Indiana CHRISTOPHER MURPHY, Connecticut
JOHN BARRASSO, Wyoming TIM KAINE, Virginia
JOHNNY ISAKSON, Georgia EDWARD J. MARKEY, Massachusetts
ROB PORTMAN, Ohio JEFF MERKLEY, Oregon
RAND PAUL, Kentucky CORY A. BOOKER, New Jersey
Todd Womack, Staff Director
Jessica Lewis, Democratic Staff Director
John Dutton, Chief Clerk
SUBCOMMITTEE ON MULTILATERAL INTERNATIONAL
DEVELOPMENT, MULTILATERAL INSTITUTIONS
AND INTERNATIONAL ECONOMIC, ENERGY,
AND ENVIRONMENTAL POLICY
TODD, YOUNG, Indiana, Chairman
JEFF FLAKE, Arizona JEFF MERKLEY, Oregon
CORY GARDNER, Colorado TOM UDALL, New Mexico
JOHN BARRASSO, Wyoming CHRISTOPHER A. COONS, Delaware
ROB PORTMAN, Ohio EDWARD J. MARKEY, Massachusetts
(ii)
C O N T E N T S
----------
Page
Young, Hon. Todd, U.S. Senator from Indiana...................... 1
Merkley, Hon. Jeff, U.S. Senator from Oregon..................... 3
Malpass, Hon. David, Under Secretary, International Affairs, U.S.
Department of the Treasury, Washington, DC..................... 4
Prepared statement........................................... 52
Responses to additional questions submitted for the record by
Senator Menendez........................................... 64
De Marcellus, Hon. Roland, acting deputy assistant secretary,
International Finance and Development, Bureau of Economic and
Business Affairs, U.S. Department of State, Washington, DC..... 6
Prepared statement........................................... 7
Lowery, Hon. Clay, visiting fellow, Center for Global
Development, Arlington, VA..................................... 21
Prepared statement........................................... 22
Hillman, Jennifer, Professor, Georgetown Law Center, Washington,
DC............................................................. 25
Prepared statement........................................... 65
Saving Multilateralism--Renovating the House of Global
Economic Governance for the 21st Century--by Jennifer
Hillman--The German Marshall Fund of the United States--
[included as a supplement to Ms. Hillman's prepared
statement]................................................. 80
Lee, Thea, president, Economic Policy Institute, Washington, DC.. 27
Prepared statement........................................... 29
Morris, Scott, senior fellow and director, United States
Development Policy Initiative, Center for Global Development,
Bethesda, MD................................................... 32
Prepared statement........................................... 33
Examining the Debt Implications of the Belt and Road
Initiative from a Policy Perspective--by John Hurley, Scott
Morris, and Gailyn Portelance--[entered into the hearing
record by Senator Young]................................... 143
Responses to additional questions submitted for the record by
Senator Robert Menendez.................................... 182
Examining World Bank Lending to China: Graduation or
Modulation--Scott Morris and Gailyn Portelance--[included
in the hearing record as part of Scott Morris's response to
a question from Senator Menendez]]......................... 183
Segal, Stephanie, senior fellow and deputy director, Simon Chair
in Political Economy, Center for Strategic and International
Studies, Washington, DC........................................ 37
Prepared statement........................................... 38
(iii)
MULTILATERAL ECONOMIC INSTITUTIONS AND U.S. FOREIGN POLICY
----------
TUESDAY, NOVEMBER 27, 2018
U.S. Senate,
Subcommittee on Multilateral International
Development, Multilateral Institutions, and
International Economic, Energy, and Environmental
Policy
Committee on Foreign Relations,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:39 p.m. in
Room SD-419, Dirksen Senate Office Building, Hon. Todd Young,
chairman of the subcommittee, presiding.
Present: Senators Young [presiding] and Merkley.
OPENING STATEMENT OF HON. TODD YOUNG,
U.S. SENATOR FROM INDIANA
Senator Young. Good afternoon. This hearing of the Senate
Foreign Relations Subcommittee on Multilateral International
Development, Multilateral Institutions, and International
Economic, Energy, and Environmental Policy will come to order.
Once again, I want to thank the ranking member, Senator
Merkley. Today's hearing represents our subcommittee's eighth
hearing during the 115th Congress. I am grateful for our
continued partnership on this and many other issues.
The title for today's hearing is ``Multilateral Economic
Institutions and U.S. Foreign Policy.''
We will divide today's hearing into two separate panels.
Our first panel will consist of two administration witnesses:
the Honorable David Malpass, Under Secretary for International
Affairs at the U.S. Department of Treasury and the Honorable
Roland de Marcellus, Acting Deputy Assistant Secretary for
International Finance and Development at the U.S. Department of
State. I want to welcome both of you.
Our second panel today will consist of five distinguished
experts and former officials from previous administrations. I
will introduce each of them following this panel.
Now, given this important topic and our excellent witnesses
here today, I am, of course, eager to hear from each of you,
but before we do, allow me to frame this conversation somewhat.
In July of 1944, delegates from 44 nations met in Bretton
Woods, New Hampshire to establish new rules and institutions
for the post-World War II international economic system. These
nations, led by the United States and informed by lessons
regarding the causes of World War II, sought to create
institutions that would catalyze economic growth, reduce
poverty, expand trade, and promote financial stability. The
primary result of these negotiations were the International
Monetary Fund and the International Bank for Reconstruction and
Development, which is now part of the World Bank group.
At risk of ruining the surprise, allow me to say the
following up front. The U.S. is not and should not be neutral
when it comes to the continued success of these institutions.
The U.S. helped create these multilateral institutions for good
reasons, and Americans have been among the leading
beneficiaries.
While the IMF, World Bank, and regional development banks
are not perfect and they require reform, on balance, they have
promoted and sustained the open rules-based international
economic order that has facilitated decades of extraordinary
economic growth for both Americans and people around the world.
They have helped lift millions out of poverty, doing good,
creating international customers for American companies, and
promoting peace, stability and prosperity. That is why I
believe the U.S. should continue to support these institutions,
pushing them to fulfill their important purposes and implement
reforms where necessary.
If we fail to lead and remain engaged in these
multinational fora, others nations will step forward and
replace us, namely China. In a vacuum created by the absence of
U.S. leadership, Beijing would twist these organizations to
their purposes and state capitalist model. Absent U.S.
leadership and engagement, China would expedite the creation of
alternatives to the institutions that have done so much good
and serve the interests of Americans and millions around the
world. Less powerful and prosperous nations would have little
choice but to reluctantly bandwagon with Beijing. That would
represent a negative outcome for Americans and for pretty much
everyone other than the Chinese Communist Party. A coercive
international economic order dominated by China would look very
different.
Now, to be clear, most developing countries, and
particularly those in Asia, do not want to be forced to choose
between the United States and China. Many countries have
genuine development needs, and they will find one way or
another to address those needs. However, developing countries
do want choices. The U.S. should ensure developing countries
have an alternative to the Chinese model, which often involves
poor transparency, unsustainable debt, and the creation of
dependence, which is frequently exploited later for China's
strategic advantage.
We should use our voice and our votes in these
international financial institutions to demand greater
transparency from China and to ensure Beijing is not saddling
developing countries with unsustainable debt burdens.
Simultaneously, we should lead with our strength, the
private sector. We should ensure U.S. federal policies, laws,
and institutions, as well as U.S. official development
assistance, focus on catalyzing private investment, making
clear that the United States want prosperous and independent
trading partners, not dependent debtors to extort in order to
gain access to a port.
I look forward to discussing with our witnesses how these
international financial institutions have benefited Americans,
how they are performing and what reforms may be necessary. I am
interested in discussing how the U.S. is or should be using our
voice and our vote in these international financial
institutions to address the lack of transparency from China we
have seen in the developing world and some of the resulting
debt burdens inflicted on developing countries.
I would also like to hear from our witnesses on the
upcoming G20 summit and what key U.S. objectives the
administration is or should be pursuing there.
So with those thoughts in mind, I would now like to call on
Ranking Member Merkley for his opening remarks. Senator
Merkley?
STATEMENT OF HON. JEFF MERKLEY,
U.S. SENATOR FROM OREGON
Senator Merkley. Thank you very much, Senator Young, in
organizing this hearing and for your partnership over the last
2 years. I think this subcommittee has examined a number of
important issues and done so with a real policy framework,
intentional effort to get to the bottom of the story. And well
done.
I expect we will hear from our State and Treasury
Department witnesses about the value of U.S. contributions to
the IMF and the World Bank, the value that they have in
supporting a transparent development agenda that seeks to
assist countries expand their economies. These efforts are
particularly relevant in a world where so many countries seek
financing from China, whose loans come with lax to nonexistent
labor and environmental standards and whose repayment terms are
clouded in mystery. These are important issues, and I look
forward to hearing from our government witnesses the
administration's current efforts in this area.
But China's opaque financing does not just affect the
developing world. I hope to hear from our second panel about
how Beijing's anticompetitive behavior has violated the
commitments it made to us and to the world community when we
supported its membership in the World Trade Organization, an
other multilateral economic institution that affects U.S.
foreign policy and workers here at home. Those violations
include the theft of intellectual property, weak labor and
environmental standards, and forcing U.S. and foreign companies
to transfer technology.
The Chinese Government provides subsidized loans, export
credits, loan forgiveness and more for state-owned enterprises.
These firms use these unfair advantages to shrink market share
for U.S. firms who do not receive the same benefits from
Washington and are forced to lay off workers.
I want to note that when I was reading the materials for
this hearing, it really emphasized the debt trap that China is
using as an instrument of foreign policy. And it reminded me of
a book I read in college called ``The Debt Trap.'' But this
book was about the IMF's policy 45 years ago and about how we
had many loans that went to the elite in developing countries,
how the elite banked those funds overseas, and how subsequent
governments were left in these poor countries to repay the
debt, leaving them in an extraordinarily vulnerable situation
in terms of policies that would benefit their citizens versus
benefit foreign investors.
It has been many, many decades in which the IMF's practices
are very different. But now we have China adopting a debt trap
model, adopting a model in which they are setting up a system
where they can exercise leverage in a fashion that is not
beneficial to the development of the welfare of the citizens of
many countries. And I think it merits this full investigation,
and I certainly appreciate you scheduling this hearing.
Senator Young. Well, again, I want to welcome our
witnesses. Know that your full written statements will be
included in the record. I thank you for the thoughtfulness of
those statements.
I would ask each of you to summarize your written
statement, however, within 5 minutes so that we can engage in a
more extended question and answer period. So let us go in the
order that I announced you. Under Secretary Malpass?
STATEMENT OF HON. DAVID MALPASS, UNDER SECRETARY, INTERNATIONAL
AFFAIRS, UNITED STATES DEPARTMENT OF THE TREASURY, WASHINGTON,
D.C.
Mr. Malpass. Thank you very much, Senator Young, and thank
you, Senator Merkley. Thanks for holding the hearing.
While there has been substantial economic progress in the
United States, growth abroad has softened materially, causing
challenges for international economic policy. Our goal is to
achieve faster U.S. and global growth in ways that improve
after-tax wages for American workers.
I would like to describe some of our major 2018
international policies in order to create the context for our
work in the international financial institutions, the IFIs.
We have engaged repeatedly with China on our trade and
investment concerns and the problems caused by their One Belt,
One Road initiative. It often leaves countries with excessive
debt and poor quality projects. If countries default on these
debts, China often gains influence over the host governments
and may take ownership of the underlying assets. We have built
a common awareness of these concerns in the G7 and the G20. In
lending, China often fails to adhere to international standards
in areas such as anti-corruption, export credits, and finding
coordinated and sustainable solutions to payment difficulties,
such as those sought in the Paris Club.
In addition to that work on China, we built a common
awareness, as I mentioned in the concerns, in the G7 and G20
that is important. Secretary Mnuchin has pushed forward an
initiative on debt transparency that will increase public
disclosure and broaden the existing definition of international
debt beyond traditional bonds and loans. We will be working
with the IMF and the World Bank in this initiative. It should
reduce the frequency and severity of developing country crises
and help push back on China's over-lending.
With Congress' support, we have also enhanced America's
national security through FIRRMA, which has strengthened and
modernized the Committee on Foreign Investment in the United
States, CFIUS. CFIUS launched an innovative pilot program on
November 10th, which includes requiring declarations for
certain foreign investments in U.S. businesses involved in
critical technologies in 27 specific industries.
We have worked multilaterally to forge a new currency
consensus in the G20 to recognize the growth and investment
benefits of currency stability. The U.S.-Mexico-Canada
agreement, to be signed later this week, includes the first
currency chapter in a trade agreement. We also reached an
understanding with South Korea on currency stability and
transparency at the time of the update of KORUS.
Argentina's new IMF program includes a nominal monetary
anchor and an important commitment to leaving currency
intervention unsterilized. Those policies quickly stopped
Argentina's mid-2018 currency crisis, and they are dramatically
reducing the rate of inflation. By expressly limiting the
growth of the monetary base, a policy that the United States
strongly supported, the central bank was able to arrest the
precipitous decline in the exchange rate.
Treasury also this year launched the America Crece
initiative to promote growth in the western hemisphere. In
2018, we signed energy framework agreements with Panama and
Chile. We expect to sign one with Jamaica tomorrow and hope to
conclude one with Argentina in the near future.
We have refocused the Financial Stability Board on its
systemic risk mandate, including the adoption of an activities-
based approach on insurance activities and wind-down of work
streams unrelated to stability issues and the evaluation of the
effectiveness of existing policies before developing new
policies. I served on the nominations committee for FSB
leadership and was pleased with yesterday's announcement of Fed
Vice Chairman Randy Quarles as the FSB's next chairman, the
first American to serve in that role.
Looking into 2019, we will continue our work on debt
transparency, the implementation of FIRRMA, the energy
initiatives, and China's unfair trade practices and lack of
reciprocity and market access. We maintain active economic
dialogues with other countries to assess systemic
vulnerabilities and to support democratic principles and
institutions.
In Latin America notably in the western hemisphere, we have
emphasized the risks and challenges posed by ``The Troika of
Tyranny,'' namely Venezuela, Cuba, and Nicaragua.
As Brexit approaches, Treasury is analyzing risks to the
international financial system. We are working toward improved
trade arrangements with the EU. The administration has notified
Congress on October 16th of its intent to start trade
negotiations with the UK, once it leaves the EU in March of
2019. And we continue to work to streamline the G20.
I am going to stop at this point and leave discussion of
the IFIs to my State Department colleague, Secretary de
Marcellus. Thank you.
[Mr. Malpass's prepared statement is located at the end of
this transcript.]
Senator Young. Thank you, Secretary Malpass.
Secretary de Marcellus?
STATEMENT OF HON. ROLAND DE MARCELLUS, ACTING DEPUTY ASSISTANT
SECRETARY, INTERNATIONAL FINANCE AND DEVELOPMENT, BUREAU OF
ECONOMIC AND BUSINESS AFFAIRS, UNITED STATES DEPARTMENT OF
STATE, WASHINGTON, D.C.
Mr. de Marcellus. Thank you very much. Chairman Young,
Ranking Member Merkley, thank you so much for holding these
hearings. It is certainly an honor to be here today and a
particular honor to testify with Under Secretary Malpass.
Senator, as you noted in your opening statement, the United
States was the leading force in establishing the World Bank and
IMF. And though Treasury has the lead for the oversight of the
IFIs, international financial institutions, the State
Department has been working closely with Treasury from the very
beginning to be sure that these institutions advance our
interests. We created them and we remain in the IFIs to advance
our national security interests, our foreign policy interests,
and our economic interests, as well as promoting the wellbeing
of people globally.
The question is sometimes asked, which is better?
Multilateral assistance or bilateral assistance? To me it is
like asking, when you build a house, which tool is better, the
nail gun or the power drill? It really depends on the task at
hand at that very moment. Now, we might use the nail gun or
bilateral assistance more often, but we do not want be at the
job site without the power drill.
Now, that said, the tools can always be improved and
reformed. And Under Secretary Malpass' written statement goes
into excellent detail on the reforms that we are looking for
across the IFIs, and we are very supportive of those.
One advantage that the IFIs offer is the leveraging of
resources since their resources so exceed our own because of
the other donors, as well as the access to capital markets.
In addition, we can leverage the skills of the very
talented staff at IFIs, provide advice to developing countries
around the world on issues like procurement, fiscal policy,
anti-corruption, or debt sustainability and many other issues.
I would like to just focus on three areas where the IFIs
advance our interests. One, by providing stability in
strategically important areas such as the Middle East. Two, by
advancing our economic interests. And three, by offering a best
practice alternative to the Chinese lending model.
In terms of the Middle East, when our vital ally, Jordan,
was threatened with massive refugee flows from Syria, it
threatened to destabilize the country. So we turned to the
World Bank to help. The World Bank set up the Global
Concessional Financing Facility, or GCFF, to help pool funds to
assist countries facing refugee flows, initially Jordan. The
United States put in, so far, $35 million to this fund. We were
a founding donor. Other countries then followed our lead and
put in, so far, another $244 million as of the middle of this
year.
Now, what happened is the World Bank and the European Bank
for Reconstruction and Development then extended loans--they
were low interest, thanks to these contributions--to help the
Syrian refugees and their Jordanian host communities with clean
water, education, health, job opportunities.
So in sum, $35 million from us went to about $1.5 billion
in low interest support for a key regional ally, Jordan.
Now, going to our economic interests, as you noted and the
Under Secretary noted, the IMF and the banks have been working
to advance prosperity around the world. So this creates better
conditions for expanding the U.S. and global economy, thus
giving us larger markets for export and support for American
jobs. America's fastest growing export markets, now
representing 40 percent of our exports, are in developing
countries.
The IFIs also help by promoting in these countries a
transparent business climate and helping to raise global
procurement standards, fight corruption, and unleash private
investment. This helps our companies compete better.
Third and lastly, the IFIs promote and provide transparent
financing terms, offering, as you noted, borrowers a better
alternative for their people to the opaque terms and financing
offered by China in their lending practices. This has already
led to unsustainable debt levels in several cases. The IMF is
working alongside the World Bank, as the Under Secretary has
noted, to bring transparency to countries external debts,
helping to shed light on these and to counter these predatory
lending practices.
But in addition, as Senator Merkley noted, development
banks employ policies aligned with American laws and American
values to safeguard the environment and people. Unlike lenders
with little to no regard for these standards, the banks require
borrowing governments to address environmental and social
impacts associated with the projects. These requirements
support sustainable development and lasting results.
So in closing, I would like to reemphasize the State
Department's commitment to working with Treasury to ensure that
the IFIs advance our national security, our foreign policy, and
our economic interests globally. Over 7 decades, this has
benefited exporters and taxpayers, promoting American
prosperity and security.
We also appreciate Congress' interest, your engagement, and
continued support on these issues.
So thank you again for holding this hearing, and I look
forward to your questions. Thank you.
[Mr. de Marcellus's prepared statement follows:]
Prepared Statement of Hon. Roland de Marcellus
Chairman Young, Ranking Member Merkley, and Members of the
Subcommittee, it is my honor to appear before you today to discuss the
important role that the International Financial Institutions (IFIs)
play in advancing our national security, foreign policy, and economic
interests globally. IFIs include the International Monetary Fund (IMF)
and the Multilateral Development Banks (MDBs), which include the World
Bank, Inter-American Development Bank, the European Bank for
Reconstruction and Development, the African Development Bank, and the
Asian Development Bank.
Enhancing U.S. Leadership
The United States was the leading force in establishing the World
Bank and International Monetary Fund (IMF) in 1944. The Department of
the Treasury has the lead for oversight of the IFIs, but the Department
of State has been working closely with Treasury from the very beginning
to advance our interests. Our objective was then and is now to
strengthen the international economy for the benefit of the American
people and U.S. interests globally.
I would like to describe briefly how these institutions work at the
most general level. First, they pool contributions from countries
around the world. The staff of the institution then works with
recipient countries to develop projects and programs for the benefit of
the recipients' economic development in the case of the Multilateral
Development Banks, or financial stability in the case of the IMF. Those
projects and programs then come to the board of the institution for a
vote of approval. The United States has the largest vote at nearly all
of the IFIs and considerable influence. The Treasury Department gives
directions to our representatives at the institutions on how to vote in
each case. They do so, however, in close coordination with other
agencies, particularly the State Department.
Getting Bang for the Buck
We created the IFIs, and remain engaged in them, to advance our
national security, foreign policy, and economic objectives as well as
to promote the wellbeing of people throughout the world. The question
is sometimes asked, which is better--bilateral assistance or
multilateral assistance? It is like asking which tool is better for
building a house--a nail gun or a power drill? It depends on the
particular task at hand. In building the house, we might use the nail
gun (or bilateral assistance) more often, but we certainly want the
power drill at the job site as well.
As I alluded to earlier, the resources of the IFIs far exceed our
own contributions because these institutions draw heavily from other
donors and leverage resources from the international capital markets.
For example, in the World Bank's non-concessional lending arm, the
International Bank for Reconstruction and Development (IBRD), every
dollar invested from the United States is combined with about five
additional dollars from other countries. These combined six dollars
allow World Bank/IBRD to raise additional financing on international
capital markets, amounting to up to 30 dollars it can then lend for
development assistance. These loans are repaid to the IBRD--with
interest--by the borrowing governments, which finances future IBRD
loans. Our contributions, multiplied by the others, contribute to
global economic growth and stability that directly benefit American
workers and exporters. In addition, we are able to leverage the highly
skilled staff at the IFIs, who provide expert advice to developing
countries on issues ranging from anti-corruption and proper procurement
practices to fiscal policy and debt sustainability, and countless other
issues.
Enhancing American National Security
The IFIs can also advance our national security. Outward migration
and destabilizing threats have frequently come from the world's fragile
and conflict-affected countries. Support to these vulnerable countries
is a key priority of the IFIs. For example, the World Bank administers
multi-donor trust funds and convenes top financial and policy experts
to develop strategies to promote growth and development in countries
such as Afghanistan, Liberia, and South Sudan. These engagements
decrease the cost of U.S. support and help to meet our policy
objectives.
Another excellent example is Jordan, which has been deeply affected
by the crisis in neighboring Syria. President Trump stated in his
remarks on September 25 to the U.N. General Assembly: ``As we see in
Jordan, the most compassionate policy is to place refugees as close to
their homes as possible to ease their eventual return to be part of the
rebuilding process. This approach also stretches finite resources to
help far more people, increasing the impact of every dollar spent.''
It is in that spirit that we had worked with the World Bank to
create the Global Concessional Financing Facility (GCFF), an innovative
financing mechanism created to help countries--initially Jordan--cope
with refugee crises. This is a perfect example of the leveraging that
stretches our contributions further. The United States was a founding
donor to the GCFF and has contributed a total of $35 million. Other
countries quickly followed our lead and by mid-2018 had provided a
total of approximately $244 million more. Those contributions combined
with loans from the World Bank and the European Bank for Reconstruction
and Development resulted in $1.45 billion of low-interest loans to
Jordan explicitly to support the refugees and assist the Jordanian host
communities. In sum, our $35 million contribution resulted in almost
$1.5 billion provided to help Jordan support hundreds of thousands of
Syrian refugees.
The IMF is another key partner in U.S. efforts to support
macroeconomic stability and advance economic reforms in strategically
important countries such as Ukraine, Iraq, and Egypt. The IMF's work
has complemented and supported many of our foreign policy objectives.
With its powerful voice on economic and financial governance issues
globally, the IMF has provided impetus for governments to undertake
necessary economic reforms aimed at boosting growth of real median
incomes. A good current example is Argentina, where, with IMF support,
the Macri Government is making important economic reforms to put itself
on sustainable financial footing. This will help the Argentine
Government continue on a path towards sound economic management and
restore growth, important for global economic stability.
Expanding Markets for U.S. Exports
Promoting prosperity around the world helps create better
conditions for expanding the U.S. and global economy, creating and
increasing markets for U.S. exporters and supporting American jobs.
America's fastest growing export markets--now representing roughly 40
percent of U.S. exports--are developing countries. The IFIs help these
countries to unleash their economic potential, which has helped to lift
tens of millions of their citizens out of poverty. As their prosperity
has increased, so has their purchasing power, expanding the number of
reliable consumers around the world for U.S. products and services.
Improving Business Climate and Standards
The IFIs also help U.S. exporters by promoting a transparent
business climate and helping to raise global procurement standards,
combat corruption, and unleash private investment. For example, the
World Bank's annual Doing Business report incentivizes countries to
undertake reforms to make it easier to open and operate a business.
This enables U.S. companies to better compete in the developing world.
Thanks in part to U.S. leadership, the IFIs engage with developing
countries to strengthen governance and legal frameworks, including
respect for the rule of law and property rights. As another example,
the World Bank has helped countries around the world establish
functional and accountable customs procedures, providing U.S. exporters
with faster, more predictable clearance of goods.
Specifically, the Multilateral Development Banks champion
transparent and fair global standards for financing and procurement,
with open, transparent bidding and terms. Public procurement accounts
for 10 to 15 percent of the world economy. By improving procurement
standards in developing economies, the MDBs help level the playing
field for U.S. business to compete for public contracts globally. The
Department of State has worked to expand opportunities for U.S.
companies to participate in MDB projects. One initiative to increase
such opportunities is the BIDS platform (which stands for Business
Information Database System). BIDS (bids.state.gov) aggregates MDB
project opportunities and helps link U.S. companies to relevant U.S.
Government economic officers at overseas posts who can help them
navigate the local market.
The transparent financing terms practiced by the MDBs offer
governments a better alternative for their people than the opaque terms
and financing proffered by some countries in bilateral lending that
have helped lead to unsustainable sovereign debt in several cases. At
the same time, our engagement at the IMF gives us the ability to press
for stringent policy requirements for countries to qualify for IMF
programs. For example, the IMF works alongside the World Bank to bring
transparency to countries' external debts, helping to shed light on and
counter predatory lending practices by other countries.
Protecting People and the Environment
The MDBs employ policies aligned with American laws and values to
safeguard people and the environment. Unlike those willing to provide
financing to governments with little to no regard for these standards,
the MDBs require the borrowing governments to address environmental and
social risks in order to receive support for investment projects.
Examples of these requirements include conducting environmental and
social impact assessments, consulting with affected communities about
potential project impacts, and restoring the livelihoods of displaced
people. These requirements not only support sustainable development,
they provide additional opportunities for U.S. companies, which lead
the world in practices that account for environmental and social
impact.
Confronting Global Health Threats
The IFIs support U.S. global health security interests by helping
address pandemic risks and diseases before they migrate to or affect
the United States. For example, in response to the 20142015 Ebola
outbreak in West Africa, the World Bank provided quick-disbursing
funding for a rapid response to the disease outbreak. Helping control
Ebola saves us money at home. The National Institutes of Health has
estimated the cost of caring for Ebola at as much as $50,000 per
patient per day. Treating just two Ebola cases in Nebraska in 2014 cost
$1.16 million. MDBs also help to prevent disease outbreaks from
becoming a pandemic by helping countries to strengthen their health
systems, which also boosts the impact of our bilateral health
assistance.
In closing, I would like to reiterate that the Department of State
is committed to working with the Department of Treasury to ensure that
the International Financial Institutions advance our national security,
foreign policy, and economic interests globally. Our contributions to
the IFIs leverage other countries' resources to deliver global economic
growth and development. Over seven decades, this has directly
benefitted U.S. exporters, workers, and taxpayers, promoting American
prosperity and strength.
Senator Young. Well, thank you both for that helpful
summary. In fact, you have preempted some of my sort of
foundational questions.
But I would like to begin with a bit of history here, as
you did, Secretary de Marcellus, indicating in your prepared
testimony that the World Bank and IMF were created through U.S.
leadership in large measure back in 1944. And the United States
was compelled because of that unique moment in history in which
it found itself as we were nearing the end of a World War. We
had suffered through a Great Depression.
Do the lessons or dangers that were felt in 1944 still have
some relevance to today as we think about the appropriate role
that the IMF and World Bank are playing? Are they serving
different needs than were felt back in--you know, 60 years ago,
70 years ago?
Mr. de Marcellus. Thank you very much. I would invite
Secretary Malpass to amplify on this because he certainly has
very good insights on this question.
I would say many of the issues remain the same at the macro
level of building economic prosperity, to advance the global
economy, and American interests.
However, the world has changed. And the focus at the time
of creation was really on reconstructing Europe and our allies
in Western Europe. Now it is really more on poor developing
countries who need more work on governance and more
foundational help, for instance, on health systems, the work
that the World Bank does to prevent pandemic health threats
from hitting U.S. shores in the country. It would not have
applied so much in 1944 but is now part of their work.
And then, of course, we have something new in that China is
an emerging donor but a large one, which is a new development
we have not seen, at the same time and as has been noted, it is
a significant factor in the international system. Therefore,
the IMF, World Bank, and other development banks have a new
role, as has been noted, to provide an alternative but also in
helping countries, borrowers, understand what is really an
offer from China, helping them understand and analyze the
terms.
So there are many new ways and countless other ways that
the development banks and IMF have adjusted to time over the 7
decades.
Senator Young. Secretary Malpass, so in addition to
stability with the example of the Middle East, more
specifically the Jordan example, very powerful, global
prosperity--40 percent of our export markets, as Secretary de
Marcellus indicated, are located in developing countries. And
then lastly, an alternative to the opaque Chinese model.
Are there other rationales for these institutions that we
should be thinking about?
Mr. Malpass. In the World Bank, we have advocated a shift,
a graduation of countries from being borrowers to not
borrowing, and that way leaving more resources for poorer
countries.
So one of the things going on now is the conflict state
problem or the fragile state problem where both the IMF and the
multilateral development banks have some expertise in helping
those situations. So one of the goals is to get the focus of
the organizations toward those needier countries or weaker
governments.
Senator Young. Very good.
Secretary Malpass, how do you believe the IMF and World
Bank are doing in fulfilling their missions? You have itemized
a whole lot of reforms that the administration is already well
on its way, fairly deeply involved in at the executive level.
Maybe you could identify the leading couple of reforms that you
believe need to occur, how the United States should be using
its voice and its vote to advance those reforms, and then if
you have an opportunity to reflect on how Congress might
provide additional authorities or assistance on any of these
fronts, please volunteer that to us.
Mr. Malpass. Thank you, Senator. I will make three areas of
comment.
One is how different the world financial environment is
today from when the institutions were founded. So there's much
more availability of private capital often, and countries have
been able to build local currency financing structures, which
simply did not exist really prior to 1990. And so that is a sea
change, a seismic shift in the way the institutions operate.
So the reforms that we have encouraged in them are this
graduation concept, so to stop lending to countries that do not
really need the money, to have differential pricing in the
loans so that better-off countries pay more in interest for the
loans that they are doing, to have an increased focus on the
quality of the loans and the transparency of those loans.
And then I would also say in the World Bank, a capital
increase that has recently been agreed on by the member
countries. There was a substantial focus on creating a
sustainable lending concept. So that means that the World Bank
would not suddenly lend a lot at the beginning of a capital
cycle and then need more money as it goes along. So the hope is
that this will create a sustainable platform where they will
not have to keep having capital increases.
So from the standpoint then of the IMF, I will mention
three reforms that we have been working on there.
One is with regard to fiscal policy, making it more growth
oriented. In some decades, the tendency was to think of it as a
repayment mechanism from countries that had gotten over-
indebted. And so one of the shifts we are looking for is to
have it be more integrally involved in creating a higher median
income for the country that it is working in.
A second is the type of privatizations being done.
Sometimes in the past there would be a tendency and emphasis on
selling assets from the government for the highest price rather
than thinking of it as the greatest benefit to the nation's
growth. And you can often get more benefit by stopping a
monopoly rather than selling a monopoly for the highest price
to the high bidder.
And the third that I will mention is we are no longer on
the gold standard. That was one of the formative purposes of
the IMF. And so in that regard, IMF is still, under article 1,
seeking stability of exchange rates rather than competitive
devaluation. So I mentioned in my opening remarks that thrust
of administration policy.
So as far as what Congress can do in this, I think holding
this hearing is very good, and then being engaged in thinking
about these policies. This is truly a seismic shift in global
finance toward a global situation where capital is available
where countries are implementing good policies. And so in that
regard, Congress can both be aware, be knowledgeable, and be
engaged in encouraging that effort. My goal--one of my goals--
is to see quite a few more countries--let us say five or 10
more countries--growing really fast as we go into 2019 and
2020.
Senator Young. Well, thank you, that is helpful.
This Senator, I know Senator Merkley, intends to stay
engaged on these issues. And if there are some concrete things
we can do to be of assistance to help you as you walk your way
through these reforms, please let us know.
Mr. Malpass. Senator, I am sorry. If I may interrupt. One
thing I forgot to mention. You know, we are bound by a great
number of mandates from Congress, legislative mandates. There
are nearly 100. And while we share many of the goals of many of
the mandates, the cost of managing those is actually
substantial. We bear a lot at Treasury. The State Department
bears a substantial cost to managing those mandates, which tend
not to expire. So these may be things that made sense 20 years
ago that do not need to be on the books now. So taking a look
at that would help us a lot.
Senator Young. Well, we will require your expertise and
assistance and that of your team. But I would request that you
identify those 100, 100-plus mandates, indicate how precisely
they impede your ability to advance reforms and open markets,
enhance stability, and present an alternative to China in the
case of the World Bank. And let us know how we can be helpful.
Mr. Malpass. Thank you.
Senator Young. We would like to take a look at that and
work together on a bipartisan basis.
But before I turn it over to Senator Merkley--and I will
give you due time to ask all that is on your mind, Jeff--I just
would like for my own benefit and for all of those who are
watching--Secretary de Marcellus, you mentioned leveraging $35
million in the case of Jordan, 35 million U.S. dollars, as I
understood it, into $1.5 billion through use of IFIs. Can you
walk me through exactly how that works?
Mr. de Marcellus. Thank you, Senator. I would be very happy
to.
So Jordan, since it is a higher income country, does not
qualify for low interest loans from the World Bank. Therefore,
when they took on all of these refugees, we and they did not
think it was fair for them to take market-based loans for
people from another country. And it would be hard for them to
sell to the Jordanian people that they were going to take
market-based loans. They really needed lower interest loans.
So what we did was set up this fund where donors--so our
$35 million plus the $244 million from others. We go and
basically buy down the interest rate on these loans, turning
what would be a normal loan for the World Bank into a discount,
very low interest loan, which is more appropriate to the need
and in recognition of Jordan's contributions to managing this
horrible humanitarian situation.
So what it does is basically by paying off the interest,
you are able to leverage much larger amounts. That is how you
get from $35 million up to almost $300 million in total donors.
Then you take the entire loan amount down to this rate. That is
how you get to $1.5 billion.
Senator Young. Thank you much.
Senator Merkley?
Senator Merkley. Thank you both very much.
So I wanted to start with a letter that a group of Senators
sent on August 16th that asked this question about whether IMF
funds are essentially being used to repay Chinese debt. And to
give you an example of this, Pakistan is a good example of a
country that has a significant amount of Chinese investment. I
think the number I have is $62 billion. They owe a lot of money
back to China, Chinese banks, and they are seeking an IMF
bailout. I think it is a $12 billion bailout. And they have
asked the U.S. to make sure that we do not block this.
Is that IMF money essentially going to help Pakistan repay
Chinese banks? Why is that a good economic development
strategy?
Mr. Malpass. Senator, I do not think that would be a good
development strategy. And so the IMF team just came back from
Pakistan. I had people in Pakistan 2 weeks ago. One of the
things we are pushing hard for is full transparency of the
debt. You mentioned Chinese debt. But one of the challenges is
they have not disclosed the terms of--in many cases, they have
not disclosed the terms of that debt. That means the interest
rate, the maturity, and when it would have to be repaid.
In general terms, we think that the maturity of the Chinese
debt comes after the IMF would have been repaid. So from the
standpoint of IMF money being used to pay Chinese money, I
would say a challenge is to find a program that will cause
substantial economic reform in Pakistan and that will allow it
to be funded, that Pakistan be funded and have an ability to
survive in financial terms going forward.
And I will take this moment to say with China in general,
this problem is not unique to Pakistan. China is lending in
many countries where the terms of the loans are simply not
given, and that gives China a lot of leverage within its
program. And it is something that we are pushing back on very
hard in the Paris Club, in the OECD, in the IMF, the World
Bank, at the G20 and in the G7.
Senator Merkley. So when you say that terms are not given,
do you mean not given to the borrower or not given to the
international community?
Mr. Malpass. In some cases, both. So they are not made
public. They are not available to the international community,
but sometimes they are not even available to certain parts
inside the government itself. And that is an issue because
China may make a loan, but not really want the terms of the
loan to be disclosed even within the government that it is
lending to.
Senator Merkley. So Senator Young and I both referred to
this Chinese debt trap strategy, and I am just going to restate
it simply and see if you all concur that this is their strategy
or if we are perhaps mischaracterizing the situation.
But China often lends to developing countries that may have
an interest in a particular--building a port, building a
highway, building a prestige project of some sort that involves
a significant amount of debt. They often use their own workers,
that is, Chinese workers, to build the project. It is often
very opaque in terms of the terms. It often involves a--these
are not gifts, but these are Chinese loans. So, therefore,
repayment is necessary. The government is often reluctant to
disclose the terms without transparency. So perhaps the country
is getting a very poor deal. And the result is now China has
significant leverage to apply for other national interests that
China has.
Is that a fair characterization of the Chinese debt trap
model?
Mr. Malpass. I share many of those concerns. Yes, sir.
So I will give you an example where China then does not
work with the international community on some of these. There
is a group called the International Working Group on Export
Credits where there is an effort to have disclosure of the
export credits that are going to countries, such as countries
in Africa or to Pakistan. China simply has stood aside from
that group. They attend meetings but then do not engage to
describe which of their institutions are making those loans.
And a second is the Paris Club itself where China is now--
for many countries in the world, China is the biggest creditor.
And yet, it does not participate in the Paris Club, which is an
organization of creditor countries that tries to have
rationality within the restructuring process when a country
basically cannot repay.
So I am describing constructive ways that China could be
better involved and yet simply it has chosen not to be.
Senator Merkley. Please go ahead, yes.
Mr. de Marcellus. If I could add to that. One of the most
prominent examples of what you have described is in Sri Lanka,
the Hambantota Port, where, after Sri Lanka could not pay the
debts, China converted the port to their own ownership for a
99-year lease, as well as 15,000 acres of land.
But when that happened, that was noticed around the world.
We hear about it all over the world. As you have seen, that
became a campaign issue in many elections around the world
where opposition groups are criticizing the volume of Chinese
lending and the terms and all of the other drawbacks that you
already elaborated.
So Malaysia, we saw Prime Minister Mahathir canceling
billions of dollars of Chinese projects.
The Maldives, a new government ran against basically
Chinese lending, and won. And they are now opening up the
Chinese books. In fact, it was in the press this morning that
they discovered that some of the Chinese projects ran massively
up in cost overruns, like tripled the market price for a
hospital.
In Africa, Sierra Leone, a new government criticized
Chinese lending and then canceled an airport project--it was
$300 million--on the rational basis that the existing airport
was not fully utilized.
And Burma scaled back a port from $7.3 billion to $1.3
billion.
So we see this happening more and more. I think countries
are beginning to notice the down side and they are getting more
savvy. I do not want to overstate it that these governments
will not go back to China for more loans, but we think they are
getting more sophisticated when they do it.
But then going to your earlier statement where you held up
the book, ``The Debt Trap,'' when the IMF and the West over-
lent in many cases and built up debt burdens in the developing
world, we dealt with it. We owned up to it. We did debt
forgiveness. So by the same token, if China makes the same
types of mistakes we might have made 45 years ago, we would
look to them to do some sort of forgiveness for these countries
so they are not saddled with debt forever crippling them. So I
think that is something that the entire world would like to
see.
But thank you for raising that issue. It is certainly one
of intense interest.
Senator Merkley. One of the reasons it was such a problem
was corruption. So there would be an IMF loan to a government
where the elite would essentially funnel off massive amounts of
the loan, and the remaining amount of the money and its
development project could not possibly generate enough economic
development to pay the loan back. So it was a bad investment.
And then the terms of the IMF agreement were essentially
that to pay back the loan, you had to engage in austerity. So
you had an elite that now had been super enriched by this deal
because of the corruption, and you had a population that was
now suffering the austerity necessary to try to find some path
to pay it back, which was not a good deal for the people of a
country. And as you say, we wrestled with it. We have
transparency around it. We had an academic debate. We had an
institutional debate.
I am not sure that those mechanisms--in fact, I am quite
sure those mechanisms are not present in the Chinese
consideration of the impact of their debt trap. It seems to me
this is a case where it is a deliberate strategy to create
leverage rather than a strategy gone awry, if you will, which
if it is a deliberate strategy, you do not necessarily have any
plan or desire to remedy it.
As you point out, in Sri Lanka, for 99 years they have a
massive port owned. I know I have heard from the national
security side. Our concern is it might also become a military
base outpost for China.
So I am wondering, as we push to kind of draw attention to
this strategy, are there other things that we should consider
doing? For example, should we push for a policy in the IMF and
World Bank that no loan, no grant project will go to any
country that does not have complete transparency for its
international borrowing?
Mr. Malpass. Senator, those are very good points.
So within the transparency initiative that I mentioned in
my remarks, we are working in the IMF and the World Bank to
encourage them to include terms in loans, so when they do make
a loan to a country, say that the country is expected to make
transparent all of the lending that it gets. Otherwise, you
would be the lender into a situation where someone else has
better terms than you do.
And then within that framework, we are also trying to make
sure that we are talking about debt in a broadly construed
context because one of the things that happens, financial
markets are very innovative. So as soon as you find one
loophole that you are closing, then there is an ability to find
another. And one of the things going on is the promise of
collateral or of payments in kind in future years. So China
will make a loan to a country in dollars or in real currency
today and then commit that country, get someone in the country
to commit to ship them oil for the next 15 years. Well, that
takes money from the people of the country and puts it in the
pockets of the elite in the near term.
So Secretary Mnuchin's initiative on that, which we discuss
in the G20, the G7, and have made substantial progress on, is
exactly in line with that. And I think Congress can be
insistent--as countries kind of look for alternatives, they
often come to Congress and say, can you not finance this, we
are in trouble--saying, look, at a minimum there has got to be
full transparency of whatever debt you are taking on.
Senator Merkley. Thank you.
Senator Young. Mr. de Marcellus, in your prepared
statement, you wrote about the transparent financing terms
practiced by multilateral development banks. And you contrasted
that with the opaque terms that some of the bilateral lending,
particularly with China, we see around the world. And you
indicated that has, in turn, led to sovereign debt, which
creates global financial fragility and instability.
You have also referred to predatory lending practices by
some countries, particularly China. You discussed actions in
Sri Lanka in particular. Malaysia is another country.
The Vice President of the United States just recently said
infrastructure loans to governments across the Indo-Pacific too
often come with strings attached and lead to staggering debt.
IMF Managing Director Lagarde, with whom I met this
morning, has also expressed concern regarding a problematic
increase in debt, potentially limiting other spending as debt
service rises and creating balance of payment challenges.
Mr. Under Secretary, how is the U.S. specifically using its
voice, its votes, and leverage in international financial
institutions to encourage more transparency from China in its
projects in the developing world, as well as an end to the
imposition of unsustainable debt arrangements on developing
countries? And, Mr. Malpass, if you prefer to chime in, please
feel at liberty.
Mr. de Marcellus. I will start and he can amplify.
Senator Young. If you would like to privately confer for a
moment and then respond collectively, that is also okay.
[Laughter.]
Mr. de Marcellus. As the Vice President said, there are
problems there. Some Chinese loans are linked to resource
extraction. Some appear to jeopardize countries' sovereignty.
Some burden countries with unsustainable debt. Some have
adverse environmental impacts. Many are implemented by Chinese
SOEs and Chinese labor. Most appear not to be commercially
viable, and then almost none are transparent. So we have to
address all of those.
On the transparency, as Under Secretary Malpass described,
working through the G20 and within the IMF and World Bank, we
are working on debt sustainability frameworks for low income
countries. So when they go into a low income country, they have
to have a full picture. And Managing Director Lagarde has
recognized this, and it has been very clear on the need for
transparency when the IFIs go in. When we Western donors or the
IFIs lend, that is not linked to resource extraction. They are
weighed against debt sustainability frameworks. The information
is shared with IMF.
And getting to the point earlier about these non-
commercially viable projects--and as Under Secretary Malpass
stressed earlier, what is new in the world is the private
sector. So the best option is the private sector building these
projects, and when they do it, they are darned sure it is
commercially viable so you do not get that problem.
Senator Young. Just following up on that briefly, how can
the U.S. better, more effectively catalyze private investment
in the developing world?
Mr. de Marcellus. I think Congress has helped us in a great
degree with the BUILD Act and the new Development Finance
Corporation. Thank you for action on that. It is going to be
able to give us new tools to try to fill the gap. They cannot
replace, it should not replace the private sector, but if there
are gaps to get the private sector off the sidelines--and there
are also--now I will defer to Under Secretary Malpass as well--
framework details. But at the G20, we are working on trying to
develop infrastructure as an asset class for institutional
investors to again to get the very large institutional money
off the sidelines to build this infrastructure.
And then within the Indo-Pacific strategy, within that
region, Secretary Pompeo announced a series of initiatives in
power and digital and just general infrastructure to try to
work with our private sector and again have our whole
government work with them to try to fill the gaps. If there is
a regulation that has to be fixed, if there is some other
element that needs to be addressed to help the private sector
get engaged, just be there on the ground, through our
embassies, the Commerce Department, Treasury, USAID.
Senator Young. Sort of wraparound services, as it were.
Mr. de Marcellus. Correct.
Senator Young. Mr. Malpass?
Mr. Malpass. I will add to those points. I wanted to give a
concrete example.
So as a country gets over-indebted, it typically has gone
to the Paris Club. As I mentioned earlier, China has not
accepted the invitation to be in the Paris Club. So it is the
biggest creditor.
And I will mention one specific country. Congo-Brazzaville
has in recent years borrowed way too much money. Much of it was
borrowed from China. The problem is that other countries cannot
then lend or even make--the private sector certainly does not
want to invest into Congo-Brazzaville while there is this
overhang of Chinese debt. But China will not say how much it
thinks it is owed and the country itself also does not know the
terms and is not able to say how much it is owed.
And further, China does not have a process to reschedule or
to forgive that debt, as Secretary de Marcellus was saying. The
developed countries have a technique for when a country really
has failed, to forgive that debt and let the country start to
rebuild. China has rejected that as a process.
Yes, sir, Senator?
Senator Young. Well, so this is instructive.
In the second panel, Ms. Segal in her prepared testimony
noted China's reluctance to participate in certain
international arrangements, the Paris Club in particular. And
on the Paris Club website, China is listed as an ad hoc
participant, not a permanent member.
So for those who may not be familiar with it, what is the
Paris Club? Why does it matter? And what explains Chinese
reluctance to become an official member of the Paris Club?
Mr. Malpass. Yes, sir.
I myself have not been to the Paris Club, though I know
some about it from my previous stint at Treasury and now my
current stint. It is under my purview. It is a group of
creditors that meets in Paris--of official creditors. So that
would be, for example, the export-import kinds of banks around
the world, the military lending that goes on, and other forms
of official credit.
So they sit down when a country has failed. It is almost
like, in my very lay terms, a bankruptcy process where a
country is unable to pay. Then the creditors get together and
think about what to do. And oftentimes that means extending the
terms of loans or actually organizing the forgiveness of debt.
So as an ad hoc member, China was invited, and this has
been going on for several years. It predates the current
administration. They sit in the same room with other creditors.
They listen to the disclosure of data. It would almost be like
you could go and sit in a bankruptcy proceeding and hear
everybody else's debt but you do not tell the group what you
are owed by that company. And so the country then works with
the creditors. China hears the information.
So what has been done in recent meetings--they meet
monthly. So in recent meetings, the rest of the world has asked
China to step out of the room when certain debts are discussed
because China, by not participating, needs to be excluded from
the group. And we are now at the point where we, the U.S., have
suggested to the other participants in the Paris Club that
China not be invited to future meetings if it is not going to
participate in a given discussion. So it is a disclosure issue
where they could be playing a constructive role in the world.
They are the biggest creditor in many countries, and they
should be doing this but have declined.
Senator Young. Just very briefly. This subcommittee hearing
is on multilateral economic institutions and U.S. foreign
policy once again. So many of the challenges and concerns that
many of us vocalize with respect to China and its predatory
economic practices are shared by our G7 partners, by G20 member
countries. And I just would like your thoughts. You can give us
a letter grade or your qualitative assessment of how the United
States is doing on a multilateral basis in working with other
countries to address these concerns and these predatory
practices.
Mr. Malpass. You know, will give us a B-plus or an A-minus.
And the reason for that, while there is a lot of criticism of
the U.S. for trying to stop international activity, the reality
is the Trump administration but the U.S. Government as a whole
is a leader in almost all of the international organizations
that are going on, leading in a direction of more freedom of
higher per capita incomes, better economic growth.
And the way to do that does not mean that we want the
organizations to spend more money. In fact, one of the things
that I have tried to get us to do is have these multilateral
bodies have a lot fewer meetings and less talk and more action
within them. And we have been somewhat successful in the G20,
in the OECD framework, and in other frameworks in scaling back
their work streams. I mentioned the Financial Stability Board,
FSB, early in my remarks.
Senator Young. Thank you. I am going to give Senator
Merkley--allow him to close out this panel. And thank you,
gentlemen.
Senator Merkley. So I was reading that the World Bank has
some $60 billion of projects in China. And I was thinking about
that, as I have seen China evolve from my first trip there, an
economy based on bicycles to another trip with a few more ring
roads around Beijing and a system choked with cars to yet
another trip where I witnessed massive new metro systems and a
200-mile per hour train system.
Should we still be sending development loans to China?
Mr. Malpass. In my view, no. In the World Bank reforms that
have been put on the table and the World Bank management has
committed to this year, they will be winding down, graduating
China from IBRD lending. That is the part of the World Bank
that is currently still lending to China.
However, the Asian Development Bank still lends and plans
to continue lending and could, I think, substantially scale
back and discontinue that lending.
So I agree with the thrust of your point, Senator Merkley.
And not to defend, but I would say to Senator Young's very
good question, how is the U.S. engaged in these, we can state
reforms and really push hard for them, but in a lot of cases,
we do not have control of the organizations and they do not
want to go in the direction that we are indicating.
With regard to China, final point, the world community is
pretty much in line now recognizing that China has been taking
advantage of the system. So there is actually good support
within the G7 and even in the G20 and bigger bodies that China
has got to change and got to stop taking these loans--wind down
its borrowing from the institutions.
Senator Merkley. And finally, last Friday, the Trump
administration released its National Climate Assessment that
got a lot of attention, despite being released the day after
Thanksgiving, because it laid out the already massive damage
that is happening in the U.S. due to climate chaos and how
those impacts will accelerate over the years to come.
Should our international institutions of lending adopt a
strategy of only financing or primarily financing renewable
strategies, non-carbon-burning strategies, given the grave
consequences we are facing from carbon pollution?
Mr. Malpass. In most cases, the organizations try to have
high quality projects that are transparent where there are
environmental assessments as appropriate for the projects. The
projects are aimed at helping the people of the country get
forward in terms of the availability of energy, the
availability of even heating in certain countries.
So I would say the policy structure--as I mentioned before,
we have nearly 100 congressional mandates, many of which--maybe
the majority--are aimed at environmental practices within the
multilateral development banks. So I do not know that
additional--so I do not think additional legislation is needed
in this regard. I would say that projects are monitored, and
there is a substantial amount of evaluation done of
environmental impacts now. Thank you.
Senator Merkley. A lengthy answer avoiding the core point
of the question, but thank you.
Mr. Malpass. Thank you, sir.
Senator Young. Well, I thank you gentlemen for your time,
your testimony, and your service. Note that I plan to keep the
hearing record open for 48 hours, and I would appreciate you
both submitting timely responses to any questions that may have
been submitted for the record in my absence when I had to step
out for a couple minutes. Thanks again for being here today.
If your schedules permit you to stay for the second panel,
I of course would welcome you to do so. However, I understand
if your schedules require you to depart.
This concludes the first panel. We will now take a few
moments to transition and permit panel number 2 witnesses to
take their positions. [Pause.]
Senator Young. Our second panel today consists of five
former members of previous administrations and expert
witnesses. And I thank all of you for being here today.
The Honorable Clay Lowery, a Visiting Fellow at the Center
for Global Development, who has also served as Assistant
Secretary for International Affairs at the Treasury Department
from 2005 to 2009.
Mr. Scott Morris, Senior Fellow and Director of the U.S.
Development Policy Program at the Center for Global
Development. He also previously served as Deputy Assistant
Secretary for Development Finance and Debt at the U.S. Treasury
from 2009 through 2012.
Ms. Jennifer Hillman, Professor in Practice, Georgetown Law
Center.
Ms. Thea Lee, President of the Economic Policy Institute.
And Ms. Stephanie Segal, Senior Fellow and Deputy Director
of the Simon Chair in Political Economy at the Center for
Strategic and International Studies.
I welcome each of you. Thank you again for being here. Your
full written statements will be included in the record. I would
ask each of you to summarize your written statement within 5
minutes so we can engage in an extended Q&A and conclude the
hearing around 4:30. So that is roughly 45 minutes from now.
Why do we not go in the order that I announced you. Once
again, Mr. Lowery.
STATEMENT OF HON. CLAY LOWERY, VISITING FELLOW, CENTER FOR
GLOBAL DEVELOPMENT, ARLINGTON, VIRGINIA
Mr. Lowery. Chairman Young, Ranking Member Merkley, thank
you for the opportunity to testify on multilateral economic
institutions and U.S. foreign policy.
I am going to skip the portion that I had about the
multilateral economic institutions. I think the government
witnesses covered it very well about the reforms that are
needed, as well as the importance to our national interests.
So when thinking about these institutions in terms of our
foreign policy, the committee asked, in particular, about the
U.S. relationship with China, as we heard in some of the debate
earlier. So I begin with the Trump administration's national
security strategy that refers to China as a strategic
competitor.
Through its section 301 investigations and other actions,
the administration has gone even further and accused China of
being an unfair competitor. And this analysis to me seems fair
and accurate.
But to compete, the U.S. should not just criticize. It
needs to have an affirmative strategy. And this starts with
emphasizing U.S. strengths and seizing opportunities to
demonstrate better U.S. alternatives. And our strengths in my
opinion start with, one, our model of the private sector, not
government support leading the way; and two, our deep and
longstanding relationships with allies around the world who
share our values and our ideals, not just having transactional
arrangements.
So while China may have spent a trillion dollars in its
Belt and Road Initiative over the last 5 years, I think it is
far more important that just in the Indo-Pacific region alone,
the U.S. has over $1.4 trillion in trade annually and invested
over $900 billion in the region as of 2017. These are U.S.
strengths, and we should use official tools, whether bilateral
or multilateral, to highlight and leverage such strengths.
This is why I think the Trump administration and Congress,
particularly this committee, deserve praise for rethinking OPIC
and strengthening it through the BUILD Act.
The closest multilateral model to this approach is the
International Finance Corporation, which is the window at the
World Bank that finances productive private enterprises in the
least developed countries.
To work in riskier countries, the IFC is probably going to
need to issue more capital. And so recently IFC shareholders,
including the United States, reached agreement that will allow
the IFC to increase significantly its investments in the
poorest countries and the most fragile countries, while the
U.S. will not have to provide any new money to this and still
retain its veto power. This deal strikes me as a solid
accomplishment by the Trump administration.
On the other hand, the Trump administration has taken a
number of steps that undermine the strengths of the United
States, and I will just name two.
First was walking away from the Trans-Pacific Partnership.
There is no other way to put it. This was reckless and a gift
to China. Instead of helping to establish higher standards and
better market access for our private sector, we are stuck
trying to cobble together bilateral deals that appear to rely
on a model of managed trade.
Second, the administration has not taken advantage of
building a coalition to confront China, but has instead
threatened to impose tariffs on our closest allies on the
laughable justification that importing automobiles threatens
our national security. In other words, rather than making China
the outlier because of its behavior, the administration's
unpredictability and unreliability on trade could cost us
allies that we need to address the real challenges posed by
China.
So this leads me to my last point, which is what can
Congress do.
To supplement the strong bipartisan work that Congress did
on establishing the International Development Finance
Corporation, Congress should also work with the administration
on the multilateral economic institutions. Let us just take the
World Bank as an example. I see three areas of action for
Congress.
First, approve and fund the capital increase for the IBRD.
Second, authorize the capital increase for the IFC, which
is not going to cost any money in our appropriations.
And third, work with the administration on the upcoming
2019 IDA replenishment.
And finally, while this hearing is not about international
trade, this committee may want to consider asserting its role
on U.S. trade policy, particularly as it concerns China. I
would encourage the committee to press the administration to
develop and share its end goal for the current trade war or at
least a framework agreement that would address the legitimate
concerns with China's trade practices.
Thank you. I am happy to field any questions.
[Mr. Lowery's prepared statement follows:]
Prepared Statement of Hon. Clay Lowery
Chairman Young, Ranking Member Merkley, and members of the
subcommittee, thank you for the opportunity to testify on the
Multilateral Economic Institutions and U.S. Foreign Policy.
My name is Clay Lowery and I am Managing Director of Rock Creek
Global Advisors, a consulting firm that advises companies on
international economic and financial policy matters. I also serve as a
visiting fellow at the Center for Global Development and as a senior
advisor to the Center for Strategic and International Studies.
From 2005 to 2009, I was the Assistant Secretary of International
Affairs for the Treasury Department, which exercises U.S. executive
oversight of our involvement in the International Monetary Fund and the
Multilateral Development Banks (MDBs), and is a key player in making
U.S. foreign policy.
My testimony today, however, reflects my own views.
In my testimony, I will discuss (i) U.S. interests in the
multilateral economic institutions, (ii) how to think about this in
terms of our ``competition'' with China, and (iii) some recommendations
on the role Congress should play.
The U.S. Role in the Multilateral Economic Institutions
The United States and its allies established the IMF, the World
Bank, and the GATT--the predecessor of the World Trade Organization--at
the Bretton Woods conference of 1944. The idea at the time--one that is
still true today--was that international cooperation on key economic,
financial and trade issues and maintaining an open, rules-based
economic order are important for global stability and prosperity. Since
then, the U.S. has also been a founding member, a substantial
contributor, and a leader of the key regional development banks: the
Asian, African, Inter-American, and European development banks.
While each of these institutions has different mandates, tools,
financing mechanisms and/or member countries, they broadly have similar
objectives: to promote economic and financial stability, increase
economic growth in a sustainable manner, and strive to maintain an
open, competitive and well-coordinated international economic order.
As a large shareholder in these multilateral institutions, the U.S.
Government should constantly be looking for ways to improve them.
However, it is worth noting that these institutions have wellserved
U.S. national interests over the decades, including by:
Promoting global financial stability, which is a core objective of
the IMF for example, and is critical to U.S. economic growth,
exports, and job creation.
Financing infrastructure and human capital development to foster
prosperity overall and to support the construction of the
actual roads and ports that allow U.S. exporters to get their
products and services to market.
Assisting with the ``soft infrastructure'' of property rights, the
rule of law, bureaucratic efficiency, and stronger
environmental and social standards, which improve the business
environment and levels the playing field for U.S. businesses
and workers.
Leveraging resources through other countries' contributions and
through capital markets. President Trump often expresses his
concern that other countries are not sharing the burden fairly
in international institutions. In the case of the IMF and the
MDBs, this criticism has no merit. For instance, every dollar
that the U.S. puts into the International Development
Association (IDA), which is the concessional loan- and grant-
making ``window'' of the World Bank, leads to 16 dollars in
contributions by others.
Maybe just as importantly, these institutions support U.S. foreign
policy goals, and the U.S. calls upon them time and time again--whether
it is to (i) finance infrastructure in frontline states such as
Afghanistan, (ii) provide non-humanitarian financial support to rebuild
countries that have been devastated by natural disasters, or (iii)
boost economies that are the source of refugee flows to mitigate the
problems of mass migrations.
These institutions have received continuous support from the
Treasury and State Departments in both Republican and Democratic
administrations. Perhaps as importantly, previous Secretaries of
Defense and military leaders also have strongly supported them. They
have recognized that the IMF and the MDBs are important tools to
conduct strong foreign policy and to provide the conditions necessary
to keep our troops out of harm's way. They have recognized that U.S.
leadership of these institutions is vital not only to their
effectiveness, but to U.S. national security interests.
How does this all relate to China?
The committee asked about these multilateral economic institutions
and U.S. foreign policy, particularly as we think about U.S. relations
with China. It should come as no surprise that, as China has risen to
the near-top of the global economic and financial ladder, it has sought
to shape the international economic order in ways that advance its own
national interests. To do so, China is trying to alter the global rules
and norms that it did not play a role in setting, change the governance
structures in existing institutions to reflect its increasing strength,
create alternative institutions that are more aligned with its economic
model, and set standards in areas where standards are not yet defined.
The Trump administration's National Security Strategy referred to
China as a strategic competitor. Through its Section 301 investigation
and other actions, the administration has gone further and accused
China of being an unfair competitor. This analysis seems fairly
accurate to me, and the administration should be commended for being
willing to take on China on a number of fronts.
I do not believe that the administration's approach on these issues
has been flawless and I have a number of criticisms. For today's
hearing, however, I will focus on the multilateral economic
institutions, and how best to use them to promote the interests I
discussed earlier.
First, the United States should have an affirmative strategy.
Rather than simply complaining about China's attempts to alter the
system, pointing out its flaws, or trying to mirror China's approach,
the U.S. should highlight its own strengths and seize opportunities to
demonstrate the better U.S. alternatives.
The U.S. strengths are abundant and well-recognized. Broadly
speaking, we have a system that relies on strong rule of law,
protection of property rights, and a very robust private sector. Our
companies, farmers, and workers are internationally competitive,
particularly in technology and high-value manufacturing, which are
areas that leverage American ingenuity, innovation, and highly-
developed capital markets. Just as importantly, we have deep and
longstanding relationships with allies around the world who share our
values and ideals.
In fact, I'd argue that often the people and governments of these
countries want the U.S. to succeed, not because it will help President
Trump or the U.S. gain more power, but because it also helps them. This
is a significant difference from the model China seems to be promoting.
While China may have spent $1 trillion in its Belt and Road
Initiative (BRI) over the last five years, I think it far more
important that--just in the Indo-Pacific region--the U.S. has over $1.4
trillion in trade annually and invested over $900 billion in the region
as of 2017. These are U.S. strengths and we should use official tools--
whether bilateral or multilateral--to highlight and leverage such
strengths.
This is why I think the Trump administration deserves praise for
rethinking the Overseas Private Investment Corporation (OPIC) and
working with Congress to strengthen it through the BUILD Act. If it
works well, the new International Development Finance Corporation
(IDFC) should catalyze U.S. private capital in ways that challenge
China's development model and leverage U.S. strengths. I also applaud
the administration for going further by working with Japan and
Australia to leverage this model.
The closest multilateral model to this approach is the
International Finance Corporation (IFC), which is the ``window'' at the
World Bank that finances the establishment, improvement, and expansion
of productive private enterprises in less developed countries. In order
for the IFC to be more effective going forward, it needs to be in
countries where private sector investors won't go--unless incentivized.
That way, instead of countries having to turn to a state-led model with
countries such as China providing the financing and expertise, the IFC
can work with an emerging private sector to advance similar objectives
and in ways that are more in line with U.S. values and interests.
To work in riskier countries, the IFC will need to issue more
capital. Recently, IFC shareholders, including the U.S., reached
agreement to increase the IFC's capital. As part of the agreement, (i)
the IFC will increase significantly its investments in the poorest and
most fragile countries, (ii) the U.S. will not have to provide any new
money, and (iii) the U.S. will still retain enough voting shares to
maintain its veto power over major decisions at the IFC. This strikes
me as a solid accomplishment by the Trump administration.
On the other hand, the administration has taken a number of steps
that undermine the strengths of the United States--particularly as
concerns a ``strategic competition'' with China. First and foremost was
walking away from the Trans-Pacific Partnership (TPP). There is no
other way to put it: this was reckless and a gift to China. Instead of
helping to establish higher standards and better market access, and
working with allies and partners in the region to advance our
commercial and strategic interests, the U.S. is stuck on the outside
trying to cobble together bilateral deals that appear to rely on the
model of managed trade. Perhaps just as importantly, by withdrawing
from this significant initiative, we have undercut another one of our
strengths, which is our allies' confidence in U.S. leadership.
Secondly, the administration has exacerbated this loss of
confidence through its approach to addressing legitimate concerns with
China's trade practices. Instead of working with our allies to build a
coalition to confront China, the administration has been trying to
justify imposing more and more tariffs, including on our closest
allies, based on the laughable proposition that importing autos and
auto parts threatens national security. Rather than making China the
outlier because of its behavior, the administration's unpredictability
and unreliability on trade could cost us allies that we need to address
the real challenges posed by China.
Third, the administration seems overly focused on U.S. trade in
goods, despite the fact that trade in services is a major American
strength. While this approach may play well politically among some in
the U.S., it fails to accurately assess U.S. competitive strengths and
how best to leverage them to compete with China over the long term.
What Can Congress Do?
This leads me to my last point, which is: what can Congress do?
Congress, particularly this committee, deserves a lot of credit for
its bipartisan leadership in modernizing and expanding our own
development finance institution through the BUILD act. The new IDFC
could demonstrate that there are preferable alternatives to China's
international economic development model, while also helping meet U.S.
foreign policy goals and promoting development around the world.
To supplement these efforts, Congress should work with the
administration on its multilateral economic institution strategy. Just
in the World Bank, I see three areas of action for Congress:
1. Funding the capital increase for the IBRD. The administration has
done a solid job of promoting reforms during the negotiation
for the capital increase, including re-allocating resources
away from China and other middle-income countries and to
lesser-developed countries. Congress should authorize and
appropriate the funds to continue to allow the U.S. to be the
leading player in the World Bank.
2. Authorize the capital increase for the IFC. As noted above, this
multilateral model aligns with U.S. strengths and requires only
authorization, not appropriation. While some have questioned
whether the agreement reached can be implemented in full, it is
worth taking some risk when there are no more U.S. taxpayer
resources at stake.
3. Work with the administration on the 2019 IDA replenishment. Next
year, the administration will be negotiating the replenishment
of IDA. This is an area where the U.S. can work with China as
another donor. If there are IDA reforms that Congress believes
should be introduced or expanded upon, then it should voice
those to the administration as early in 2019 as possible.
These are just a few examples and do not include the regional
development banks, which may also require oversight and reform. Just
over the Thanksgiving weekend, for instance, former Secretary of State
and Treasury George Schultz authored an op-ed suggesting changes at the
IDB to allocate more resources to addressing economic challenges in
Central American countries as a way to better approach the refugee
problem. Serious ideas such as these should be examined and explored.
Finally, while this hearing is not about international trade, this
committee may want to consider asserting its role on U.S. trade policy,
particularly as it concerns China. The administration's approach of
conflating national security with international economic policy,
attacking our allies whose help we need to confront and negotiate with
China, and imposing successive rounds of tariffs instead of negotiating
new commitments, does not appear consistent with the principle of
strong Congressional oversight on trade. I would encourage this
committee to press the administration to develop and share its end-goal
for the current trade war or a framework agreement that would address
the legitimate concerns with China's trade practices.
Thank you and I'm happy to field any questions.
Senator Young. Plenty to follow up on there. Thank you, Mr.
Lowery.
I am going to go down the line with your indulgence. I had
indicated I would go in the order in which I introduced you,
but you are not seated in that order. So Ms. Hillman.
STATEMENT OF JENNIFER HILLMAN, PROFESSOR, GEORGETOWN LAW
CENTER, WASHINGTON, D.C.
Ms. Hillman. Well, thank you very much. That makes it a lot
easier on all of us.
Thank you, Chairman Young and Senator Merkley. I very much
appreciate the opportunity to appear before you, particularly
at this time when the international economic order that, as
Chairman Young mentioned, the United States worked so hard to
create and nurture is at such a critical inflection point I
think with the United States in particular headed down a
potentially dangerous, unilateral, and isolationist road.
The major problem I think with the approach that we are
taking is that the problems that we are confronting, whether
that is the struggle around the world for good jobs that pay a
living wage, whether that is climate change, whether that is
the widening of the wealth gap or the rise of extremism and
threats to national security. These are not problems that can
be isolated or solved by the United States alone. These are
increasingly complex problems that overlap with one another and
that will require global solutions.
And yet, these problems are arising at a time when our
international economic institutions are under siege. They are
responding to a backlash from globalization. They are being
attacked from outdated mandates that do not address the 21st
century problems that they need to deal with. And they are
being questioned in terms of their effectiveness, their
relevance and their legitimacy.
I would say the crisis is the most acute at the World Trade
Organization. And yet, the United States needs the United
States more than ever if we are to take on China.
Why the crisis at the WTO? Well, there are a number of
sources of frustration outlined in my written testimony. I will
mention just two.
First, there is a lack of balance at the WTO between the
weak negotiating arm of the WTO with members having reached
only one agreement on trade facilitation since 1995 compared to
the very strong--some would say even too strong--dispute
settlement arm of the WTO, while the executive part of it is
viewed as highly competent but lacking in the authority to
drive any meaningful change.
And it is this lack of balance that appears to be the
primary driver for the United States' decision to block any
process to reappoint members of the WTO's appellate body. So we
are now down to just the bare minimum of three members sitting
on that appellate body, and any even discussion about how to
put new members on the appellate body has been blocked by the
United States.
Secondly I will mention a recently willingness, led by the
United States, to impose tariffs that violate the WTO's basic
rules, which leads many to question what is the point of having
a rules-based organization if its major members regularly flout
those rules.
So I believe it is critical that the WTO and its WTO
dispute settlement system be fixed immediately as the United
States needs to take the WTO path if it is going to fix the
problems that we have with China. And in my view that is what
ought to happen, is that we ought to be bringing a big and bold
case based on a coalition of countries working together to take
on China. Why?
First, it represents the best opportunity to bring enough
leverage together by the trading interests of the coalition to
put sufficient pressure on China to make it clear that
fundamental reform is needed.
Second, a comprehensive WTO case would restore confidence
in the WTO and the rules of the trading system.
Third, in the past, countries have been reluctant to take
on China for fear of retaliation. But a broad coalition-based
case would lessen the likelihood that China would or could
effectively retaliate against all of the trading partners that
would be in this coalition.
Fourth, the evidentiary burdens of bringing a case against
China because of its lack of transparency are formidable, but a
coalition case would allow you to pool all of the evidence that
has been being collected against China from the United States,
the European Union, Japan, Canada, and others.
And finally, WTO cases have already been tried but with
limited success. The problem is that the challenges were
narrow, limited to a few Chinese measures or to a particular
industry or set of producers. No panel has yet been requested
to rule on the Chinese system as a whole, and that is what I
would recommend, that there be a WTO case to hold China to the
specific commitments that it made when it joined the WTO as
well as a broad, overarching what is referred to as a non-
violation case that would basically say, China, you promised
when you became a member of the WTO that you would become a
market-oriented economy and you have not done so. If anything,
you have gone the other way. And you would bring a case at the
WTO that says, A, you are violating that basic overarching
notion of being a market economy, and B, you are violating--and
I have laid out in my written testimony--12 very specific
commitments that you made that you are now violating.
And my own view would be if you bring this kind of big,
bold coalition case against China, that will be the best way to
result in the big structural reforms that we really need to see
within China and that we ought to use the multilateral
institution of the WTO and use the leverage and the power that
it creates with its binding dispute settlement mechanism to be
the best tool that we can engage in to take on China.
[Ms. Hillman's prepared statement is located at the end of
this transcript.]
Senator Young. Thank you, Ms. Hillman.
Ms. Lee?
STATEMENT OF THEA LEE, PRESIDENT, ECONOMIC
POLICY INSTITUTE, WASHINGTON, D.C.
Ms. Lee. Thank you, Chairman Young, Ranking Member Merkley,
for the invitation to participate in today's important hearing.
Today's hearing provides an opportunity to review U.S.
engagement with multilateral economic institutions and the
importance of both using our influence in those institutions
strategically and balancing international engagement with the
use of appropriate unilateral tools and domestic policies.
I would argue that past U.S. trade policy has failed
American workers, as well as many domestic producers, and has
undermined democratic decision-making authority with respect to
environmental and consumer protections.
Going forward, Congress and the executive branch should
articulate and implement a new approach to global economic
integration, one that prioritizes good jobs and strong
communities and that supports domestic democratic decision-
making, where possible. This strategy is most likely to succeed
if implemented with the cooperation and support of key allies
and the multilateral economic institutions, as I think both Mr.
Lowery and Ms. Hillman discussed.
Enforceable multilateral rules are essential to a well
functioning global system. But the WTO, the organization tasked
with defining those rules has struggled in recent years to
achieve consensus on new rules and to enforce existing rules.
For American workers, the WTO has often appeared to be an
obstacle to a reformed trade policy.
First, WTO rules are lopsided towards corporate investors
over those of workers--to its corporate interests over those of
workers, consumers and the environment. Investors' rights are
prominently protected by provisions on investment, financial
flows, intellectual property rights, among others, while
protections for workers' rights are almost completely absent.
The WTO has failed to address systematic currency manipulation
or misalignment, as well as the use of permissive tax laws to
attract investment. I would argue that both of these are key
areas where multilateral trade rules ought to be available and
enforceable.
The U.S. Government has not used its considerable clout at
the WTO to press for deep reforms along these lines. Even if it
were to do so, it would only succeed if it were able to build a
coalition with other industrialized countries and key
developing and emerging nations. But perhaps the current moment
of stalemate and rising tension could be an opportunity to
build such a coalition.
Second, with respect to enforcement, the United States has
not been able to manage its trade relationship with China
effectively since China's accession to the WTO. The U.S. goods
trade deficit with China hit $375 billion in 2017, up from $83
billion in 2001. The growth of the trade deficit with China
during this period was responsible for the loss of 3.4 million
U.S. jobs in all 50 States and in every congressional district.
Nearly three-fourths of the jobs lost were in manufacturing.
And that is one of the reasons why getting trade policy
right is so important. The jobs displaced by flawed trade
policy are, for the most part, manufacturing jobs which provide
excellent wages and benefits, especially compared with jobs in
the service sector.
EPI research has shown that the wage-suppressing effects of
our poor approach to globalization and trade have hit all
workers without college degrees across the country, not just
those in manufacturing who have lost jobs directly to import
competition.
These widespread wage impacts are more in the aggregate
than the more concentrated losses in directly trade-impacted
sectors.
The key elements of needed trade policy reform include the
following.
First of all, address currency misalignment. The U.S. must
abandon our strong dollar dogma and target a currency that
allows for a manageable and stable trade deficit.
We should also ensure that our tax and spending policies
are in line with a sustainable value for the dollar. Last
year's tax bill and spending policies contributed to a higher
value dollar, which is one reason why our trade deficit is
growing.
The WTO and the IMF have not provided any support or
guidance for addressing currency misalignment despite the fact
that each of those organizations in principle have some
jurisdiction in that area. In the medium and long term, the
U.S. Government should seek to strengthen and clarify currency
tools at both the WTO and the IMF. Ultimately, the goal should
be to bring countries to the table to negotiate a new Plaza
Accord, as was last done in 1985. This is the single most
effective way to rebalance global trade flows, and supportive
action from the multilateral economic institutions could be
crucial in incentivizing such a deal.
We should make access to the U.S. market contingent on
respect and enforcement of internationally recognized core
labor rights. The WTO, in particular, must recognize that
violation of core workers' rights is as much an unfair trade
policy as the violation of patents or copyrights.
And finally, we need to develop and commit to a concrete
economic plan to help workers in America, focusing on skills,
workforce development, job quality, infrastructure, clean
energy transition, and expanding a strong social safety net. We
need a tax system that supports this plan, but our current
system rewards capital over labor and outsourcing over domestic
production. It remains riddled with unproductive loopholes and
especially after last year's changes, it failed to raise
adequate revenue to fund needed investments. We must ensure
that American workers and businesses have the tools and skills
they need to compete successfully in a dynamic global economy.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Ms. Lee follows:]
Prepared Statement of Thea Mei Lee
Thank you, Chairman Young, Ranking Member Merkley, and members of
the subcommittee, for the invitation to participate in today's
important hearing. I am the president of the Economic Policy
Institute--a nonprofit, nonpartisan think tank, which has analyzed the
effects of economic policy on the lives of America's working families
for over three decades.
Our country is at a critical moment with respect to international
trade and investment policy. We need clarity regarding our strategic
goals and priorities in the global economy. At the same time, we
urgently need to align our trade policy with our domestic choices on
tax policy, infrastructure, workforce development, regulation, and
labor markets.
Today's hearing provides an opportunity to review U.S. engagement
with multilateral economic institutions, and the importance of both
using our influence in those institutions strategically and balancing
international engagement with the use of appropriate unilateral tools
and domestic policies.
Over the last several decades, the U.S. Government has consciously
chosen to accelerate our integration into the global economy, with a
particular set of priorities focused on accommodating the concerns of
multinational corporations that invest and operate both in the United
States and abroad. The vehicles for this accelerated integration
include the negotiation of more than a dozen bilateral and regional
trade agreements, a corporate-centered agenda at the World Trade
Organization and the international financial institutions, and
inconsistent and lackluster enforcement of U.S. trade laws.
At the same time, the U.S. Government has dramatically under-
invested in crucial infrastructure, education, and skills training,
while workplace protections and the social safety net have eroded, and
the tax code has become more regressive. Our macroeconomic policy has
tended to weight concerns about inflation more heavily than the goal of
achieving and maintaining full employment. On net, these global and
domestic choices have exacerbated growing inequality and wage
stagnation, and contributed to the erosion of the middle class and the
manufacturing sector. This has deepened geographical, as well as class
and race, divisions in the United States.
Critique of current trade policy
Past U.S. trade policy has failed American workers--as well as many
domestic producers--and has undermined democratic decision-making
authority with respect to environmental and consumer protections. Going
forward, Congress and the executive branch should articulate and
implement a new approach to global economic integration--one that
prioritizes good jobs and strong communities, and that supports
domestic democratic decision-making where possible. This strategy is
most likely to succeed if implemented with the cooperation and support
of key allies and the multilateral economic institutions. Transparency
and predictability are essential elements.
The World Trade Organization (WTO) is the global organization
tasked with defining multilateral trade rules. The 168 members of the
WTO constitute about 98 percent of the global economy. While
enforceable multilateral rules are essential to a well-functioning
global system, the WTO has struggled on several fronts in recent years.
First, it has become increasingly difficult to achieve consensus on new
rules, and key areas like currency misalignment, climate change
abatement, and coordination of tax regimes are not even on the agenda.
Second, enforcement of existing rules has been contentious, and the
member states are currently locked in a disagreement over dispute
settlement.
For American workers, the WTO has often appeared to be an obstacle
to a reformed trade policy--both in terms of the inadequacy of the
current rules and problems with enforcement.
First, WTO rules are lopsided towards corporate interests over
those of workers, consumers, and the environment. Investors' rights are
prominently protected by provisions on investment, financial flows, and
intellectual property rights, among others, while protections for
workers' rights are almost completely absent (with the exception of a
minor clause on prison labor). The WTO's regulatory rules also tend to
favor corporate interests in weaker regulation over stronger domestic
protections for consumers or the environment. In addition, the WTO has
failed to address systematic currency manipulation or misalignment, as
well as the use of permissive tax laws to attract investment. I would
argue both of these are key areas where multilateral trade rules ought
to be available and enforceable.
The U.S. Government has not used its considerable clout at the WTO
to press for deep reforms along these lines. Even if it were to do so,
it would only succeed if it were able to build a coalition with other
industrialized countries and key developing and emerging nations.
Perhaps the current moment of stalemate and rising tension could be an
opportunity to build such a coalition.
And second, with respect to enforcement, the United States has not
been able to manage its trade relationship with China effectively since
China's accession to the WTO in 2001. This is, in our view, the most
pressing U.S. trade concern, along with other countries that run
persistent current account surpluses. The United States ran a goods
trade deficit with China of $375 billion in 2017--up from $83 billion
in 2001. This is the largest single bilateral trade deficit between any
two countries in the history of the world--and it continues to trend
upwards, despite twenty U.S. challenges to China at the WTO, despite
earnest annual bilateral talks and commitments, and despite all the
``reform'' commitments China made upon accession. Currency misalignment
is at the center of our trade imbalance with China.
The growth of the U.S. trade deficit with China between 2001 and
2017 was responsible for the loss of 3.4 million U.S. jobs--in all 50
states and in every congressional district. Nearly three-fourths (74.4
percent) of the jobs lost were in manufacturing.\1\
---------------------------------------------------------------------------
\1\ Robert E. Scott and Zane Mokhiber, ``The China Toll Deepens,''
October 23, 2018.
---------------------------------------------------------------------------
And our trade problems with China are getting worse, not better.
The U.S. trade deficit with China is up almost 10 percent through
September of 2018 (year to date, over the same period last year).
The composition of imports from China is changing in fundamental
ways, with significant, negative implications for certain kinds of
high-skill, high-wage jobs once thought to be the hallmark of the U.S.
economy. Since it entered the WTO in 2001, China has moved rapidly
``upscale,'' from low-tech, low-skilled, labor-intensive industries
such as apparel, footwear, and basic electronics to more capital- and
skills-intensive industries such as computers, electrical machinery,
and motor vehicle parts. China has developed a rapidly growing trade
surplus in these specific industries, and in high-tech products in
general.
The jobs displaced by flawed trade policies are often manufacturing
jobs, which provide excellent wages and benefits, especially compared
with jobs in the service sector, where employment has been growing.
These manufacturing jobs are often unionized, and have generally
provided higher than average wages, on-the-job training, and benefits
like health care and retirement security.\2\
---------------------------------------------------------------------------
\2\ Robert E. Scott, ``We Still Haven't Recovered Well-paying
Construction and Manufacturing Jobs,'' Economic Policy Institute,
August 16, 2017.
---------------------------------------------------------------------------
And EPI research has shown that the wage-suppressing effects of our
poor approach to globalization and trade have hit all workers without
college degrees across the country--of all races and ethnicities--not
just those in manufacturing who have lost jobs directly to import
competition. While trade-displaced workers face the largest individual
losses, in the aggregate the wider effects of across-the-board downward
pressure on wages are much more significant.\3\
---------------------------------------------------------------------------
\3\ Josh Bivens, Adding Insult to Injury: How Bad Policy Decisions
Have Amplified Globalization's Costs for American Workers, Economic
Policy Institute, July 11, 2017.
---------------------------------------------------------------------------
What we should be doing on trade policy
We urgently need to work together to develop and implement a
strategic trade policy that aligns with our values and goals, and that
complements our domestic policy to create good, skilled jobs in
manufacturing, in agriculture, and in the service sector.
The key elements of reform include the following:
Address currency misalignment. The United States must abandon our
strong dollar dogma and target a currency that allows for a manageable
and stable trade deficit. We absolutely can manage the value of the
U.S. dollar, and we need to set it at a level that essentially balances
trade. This will give U.S. manufacturing the breathing room it needs to
gain back some of the few million jobs it has lost in recent decades.
(More information can be found in a 2017 EPI report on the pervasive
negative impact currency misalignment has had on American jobs and
wages.) \4\ Our multilateral economic institutions tasked with
addressing currency--the WTO and the International Monetary Fund--have
not provided any support or guidance for addressing currency
misalignment. In the immediate term, we should test the multilateral
institutions by taking necessary steps to manage the dollar, but in the
medium and long term, the U.S. Government should seek to strengthen and
clarify currency tools at both the WTO and the IMF. This multilateral
action can send a strong message to those countries that run large,
persistent trade surpluses and have undervalued currencies. Ultimately,
the goal should be to bring countries to the table to negotiate a new
``Plaza Accord,'' as was last done in 1985. This is the single most
effective way to rebalance global trade flows,\5\ and supportive action
from the multilateral economic institutions could be crucial in
incentivizing such a deal.
---------------------------------------------------------------------------
\4\ Robert E. Scott, Growth in U.S.-China Trade Deficit between
2001 and 2015 Cost 3.4 Million Jobs: Here's How to Rebalance Trade and
Rebuild American Manufacturing, Economic Policy Institute, January 31,
2017.
\5\ Robert E. Scott, Re-Balancing U.S. Trade and Capital Accounts,
Economic Policy Institute, Working Paper#286, 2009.
Moratorium on new trade agreements. There is no reason to devote
policy resources to chasing a ``better trade deal''--certainly not by
negotiating agreements that incentivize outsourcing and boost the
profits of the multinational corporations that actively subvert the
bargaining power of American workers. Policymakers who want to work
across international borders could instead focus on eliminating tax
havens or harmonizing climate policies to ensure that countries do not
free ride on others' efforts to mitigate greenhouse gas emissions. The
most effective and appropriate way to address these concerns would be
for the multilateral economic institutions to provide a forum,
eventually moving toward consensus rules and enforcement capacity.
(Recommendations in a 2017 report by EPI address how to reorient
national policy toward measures that will benefit the United States and
other countries.) \6\
---------------------------------------------------------------------------
\6\ Josh Bivens, Adding Insult to Injury: How Bad Policy Decisions
Have Amplified Globalization's Costs for American Workers, Economic
Policy Institute, July 11, 2017.
---------------------------------------------------------------------------
Make access to the U.S. market contingent on respect and
enforcement of internationally recognized core labor rights. These core
labor standards include the right of freedom of association and the
right to bargain collectively, as well as freedom from discrimination,
forced labor, and child labor (as outlined by the International Labour
Organization in the Declaration on Fundamental Principles and Rights at
Work). Enforcing these core labor rights is win-win for workers in all
countries.\7\ While the U.S. has included labor rights provisions in
our trade agreements for many years, these rights still suffer from
unnecessary loopholes and ambiguity in definition, and they have not
been effectively and consistently enforced. We need a new approach and
commitment, and the WTO in particular must recognize that violation of
internationally recognized workers' rights is as much an unfair trade
policy as the violation of patents or copyrights.
---------------------------------------------------------------------------
\7\ Thomas I. Palley, ``The Economic Case for Labor Standards: A
Layman's Guide,'' Richmond Journal of Global Law & Business, vol. 2,
issue 2, 2001.
---------------------------------------------------------------------------
And finally, but just as significantly, we need to develop and
commit to a concrete economic plan to help workers in America--by
focusing on skills and workforce development, job quality,
infrastructure, the clean energy transition, and expanding a strong
social safety net. The U.S. Government has its own responsibility to
develop and implement a coherent long-term economic strategy with
respect to both manufacturing and services, both trade-related and
domestic. We have failed to invest adequately in infrastructure and
skills for decades, and business has not filled the void. We have a tax
system that rewards capital over labor, and outsourcing over domestic
production. It remains riddled with unproductive loopholes, and--
especially after last year's changes--it fails to raise adequate
revenue to fund needed investments. We must use domestic tax,
infrastructure, and workforce development policies to ensure that
American workers and businesses have the tools and skills they need to
compete successfully in a dynamic global economy.
Thank you for your attention, and I look forward to your questions.
Senator Young. Thank you, Ms. Lee.
Mr. Morris?
STATEMENT OF SCOTT MORRIS, SENIOR FELLOW AND DIRECTOR, UNITED
STATES DEVELOPMENT POLICY INITIATIVE, CENTER FOR GLOBAL
DEVELOPMENT, BETHESDA, MARYLAND
Mr. Morris. Thank you, Mr. Chairman, Senator Merkley.
Let me start by saying I very much agree with the case that
has been made, in particular, for the multilateral development
banks. So I am not going to repeat in any detail what we have
already heard.
I do want to say, though, on these institutions--I want to
make the point that U.S. leadership depends on our willingness
to provide financial support. So the administration's support
for the capital increase of the World Bank is a positive move
in my view, and while a capital increase does not benefit the
poorest countries, it will support many countries in Asia,
Africa, and Latin America where the U.S. has important
interests and ties.
At the same time, the administration has scaled back
support for the MDBs' efforts in the poorest countries. These
cuts diminish U.S. standing and limit the MDBs' ability to
engage where they are needed the most.
So while I believe the capital increase merits your
support, it should not happen on the backs of other critical
MDB commitments.
Senator Merkley, you raised the question of China's
borrowing from the MDBs, and I do want to address that point. I
should say, as we already heard from the administration, that
this has been something that this administration and, frankly,
the Obama administration was critical of.
That said, I think it is actually misguided to push too
hard on this issue, particularly when there is a better
alternative. Specifically the capital increase agreement itself
requires China and other relatively wealthier borrowers to pay
higher interest rates on their World Bank loans. Higher loan
charges will increase bank revenues, easing the financing
burden on shareholders and creating better incentives for the
bank's borrowers.
But it is also important to recognize how World Bank
lending to China can actually benefit us. In a forthcoming
paper, I examine the bank's projects in China, a significant
share of which is aimed at the critical task of reducing the
country's massive carbon emissions. The damaging effects from
climate change are not contained within our national borders,
and positive action taken in one country ultimately benefits
others, including our own.
Finally, let me turn to China's financing activities in
other developing countries.
In some respects, China's lending is like that of the MDBs
in providing capital to invest in transport and energy
infrastructure, which is sorely needed to spur economic growth.
But it is also increasingly clear, as we have heard, that
China's lending is pushing some countries into over-
indebtedness.
Earlier this year, my colleagues and I detailed the debt
problems facing China's Belt and Road Initiative and pointed to
failures in China's approach that are harming some countries.
Within the Belt and Road, this includes countries like
Djibouti, which hosts U.S. and Chinese military bases, as well
as Pakistan, Mongolia, and Laos.
A key priority for U.S. policy should be to effect a change
in behavior by bringing China into the norms and disciplines of
other major creditor countries.
We can also respond by offering developing countries more
options. That should start with strong support for the MDBs,
which are readymade to lend at scale and with high standards.
The recently enacted BUILD Act will also usefully bring more
U.S.-led development finance to bear globally.
That said, the new Development Finance Corporation should
be additional and not a substitute for traditional assistance.
U.S. leadership through longstanding programs like PEPFAR is
doing vital work measured in lives saved, and they deserve
sustained support.
It is also important to recognize the essential value of
this Development Finance Corporation. Yes, it will deliver more
financing, but it is in the standards attached to that
financing that will distinguish the institution.
The BUILD Act lays important markers on project
effectiveness and social and environmental safeguards, things
like ensuring that local communities are consulted and
compensated if they are displaced by a road project. It will
take diligence to make these things a reality and sustain them
over time.
Let me close by highlighting the risk of going too far when
it comes to competing with China. There is a difference between
offering choices to developing countries and forcing them to
choose. It would be a costly mistake to seek to carve up the
developing world in Cold War fashion between clients of the
U.S. and clients of China. Chinese finance is a reality, and
where it is delivering something of value to developing
countries, we will not convince them otherwise.
Chinese officials are sensitive to the backlash on the debt
issue right now. And now is the time to exploit that by seeking
a change in policy and practice, not by drawing battle lines in
the developing world that are unlikely to hold, but by working
with allies to pressure Chinese officials in settings that
matter to them, settings like the World Bank, the IMF, and the
G20.
Thank you.
[Mr. Morris's prepared statement follows:]
Prepared Statement of Scott A. Morris
Chairman Young, Senator Merkley, thank you for the opportunity to
testify today. My name is Scott Morris and I am a senior fellow and
director of the U.S. development policy program at the Center for
Global Development, a non-partisan think tank in Washington, DC. I
previously served as the Deputy Assistant Secretary for Development
Finance and Debt at the U.S. Treasury from 2009 through 2012.
You have raised a critical set of issues and challenges in this
hearing, and I will try to do justice to at least some of them. I will
focus my remarks on the importance of the International Financial
Institutions (IFIs) for U.S. interests, the role that China is playing
today in development finance, and the U.S. response to China's
emergence as a leading development actor.
The Value of the IFIs
All the IFIs, which includes the IMF as well as the leading
multilateral development banks (MDBs), \1\ have been key partners for
the United States since the creation of the World Bank and IMF over
seven decades ago. This is not coincidental. The United States has been
the leading architect and remains the largest shareholder or ``owner''
across the IFIs.
---------------------------------------------------------------------------
\1\ The World Bank, Inter-American Development Bank, Asian
Development Bank, African Development Bank, and the European Bank for
Reconstruction and Development.
---------------------------------------------------------------------------
But even if they were of our making, how do they continue to serve
our interests? Let me try to answer that question by focusing on the
multilateral development banks.
First, the MDBs amplify U.S. assistance, both by drawing in other
countries' money and by their own AAA-rated borrowing on
capital markets. In 2017, the United States contributed $1.8
billion to MDB programs (just 5 percent of the U.S. foreign
assistance budget). In doing so, we directly leveraged over
$120 billion in MDB on-the-ground assistance that year. That's
three and half times as much as the U.S. spends directly on
foreign assistance globally.
Second, by virtue of their lending model, the MDBs can operate at a
scale and across a range of sectors (infrastructure in
particular), that the United States alone cannot, given our
reliance on grant financing in our bilateral programs. This
includes a presence in a wide range of developing countries and
settings, including places where we have U.S. troops on the
ground. This is why U.S. military leadership past and present
has been among the leading advocates for the MDBs.
Finally, the MDBs have been rated as the most effective development
institutions by multiple systematic reviews of aid and
development finance. More so than any other financing
mechanism, this means that U.S. taxpayers stand a greater
chance of getting the results that they pay for and not paying
more than they should when it comes to MDB-financed projects.
Surveys of developing country officials also reveal a strong
preference for working with the MDBs compared to other sources
of aid, suggesting that when we pursue our development
objectives through these institutions, we stand a good chance
of having committed partners on the other side of the
transaction.
Continued U.S. leadership in these institutions depends on our
willingness to provide financial support, and on this point the Trump
administration's record is mixed. Last spring, Treasury Secretary
Mnuchin announced U.S. support for a capital increase at the World
Bank, a positive move that will enable the bank to continue to operate
in a large group of developing countries, the so-called ``middle income
countries.'' These World Bank borrowers are not among the poorest but
include countries like India and the Philippines where the United
States has important ties and interests. I hope this committee will
give timely consideration to the capital increase when the
administration brings it forward next year.
At the same time, the administration's support for the MDBs when it
comes to the poorest countries has not been as strong. The
administration has scaled back commitments for the World Bank's low-
income country financing arm, the International Development Association
(IDA), as well as those of the other MDBs. This has been a mistake. It
diminishes U.S. standing and limits the potential to fully engage in
poorest countries where they are needed the most.
Looking ahead, given the administration's overall posture on the
foreign assistance budget, there's a risk that the U.S. contribution
for the World Bank's capital increase will come at the expense of our
other multilateral contributions, and particularly IDA. But if there is
to be a trade off in the budget to make room for the capital increase,
this is not the right one. It will mean that the poorest countries will
shoulder the burden of more financing for middle income countries at
the World Bank. Surely there must be room in the remaining 95 percent
of the foreign assistance budget to absorb this important and modest
funding commitment.
China's Borrowing from the World Bank and ADB
Let me turn now to the question of China's relationship with the
MDBs, particularly the World Bank and Asian Development Bank (ADB). In
both cases, China remains one of the largest borrowers, something that
has attracted criticism from the Trump administration and the Obama
administration before it. Yet, neither administration has succeeded in
halting MDB lending to China by fiat, and I want to encourage a
different way of thinking about this issue.
First, we should recognize that much of the value of the IFIs for
the United States derives from their multilateral character. It greatly
oversimplifies things to suggest they are strictly a U.S. tool,
available to do our bidding no matter what the issue. The reality is
that when we want to get something done in these multilateral
institutions, we need to work with other countries. In turn, these
institutions are most effective when they have the buy-in of the
largest number of their member countries. And when the United States is
seeking something from them that doesn't have broad-based support, it
can be a tough road.
China's borrowing from the World Bank and ADB is such a case. I
think it's misguided to push too hard on this issue, particularly when
there is a better alternative with broader support, one that the Trump
administration has already had some success in pursuing. Our objectives
here ought to be twofold: to make the most of MDB engagement in China
in terms of U.S. interests and to extract the most from China in
return.
Making the most of China's borrowing means recognizing the value of
some areas of this engagement and ensuring that the MDBs are
appropriately focused on these areas. In some forthcoming research, I
look in detail at World Bank projects in China. A significant share of
the bank's China portfolio is aimed at reducing the country's massive
carbon emissions, which is essential if we are to reduce the pace of
climate change and its harmful effects, detailed just last week in the
government's report on climate change. We know well that the damaging
effects from climate change are not contained within national borders,
and positive action taken in one country ultimately benefits other
countries. From an economist's perspective, this aspect of the MDBs'
work in China is a classic global public good and something that
ultimately benefits us, even as we sit here 7,000 miles away.
There are other areas of World Bank lending that aren't nearly as
compelling, and by my estimates, one-third to nearly half of the bank's
lending in China is not appropriately focused. The capital increase
agreement negotiated by the U.S. Treasury rightly seeks to reign in
these areas of financing by laying out what sorts of activities are
appropriate for the bank's relatively wealthier borrowers.
More importantly, the agreement also asks more of China and other
relatively wealthier borrowers in the form of higher prices on their
World Bank loans. Through higher loan charges, the bank will increase
revenues, which eases the financing burden on shareholders, and will
also create better incentives for the bank's borrowers. I think there
is more scope over time to further differentiate the lending terms for
China and other borrowers to a degree that their borrowing can
genuinely be viewed as financially profitable for the institution.
Responding to China's Global Financing
Let me turn to what China is doing outside of the multilateral
institutions and how the United States is responding. Over the course
of a decade, China has become the leading bilateral source of
development assistance globally, slightly surpassing the United States.
Of course, the two countries look very different in the composition of
their assistance. The United States mostly provides grant support in
the health and humanitarian sectors, while China mostly provides loans
to support infrastructure projects.
In some respects, China's lending is like that of the MDBs in that
it is providing development country governments access to capital to
invest in roads, bridges, and energy infrastructure, all of which are
sorely needed to spur economic growth. But it's also increasingly clear
that China's lending lacks important constraints, and the evidence
suggests that Chinese development finance is pushing some countries
into over-indebtedness with all the problems that come with
unsustainable debt burdens.
In research earlier this year at the Center for Global Development,
my colleagues and I detailed the debt problems facing China's Belt and
Road initiative and pointed to the failures in China's approach that
are pushing some countries into debt crises. Within the Belt and Road,
this includes countries like Djibouti, which is host to ports and
military bases for multiple countries, as well as China's neighbors
Pakistan, Mongolia, and Laos.
While I am skeptical about overuse of the term ``debt trap
diplomacy'' to characterize China's lending program, we don't have to
have a clear understanding of China's motivations in every instance in
order to recognize that policy failures on China's part are
contributing to debt problems when they arise. As a result, a key
priority for U.S. policy should be to affect a change in behavior by
bringing China into the norms and disciplines of other major creditor
countries, something we describe in detail in our research paper.
But we can also respond to the problematic aspects of China's
lending by offering developing countries better alternatives. That
should start with strong support for the MDBs, which are ready made to
lend at scale and with high standards.
But we can also do more bilaterally, and one response from the
administration, spurred by leadership in this committee, holds promise.
The expansion of OPIC's lending authority and other reforms contained
in the BUILD Act have the potential to bring more U.S.-led development
finance to bear globally, expanding the mix of financing tools on offer
in the U.S. assistance portfolio. The new U.S. Development Finance
Corporation should better enable the United States to go beyond
traditional assistance in the health and humanitarian sectors to
provide larger scale financing in infrastructure and other growth-
oriented sectors.
As much as I think the BUILD Act is a positive step forward, my
optimism comes with some caveats. First, the U.S. DFC should be
additional and not a substitute for traditional assistance. U.S.
leadership through long-standing programs like PEPFAR is highly valued
in developing countries and is doing vital worked measured in lives
saved. And as I noted earlier, strong U.S. contributions to
multilateral funds like IDA are critical in maintaining our leadership
in these institutions. It would be a fundamental mistake to allow the
aid budget to be gutted on the heels of the BUILD Act.
When it comes to the new DFC itself, it is important to recognize
its essential value, particularly vis-a-vis Chinese finance. Yes, more
financing overall is a good thing. But it is in the standards attached
to that financing that will distinguish the DFC. The legislation lays
important markers on project effectiveness and social and environmental
safeguards. But it will take diligence and hard work to make these
things a reality and to sustain them over time.
Too often, the experience of other development finance institutions
suggests, for example, that time and resource-intensive environmental
impact assessments are viewed as red tape in the face of competitive
pressures. Positioning the new DFC so prominently as a competitor to
China only heightens my concern on this point. I encourage this
committee in its oversight to adhere to a strong sense of what ought to
distinguish U.S. finance from the worst characteristics of Chinese
finance-things like ensuring that local communities are consulted and
fully compensated when they are negatively affected by a road project,
or ensuring that a negative environmental impact assessment carries
enough weight to alter or even halt a potential project.
Finally, I'll close by highlighting the risk of going too far when
it comes to using development finance to compete with China. Yes, we
should offer developing countries a ``clear choice'' by distinguishing
our approach to assistance from the problematic features of Chinese
finance. Here, we can and should do a better job with our developing
country partners--both by clearly identifying problems such as non-
competitive procurement and by supporting their efforts to be smarter
borrowers when China is the creditor.
But there's a difference between offering choices and forcing
countries to choose. It would be a costly mistake to seek to carve up
the developing world in Cold War fashion between clients of the United
States and clients of China. Chinese development finance is a reality,
and even with its problematic features, it is undoubtedly delivering
something of value to a wide range of developing countries. Where that
is the case, we will not convince these countries otherwise.
Where Chinese finance is causing problems, the U.S. objective
should be to change Chinese behavior, working with key allies in the
G7, India, and Australia, and through multilateral settings like the
IMF and World Bank. Chinese officials are showing signs of feeling the
pressure of a backlash on the debt issue. Now is the time to exploit
that by seeking change: not by drawing battle lines in the developing
world that are unlikely to hold, but by pressuring Chinese officials in
settings that matter to them, settings like the G20, the IMF, and the
World Bank.
Thank you.
Senator Young. Thank you, Mr. Morris.
Ms. Segal?
STATEMENT OF STEPHANIE SEGAL, SENIOR FELLOW AND DEPUTY
DIRECTOR, SIMON CHAIR IN POLITICAL ECONOMY, CENTER FOR
STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, D.C.
Ms. Segal. Mr. Chairman, Mr. Ranking Member, thank you for
the opportunity to contribute to today's discussion. I was
asked to speak about the International Monetary Fund and also
to address China's strategic approach to projecting economic
power and influence globally.
The IMF was created to foster the stability of the
international monetary system, and it does this by engaging in
three principal activities. First, it monitors the economic
developments of its members through IMF surveillance. Second,
it provides loans to IMF members facing balance of payments
needs. And third, it enhances the technical competence of IMF
members through capacity development.
The global economy has changed considerably since the IMF's
founding. Economic liberalization has extended beyond trade to
now include financial and human capital flows. We are also
witnessing the emergence of China as a global power and as a
challenger to U.S. economic supremacy. This context makes the
activities of the IMF, that is, surveillance, lending, and
capacity building, more important than ever.
In terms of surveillance, the IMF's most recent evaluation
of the Chinese economy took place in July, and thanks to
efforts championed by the United States to promote
transparency, the Fund's report on China can be accessed by
anyone with an unrestricted Internet connection. Because of IMF
surveillance, Chinese authorities and the rest of the world
receive a technical assessment of China's economy from highly
trained economists. Having a fact-based discussion on a common
set of indicators, something that is required by the Fund's
articles of agreement for all Fund members, is valuable in and
of itself. That is the good news.
Where IMF lending is concerned, China and specifically its
Belt and Road Initiative, or BRI, is playing a less
constructive role. According to the U.S.-China Economic and
Security Review Commission, the BRI is a well resourced, whole-
of-government concept for regional and global connectivity. BRI
financing comes from Chinese policy banks, state-owned
commercial banks, the Silk Road Fund, as well as the Asian
Infrastructure Investment Bank and the new Development Bank.
Some projects will deliver the benefits that recipient
countries hope for. But reports from BRI countries suggest that
the return on other projects will not live up to expectations.
A recent report noted that Chinese lending to Pakistan, Angola,
and Zambia have complicated the countries' prospects for an IMF
program due largely to nonexistent information on the maturity,
cost, and terms of Chinese loans. Missing terms or contingent
liabilities left out of official statistics would compromise a
key piece of IMF due diligence, that is, the debt
sustainability analysis.
The IMF's Managing Director is correct to call for absolute
transparency on the nature, size, and terms of debts in order
to determine the debt sustainability of any country seeking IMF
assistance.
Separate but related to comprehensive data reporting is
China's reluctance to join the Paris Club. Given China's role
as the largest single bilateral creditor to post-HIPC, low
income countries, its failure to join with other creditor
nations in seeking cooperative approaches to data collection
and to debt relief undermines recipient countries, fellow
creditors, and the integrity of the system.
The issue of data is where the Fund's work on capacity
development is particularly relevant. The IMF should be ready
to assist China in boosting its capacity to track credit and
credit-like instruments and make this information public.
Capacity development should also be prioritized for recipient
countries so that they can assess financing terms and reduce
any information asymmetries between borrowers and creditors.
Expanding the envelope of data that member countries are
obligated to provide in the context of IMF surveillance is also
worth exploring.
So to close, IMF activities advance our national interest
by boosting transparency, by promoting global financial
stability, and by enhancing the technical capacity around the
world. Maintaining U.S. support for the IMF through our policy
engagement and in the context of periodic IMF resource reviews
represents a responsible use of our own scarce national
resources.
In addition to support for the IMF and the other IFIs, the
United States can help countries that have limited options to
finance needed investments. Passage of the BUILD Act, along
with the recently announced Indo-Pacific Transparency
Initiative, allows the United States to offer a positive agenda
for infrastructure investment.
Again, I thank the subcommittee for the chance to offer my
thoughts, and I look forward to any questions.
[Ms. Segal's prepared statement follows:]
Prepared Statement of Stephanie Segal
Introduction
Mr. Chairman, Mr. Ranking Member, Members of the Subcommittee,
thank you for the opportunity to contribute to today's discussion on
Multilateral Economic Institutions and U.S. Foreign Policy. I
appreciate the opportunity to discuss this topic, and I recognize the
good work of the Subcommittee related to the strategic role of
economics in foreign policy and national security.
I was asked to focus my testimony on the International Monetary
Fund (IMF or Fund) and U.S. engagement with the institution. I will
also address briefly China's economic rise, which has led to rapid
changes in the international monetary system that the IMF oversees, as
well as China's strategic and increasingly assertive approach to
projecting its economic power and influence globally.
The International Monetary Fund
As members of the Committee know, the IMF and its sister
institution, the World Bank--together the Bretton Woods Institutions--
were created following World War II as part of an effort ``to establish
a framework for economic cooperation and development that would lead to
a more stable and prosperous global economy.'' \1\ To achieve this
goal, the World Bank focuses on economic development and poverty
reduction, while the IMF promotes international monetary cooperation to
foster the stability of the international monetary system. The IMF
engages in three principal activities to execute its mandate: First, it
monitors the economies of its 189 members as well as the global economy
under ``Fund surveillance''; second, it provides temporary financial
resources to IMF members facing balance of payments needs; and third,
it enhances the technical competence of IMF members through capacity
development. While not without room for improvement, these activities
have advanced U.S. interests by fostering greater transparency and
accountability in the international system, and smoothing inevitable
periods of adjustment.
---------------------------------------------------------------------------
\1\ https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/
31/IMF-World-Bank. Accessed November 23, 2018.
---------------------------------------------------------------------------
Surveillance. The IMF's bilateral surveillance activities are based
on Article IV of the IMF's Articles of Agreement which obliges the IMF
to conduct ``firm surveillance'' over the exchange rate policies of its
members in order to ensure the effective operation of the international
monetary system. IMF members, in turn, are obligated to provide the IMF
with the information necessary for such surveillance, as well as with
any information deemed necessary for the effective discharge of the
Fund's duties, which is called for separately under Article VIII,
Section 5.
Bilateral surveillance takes the form of annual ``Article IV''
consultations, where an IMF country team spends time in-country,
meeting with the monetary and fiscal authorities, political leadership,
private sector participants, and civil society representatives among
others to assess the country's economic and financial conditions. This
annual review culminates in a detailed ``Article IV'' report which is
presented to the country's authorities and IMF management, and then
discussed by the IMF's Executive Board representing all 189 IMF member
countries.
Thanks to the IMF's transparency policy, championed by the United
States, publication of Article IV reports is now ``voluntary but
presumed'', making the vast majority of such reports available to the
wider public.
The IMF also conducts multilateral surveillance on regional and/or
global economic and financial conditions. The IMF's twice-yearly World
Economic Outlook (WEO), Global Financial Stability Report (GFSR),
Fiscal Monitor and Regional Economic Outlooks (REOs), as well as the
annual External Sector Report (ESR), are examples of IMF multilateral
surveillance products which evaluate regional or global financial and
economic conditions. The ESR, the newest of the multilateral reports
and first piloted in 2012 with strong support from the United States,
analyzes economic conditions in individual economies to assess if and
how they contribute to global imbalances, as well as the role of policy
in contributing to such imbalances.
Separate but related to IMF surveillance is the Fund's work to
further the provision of economic and financial data to the public
through various data standards. While voluntary, adherence to the IMF's
enhanced General Data Dissemination Standard (e-GDDS); Special Data
Dissemination Standard (SDDS); and SDDS Plus have filled data gaps,
promoted greater data transparency, and provided market participants
around the world with high quality data essential to capital market
development. Taken together, nearly the entire IMF membership (185 of
189 member countries) subscribe to one of the three standards.
Lending. IMF lending is intended to ``give confidence to members by
making the general resources of the Fund temporarily available to them
under adequate safeguards, thus providing them with (the) opportunity
to correct maladjustments in their balance of payments without
resorting to measures destructive of national or international
prosperity.'' \2\ An IMF member therefore can smooth the adjustment to
an economic shock by borrowing from the IMF in exchange for a set of
conditions, generally ex ante commitments to policy reforms and
quantified performance criteria for the duration of a lending program.
Under a successful program, market confidence is restored, and the IMF
is repaid as the economy adjusts and investors return to the country.
In practice, few cases are so straight-forward, and yet the IMF has an
excellent repayment history. During the Global Financial Crisis (GFC)
in 2008-09, on through the ensuing euro area debt crisis, the IMF
entered into programs and provided financial support to numerous
countries, the vast majority of which have repaid their purchases to
the Fund in full. A 2016 U.S. Treasury Report to Congress highlights
that in the 24 cases of IMF exceptional access lending since 2008 there
was only a single instance of a country not repaying in full and on
time, and in that case (Greece in June 2015) the country quickly
remedied the delay in its repayment to the IMF. The same report offered
Treasury's assessment that IMF lending played an essential role in
mitigating risks of spillover to the global economy.\3\
---------------------------------------------------------------------------
\2\ Articles of Agreement of the International Monetary Fund,
Article I(v): https://www.imf.org/external/pubs/ft/aa/index.htm.
Accessed November 23, 2018.
\3\ U.S. Department of the Treasury, U.S. Treasury Report to
Congress on Ways to Improve the Effectiveness of the IMF and Mitigate
Risks to U.S. Participation, June 2016.
---------------------------------------------------------------------------
Of course, there are cases where Fund programs are unsuccessful,
either because the program was not completed, or because even despite
program completion, balance of payments vulnerabilities were not
durably addressed, leading to follow-on programs. In these cases, while
IMF program design should be examined, factors contributing to a
program's success or failure generally go well beyond program design
and concern the member's political will to implement sustainable
macroeconomic policies as well as global conditions, among other
factors.
Currently, the IMF has $81.5 billion (SDR 58.8 billion) in credit
outstanding, consisting of borrowing from the IMF's General Resources
Account (GRA) as well as its concessional borrowing window, the Poverty
Reduction and Growth Trust. The largest outstanding exposures to
members currently engaged in IMF programs are to Argentina, Ukraine and
Egypt. All three programs received strong support from the United
States when they were brought to the Board for approval. While the
circumstances giving rise to financing needs differ dramatically in
each case, the country's importance to the United States was clearly a
factor in garnering U.S. support for IMF program engagement. In each
case, any bilateral assistance provided by the United States is dwarfed
in comparison to the resources provided by the IMF.
Capacity Development. Capacity development--covering technical
assistance, training and other related activities in fiscal management,
monetary policy, legal frameworks, and statistics--can be provided by
the IMF at the request of a member, although there is no obligation for
a member to accept such assistance. Like IMF surveillance and lending
activities, capacity development is grounded in the IMF's Articles of
Agreement, which provide the Fund with the ability to ``perform
financial and technical services.consistent with the purposes of the
Fund.'' A review of the IMF's capacity development activities completed
this month underscores the importance of capacity development
activities to meeting the Fund's core mandate of fostering the
stability of the international monetary system.\4\ In particular, the
review highlights the importance of integrating the Fund's capacity
development and surveillance activities; as well as continuing to
prioritize the provision of capacity development assistance to fragile
states where needs are greatest.
---------------------------------------------------------------------------
\4\ International Monetary Fund, 2018 Review of the Fund's Capacity
Development Strategy--Overview Paper, November 2018.
---------------------------------------------------------------------------
An Evolving International System
The global economy and international monetary system have changed
considerably since the IMF's founding in 1945. The global economy is
much more integrated now than in the wake of the Second World War, and
economic liberalization has extended beyond trade to include financial
and human capital flows. Liberalization has been good for living
standards in the United States and around the world, yet we are
experiencing a backlash, ironically coming from the center of the
international system. In addition, in less than a generation we have
witnessed the emergence of China as a global power and challenger to
U.S. economic supremacy, which has likely exacerbated the backlash
against economic liberalization, in part because China's own impressive
growth has exploited liberalization without offering the same opening
to the rest of the world. Finally, the uncertainty around the impacts
of technological change on productivity, economic growth and the
distribution of economic gains means the global economy is headed into
unchartered territory. Neither the backlash to globalization nor
technological disruption are the focus of today's hearing, so I won't
spend more time on these issues here except to offer that they
underscore the Fund's importance; the principal activities of the IMF--
surveillance, lending and capacity development--are more important now
than ever.
China's Rise. In 1980, the U.S. economy was nearly ten times the
size of China's, and per capita GDP in the United States was more than
40 times China's. By 2000, the difference narrowed only marginally in
U.S. dollar terms; however, under purchasing power parity--which
assesses economic size by equalizing price levels between countries--
the difference narrowed to slightly less than three times, reflecting
both a weak renminbi and China's low cost of living. By 2017, the U.S.
economy, at just over $19 trillion, was little more than one-and-one-
half times the size of China's. But under purchasing power parity, the
Chinese economy had already overtaken the United States as the world's
largest. One can debate the merits of U.S. dollar versus purchasing
power parity measures, but the trend is clear. Given that China's GDP
per capita is still just a fraction of U.S. GDP per capita, we should
expect the rate of Chinese economic growth to continue to outpace the
United States, even as the U.S. economy grows in absolute terms.
China's economy (in U.S. dollars), can be expected to overtake the
United States within a generation. The fact that China's economy,
fueled by 1.4 billion Chinese consumers, will overtake the United
States, a country one-fourth its size by population, should not be seen
as a threat so much as a high probability event. Furthermore, China's
economic size tells us little about how its leaders will manage its
many challenges, ranging from population aging to environmental
degradation to financial sector vulnerabilities. But the size of
China's economy, combined with the Government's ability and willingness
to corral its resources to achieve strategic objectives, does merit our
close attention.
IMF Surveillance and China. China's economic rise and its relevance
to the IMF can be framed around the three principle activities of the
IMF: surveillance, lending and capacity development. In terms of
surveillance, China meets the obligations of Fund membership. Its most
recent Article IV discussion was held in July; and thanks to previously
mentioned efforts championed by the United States to promote
transparency, China's Article IV report can be downloaded by anyone
with an unrestricted internet connection. In the report and
accompanying materials, we read staff's assessment that Chinese data
quality is ``barely adequate'' for Fund surveillance; that IMF
Executive Directors support increased exchange rate flexibility and
further capital account liberalization; and that they want China to
allow market forces to play a more decisive role in the economy. With
regard to China's Belt and Road Initiative (BRI), Executive Directors
encourage China to give due attention to debt sustainability in partner
countries. At a minimum, Chinese authorities are hearing the technical
assessment of IMF economists, including specific shortcomings (e.g.,
data quality) and areas of vulnerability (e.g., the financial sector).
The IMF Executive Board--that is, the international community--is
weighing-in with messages that will formally be transmitted back to
Beijing. It is always a question whether a staff assessment or Board
discussion will gain traction domestically, but the question is not
unique to China. Having a fact-based discussion on a common set of
indicators--something required by the Fund's Articles of Agreement--is
valuable in and of itself.
China, BRI and IMF Lending. In contrast to IMF surveillance,
China's BRI is playing a far less constructive role where IMF lending
is concerned. The problem comes from loans China is making to some
would-be borrowers of the IMF, with much of the potentially problematic
lending happening under the auspices of the BRI, which the U.S.-China
Economic and Security Review Commission describes as a ``well-
resourced, whole-of-government concept for regional and global
connectivity.'' \5\ This year's Article IV report for China describes
the BRI as an initiative which could ``bring both opportunities for
greater connectivity and growth, but also risks (e.g. debt
sustainability)''; and calls on China to develop ``a clearer
overarching framework governing BRI investment, better coordination and
oversight, more focus on debt sustainability of the partner countries,
and a transparent mechanism for dealing with project disputes, non-
performance and debt service problems, as well as more open procurement
and greater transparency over contracts.'' \6\ Chinese authorities,
however, believe these concerns are overstated, and they see project
selection and governance as ``decisions of market entities.''
---------------------------------------------------------------------------
\5\ U.S.-China Economic and Security Review Commission, 2018 Report
to Congress, November 2018.
\6\ International Monetary Fund, People's Republic of China: Staff
Report for the 2018 Article IV Consultation, June 28, 2018.
---------------------------------------------------------------------------
It is possible that a number of BRI projects will deliver the
economic benefits recipient countries hope for. It is also possible,
based on reports coming from a number of BRI countries, that the
economic return on some of these projects will be negative. In these
cases, far from adding to macroeconomic stability, these projects
potentially mire the recipient countries in higher levels of debt. The
sheer scope of the BRI is daunting. Data provided in the U.S.-China
Economic and Security Review Commission 2018 report suggests BRI equity
and debt funding could already top half a trillion dollars through end-
2017, coming from a mix of Chinese policy banks, Chinese state-owned
commercial banks, the Silk Road Fund, as well as the multilateral Asian
Infrastructure Investment Bank (AIIB) and New Development Bank (NDB).
In a speech earlier this month at the APEC CEO Summit, Vice
President Pence referred to ``infrastructure loans to governments''
with ``opaque'' terms, producing ``poor quality'' projects ``with
strings attached and lead(-ing) to staggering debt.'' \7\ He cautioned
countries against accepting foreign debt that could compromise their
sovereignty, reflecting fears that at least some of the infrastructure
projects built under the BRI are motivated by China's political or
military ambitions rather than to benefit the local or regional
economies. A recent report initially published in the Financial Times
and later re-printed in Pakistan reported that Chinese lending to
Pakistan, Angola and Zambia has complicated the countries' prospects
for an IMF program due largely to ``non-existent'' information on the
maturity, cost and terms of loans.\8\ The missing terms, combined with
concerns that contingent liabilities (e.g., government guarantees) may
not be captured in official government statistics means that a key
component of IMF due diligence, the debt sustainability assessment or
DSA, is compromised.
---------------------------------------------------------------------------
\7\ https://www.whitehouse.gov/briefings-statements/remarks-vice-
president-pence-2018-apec-ceo-summit-port-moresby-papua-new-guinea/.
Accessed November 20, 2018.
\8\ https://www.thenews.com.pk/print/397725-imf-faces-china-debt-
dilemma-as-low-income-nations-seek-help,November 25, 2018. Accessed
November 25, 2018.
---------------------------------------------------------------------------
The IMF has policies and conventions, starting with its preferred
creditor status, that protect the Fund's balance sheet, but
comprehensive and reliable data must be the foundation for any
assessment. IMF Managing Director Christine Lagarde is correct in
demanding ``absolute transparency'' on the nature, size and terms of
debts in order to determine the debt sustainability of any country
seeking IMF financial assistance.\9\
---------------------------------------------------------------------------
\9\ https://www.reuters.com/article/us-imf-worldbank-pakistan-
talks/imf-to-seek-absolute-transparency-of-pakistans-debts-in-bailout-
talks-idUSKCN1ML0W1, October 11, 2018. Accessed November 25, 2018.
---------------------------------------------------------------------------
Separate but related to the issue of comprehensive data reporting
is China's reluctance to participate in certain international
arrangements, and the Paris Club in particular. Given China's role as
the largest single bilateral creditor to post-HIPC low income
countries, its failure to join with other creditor nations in seeking
cooperative approaches to data transparency and debt relief undermines
recipient countries, fellow creditors, and the integrity of the
system.\10\
---------------------------------------------------------------------------
\10\ International Monetary Fund, Macroeconomic Developments and
Prospects in Low-Income Developing Countries-2018, March 2018, Table 4.
Total Public and Publicly Guaranteed Debt by Creditor, 2007-16.
---------------------------------------------------------------------------
Capacity Development: China and BRI Recipients. Data is where the
last of the three principle functions of the IMF is particularly
relevant. While the conventional wisdom suggests China is actively
hiding the amount and terms of its financing, it is also possible that
Chinese authorities, at least those in charge of managing the country's
exposures to overseas projects, have been blindsided by the volume of
Chinese credit abroad. Given reports of Chinese exposure to numerous
vulnerable countries, there is likely growing concern in China
regarding the prospects for repayment. The IMF should be ready to
assist China is boosting its capacity to track external credit and
credit-like instruments, including contingent liabilities, with an eye
to making this information public. China's move earlier this year to
create China International Development Cooperation Agency (CIDCA) to
evaluate and administer China's foreign assistance program can be a
good first step, but with its limited focus on official development
assistance, it is insufficient to capture all categories of relevant
debt and contingent liabilities. In order to be effective and credible,
CIDCA would also need to be independent from the Government.
Expanding the envelope of data that member countries are obligated
to provide to the IMF in the context of surveillance is also worth
considering.
The IMF and World Bank, in their reporting to the G-20, have
underscored ``that the primary responsibility for transparent debt
recording, monitoring and reporting lies with the borrower.'' \11\ In
this respect, IMF capacity development should be prioritized for
recipient countries attempting to attract financing for infrastructure
to provide these countries with the tools to assess financing terms.
The increasing complexity of debt instruments makes this work even more
critical to reduce information asymmetries between borrowing countries
and their creditors. In addition to the IMF, the donor-supported Debt
Management Facility housed at the World Bank works to strengthen low
income countries' debt management capacity and merits support.
---------------------------------------------------------------------------
\11\ International Monetary Fund and World Bank Group, G20 Notes on
Strengthening Public Debt Transparency, June 13, 2018.
---------------------------------------------------------------------------
What Can the United States Do?
U.S. influence at the IMF remains strong, reflecting America's role
in the IMF's creation as well as the still-predominant contribution of
the United States to the global economy. The United States currently
holds 16.52 percent of the Fund's total voting power, giving it an
effective veto over any change to the Articles of Agreement.\12\ The
United States also benefits from U.S representation among senior
management, not only at the IMF but also at the multilateral
development banks. In addition, while the IMF's resident Board ensures
that all members interact directly with IMF staff, management and other
Board members, the IMF's location in Washington also benefits the
United States. But sustaining U.S. influence is far from guaranteed.
The United States should recognize how IMF activities advance our
national interests, by boosting transparency and ensuring a common
reference point for economic discussions among global participants. IMF
lending benefits U.S. strategic priorities and promotes financial
stability, even when individual IMF programs fall short of objectives.
Maintaining U.S. support for the Fund, through serious political
engagement and financial support in the context of periodic IMF quota
reviews, constitute a responsible use of scarce national resources.
---------------------------------------------------------------------------
\12\ Any amendment to the IMF's Articles of Agreement requires the
approval of three-fifths of the IMF's members representing 85 percent
of the total voting power. The next largest shareholder, Japan, holds a
6.15 percent of total votes; while China, the third largest
shareholder, holds 6.09 percent.
---------------------------------------------------------------------------
In addition to supporting the IMF and the other international
financial institutions, the United States can assist countries that are
otherwise left with limited options to finance needed investments. In
his speech earlier this month at the APEC CEO Summit, Vice President
Pence underscored a renewed commitment to development financing, and
infrastructure in particular.\13\ Recent actions, including passage of
the BUILD Act to create a new foreign aid agency with authority to
provide US$60 billion in funding for developing nations; along with a
new Indo-Pacific Transparency Initiative, can equip the United States
to offer a positive agenda for infrastructure investment, including
private sector participation, while boosting transparency and combating
corruption. Finally, allowing U.S. companies to compete overseas,
including with the backing of a fully operational Export-Import Bank,
can support a positive U.S. agenda overseas.
---------------------------------------------------------------------------
\13\ https://www.whitehouse.gov/briefings-statements/remarks-vice-
president-pence-2018-apec-ceo-summit-port-moresby-papua-new-guinea/.
Accessed November 20, 2018
---------------------------------------------------------------------------
Again, I thank the Subcommittee for the opportunity to offer these
thoughts, and I look forward to answering members' questions.
Senator Young. I thank each of you for your summary
testimony. There is a lot for us to deal with in a fairly short
amount of time.
But why do I not begin with our first three panelists, Mr.
Lowery, Ms. Hillman, Ms. Lee. Each of you spoke to, I believe,
the need for a more coherent and comprehensive strategy with
respect to some of these issues we are dealing with.
Mr. Lowery, you indicated that Congress needs to assert our
role with respect to trade policy and perhaps pressure--you did
not say this, but pressure this and future administrations to
clarify our economic security strategy. I will give you an
opportunity to respond.
Ms. Hillman, you focused quite a bit on the WTO in your
summary comments, indicating that there is a need to fix the
binding dispute settlement system, and you suggested this could
best be done by assembling a coalition. I am not aware that
that has been written into any particular strategy document,
certainly not in any great detail by a previous administration
or the current administration.
Ms. Lee, you indicated that the Congress, working with our
executive branch, should articulate and prioritize a strategy--
your words. Most likely that would affect the sort of positive
change I think that we all want with respect to jobs and
incomes and economic stability if that change were pursued
multilaterally, something you supported.
So I think there is a means towards our getting there. In
fact, I drafted legislation that I think would get us there. It
is S. 2757, the National Economic Security Strategy Act of
2018. Senator Merkley was the original cosponsor lead on this.
It would create a statutory requirement for the periodic
production and submission to Congress of a national economic
security strategy.
What do you think about this idea, Mr. Lowery? We actually
have a written document that can be critiqued by the academic
community that will signal to our friends and adversaries and
partners alike exactly what our strategy is. We could seek buy-
in as we do with the National Defense Strategy or a National
Security Strategy from the legislative branch. So we are all
working together for the betterment of the United States and
all we represent. Is it a good idea to have a written strategy?
Mr. Lowery. So I had the honor of serving on the National
Security Council staff back in 2001 and 2002. And part of the
staff's work was the National Security Strategy, which I do
find to be a very helpful document. In fact, I used that in my
testimony today from the Trump administration.
So I have read your legislation. I think it would be a very
helpful thing. I mean, having international economics should be
part of any strategy, whether it is the National Security
Strategy or creating a national economic strategy to go into
more detail, just like, for instance, on the National Security
Strategy, there is a National Defense Strategy that relies on
it to create more--to be more specific on how the Defense
Department envisions this document.
So I think that this makes a lot of sense to me. It helps
create priorities. It helps communicate what the administration
is trying to do, whether it is this administration, the next
administration, or following administrations.
Senator Young. And, of course, much of the strategy would
be classified in nature. There would be a classified annex. As
with our National Security Strategy, the rest of it would be
open source.
Ms. Hillman, thoughts.
Ms. Hillman. I think it would be serving a great need,
which I see very clearly right now, by helping to draw a line
between what is economic security and what is national security
because clearly one of the real threats to the WTO is the fact
that the United States has imposed these tariffs on steel and
aluminum in the name of national security. And right now, those
tariffs are being challenged at the WTO by many of our trading
partners. And the response of the United States has been that
somehow we are allowed to violate all of our commitments
because the challenge is coming to say you cannot put tariffs
on steel of 25 percent because we agreed. We bound our tariffs
on steel at 0 percent duties. So by charging this 25 percent
tariff, we are breaking that commitment. We are violating the
WTO rules. We said clearly we would not impose tariffs other
than equally on all of the members of the WTO, and yet we are
putting the tariffs on some but not on others. So what the
United States is intending to say in that litigation is, oh,
no, we are allowed to do this because we say it is in the name
of national security.
And the problem for the WTO is if they agree with the
United States that you can do anything if you claim that it is
in the name of national security, every other country can do
this to every other product and say that they can put these
restraints on if they simply say it is in the name of national
security.
And if, on the other hand, the WTO says no, United States,
you cannot do this in the name of national security, the
concern is that the Trump administration will withdraw from the
WTO on the theory of, you know, sort of who are you, WTO, to
tell us what is in our national security.
So I think your legislation and your idea of helping to
figure out where is that line between national security from a
defense sort of security standpoint versus what is in our
economic security would be immensely helpful.
I think also going forward, as we think about whether or
not there is going to be future tariffs under this section 232,
it would be very helpful if there could be some of that line-
drawing.
And the last thing. I will only comment quickly. You asked
about whether or not there is some kind of a strategy document
that would speak to these China issues that I was talking about
in terms of a WTO case. The U.S.-China Economic and Review
Security Commission just recently, very recently, released its
annual report to the Congress, and included in their section on
trade and China is this idea of sort of bringing a sort of
bigger, bolder coalition case to challenge these trade issues
with respect to China.
Senator Young. Excellent.
Ms. Lee?
Ms. Lee. Thank you. Thank you, Mr. Chairman.
I look forward to reviewing your document because it sounds
like a very useful direction to go. And I do believe there is a
value in articulating and putting on paper and bringing
together all the different agencies to have a coherent
strategy. I think that is often missing in terms of U.S.
economic policy. And I think one issue is that we should
recognize that there are connections between our economic
security and foreign policy, and sometimes those are legitimate
concerns that are not taken into account.
I think the other reason that it is useful is that, as we
know--and I think we have had a lot of discussion today--other
governments, particularly China, but others as well, have a
very concerted economic strategy, a long-term economic strategy
that they are playing off of. And if the United States is
passive or not coordinated, I think that we will almost
inevitably lose out.
Senator Young. Thank you.
It is a bit ironic. I can go to the Internet and access
China's strategy. I can. In a sense, I have more coherence,
more clarity, a broader view about what their strategy is on a
going forward basis than I do as a member of the Senate Foreign
Relations Committee where my job is, in the main, oversight.
And I find that not just ironic but troubling, and I think a
number of my colleagues find it troubling as well.
I will ask one additional question and then kick it to
Senator Merkley. It is a follow-up to you, Ms. Hillman, with
respect to this idea of bringing one broad case at the WTO
against China.
The grounds of the case would be, A, that China has just
broadly violated the expectations of a market economy. That
seems sort of a violation of the spirit of the WTO agreement
and the expectations you have when invited into the WTO. But
then there are 12 specific commitments that you indicate the
charges should include as well that one commits to when you
enter the WTO.
In your assessment, why has a case like this not been
brought?
Ms. Hillman. I think it's an excellent question. I think
there is a number of reasons why it has not been brought.
Part of it is trying to bring a case as a coalition is
difficult because you have to get everybody on the same page in
terms of thinking about what kind of claims do we want to
bring.
As I mentioned, in the past, there has been really a
reluctance because China retaliates and retaliates so quickly
and immediately against countries that do take actions against
China. And they retaliate very clearly in this trade sphere and
even for fairly innocuous actions.
When the Nobel Peace Prize is given out to a Chinese
dissident, what is the first thing China does? It bans the
exports of salmon because they do not want to in any way reward
countries where the Nobel Peace Prize is given.
When the Philippines challenges the development of the
islands in the South China Sea at the International Court of
Justice and wins the case, what is the first thing China does?
Ban Philippine mangos from going from the Philippines into
China as a way of retaliating.
So countries have been really reluctant to take on China in
a major way for fear that they will be the subject of this
retaliation. Again, hence the reason why my view is if you put
together a large coalition of countries, it does create a bit
of a shield against this ability for China to immediately
retaliate.
The other part of it, again as I mentioned, is evidence. It
is hard to get enough of this evidence, particularly because
China is so nontransparent. You simply cannot get your hands on
the kind of documents that you would normally need in order to
prove these cases.
And I think the last thing that is really important is one
of the major and I would say the most major claim against China
relates to the issue of subsidies, that China creates massive
over-capacity in steel, in aluminum, in chemicals, in all of
these products on the backs of subsidies. And the concern there
is whether or not the disciplines for how do we get at
subsidies in the WTO are adequate.
Right now, when the WTO tries to take on subsidies, you go
kind of two roads. One is you can show that the imports of
subsidized products are coming into the U.S. market, in which
case you can try to put a countervailing duty onto those goods
to offset the amount of the subsidy. So 50 percent of the cost
of production was by a subsidy. You put a 50 percent duty on.
That may work to protect the U.S. economy, but it pushes that
subsidized steel out into all of the rest of the world. So it
did not solve the problem.
If, on the other hand, what you bring is an adverse effects
case, the problem is that the remedy is prospective only and it
only requires China to so-call remove the adverse effects of
the subsidy. But if that steel plant is already up, built, and
running, it does not do you very much good to say prospectively
that you are supposed to get rid of the adverse effects of the
subsidy.
So the other reason why cases have not been brought is
because some of the rules in the WTO are probably not
sufficient to really take on board the substance of the problem
that we have with China.
Senator Young. Okay. Thank you.
I do not believe I will get to all of the questions I
wanted to ask of all the witnesses because I do want to give
Senator Merkley a lot of time to ask whatever might be on his
mind. Thank you.
Would you encourage us, Ms. Hillman, yes or no, to consider
contacting the administration, encouraging them to assemble a
coalition, gather evidence, and bring a case even in light of
the infirmities with respect to some of the WTO provisions? Do
you think it still merits----
Ms. Hillman. Absolutely, yes. If the case wins, you have a
lot of leverage over China to really push for it. If it loses,
it will make it very clear where are the holes in the WTO rules
that need to be fixed. So either way, the answer is yes.
Senator Young. Thank you.
Senator Merkley?
Senator Merkley. Thank you.
Mr. Morris, you noted that some of our loans to China are
helping China reduce carbon pollution and that that is a
positive thing. Do you share the viewpoint from the
administration's report last Friday that carbon pollution is a
significant world problem and we need to act quickly to address
it, a point that was also made last month by the IPCC report
that was described as a firm alarm going off saying, wake up,
act fast on carbon?
Mr. Morris. Absolutely I do.
And I would make the additional point that in fact it is,
if not the most important thing the MDBs themselves are doing
today, among the most important. The capital increase at the
World Bank--that agreement itself makes new commitments to
climate finance that I think are part of what garner my support
for that agreement. I think it is absolutely critical to their
agendas going forward.
Senator Merkley. Ms. Segal, do you share that view?
Ms. Segal. I do, and I would also add the IMF focuses on
macro-economic issues as opposed to development issues. But the
IMF has also thought about climate and climate change as a
macro-economic issue. And we do see that there are real macro-
economic impacts from climate change. So, yes, I do agree.
Senator Merkley. Ms. Lee?
Ms. Lee. Yes, absolutely.
And I also think that the WTO could play a more
constructive role with respect to climate change to allow
countries that go first and go faster to implement carbon
reducing strategies are not put at a competitive disadvantage
through trade, so allowing border adjustable methods to adjust
at the border for the difference in prices between countries
that are moving quickly and countries that are moving more
slowly.
Senator Merkley. Ms. Hillman?
Ms. Hillman. Yes, I totally agree. And I would only add
that I do think I would agree with Ms. Lee that there is more
that the WTO can do to both reduce all tariffs on anything that
would contribute in terms of renewable energy types of goods.
There has been a longstanding fight over exactly what products
should be on that list, and my own view is that fight needs to
be over with today so that you can go to zero duties and zero
restraints of any kind on the trade in renewable energy
materials in order to, again, make that contribution.
I do think the WTO is also trying to work at disciplines on
fossil fuel subsidies, which is the other way in which the
trading system could contribute to helping.
But the answer is unequivocally yes.
Senator Merkley. And Mr. Lowery, I do not want to leave you
out.
Mr. Lowery. Thank you. I am not going to say yes or no only
because I have not read the report, one. And secondly I clearly
just do not have deep enough knowledge in this area. But I will
say this. I usually would listen to a lot of scientists that
seem to be coming to similar conclusions.
Senator Merkley. Thank you.
So, Mr. Morris, as you were noting about the loans to China
and helping China reduce carbon pollution, I could not help but
recall an article I had read about how China is the major
financer of new coal plants around the world. So I asked my
team to get me some facts here.
So China is the largest investor in overseas coal projects,
having invested $15 billion in the last few years. And they
have another $13 billion in proposed projects.
They are involved in planning 700 new coal plants at home
and abroad.
And from a different source, a New York Times article, at
the end of 2016, China was immersed in 240 overseas coal power
projects. And I have run into a number of these in different
parts of the world.
And the same articles note that just the building of these
plants that are essentially on the drawing board completely
overwhelms Paris. And Paris itself is not a significant ceiling
in terms of--we will break the barriers that have been set by
international scientists for 2 degrees under Paris.
So some of you have already mentioned strategies that we
could use in the international multilateral institutions to
help take this on. But I hear this fire alarm ringing, saying
wake up world. It is very hard. It is very hard because we have
deeply invested ownership of fossil fuel assets around the
world, and the owners clearly want to work hard to keep
extracting them and burning them. And so that is an enormous
challenge.
But the international institutions that you all study or
represent--share a little bit more about. And I think, Ms. Lee,
you mentioned a specific idea that I did not completely
capture, but maybe you would like to start by mentioning that
idea. How can multilateral institutions really help us as a
human civilization on this planet take on this enormous and
immediate catastrophic challenge?
Ms. Lee. The idea I was talking about had to do with the
competitive differences, when countries move at different
speeds to reduce carbon emissions. So, for example, if, let us
say, the United States were to put on a carbon tax and raise
the price of producing certain manufactured goods and other
countries might move more slowly--developing countries. And
that is certainly the idea of the Paris Accord. If production
were to move from the United States to those places that have
not yet reduced carbon emissions, then you are actually
increasing emissions globally because you are moving relatively
clean production to a relatively dirty place.
And one way of deterring that is to allow a border
adjustable tax that would adjust for the difference in carbon
strategies and that would prevent the competitive gaming of
that. And it would not penalize the countries that do the right
thing and move more quickly. And I believe it is correct that
wealthier countries, wealthy industrialized countries, should
move more quickly than poorer countries, but what you do not
want to do is end up with this terrible outcome where----
Senator Merkley. No. I take your point on border
adjustment.
We recently had a report from Xcel Energy in Colorado that
put out a request for proposals, and it came back at 2 cents
per kilowatt hour for wind, 3 cents for solar, and both of
those were below the cost of power from an already depreciated
coal plant.
Are we at the point where the dropping costs of solar and
wind are going to dramatically change the calculations? Because
even folks who may not share a concern about the health of our
planet may want to be on the smart end of the cheapest energy.
Ms. Lee. Yes, and I think that is a really positive
development when renewable energy actually ends up being
cheaper than the more expensive. That is a huge advantage.
But also I think it is true--this goes, I think, back to
the economic strategy and the long-term planning--is that some
countries like China and Germany might have subsidized wind or
solar panel productions at an earlier stage when it was not so
obvious that there was an economic advantage. And that is the
kind of thing I would like also see the United States be
thinking ahead so that we are not brining up the rear in that
kind of a decision.
Senator Merkley. Yes, Scott?
Mr. Morris. Yes. I would just say, Senator Merkley, you
raise a good point. I do not think it has received enough
attention. In fact, there seems to be an effect. As China goes
greener and cleaner at home, they are pushing out dirtier
abroad.
I think the challenge here, which is consistent with the
broader challenge we have talked about, is that we want to
bring China into multilateral norms and disciplines. Well, in
this area, we need to be sure that they exist. So that is
things like standards for export credit agencies when it comes
to energy finance, development finance abroad.
You know, this institution that we are standing up under
the BUILD Act--it is going to be really important that it has
standards in this area that gives us some standing to try to
enforce the massive volume of financing that is coming out of
China and supporting these kinds of projects.
Senator Merkley. Anyone else want to chip in on this? [No
response.]
Senator Merkley. So I want to turn back, Ms. Hillman, to
your concept about this strategy for a multilateral challenge.
I think of the whole WTO process as clunky--that is maybe on
the complimentary side--and deeply dysfunctional, a maybe more
accurate way to describe it.
And also fundamentally we struck a deal. It was a
geostrategic maneuver aimed significantly at separating China
from Russia, keeping the communist bloc separated. And we said,
you know what? We will give you access to our market. We will
let you produce goods at different labor standards, different
environmental standards, and different enforcement standards,
and very low wages, which means you will be able to undercut
our products. Will this not be a sweet deal for you?
And it was a sweet deal, and it remains a sweet deal. And
essentially every manufacturer in America said, can we not make
a lot more money going to the cheapest place in the world to
make things and then sell it back into the American market? And
we saw a massive loss of manufacturing.
Is it time to rethink this sweet deal for China? They have
taken the proceeds from that. They are doing massive
infrastructure at home, which I described earlier, that I have
seen just within a few trips. They are buying up strategic
resources around the world. This is all part of a Chinese
national economic security strategy, their Belt and Road
strategy. And my colleague here has said, well, America needs a
strategy. And our strategy is kind of mired going back to our
Cold War battle keeping Russia and China separated. And we pay
a massive economic price for it. Is it time to rethink the
whole thing?
Ms. Hillman. I think it very well may be time, and part of
why I guess I am proposing this idea is as part of a rethink,
if you will, or resetting the table vis-a-vis China. And the
question is sort of under what auspices or under what table
setting, if you will, do we have the best leverage with respect
to China. Because I do think it is clear that many countries
around the world share many of the United States' substantive
concerns about China, all of the concerns that you have just
articulated, again that China has gotten away with because it
is not just the United States that is feeling the brunt of a
lot of the Chinese exports and, again, the products that are
made with the low labor and the poor environmental conditions
that you are describing. Those are affecting countries
elsewhere in the world. So we have many allies with us that
would agree with everything that you have just said in terms of
what do we need to do about China.
Where they disagree is over the United States' unilateral
tactic in approaching it.
And I guess where I am disagreeing is I do not think we
have enough leverage alone to create the kind of change that we
are really talking about in China. So my own view is that the
only way you are going to get at exactly the issues that you
have described is to try to put together a coalition. And I do
think it is a large coalition that agrees with you and agrees
that China must be dealt with.
The question is then what do get at the end of the day,
whether it is enough change, enough resetting of that
relationship because I do not disagree with you that when China
joined the WTO, the expectations were really quite different
from what the reality has been. And over the first couple of
years, it appeared that China was moving in the right
direction, it was opening up its economy, it was moving in a
more market-oriented direction, it was starting to shut down
some of the most environmentally damaging.
But about--I do not know--2004, 2005, there is no question
China took a major 180 degree turn in the wrong direction from
every aspect. It became more state-owned. It became more
Communist Party controlled. It became more abusive on a whole
series of labor and environmental rights.
So I do not disagree with you. I guess what I am trying to
say is I think you are right that we need a very dramatic
response to China. And my only point is I think it needs to be
a multilateral response and not just a unilateral one.
Senator Merkley. That is a very appropriate response for a
multilateral conversation.
And our time has expired. So I am going to turn this back
to the chairman. Thank you all very much.
Senator Young. Well, thank you, Senator Merkley.
And so many smart minds, so many topics we have covered and
so many more questions I would like to ask, but we have run out
of time.
Chairman's prerogative. A couple of administrative items.
One, I would like to draw some attention to a report, of which
Scott Morris was one of the co-authors, for those who have an
interest in Examining the Debt Implications of the Belt and
Road Initiative From a Policy Perspective, the title of the
report, I would commend it to you. Among other things, the
report indicates that the World Bank and other MDBs should work
toward a more detailed agreement with the Chinese Government
when it comes to lending standards that will apply to any BRI
project no matter the lender. With unanimous consent, I would
like to enter this report in the record.
Senator Merkley. Absolutely.
Senator Young. And as the last order of business, Mr.
Lowery, I will be submitting a question to you for the record
because in your prepared testimony, you called walking away
from the TPP, ``reckless and a gift to China.'' I would be very
interested in your thoughts about where we should go from here
with respect to multilateral trade agreements.
Thanks again all for appearing today as witnesses, for your
research, for your expertise.
For the information of this member and others, the record
will remain open until the close of business on Thursday.
Yes?
Senator Merkley. Thank you. I would like to ask unanimous
consent to submit to the record a table from the Information,
Technology and Innovation Foundation. It is a summary of what
was referred to as China's broken WTO commitments, a dozen
commitments where they have failed to live up to their
promises.
Senator Young. Without objection, and just under the wire.
[The information referred to above follows:]
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Senator Young. So the record will remain open until
Thursday, including for members who may not have been present
to, to submit questions for the record.
Thank you again, and thank you, Senator Merkley, for our
continued partnership.
This hearing is now adjourned.
[Whereupon, at 4:40 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of Hon. David Malpass
Thank you for holding this hearing and for inviting me to testify.
My testimony a year ago to Congress addressed the topic of
achieving faster U.S. and global growth in ways that improve after-tax
wages for American workers. While there has been substantial progress
in the United States, growth abroad has softened materially, causing
challenges for international economic policy. In this context, I would
like to provide an update on some of the major policies we implemented
over the past year, and describe our policy direction for 2019. I will
also present a detailed explanation of our policies on the
International Financial Institutions (IFIs).
Major Policy Developments in 2018
In 2018, we worked to orient better the G20, G7, International
Monetary Fund (IMF) and multilateral development banks (MDBs) toward
growth and accountability. With engagement by the World Bank, IMF, and
other partners, Secretary Mnuchin has pushed forward an initiative on
debt transparency that will, in the near term, significantly increase
public disclosure and broaden the existing definition of international
debt beyond traditional bonds and loans. This will reduce the frequency
and severity of developing country crises and help push back on China's
over-lending to fragile developing nations, including those with weak
governance. The World Bank and IMF have focused on more comprehensive
and transparent reporting of public sector liabilities of borrowers to
assist with our initiative.
We engaged repeatedly with China on our trade and investment
concerns and the problems caused by their One Belt, One Road (OBOR)
initiative, which often leaves countries with excessive debt and poor-
quality projects. If countries default on these debts, China often
gains influence over the host government and may take ownership of the
underlying assets. We have built a common awareness of these concerns
in the G7 and G20. In lending, China often fails to adhere to
international standards in areas such as anti-corruption, export
credits, and finding coordinated and sustainable solutions to payment
difficulties, such as those sought in the Paris Club. With evidence
mounting in Asia and Africa that OBOR has undermined domestic
institutions and economic strength in borrowing countries, countries
such as Malaysia are re-examining the costs and benefits of OBOR-
related projects.
With Congress's bipartisan support, we have enhanced America's
national security through the enactment and ongoing implementation of
the Foreign Investment Risk Review Moderation Act of 2018 (FIRRMA),
which has strengthened and modernized the Committee on Foreign
Investment in the United States (CFIUS).
We have worked multilaterally to forge a new currency consensus in
the G20 and International Monetary and Financial Committee recognizing
the growth and investment benefits of currency stability. The
administration recently concluded the U.S.-Mexico-Canada Agreement
(USMCA), which included the first currency chapter in a trade
agreement, consistent with congressional directives promulgated under
Trade Promotion Authority. We also reached an understanding with South
Korea on currency stability and transparency at the time of the update
to the U.S.-Korea Free Trade Agreement (KORUS). Argentina's new IMF
program includes a nominal monetary anchor and an important commitment
to leaving currency intervention unsterilized, policies that quickly
stopped Argentina's mid-2018 currency crisis and are dramatically
reducing the rate of inflation.
Treasury also launched the America Crece (The Americas Grow)
initiative to promote growth in the Western Hemisphere. One key element
of this initiative is to deepen U.S. commercial ties with Latin America
in energy and infrastructure. In 2018, we signed energy framework
arrangements with Panama and Chile, plan to sign one with Jamaica
tomorrow, and hope to soon conclude one with Argentina. Looking
forward, we are working with Colombia and have identified other
attractive partners. These energy framework arrangements seek to
achieve a high degree of energy development, integration, faster
economic growth, and security with our partners through heightened and
impactful trade, investment, and finance transactions that rely
primarily on private capital.
We have refocused the Financial Stability Board (FSB) on its
systemic risk mandate, including the adoption of an activities-based
approach for insurance activities, the wind-down of work streams
unrelated to stability issues, and the evaluation of the effectiveness
of existing policies before developing new policies. I served on the
nominations committee for FSB leadership and was pleased with the
recent announcement of Federal Reserve Vice Chair Randy Quarles as the
FSB's next Chair, the first American to serve in this role.
We prepared and published a number of reports including: the MDB
Evaluation Report, the Foreign Exchange Report, the report of the
National Advisory Council on International Monetary and Financial
Policies, the Export Credit Negotiations report, the Technical
Assistance report, and the Exchange Stabilization Fund report.
My testimony before Congress last year discussed the role of
multilateral development finance in global growth and prosperity. Since
then, we have been successful in getting the World Bank to commit to
meaningful reforms to achieve sustainability in its lending, enforce
its graduation policy, implement differential pricing, and agree to
other reforms that would enhance accountability. As discussed further
below, a 2018 package for a World Bank capital increase focuses on
these areas and includes a new financial discipline mechanism that
constrains annual lending levels to stop the pattern of recurrent
capital increases.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Policy Direction for 2019
Looking into 2019, we are again aiming our initiatives at improving
the U.S. and global growth. We will follow through on the ongoing
initiatives and push forward with new ones that will contribute to our
economic and national security. As a key part of this effort, we
maintain active economic and financial dialogues with like-minded
countries around the world in order to exchange views on and assess
systemic vulnerabilities and to support democratic principles and
institutions.
Here in the Western Hemisphere, we have emphasized the risks and
challenges posed by `The Troika of Tyranny,' namely Venezuela, Cuba,
and Nicaragua. This `Troika' has actively subverted democratic
institutions, looted its people's assets and engaged in economic
malfeasance, which has resulted in one of the world's gravest migration
crises, creating serious fiscal burdens and both security and public
health risks for its neighbors in Colombia, Ecuador, Brazil, Peru,
Panama, and Costa Rica. There are nearly 50,000 Venezuelans per day
crossing into Colombia. Secretary Mnuchin has already held four
meetings of finance ministers to review the crisis in Venezuela and the
impact on its neighbors and support the broad coalition pressing for
democratic change. In Nicaragua, we have built a strong consensus of
donor countries to stop the multilateral development banks from lending
to the Ortega regime, which perpetuates itself through the death,
imprisonment, and exile of its many opponents.
A high priority in 2019 will be the continued implementation of
FIRRMA. Pursuant to that legislation, CFIUS launched an innovative
pilot program on November 10, which includes requiring declarations for
certain foreign investments in U.S. businesses involved in critical
technologies in 27 specific industries.
There will be substantial work to deepen our major initiative on
debt transparency. And we will continue to challenge China's unfair
trade practices and lack of reciprocity in trade, lending, and
investment. We will continue our work in the G7, G20 and other forums
to discuss the challenge to our market system from China's non-market
policies. There is already widespread acknowledgement of the problems
in many key countries, but more work needs to be done on strengthening
the debt transparency and financial resiliency of market-oriented
countries.
As Brexit approaches, Treasury is analyzing risks to the
international financial system and working with the EU and the UK to
ensure continued market access for U.S. firms, including financial
services firms, and to avoid cliff-edge risks. We are working toward an
improved trade arrangement with the EU and would like to pursue a
bilateral trade agreement with the UK. The administration notified
Congress on October 16, 2018 of its intent to start trade negotiations
with the UK once it leaves the EU in March 2019.
Supporting the administration's trade agenda remains another high
priority in 2019. We will continue to increase reciprocity and market
access, particularly for U.S. financial services firms. The financial
services chapter of the USMCA will result in the elimination of a
Canadian data localization rule that requires U.S. firms to store data
in Canada. Other countries continue to erect similar barriers, and we
are continuing to engage with finance ministries and central banks to
achieve their regulatory objectives through other means while
protecting U.S. firms from cumbersome foreign data localization
requirements.
Treasury's Office of Technical Assistance (OTA) will continue its
work to improve financial processes, including transparency,
accountability, financial sector security and private sector-led
growth. OTA works to improve budget and tax systems, while
strengthening institutions charged with combating terrorist financing
and financial crimes. For example, in Colombia, Indonesia and Uganda,
Treasury's OTA helped governments strengthen public-private
partnerships to finance infrastructure development in ways that
mobilize private capital.
In Latin America, we will be building relationships with newly
elected governments, including in Brazil and Mexico. We have engaged
with Mexico on strengthening donor cooperation with the Northern
Triangle, which is an area that the incoming Mexican Government has
also stressed as a priority.
We continue to work to streamline the G20 and make it more
effective. In 2019, Japan will chair the G20 while France will chair
the G7. We will also start preparing for the United States to host the
G7 in 2020.
Through Treasury's seats on the boards of the Overseas Private
Investment Corporation (OPIC), the Millennium Challenge Corporation
(MCC), and the U.S. International Development Finance Corporation (DFC)
(the new organization to be established under the Better Utilization of
Investments Leading to Development Act of 2018 that will encompass
OPIC), Treasury seeks policies that provide strong financial coherence,
further the national interest, and promote the effective use of
taxpayer resources. Treasury is also leading U.S. efforts in the
International Working Group on Export Credits, and working with the
interagency on reforms in connection with the Export-Import Bank, to
pursue relevant reforms.
We have been in discussions on the World Bank's request for a
capital increase. We are seeking to improve the quality of IMF programs
through existing cases and upcoming conditionality reviews. We will be
notifying Congress of negotiations related to the IMF's request for a
quota increase under the 15th Quota Review (where we are in discussions
to review the IMF's funding needs and the makeup of their resources)
and have notified Congress of negotiations related to the International
Development Association (IDA) and the African Development Bank (AfDB).
These IFI topics are discussed in more detail below.
Seismic Shifts in Global Finance
My testimony a year ago discussed the seismic shifts that have
occurred in the global financial landscape and that are challenging the
relevance of the international financial institutions (IFIs). The
structure of global interest rates has moved substantially lower after
the inflation peaks of the late 1970s and early 1980s. Large inflows of
private sector capital at increasingly affordable interest rates have
materially added to growth and prosperity in many developing countries
and dwarfed the resources of the IFIs. Similarly, emerging markets have
gained far more access to external private capital, including directly
from the capital markets as well as through global banks that borrow on
the capital markets, resulting in private capital flows dwarfing
official flows.
But these inflows have presented challenges, including renewed debt
sustainability risks in more vulnerable countries with weaker
institutions and macroeconomic policies. Consequently, the availability
of increased financing must be accompanied by a dramatically increased
level of debt transparency, the capacity to manage liabilities
prudently, and the capability to deploy resources toward their most
productive use.
Many emerging economies--particularly larger middle-income and
upper middle-income economies--have gained access to longer maturity
debt, increasingly in local currency. This has allowed these countries
to build domestic yield curves, providing a solid foundation for
ongoing market-sourced borrowing.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
In addition to greater private capital flows, there is another
important feature in the creditor landscape: developing economies are
grappling with significant and growing inflows from non-traditional
official creditors such as China. While Chinese financing may fill some
gaps in financing for infrastructure investment in developing
countries, there are often negative repercussions associated with
Chinese lending. China's use of non-market export credits, opaque
financing, and exclusive procurement practices often benefits the donor
more than the recipient and undermines debt sustainability, domestic
institutions, and environmental and social standards. China, for
example, does not adhere to legally binding international standards to
criminalize bribery of foreign public officials in international
business transactions. Its financing also often includes conditions
that do not show up on the Government balance sheet but burden
borrowing countries with future liabilities such as commodity
deliveries.
These major developments--the increase in developing country access
to global capital markets and the surge in their official inflows from
state-directed capital (mainly from China)--not only have profound
consequences for developing countries, but also for the MDBs.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
To deliver on their policy goals--positively shaping the conditions
for growth and higher median incomes in developing countries--the MDBs
need to focus more on the quality of their project loans rather than
the quantity and on helping developing countries get their policy
environment right for using private capital inflows effectively. The
MDBs must ensure that they themselves do not displace private capital
or lower their lending standards to compete with China's.
Role of MDBs
For the MDBs to effectively deliver on these goals, they must
conduct sweeping reforms: Refocus assistance on poorer and more
vulnerable countries. Strengthen institutions in those countries, and
work with them to implement sound policies that attract private
investment, deepen private markets, and accelerate economic growth.
Potential reforms include limiting lending to defined needs and
existing resources, introducing mechanisms to promote financial
discipline including through budget and salary constraints,
differentiated loan pricing, graduation of borrowers, and sustainable
lending practices.
We are working in the G-20 and G-7 to improve coordination among
the IFIs. The G-20 has agreed on a set of principles whereby the IFIs
will coordinate with each other, particularly regarding budget support
lending. This helps ensure that the MDBs are not competing with the IMF
to lend into difficult situations where the macroeconomic framework is
inadequate. The MDBs are also striving to coordinate better at a
strategic and operational level. One approach, coordinated country
strategies, would help the MDBs and other donors avoid duplicating
their efforts in a particular country and respond more effectively to
the challenges it faces.
With regard to China's excessive lending, the MDBs (alongside the
IMF) can be an effective tool in helping vulnerable countries better
understand the risks and implications of such lending. The MDBs present
a better source of development finance with higher environmental,
social, procurement, and debt sustainability standards. They can also
help countries constructively channel bilateral loans toward growth-
positive projects that serve the borrower, not just the lender.
Finally, the MDBs and IMF can help countries build capacity to
negotiate transparent, non-corrupt terms for infrastructure projects
with foreign financiers, taking into account the macroeconomic
consequences of new non-concessional debt.
But it is worth noting that China has made substantial inroads into
the MDBs despite its financing practices. In combination, China is
absorbing decades of financial knowhow into its institutions in a few
short years, a similar pattern to its absorption of manufacturing
technology. We are working with allies and like-minded countries to
guide the MDBs away from what could be viewed as endorsement of China's
geopolitical ambitions.
World Bank Capital Increase
Regarding the World Bank's request for a capital increase, we
secured commitments on most of the reforms discussed in my testimony
before Congress a year ago. Though it will take time to implement, it
is a solid reform package that better aligns the World Bank with U.S.
national security, foreign policy, and economic priorities.
Treasury pushed hard for the adoption of a new mechanism to limit
World Bank lending and ensure the durability of this capital increase.
Based on this push, the International Bank for Reconstruction and
Development (IBRD) will adopt a new financial sustainability framework
that restricts annual lending commitments to those that can be
sustained in real terms over the next 10 years through organic capital
accumulation alone. The framework also includes a buffer to allow for a
crisis response without the World Bank having to approach the United
States and other shareholders for a capital increase. This new
framework is aimed at achieving financial discipline and avoiding
future capital increase requests. IBRD Governors will review the
framework every five years, providing them an opportunity to push for
any needed enhancements to ensure the IBRD continues operating within
its existing financial resources.
As a direct result of the reform package, the IBRD committed to
directing a bigger share of its lending to poorer countries, with the
share of lending going to countries below the IBRD graduation income
threshold increasing to 70 percent (from the current level of 60
percent); and to applying its graduation policy more rigorously,
freeing up resources for countries that most need them. The reform
package introduced differentiated loan pricing, making it the first MDB
to adopt differentiated pricing for non-concessional sovereign lending.
This will provide better-off, more creditworthy countries with an
incentive to pursue market financing, rather than IBRD financing.
The World Bank will also constrain the growth of staff salaries,
which are the biggest driver of increases in its administrative budget.
Beginning with the World Bank's FY 2020 budget, the annual general
salary adjustment for staff salaries will be capped. Management will
also conduct a study of recruitment and retention, strengthen
performance management, and undertake efforts to remove low performers.
With these changes, staff compensation and World Bank administrative
costs will grow at a slower rate than in past years.
The IBRD capital increase is packaged with an increase in the
capitalization of the International Finance Corporation (IFC), the part
of the World Bank Group that focuses on lending to and investing in the
private sector in developing countries. We declined to participate in
the IFC capital increase based on our assessment that the IFC did not
need more capital to be impactful. Other countries wanted to expand the
IFC on their own, and packaged their support for the IBRD reforms to an
IFC expansion. Our voting power will be diluted to 16.4 percent from
21.0 percent, but we maintained our veto through a reduction in the
IFC's veto threshold, which will be adjusted from 20 percent to 15
percent. However, we succeeded in negotiating that shareholders will,
in parallel, seek an amendment to the IFC Articles of Agreement to
reduce the threshold that allows the United States to maintain our veto
over any future IFC capital increases from 20 percent to 15 percent. We
will also be seeking Congressional authorization to vote for such an
amendment.
We will work with Congress regarding the subscription to the IBRD
capital increase. Supporting the GCI would lock in the reforms, improve
the effectiveness of World Bank programs, and complement U.S.
assistance for strategically important partners. In short, the package
will encourage countries to be more self-sufficient in financing their
development, focus official development resources on needier countries
with less access to other sources of finance, and create a more
financially-disciplined World Bank whose lending growth is constrained
and therefore more sustainable. The reform package will also advance
other U.S. foreign policy objectives, including offering developing
countries development finance based on transparency and high standards
to counter Chinese over-lending.
IMF's Role in Growth
We are pursuing policies at the IMF to help make the institution
both more effective and more focused on its core mission, including the
purposes laid out in Article 1 of the IMF's Articles of Agreement, to
promote high levels of employment and real income, promote exchange
stability, maintain orderly exchange arrangements among members, and
avoid competitive exchange depreciation.
We have pressed the IMF to prioritize this core mission in its
analysis of exchange rates and global imbalances. As mentioned above,
the IMF has, in its communiques starting in October 2017, highlighted
that sound policies and strong fundamentals are essential to the
stability of exchange rates, contributing to robust and sustainable
growth and investment.
With strong U.S. support, the IMF approved in April 2018 a new
enhanced framework for assessing corruption in its member countries.
Under the new framework, IMF staff will assess the extent to which
corruption is a macro-critical issue and propose policy recommendations
to member countries. IMF lending programs may also include steps aimed
at reducing endemic corruption.
As countries approach the IMF for support, the United States has
stepped up its engagement in shaping program design. We prefer programs
with design elements that prioritize the potential for broad-based
growth (i.e., increases in real median income, not just GDP) and allow
countries to pivot away from policies that have not worked. This
involves three major changes to the IMF's current approach. First,
fiscal policy changes need to be growth oriented. The projection of a
reduction in the fiscal deficit cannot be an end in itself, because
spending reductions often fail to materialize and recessions often
derail deficit reduction based on tax increases. Second, IMF programs
have often measured the success of a privatization in terms of the
projected proceeds for the Government, which often means continued
monopoly power. That is a mistake since de-monopolization of critical
sectors generally has a more lasting growth impact. Third, monetary
policies that provide sound money are at the core of a successful
growth program.
The last point was recently illustrated by Argentina's first IMF
program earlier this summer that neglected the exchange rate, which
weakened precipitously. At the heart of the revised IMF program for
Argentina is a commitment to a strong nominal anchor to recover
confidence in the currency. By expressly limiting the growth of the
monetary base, a policy that the United States strongly supported, the
central bank was able to arrest the precipitous decline in the exchange
rate, and the authorities there are on track to reduce interest rates
and inflation very significantly (which had reached 6.5 percent per
month in September and 5.4 percent in October), which will allow
interest rates to support credit and growth. We support President
Macri's vision for economic reforms, and believe that the monetary and
structural reforms in the IMF program, if implemented, will place the
Argentine economy on a path of sustainable growth.
IMF Quota Review
The IMF is undertaking its 15th General Review of Quotas, with the
goal of completing the review no later than the Annual Meetings in
October 2019. The review will both assess the adequacy of the IMF's
resources and determine whether or not to adjust members' quotas and
quota shares. The IMF has requested a buildup in its quota resources
and claims that it needs to be the center of the global financial
safety net. We will be seeking a constructive size for IMF resources
that contributes fully to the stability of the international financial
system, but recognizes that the IMF is just one part of the global
financial system and its various support mechanisms.
CURRENT IMF RESOURCES
------------------------------------------------------------------------
SDR billions USD billions
------------------------------------------------------------------------
Quota 476 $661
Of which: U.S. 83 $115
------------------------------------------------------------------------
NAB (40) 182 $253
Of which: U.S. 28 $39
------------------------------------------------------------------------
Bilateral loans (40) 314 $436
Of which: U.S. 0 0
------------------------------------------------------------------------
Total 972 $1,349
Of which: U.S. 111 $154
------------------------------------------------------------------------
Pursuant to Section 41 of the Bretton Woods Agreement Act, we will
shortly send a notification that IMF negotiations related to quota will
begin in 2019 to provide you with formal advance notice of discussions.
As the IMF conducts its quota review, we will work closely with it to
improve the approach to conditionality in lending programs in order to
make them more growth oriented. We will be heavily engaged in an
upcoming review of IMF compensation and benefits with the goal of
making IMF operations less costly and inefficient. And we will ensure
that the IMF is sufficiently and efficiently resourced to carry out its
mission and role. In this regard, we note that the IMF has ample
resources to achieve its mission, countries have considerable
alternative resources to draw upon in the event of a crisis, and the
post-crisis financial reforms have helped strengthen the overall
resiliency of the international monetary system.
MDB Authorization Topics and Specific MDB Objectives
We have notified Congress of the launch of negotiations on fund
raising efforts by IDA and the AfDB.
The negotiations for the 19th replenishment of IDA (IDA-19) were
launched on November 15, 2018 and will be carried out over the course
of 2019. Under discussion is the donor funding for IDA's fiscal 2021-
2023, running from July 2020-June 2023. Substantial changes were made
to IDA's financial model and policy agenda before and during the
current replenishment period.As a result, we expect IDA-19 to focus on
taking stock of the IDA-18 reforms and IDA's ability to implement
productive projects. We also have several reform priorities. First, we
will work with other donors to ensure IDA-19 addresses rising debt
levels among low-income countries.Second, we will seek to review and
better target the support the World Bank provides for countries as they
grow wealthier and transition from concessional financing under IDA to
less-concessional financing through the IBRD. Third, we will seek to
ensure that IDA retains a strong focus on fragile and conflict-affected
countries, gender and development, and good governance, including in
the area of debt management and transparency.
The Governors of the AfDB, over a U.S. objection, have decided to
commence negotiations on the AfDB's capital needs in December 2018.
Given Africa's enormous development challenges, we want a strong AfDB
to serve the continent. However, new capital alone will not achieve a
stronger institution. The AfDB needs to make greater progress on
ongoing institutional reforms and agree on a set of further reforms
that would accompany any new capital to ensure that it uses such funds
more prudently and effectively. Among other items, we hope to see the
AfDB fill critical vacancies in its accountability functions, better
focus its lending on areas where it is most impactful, improve the
readiness of projects before seeking board approval, strengthen project
supervision and monitoring, and put in place a framework for financial
discipline.
As with IDA, replenishment negotiations for the African Development
Fund (AfDF), the AfDB's concessional arm, will occur in 2019. We intend
to notify Congress of the launch of this negotiation in 2019. We are
seeking many of the same improvements that are needed for the AfDB. In
particular, given its relatively small scale, we want the AfDF to
increase the selectivity of the areas it works in, with an emphasis on
regional transport and trade facilitation, electricity access, and
water and sanitation. As a majority of AfDF recipient countries are now
classified as fragile, heavily affected by conflict in neighboring
countries, or otherwise at high risk of debt distress, we also expect
the AfDF to maintain a strong emphasis on addressing fragility,
conflict, and violence and helping countries improve their debt
management.
We are strongly committed to enhancing growth and development
within the U.S.-Mexico border region. We continue to support the North
American Development Bank (NADB). The administration has requested in
our FY 2019 budget that Congress authorize the United States to
subscribe to $10 million of paid-in shares at the NADB. We and our
Mexican partners in the NADB think that the NADB can do even more to
improve the wellbeing of people in communities along the border. To
that end, we included the NADB in our America Crece initiative and are
exploring ways to boost the NADB's capabilities. The goal is to improve
infrastructure along both sides of the border and create economic
opportunities that increase median real incomes. We are also assessing
whether the NADB has the right strategic and financial tools. We look
forward to continuing these discussions once President-elect Lopez
Obrador takes office and working with his administration and Congress
to realize these goals.
The European Bank for Reconstruction and Development (EBRD) and the
Asian Development Bank (AsDB) are both currently well capitalized. Our
paramount objective at both institutions is to ensure they remain
focused on project quality rather than using their existing capital to
grow more quickly without due regard for development outcomes. At the
EBRD, this is all the more important given that most of its traditional
countries of operation in Central and Eastern Europe have gained ample
access to capital markets since the EBRD was created in 1991. We want
the EBRD to focus on priority countries with less access to capital--
such as Egypt, Jordan, and countries in Central Asia and the Balkans--
while resisting calls to expand its existing geographic footprint. At
the AsDB, our principal objectives are to develop a path to graduation,
reduce its engagement in upper middle income countries such as China,
and introduce higher loan prices for countries with more access to
private capital. We also seek to introduce an enhanced financial
sustainability mechanism to ensure that we do not encounter future
unplanned requests for shareholder capital.
Mandates Can Complicate the Goal of High-quality MDB Programs
Treasury is proud to have the statutory lead in representing the
executive branch in the IFIs. This is a serious task and we execute it
faithfully. That said, we coordinate closely with interagency
colleagues, and we benefit from the input provided by other parts of
the Government so that we can present a whole-of-government approach.
For example, our State Department colleagues actively keep us abreast
of key foreign policy priorities in countries where the IFIs are
active; the Commerce Department informs American companies about
procurement opportunities that come about as a result of MDB projects;
and USAID provides technical advice regarding the soundness of
individual projects and linkages to our bilateral assistance. As we
consider individual projects at the MDBs, we systematically solicit
input from any agency that is interested, and we seek to synthesize
information so it can be provided as useful feedback to the MDBs.
The U.S. Government seeks high quality MDB projects that not only
address the important development needs of recipient countries but that
are also well--designed, technically sound, growth-enhancing, and based
on strong consultation with the recipient government, affected
communities, civil society, and other donor partners. We want to see
strong monitoring of MDB projects, robust evaluations of completed
projects, and thorough results measurement frameworks baked into every
project so we can systematically track whether projects are performing
well or not.
We continue to press the MDBs to achieve high standards regarding
transparency, procurement, and environmental and social safeguards,
with the goal of having our funds used correctly, fairly, and
transparently. These high standards set the MDB projects apart from
projects financed by other lenders who may provide funding, but without
transparency and other protections.
The MDBs have substantially improved their projects over the years,
often with significant help from Congress, including leaders on this
Committee. And while we work to avoid situations in which people are
hurt or abused in a project funded through the MDBs, there are
instances when something goes wrong with an MDB project. Hence, we are
advocating for robust independent mechanisms that improve MDB
accountability and enable relief and redress.
Treasury follows numerous congressional mandates by using its voice
and vote in international organizations. However, implementing the
plethora of mandates is expensive, consumes significant staff time, and
often ends up reducing the U.S. ability to influence policy in the
direction Congress desires. Treasury is implementing a large number of
legislatively required mandates in the IFIs. At last count, there are
well over 100 congressional policy and directed vote mandates on the
books. In addition, while mandates are added year by year, few are ever
removed. We diligently follow these mandates from Congress. But as we
seek to improve and reform the MDBs, we also invite Congress' attention
to streamlining the number of legislative directives. Mandates require
considerable time and resources to implement, and can detract from
other important tasks related to loan quality. They can occasionally
inadvertently undermine
U.S. leadership in the MDBs, as other member countries pay less
attention to the U.S. position because our votes and positions on a
given loan are pre-determined. Many mandates and reporting requirements
are simply outdated. As we seek to reform the MDBs, we look forward to
having a dialogue with members about how we can ensure voting mandates
and reporting requirements have the impact that Congress intends but do
not impede U.S. efforts to advance our broader strategic objectives in
the MDBs. We appreciate the dialogue that we have had with the
committee, not only on legislative mandates, but also on U.S.
engagement at the MDBs as a whole. We look forward to continuing this
dialogue today and into next year.
Debt Transparency Initiative
Treasury has encouraged an initiative at the IMF and World Bank to
develop, and disseminate to the public, information on international
borrowing. One of the principal thrusts of the initiative is to
modernize official debt data in line with market developments over the
last 20 years. Government debt obligations are no longer limited to
traditional loans and bonds. New liabilities ranging from derivative
operations to pre-paid forward sales of commodities impose the same
calls on government budgets. If the burden on taxpayers is the same,
the disclosure, accounting and fiscal treatment must be the same.
Investors will then have more and better data to make decisions,
allowing markets to function more smoothly and crises to be less
frequent and less severe.
Over the next two years, this new standard of debt disclosure
should be defined and endorsed by the official sector. In the case of
the IMF, this practice is consistent with Section 42 of the Bretton
Woods Act, which specifically directs the Secretary of the Treasury to
support procedures to collect, and disseminate publicly, information on
international borrowing.
The IFIs--including the IMF and World Bank--have a key role to play
in enhancing debt transparency in, and supporting sustainable borrowing
and lending practices by, their member countries. Developing countries
need investment to grow, including in infrastructure. But lending to
low-income countries (LICs) that is non-concessional, non-transparent,
and funneled into poor quality projects will raise debt burdens without
boosting productivity and growth. This, in turn, results in countries
diverting scarce budget resources to service high levels of debt and
poses a threat to countries' growth prospects and overall economic
stability and development.
On the borrower side, the IMF and World Bank are making efforts to
obtain a comprehensive picture of members' debt positions in both IMF
bilateral surveillance and as part of their lending programs, with the
goal of improving debt sustainability. In particular, we are working
with both institutions to improve the public disclosure of a broad
range of sovereign debt statistics, including publicly guaranteed
contingent liabilities and forward sales of commodities, by member
countries to reduce debt surprises. This will improve policy making and
reduce the frequency and severity of financial crises. We also strongly
support the IMF and World Bank's efforts to build borrower countries'
capacity in public debt management and disclosure.
On the creditor side, the IMF and World Bank also have roles to
play, in particular with emerging, non-traditional creditors such as
China. The IMF and World Bank are engaging in more structured outreach
to non-Paris Club and multilateral creditors, including preparing and
providing workshops on debt sustainability analyses, lending
frameworks, and external coordination in debt resolution. At the same
time, they are planning reviews of their respective debt limit policies
to strengthen data provisions and simplify conditionality. All of these
steps reflect our shared priorities with the IFIs in promoting debt
transparency, debt sustainability, and responsible burden sharing in
debt resolution, which in turn will help reduce opportunities for
corruption.
In conclusion, while U.S. growth has accelerated, growth in many
other countries has slowed. This gives rise to new challenges in
international economic policy that we are working to meet through new
initiatives. I appreciate the opportunity to present this Committee
with a description of our major activities in 2018 and policy direction
for 2019 and beyond, and I invite your views and questions.
Responses to Additional Questions for the Record Submitted to
Hon. David Malpass by Senator Robert Menendez
Debt Transparency
In your testimony you state ``Secretary Mnuchin pushed forward
an initiative on debt transparency that will, in the near term,
significantly increase public disclosure and broaden the
existing definition of international debt beyond traditional
bonds and loans.''
Question 1. Can you provide a preliminary overview of the
initiative?
Answer. The purpose of the initiative is to improve the quality,
consistency, and transparency of sovereign debt data, including the
reporting of debt equivalent instruments (e.g., forward sales of
commodities, asset repurchase agreements) and contingent liabilities
(e.g., obligations of state-owned enterprises, guarantees). To do so,
the Treasury Department is working closely with our international
counterparts as well as the International Monetary Fund (IMF) and the
World Bank to promote the development and adoption of stronger
international standards of data collection and disclosure. The
Department anticipates that enhanced transparency of sovereign debt
statistics will promote better policy decisions and reduce the
frequency and severity of financial crises.
Question 2. Will you commit to consulting with Congress on issues
that would entail any new authorities or oversight obligations?
Answer. Yes. The Treasury Department looks forward to working with
Congress on this initiative.
Question 3. Will you commit to scheduling staff-level briefings on
your ongoing efforts to combat Chinese debt-trap diplomacy?
Answer. Yes. The Office of Legislative Affairs will contact
committee staff to schedule these briefings.
Multilateral Development Banks
Regarding your testimony on Multilateral Development Banks
(MDBs),
Question 4. Will you commit to engagement with this committee on
the ``sweeping reforms'' envisioned by the administration to make MDBs
more effective?
Answer. Yes. The Treasury Department looks forward to working with
Congress to make MDBs more effective.
Question 5. Do you anticipate any new authorities will be required
to achieve those reforms? If so, can you commit to timely consultations
with the Committee?
Answer. Yes. For example, continued congressional support for
contributions to the MDBs' concessional window replenishments advances
our ability to promote additional reforms for the benefit of the
world's poorest countries and ensure effective use of U.S.
contributions. Treasury is committed to timely consultations, and we
look forward to working with you.
International Monetary Fund Quota Review
In your testimony you state ``the IMF has ample resources to
achieve its mission, countries have considerable alternative
resources to draw upon in the event of a crisis, and the post-
crisis financial reforms have helped strengthen the overall
resiliency of the international monetary system.''
Question 6. Please provide the data and calculations that you have
used to conclude that the IMF has sufficient resources to meet expected
contingencies.
Answer. There are many ways to estimate future demand for IMF
resources, including by looking at the size of members' economies and
their trade and capital flows, estimates of demand based on historical
IMF programs, and data from past global crises. In addition, demand for
IMF resources also relates to the availability of other sources of
support, such as regional financial arrangements. Moreover, it is not
feasible to assume that the IMF resources will cover every tail risk
scenario. Therefore, Treasury constructed several crisis scenarios.
These include a mild crisis scenario in which a set of emerging markets
face financial difficulties and request assistance of about 3.5 percent
of their Gross Domestic Product (GDP), with resulting demand for IMF
resources of about $300 billion; a moderate crisis scenario in which
the same set of emerging markets requests assistance at 6 percent of
GDP, with resulting demand of about $500 billion; and a severe shock
scenario in which the set of emerging markets require assistance at
amounts of 9 percent of GDP, with demand of about $700 billion.
Given underlying IMF financial commitments of almost $200 billion,
under these scenarios, the IMF's medium-term overall lending needs
range from about $500 to about $900 billion. Current IMF resources are
sufficient to cover most crisis scenarios. In addition, the IMF can
mobilize additional resources in the event of a severe global crisis.
__________
Prepared Statement of Jennifer Hillman
a. introduction
Virtually every major international gathering of world leaders
recently has ended in failure--or at least failure to reach enough
agreement to issue a concluding statement or communique.\1\ These
failures come at a time when many have been looking for signs that
world leaders would come together to address the most pressing problems
facing the world--including climate change, the breakdown in the rules
of the international trading system, the need everywhere for good jobs
that pay a living wage, and rapidly growing income inequality.
---------------------------------------------------------------------------
\1\ 1 See, for example, Summit of Asia-Pacific Economic Cooperation
in Papua New Guinea, November 18, 2018 (failure of an agreed-upon
communique among the 21 nations of APEC blamed on US-China trade
tensions and the growing competition for influence among the South
Pacific countries); G-20 Finance Ministers, Buenos Aires, March 20,
2018 (no agreement on usual communique of shared principles on major
economic policies due to trade issues); G-7 meeting, Quebec, Canada,
June 8-9, 2018 (President Trump rejected a previously agreed-upon
communique and disparaged Canadian Prime Minister Trudeau); G-20
leaders meetings in Hamburg, July 2017 (final text was held up by
objections to the U.S. decision to withdraw from the Paris Agreement on
climate change, despite agreement on most aspects of the final
statement); WTO 11th Ministerial Meeting, Buenos Aires, Argentina,
November 2017 (ended with no concluding statement and no new
agreements). The NATO Summit (Brussels, July 11-12, 2018) did produce a
communique, but also disputes over President Trump's demand that
spending increases occur faster than previously agreed timeframes.
---------------------------------------------------------------------------
The failure of these meetings to produce formal agreements--or even
specific paths to reaching agreements in the future--despite the high
stakes has left many questioning the ability of the world's leaders to
meet global challenges, shining a spotlight on the institutions and
fora that were established for the purpose of achieving multilateral
solutions-particularly the World Trade Organization (WTO), the World
Bank, the International Monetary Fund (IMF), and the United Nations.
The failure to reach agreements can best be seen as part of a long-term
trend toward increased complexity in the world that makes it nearly
impossible to reach traditional multilateral binding accords, combined
with a waning of faith on the part of many countries in multilateralism
and multilateral institutions.\2\
---------------------------------------------------------------------------
\2\ 2 Concerns over the functioning of the international economic
institutions and analyses about how to improve them have existed for
decades. A number of these ideas were summarized, along with the
suggestion that the G-20 be used as a fora in which renovation of the
WTO, IMF and World Bank could be coordinated, in Saving
Multilateralism: Renovating the House of Global Economic Govemance for
the 21st Century. Jennifer Hillman, ``German Marshall Fund of the US,''
attached as Appendix A.
---------------------------------------------------------------------------
A number of clear trends emerge from the failures to reach accords
at virtually all recent international gatherings:
1.) Government policies and international arrangements for
collective decision-making have not kept pace with changes in the
world, especially the high degree of international economic integration
and interdependence.
Much of the increasing complexity in the international economic
order stems from the explosive growth in the number and size of
multinational corporations and financial institutions, many of which
now dwarf the economic size of most of the nations in the world.\3\
Added to the complexity is the increase in the speed at which goods,
money and technology move around the globe in our digital age.
---------------------------------------------------------------------------
\3\ For example, Apple Inc. recently crossed the $1 trillion market
capitalization figure, which makes it larger than the GDP of 183 out of
the 199 countries for which the World Bank has GDP data.
---------------------------------------------------------------------------
2.) Learning to operate in this vastly more complex world will
require more multilateralism, not less.
As countries emerged from the era of colonialization and began
opening their markets, the number of players on the global stage
increased, making reaching consensus among a much larger group of
disparate interests more difficult. But because the most significant
problems facing the world cross many international boundaries, solving
them will require that countries come together to find regional,
plurilateral, or global solutions.
3.) It is essential that the international economic institutions be
updated and improved, not destroyed or left to wither.
Because it is clear that reaching major new binding accords or
creating new international institutions is quite difficult, the best
and most achievable solution is to renovate our existing institutions.
Each needs to modernize and improve their governance structures to
ensure that work can get done despite the increases in complexities and
to update their mandates to ensure their ability to address the
problems of the 21st century, many of which are quite different from
those that existed in the 1940s when these institutions were created.
Given that the crisis is most acute at the WTO, this testimony will
focus on what must be done to renovate the World Trade Organization and
why doing so is critical, both for the trading system and for the
continued existence of a rules-based international economic order. The
need for the WTO and its dispute settlement system to remain viable is
particularly critical if we are to address the challenges presented by
the explosive growth of China and its transformation into the largest
exporter of goods in the world.\4\
---------------------------------------------------------------------------
\4\ In 2017, China's merchandise exports exceeded $2.3 trillion,
far outstripping all other countries in the world, as the United States
merchandise exports were close to $1.6 trillion, followed by Germany at
just over $1.4 trillion, with all other countries' merchandise exports
far below $1 trillion. WTO Trade Statistical Review 2018.
---------------------------------------------------------------------------
B. The Crisis at the WTO
The WTO was created in 1995 as a successor to the General Agreement
on Tariffs and Trade (GATT) at the height of support for
multilateralism and multilateral institutions. In recent years, many
have expressed frustration with the WTO. The concerns include:
1.) A lack of balance--the negotiating arm of the WTO is weak and
WTO members have reached only one new agreement-on trade facilitation-
since 1995, while the dispute settlement arm has been (at least until
the blockage at the Appellate Body in 2017) considered very strong-some
say too strong, while the executive arm is viewed as highly competent
but lacking in authority to drive change.\5\
---------------------------------------------------------------------------
\5\ USTR Robert Lighthizer commented on the relative strength of
dispute settlement compared to negotiation in his remarks at the WTO's
most recent Ministerial Conference (MC-11) in Buenos Aires: ``[M]any
are concerned that the WTO is losing its essential focus on negotiation
and becoming a litigation-centered organization. Too often members seem
to believe they can gain concessions through lawsuits that they could
never get at the negotiating table.''
---------------------------------------------------------------------------
2.) A limited mandate that does not readily allow the WTO to take
on the ``trade and . . . '' issues connected to trade's impact on the
environment, labor, the uneven distribution of the benefits of trade,
currency manipulation, competition policy, or corruption around trade,
or to ensure that the trading system rules contribute to the
Sustainable Development Goals agreed to by the world's leaders in 2015.
The WTO negotiating agenda has not been focused on the 21st century
trade issues of digital trade, investment policy, food security, global
health services, technology, on environmental goods and services.
3.) A bifurcation of members into ``developed'' versus
``developing'' country camps, with no in between for the emerging
economies such as India, Russia, Brazil, or South Africa and no easy
way to address the rise of China-now the largest merchandise exporter
and second largest merchandise importer in the world.
4.) A recent willingness, led by the United States, to impose
tariffs that violate the WTO's basic rules, leading many to question
the point of having a rules-based organization if its major members
openly flout those rules.
5.) A lack of enforcement of the transparency and notification
requirements of the WTO, with most countries hopelessly behind on
making required disclosures of their policies and practices,
particularly with respect to the granting of subsidies.
6.) A limited ability to respond to the explosive growth of
regional, bilateral and preferential trade agreements, with over 400
agreements establishing trade relationships and rules outside of the
fonnal ambit of the WTO.
7.) concerns over the functioning of the dispute settlement system,
particularly its Appellate Body, which have grown so extreme in the
United States that the U.S. has blocked any process for the appointment
of new Appellate Body members to fill the vacancies created by the
expiration of members' terms, potentially leaving the Appellate Body
with too few members to hear appeals.
Possible Fixes?
Given the failure to reach many new agreements or even to agree on
a ministerial declaration at its latest Ministerial Conference--the
WTO's MC-11, held in Buenos Aires, Argentina in December 2017--it is
clear that the creation of a new and different international trade
organization is a virtual impossibility.\6\ Therefore, it is imperative
that the WTO be renovated to make it a more efficient and effective
organization-one that is capable of reaching new agreements and
establishing new rules on the pressing trade issues of today and one
that finds ways to respond to the concerns noted above.\7\
---------------------------------------------------------------------------
\6\ EU Trade Commissioner Cecilia Malmstrom noted at the close of
the meeting: ``All WTO Members have to face a simple fact: we failed to
achieve all our objectives, and did not achieve any multilateral
outcome. The sad reality is that we did not even agree to stop
subsidizing illegal fishing.'' As the Reuters report on the Ministerial
Conference (MC-11) noted: ``The World Trade Organization failed to
reach any new agreements on Wednesday, ending a three-day ministerial
conference in discord in the face of stinging U.S. criticism of the
group and vetoes from other countries.''
\7\ A number of major studies have been done suggesting ways to
improve the functioning of the WTO, including ``The Future of the WTO:
Addressing Institutional Challenges in the New Millennium: Report of
the Consultation Board to the Director-General Supachia Pantichpakdi''
(2004) (``the Sutherland Report''); ``The Multilateral Trade Regime:
Which Way Forward?'' (2007), The Warwick Commission Report, and most
recently, the report of the high-level board of experts convened by the
Berertelsmann Stiftung foundation, ``Revitailzing Multilateral
Governance at the World Trade Organization,'' 2018.
---------------------------------------------------------------------------
The specifics of how to do so are beyond the scope of this
testimony, but should retlect the work that has been done over many
years and with increasing intensity in the past year. Most recently,
Canada hosted twelve WTO members at the Ottawa Ministerial on WTO
Reform, focusing on changes that would: I) improve the efficiency and
effectiveness of the WTO monitoring function, 2) safeguard the WTO
dispute settlement system, and 3) modernize the trade negotiating
agenda.\8\ Neither the United States nor China were included in the
Ottawa meeting, but both were informed of the outcome and much further
discussion has flowed from the meeting.
---------------------------------------------------------------------------
\8\ Included in the Ottawa gathering were trade ministers from
Australia, Brazil, Chile, the European Union, Japan, Kenya, Korea,
Mexico, New Zealand, Norway, Singapore and Switzerland. In advance of
the gathering, Canada circulated a paper outlining the discussion
proposals to all members of the WTO. JOB/GC/201.
---------------------------------------------------------------------------
For its part, the European Union put forward a series of proposals
to reform the WTO and to break the logjam regarding the appointment of
new members to the WTO's Appellate Body.\9\ These proposals come at the
behest of the European Council, which mandated a pursuit of WTO
modernization that would: 1) make the WTO more relevant and adaptive to
a changing world, and 2) strengthen the WTO's effectiveness. They
involve reform ideas around broadening the negotiating agenda of the
WTO to permit it to rebalance the system and level the playing field;
establishing new rules to address barriers to services and investment,
including with respect to forced technology transfers; increasing
compliance with the transparency and notification requirements of the
WTO; and shoring up the WTO's dispute settlement system, including by
resolving the current blockage in appointments to the Appellate Body.
---------------------------------------------------------------------------
\9\ Even more recently, the EU revised its specific proposals for
changes at the Appellate Body (AB) into two formal submissions to the
WTO, one that was introduced along with China, Canada, India, Norway,
New Zealand, Switzerland, Australia, Korea, Iceland, Singapore and
Mexico (WT/CG/W/72) that addresses five specific concerns relating to
the Appellate Body (1. AB members remaining on after their term expires
to finish appeals, 2. Reports taking longer than 90 days, 3. Municipal
law as a matter of fact rather than law, 4. Unnecessary findings, and
5. The role of precedent) and a second document introduced along with
China and India (WT/GC/W/753) that proposes that AB members serve one
longer term, that the AB be expanded from 7 to 9 members serving on a
full-time basis, with members remaining in place until their
replacement has been appointed. Both proposals were submitted on
November 26, 2018 for discussion at the meeting of the WTO's General
Council scheduled for December 12-13, 2018.
---------------------------------------------------------------------------
The United States, in its 2018 President's Trade Policy Agenda,\10\
expressed concerns that the WTO dispute settlement system had
appropriated to itself powers that the WTO Members never intended to
give it; and lamented its inability to reach new agreements, its
allowance for members to ``self-declare'' themselves to be
``developing'' countries and thereby take advantage of certain
additional flexibilities (special and differential treatment) granted
to developing countries, and its lack of management of the rise of
China. Recently, the United States, along with Argentina, Costa Rica,
the EU and Japan recently submitted a proposal to the WTO to address
``the chronic low level of compliance with existing notification
requirements'' by introducing administrative sanctions for countries
that fall behind with their reporting obligations.\11\
---------------------------------------------------------------------------
\10\ https://ustr.gov/about-usfpolicy-offices/press-office/reports-
and-publications!2018/20l8-trade-policy-agenda-and-2017
\11\ WTO JOB/GC/204 and JOB/CTG/14, November 1, 2018.
---------------------------------------------------------------------------
The Government of France, on the heels of hosting the 100th
anniversary of Armistice Day and its follow-on Paris Peace Forum,\12\
hosted a conference, A WTO Fit for the 21st Century, on November 16,
2018 to gather representatives from government, the WTO, academia and
more to discuss and debate specific ideas on modernizing and improving
the WTO.
---------------------------------------------------------------------------
\12\ The Paris Peace Forum, led by France's President Emmanuel
Macron, is designed to be an annual gathering ``based on a simple idea:
international cooperation is key to tackling global challenges and
ensuring durable peace. To support collective action, it gathers all
actors of global governance under one roof for three days-states,
international organizations, local governments, NGOs and foundations,
companies, experts, journalists, trade unions, religious groups and
citizens. Through original formats of debates and the presentation of
solutions, it demonstrates there is still a momentum for
multilateralism and a better organization of the planet, both among
states from North and South and civil society actors.'' https://
parispeaceforum.org/
---------------------------------------------------------------------------
Numerous non-governmental players-from think tanks to academics to
trade practitioners--have also put forward ideas and proposals-
increasingly under the banner of ``the trading system is in crisis.''
Prominent among them is the Bertelsmann Stiftung report of its high-
level board of experts, Revitalizing Multilateral Governance at the
World Trade Organization.'' \13\ That board recommended: 1) new policy
dialogues to address trade policies and on the functioning of WTO
bodies, 2) use of plurilateral negotiations among the ``coalitions of
the willing'' rather than all members of the WTO; 3) an enhanced role
for the WTO Secretariat to provide input and support to the policy
debates at the WTO; and 4) an ongoing review of the institutional
performance of the WTO.
---------------------------------------------------------------------------
\13\ https://www.wto.org/english/news_e/news18_e/
bertelsmann_rpt_e.pdf.
---------------------------------------------------------------------------
Among the cross-cutting ideas in many of these proposals are the
following:
1. The need for better enforcement of the transparency and
notification requirements of the WTO;
2. Support for new negotiation dynamics through increased used of
negotiations in groups smaller than all of the WTO membership
to allow agreements to be reached more quickly;
3. A reconsideration of the role of the WTO Secretariat to permit it
to recommend solutions and drive toward negotiated outcomes;
4. An urgent need to resolve the blockage of appointments to the WTO
Appellate Body;
5. A need to expand the negotiating mandate of the WTO to include the
21st century trade issues, the many issues that fall into the
``trade and . . .'' set of issues, and the Sustainable
Development Goals.
C. The United States Needs the WTO to Effectively Address Its Concerns
with China
For the United States, the need for a well-functioning WTO is
critical, as the United States needs the WTO if it is to effectively
address its difficulties with China.
Concerns in the United States and around the world with China's
practices and policies have been growing with each passing year. These
concerns were recently succinctly summarized in the statement made by
U.S. Ambassador to the WTO Dennis Shea in a May 8, 2018 statement to
the WTO General Council:
China ... is consistently acting in ways that undermine the
global system of open and fair trade. Market access barriers
too numerous to mention; forced technology transfers;
intellectual property theft on an unprecedented scale;
indigenous innovation policies and the Made in China 2025
program; discriminatory use of technical standards; massive
government subsidies that have led to chronic overcapacity in
key industrial sectors; and a highly restrictive foreign
investment regime.\14\
---------------------------------------------------------------------------
\14\ Statement as delivered by Ambassador Dennis Shea, Deputy U.S.
Trade Representative and U.S. Permanent Representative to the WTO, WTO
General Council, Geneva, May 8, 2018.
---------------------------------------------------------------------------
The concerns are further laid out in two recent documents:
(1) the Section 301 Report, issued by USTR on March 2, 2018,\15\
which raises four core concerns:
---------------------------------------------------------------------------
\15\ Findings of the Investigation Into China's Acts, Policies, And
Practices Related lo Technology Transfer, Intellectual Property, And
Innovation Under Section 301 of the Trade Act Of 1974, Office of the
United States Trade Representative, March 22, 2018,
First, China uses foreign ownership restrictions, such as joint
venture requirements and foreign equity limitations, and various
administrative review and licensing processes, to require or pressure
technology transfer from foreign companies.
Second, China's regime of technology regulations forces U.S.
companies seeking to license technologies to Chinese entities to do so
on non-market-based terms that favor Chinese recipients and that
violates China's national treatment requirements to treat foreign
investors no less favorably than it treats domestic investors.
Third, China directs and unfairly facilitates the systematic
investment in, and acquisition of, foreign companies and assets by
Chinese companies to obtain cutting-edge technologies and intellectual
property and generate the transfer of technology to Chinese companies.
The role of the state in directing and supporting this outbound
investment strategy is pervasive, and evident at multiple levels of
government--central, regional, and local.
Fourth, China conducts and supports unauthorized intrusions into,
and theft from, the computer networks of foreign companies to access
their sensitive commercial information and trade secrets.
This initial Section 301 report was recently (November 20, 2018)
updated with additional evidence and new data, with the conclusion that
``China fundamentally has not altered its acts, policies, and practices
related to technology transfer, intellectual property, and innovation,
and indeed appears to have taken further unreasonable actions in recent
months.'' \16\
---------------------------------------------------------------------------
\16\ USTR Update Concerning China's Acts, Policies and Practices
Relating to Technology Transfer, Intellectual Property and Innovation,
November 20, 2018,
(2) the 2017 Report to Congress on China's WTO compliance, issued
by USTR January 2018, which is the sixteenth such report and examines
nine categories of WTO commitments undertaken by China (trading rights,
import regulation, export regulation, internal policies affecting
trade, investment, agriculture, intellectual property right, services
and legal framework), with this year's report concluding that ``the
United States erred in supporting China's entry into the WTO on terms
that have proven to be ineffective in securing China's embrace of an
open, market-oriented trade regime.'' \17\
---------------------------------------------------------------------------
\17\ 2017 Report to Congress on China's WTO Compliance, Office of
the United States Trade Representative, January 2018,
Both Reports raise the obvious question of what is the most
effective way to address this myriad of interwoven and overlapping
concerns. For me, the best approach would be a big, bold, comprehensive
case at the WTO tiled by a broad coalition of countries that share the
United States' substantive concerns about China-even if they strongly
oppose the Trump Administration's unilateral tactics or the sequencing
of actions that began with putting tariffs on steel and aluminum
imports from those same countries that the United States needs to be
working with on such an action at the WTO.
D. A Big, Bold WTO Case is the Best Way To
Address the Deep, Systemic China Problems. Why?
First, a broad and deep WTO case represents the best opportunity to
bring together enough of the trading interests in the world to put
sufficient pressure on China to make it clear that fundamental reform
is required if China is to remain a member in good standing in the WTO.
The U.S. needs to use the power of collective action to impress upon
both China and the WTO how significant the concerns really are. The
United States simply cannot bring about the kind of change that is
needed using a go-it-alone strategy. A coalition case also has the
potential to shield its members from direct and immediate retaliation
by China.
Second, a comprehensive WTO case would restore confidence in the
WTO and its ability to address fundamental flaws in the rules of the
trading system. As U.S. Ambassador Dennis Shea put it, ``If the WTO
wishes to remain relevant, it must--with urgency--confront the havoc
created by China's state capitalism.'' \18\ If the WTO can be seen to
be able to apply or, where necessary, amend its rules to take on the
challenges presented by China's ``socialist market economy'' framework,
then faith in the institution and its rules-based system can be
enhanced, for the good of the United States and the world.
---------------------------------------------------------------------------
\18\ Statement as delivered by Ambassador Dennis Shea, Deputy U.S.
Trade Representative and U.S. pennanent Representative to the WTO, WTO
General Council, Geneva, May 8, 2018.
---------------------------------------------------------------------------
Third, the work to put together a coalition, to research and agree
upon the Chinese measures to be challenged and the claims to be made,
and to litigate in a coordinated way at the WTO would make it less
likely that the United States would accept a limited agreement
connected to the U.S.-China bilateral trade deficit. Certainly the
United States' partners in such a coalition would raise strong
objection to the U.S. accepting an agreement under which China simply
agreed to shift its purchases of soybeans from Brazil to the U.S. or
its sourcing of energy products from Russia and Central Asia to the
United States. Given that the American people are already paying a high
price as a result of the imposition of Section 301 tariffs on China and
the corresponding retaliatory tariffs imposed by China on U.S. exports,
it is essential that the United States emerge from the process with
measures to address the many real problems with China rather than
simply addressing the bilateral goods trade deficit.\19\ A coalition
may be the best way to avoid a narrow, deficit-focused bilateral deal.
---------------------------------------------------------------------------
\19\ In Beijing on May 3-4, at its first high-level meeting with
China following the release of the Section 301 Report, the United
States presented it draft framework (attached herewith as Appendix B)
for balancing the trade relationship with China, noting that ``there is
an immediate need for the United States and China to reduce the U.S.
trade deficit with China,'' and listing as the first of eight issues
the request for a commitment by China to reduce the US-China trade
deficit by $200 billion.
---------------------------------------------------------------------------
The idea of bringing a broad, coalition-based case against China--
both for specific violations and for its nullification and impairment
of legitimate expectations that the United States and the other members
of the WTO had at the time China joined the WTO--was recently endorsed
in a recommendation to the Congress contained in the U.S.-China
Economic and Security Review Commission's November 2018 Report to
Congress.\20\ The Commission specifically recommended that Congress
examine whether USTR ``should bring, in coordination with U.S. allies
and partners, a ``non-violation nullification or impairment'' case--
alongside violations of specific commitments--against China at the
World Trade Organization under Article 23(b) of the General Agreement
on Tariffs and Trade.\21\
---------------------------------------------------------------------------
\20\ https://www.uscc.gov/sites/default/files/annual--reports/
2018%20Annual%20Report%20to%20Congress.pdf.
\21\ Commission Recommendation 2, page 21, Executive Summary and
Recommendations, 2018 Report to Congress of the U.S.-China Economic and
Security Review Commission.
---------------------------------------------------------------------------
E. The Time is Ripe for a WTO Case Now
The suggestion to bring a bold WTO case against China now certainly
begs the question: if such a case is so clearly warranted and the
problems have persisted for so long, why hasn't it been brought before
now?
Among the reasons may be the following:
First, many countries (and the companies within those countries)
have been reluctant to take on China for fear of retaliation by China,
in ways both obvious and hidden.\22\ Countries fear that China will
impose trade remedies or other measures on their exports or deny needed
permits to their companies or file WTO challenges, all in direct
response to claims of unfair trade practices, forced technology
transfers or intellectual property theft. While not a perfect shield,
bringing a broad, coalition-based case would lessen the likelihood that
China would or could effectively retaliate against all of the coalition
partners, much less the many industries and companies that would be
standing behind the case.
---------------------------------------------------------------------------
\22\ As stated in the Section 301 Report (at pg. 9): U.S. companies
``fear that they will face retaliation or the loss of business
opportunities if they come forward to complain about China's unfair
trade practices . . . ``Multiple submissions noted the great
reluctance of U.S. companies to share information on China's technology
transfer regime, given the importance of the China market to their
businesses and the fact that Chinese Government officials are `not shy
about retaliating against critics.' For example, a representative of
the Commission on the Theft of American Intellectual Property testified
at the hearing: `American companies are intimidated and reticent over
the issue, especially in China. There they risk punishment by a
powerful and opaque Chinese regulatory system.' In addition, according
to the U.S. China Business Council, their member companies do not
presently have `reliable channel[s] to report abuses and to appeal
adverse decisions . . . without fear of retaliation.' ''
---------------------------------------------------------------------------
Second, bringing a collective case, with multiple complainants, is
never easy, as it requires tremendous coordination of both the legal
tasks of drafting and pleading and of the substantive arguments to be
made, which may favor one country more than others or raise concerns
for some but not all of the coalition. Only a handful of the 547 WTO
complaints brought to date have been brought by a coalition of
countries, but for this case to be most effective, a coalition is
needed. And many of the potential coalition partners have been working
with the U.S. in other fora, including the OECD, the G-7, and the
Global Forum on Steel Excess Capacity. The need to pool together both
the evidence and the political power of as large a coalition as can be
mustered will be important to achieving sustained pressure at the
highest levels on China.
Third, many countries in the past have been reluctant to bring WTO
disputes unless they were virtually assured of a victory. No one wanted
to lose, given the diplomatic and political fallout that can occur from
one country accusing another foreign sovereign of being a rules
scofflaw. But in light of the depth and breadth of the concerns about
China, now is the time to throw caution to the wind and bring a big
case that challenges a number of both specific measures and systemic
matters, assuming there is sound evidence to ensure that each claim has
been brought in the good faith required by the WTO's Dispute Settlement
Understanding (DSU). \23\ Moreover, a number of the most likely
applicable provisions have not yet been tested, against China or any
other country. In the past when tried for the first time, WTO rules
have usually been found to work.
---------------------------------------------------------------------------
\23\ Article 10 of the DSU provides: ``It is understood that
requests for conciliation and the use of the dispute settlement
procedures should not be intended or considered as contentious acts and
that, if a dispute arises, all Members will engage in these procedures
in good faith in an effort to resolve the dispute.''
---------------------------------------------------------------------------
Fourth, bringing cases against China has often presented very
difficult evidentiary hurdles, as much of the information and evidence
needed to support a claim, particularly a claim based on unwritten
rules or practices, can be quite difficult to obtain. As noted above,
one of the ongoing complaints of the United States and others is the
lack of transparency in China, particularly around the issue of
granting licenses or permits. As stated in the Section 301 Report:
``The fact that China systematically implements its technology transfer
regime in informal and indirect ways makes it `just as effective [as
written requirements], but almost impossible to prosecute.' . . .
Nevertheless . . . confidential industry surveys, where companies may
report their experiences anonymously, make clear that they are
receiving such pressure. The lack of transparency in the regulatory
environment, the complex relationship between the State and the private
sector, and concerns about retaliation have enabled China's technology
transfer regime to persist for more than a decade.'' 1A\24\
---------------------------------------------------------------------------
\24\ Findings of the Investigation Into China's Acts, Policies, And
Practices Related to Technology Transfer. Intellectual Property, And
Innovation Under Section 301 of the Trade Act Of 1974, Office of the
United States Trade Representative, March 22, 2018, at pg. 22.
---------------------------------------------------------------------------
However, it is clear that over the course of the last decade or
more, through the work of the U.S.-China Economic and Review Security
Commission, USTR and other U.S. Government agencies, along with
numerous business and industry groups, a substantial amount of evidence
has been collected here in the United States. The combination of the
comprehensive and well-documented Section 301 Report, the annual USTR
report to Congress on China's WTO compliance and the annual reports to
the Congress from the U.S.-China Economic and Review Security
Commission already contain substantial evidence to support the
potential claims noted above. Add to that the work done in the EU,
Japan, Canada and others, and at the OECD along with other multilateral
institutions, and it becomes clear that there should be more than
sufficient evidence to demonstrate that China's economy is operating in
ways that undermine the WTO's rules-based, market-based system. Indeed,
one of the many benefits of bringing a case as a coalition is that each
member of the coalition can contribute the evidence that they have
collected and the experience of their companies.
Fifth, some would argue that WTO cases have already been tried,
with some success and some failure. It is true that China has been
challenged in 40 disputes brought to the WTO's dispute settlement
system, with 22 of those cases arising from complaints filed by the
United States, eight coming from the EU, four from Mexico, three from
Canada, with Japan and Guatemala also bringing claims against
China.\25\ And a number of them (at least 15) have found against China.
While the actual extent of Chinese compliance with WTO rulings can be
questioned, in a number of cases, China has removed or amended its
offending measures and in five others, China has reached a settlement
agreement with the complaining party. The problem with many of these
cases is that the challenges were relatively narrow, limited to a few
Chinese measures, or to a particular industry or set of producers.
While some of the more recent cases, including in particular the case
on subsidies for aluminum and the Section 301-related case on IPR
violations, have attempted to bring a specific case to showcase the
underlying and more systemic problems, no panel has yet been requested
in those cases and it remains to be seen whether a single case can
provoke a more systemic response from China.
---------------------------------------------------------------------------
\25\ See the attached Appendix C for a list of the cases brought
against China and their outcomes. Note that for eight of the cases, no
panel has been requested, for two of the cases the panel is working on
the case, and for two others, the DSB has agreed to establish the panel
but the actual panelists to hear the case have not yet been appointed.
---------------------------------------------------------------------------
As a result, some have come to believe that the WTO, as the 20 17
USTR report to Congress states, ``is not effective in addressing a
trade regime that broadly conflicts with the fundamental underpinning
of the WTO system.'' \26\ I disagree. I do not believe that the kind of
broad case, with claims across sectors and across legal regimes, has
been tried. No one, for example, has challenged the Chinese system of
intellectual property rights or technology transfers as a whole. The
WTO, therefore, has not been given the opportunity to show what can be
done to save its core provisions. Yet it is just such a systemic case
that could provide the basis and the incentive to craft a legal remedy
that could be beneficial to all sides.
---------------------------------------------------------------------------
\26\ 2017 USTR Report to Congress on China's WTO Compliance at 5.F.
The WTO Case Against China
---------------------------------------------------------------------------
The essential thrust of any WTO case should be to hold China to the
specific commitments it made when it joined the WTO in 200 I and to the
overarching understanding embodied in the Marrakesh Declaration that
WTO members participate ``based upon open, market-oriented policies.''
\27\ The specific commitments China made are found in the texts of the
WTO Agreements, China's Protocol of Accession to the WTO, certain
designated paragraphs of the accompanying Working Party Report, and
China's schedules of commitments.\28\ The schedules cover tariffs and
non-tariff measures applicable to agricultural trade and industrial
goods (commitments under the General Agreement on Tariffs and Trade, or
GATT) and services (commitments under the General Agreement on Trade in
Services, or GATS). The Accession Protocol and Working Party Report
thereto also set out promises on how China intends to fulfill its WTO
obligations.
---------------------------------------------------------------------------
\27\ Marrakesh Declaration of 15 April 1994, Preamble.
\28\ See Report of the Working Party to the Accession of China to
the WTO, WT/ACC/CHN/49, 1 October 2001. Para 342 sets forth the
specific paragraphs of the Working Party Report that are considered to
be incorporated into the Protocol of Accession itself. These paragraphs
are therefore considered to be equally legally binding on China as the
provisions in its Protocol or the text of the WTO Agreements.
---------------------------------------------------------------------------
Every WTO case must be based on government measures (i.e., Jaws,
regulations, rulings or practices), whether written or not, that
violate one or more specific commitments or that ``nullify or impair''
a benefit provided to members of the WT0.\29\ It is this combination of
both actual violations and the non-violation impairment of benefits
that should be the focus of the case at the WTO.
---------------------------------------------------------------------------
\29\ The WTO Appellate Body, in EC-Asbestos described nullification
and impairment: ``Article XXIII: l(a) sets forth a cause of action for
a claim that a Member has failed to carry out one or more of its
obligations under the GATT 1994. A claim under Article XXIII: I (a),
therefore, ties when a Member is alleged to have acted inconsistently
with a provision of the GATT 1994. Article XXIII:l(b) sets forth a
separate cause of action for a claim that, through the application of a
measure, a Member has `nullified or impaired' `benefits' accruing to
another Member, `whether or not that measure conflicts with the
provisions' of the GATT 1994. Thus, it is not necessary, under Article
XXIII:l(b), to establish that the measure involved is inconsistent
with, or violates, a provision of the GA TT 1994. Cases under Article
XXIII: l(b) are, for this reason, sometimes described as `non-
violation' cases.'' Appellate Body Report, EC -Asbestos, para. 185.
---------------------------------------------------------------------------
Among the things that could be included in such a big, bold case
are the following, understanding that this is not an exhaustive list:
1. Technology Transfer
One of the key findings of the Section 301 Report is that the
Chinese government uses both foreign ownership restrictions and
administrative licensing and approvals processes to force technology
transfer in exchange for either the investment approval itself or for
the numerous administrative approvals needed to establish or operate a
business in China.
However, China clearly committed (in one of the legally binding
paragraphs of its Working Party report) that it would not condition
investments on the transfer of technology:
The allocation, permission or rights for importation and
investment would not be conditional upon performance
requirements set by national or sub-national authorities, or
subject to secondary conditions covering, for example, the
conduct of research, the provision of offsets or other forms of
industrial compensation including specified types or volumes of
business opportunities, the use of local inputs or the transfer
of technology. (Emphasis added).\30\
\30\ Paragraph 203, Working Party Report. See also Section 7.3 of
China's Protocol of Accession.
---------------------------------------------------------------------------
While the Section 301 Report clearly notes the difficulty in
proving the technology transfer mandates, given that many of them are
unwritten, and that others are done in the course of a negotiation
between two ostensibly private parties (even though the Chinese entity
may be either state-owned or have Communist Party members on its
board), recent decisions of the WTO Appellate Body have made it clear
that unwritten measures can be challenged.\31\ Given the clear
commitment made by China and the WTO's Agreement on Trade Related
Investments' (TRIMs) prohibition on treating foreign investment less
favorably than Chinese investment, China's practices resulting in the
forced or coerced transfer of technology should be challenged.
---------------------------------------------------------------------------
\31\ See, for example, Appellate Body Reports, Argentina--Measures
Affecting the Importation of Goods, WT/DS438/AB/R / WT/DS444/AB/R / WT/
DS445/AB/R, adopted 26 January 2015.
---------------------------------------------------------------------------
2. Discriminatorv Licensing Restrictions
The second key finding of the Section 301 Report is that China's
regime of technology regulations does not allow U.S. (or other foreign)
firms to license their technology (or choose not to license it) under
the conditions and terms that they would like or that would prevail in
a market economy. The Chinese regulations, among other things,
discriminate against foreign technology, putting foreign technology
importers at a disadvantage relative to Chinese companies and imposing
additional restrictions on the use and enjoyment of technology and
intellectual property rights simply because the technology is of
foreign origin. This violates China's commitment to provide national
treatment.
Unlike the concerns for the unwritten and under-the-table nature of
the forced technology transfer practices, these measures are formal
laws and regulations that are well-known to the United States and
others. Indeed, Japan, the U.S. and the EU have been raising concerns
about these rules in the TRIPS Council and other WTO forums. Some of
these same laws and regulations are the source of the United States'
and the EU's May 2018 requests for consultations with China.
China's commitments here are clear: China ensured national and MFN
treatment to foreign right-holders regarding all intellectual property
rights across the board in compliance with the TRIPS Agreement\32\ In
enacting laws and imposing regulations which discriminate against
foreign holders of intellectual property rights and which restrict
foreign right holders' ability to protect certain intellectual property
rights, China has broken those commitments and violated its WTO
obligations.
---------------------------------------------------------------------------
\32\ Paragraph 256, Working Party Report, one of the legally
binding paragraphs of China's Working Party Report.
---------------------------------------------------------------------------
3. Outbound Investment and Made in China 2025
The third major finding of the Section 301 Report is that China has
engaged in a wide-ranging, well-funded effort to direct and support the
systematic investment in, and acquisition of, U.S. companies and assets
to obtain cutting-edge technology, in service of China's industrial
policy. The report also notes that the role of the state in directing
and supporting this outbound investment strategy is pervasive, and
evident at multiple levels of government--central, regional, and local.
The government has devoted massive amounts of financing to encourage
and facilitate outbound investment in areas it deems strategic. In
support of this goal, China has enlisted a broad range of actors to
support this effort, including SOEs, state-backed funds, government
policy banks, and private companies.
Concerns about these policies were heightened by the release by
China's State Council in 2015 of its Made in China 2025 initiative, a
.. comprehensive blueprint aimed at transforming China into an advanced
manufacturing leader [through] preferential access to capital to
domestic companies in order to promote their indigenous research and
development capabilities, support their ability to acquire technology
from abroad, and enhance their overall competitiveness.'' \33\
---------------------------------------------------------------------------
\33\ U.S. Chamber of Commerce, ``Made in China 2025: Global
Ambitions Built on Local Protections.''
---------------------------------------------------------------------------
Because much of the outward investment regimes and the Made in
China 2025 plan are formal laws, regulations or programs of the Chinese
government, basic documentation for a WTO claim is relatively
straightforward. However, the WTO rules have much less say over outward
investment, making the nature of a WTO claim in this area more
complicated. Nonetheless, there are some commitments that could form
the basis for a violation claim, including a lack of reciprocity. For
example, China stated that its IPR Jaws will provide that ``any
foreigner would be treated . . . on the basis of the principle of
reciprocity.'' \34\ Yet as the Section 3 0 I Report amply documents,
the Chinese adm in istrati ve approval regime imposes substantially
more restrictive requirements than that of the United States. U.S.
firms face numerous barriers, such as sectoral restrictions, joint
venture requirements, equity caps, and technology transfer requirements
when they seek access to the Chinese market. Chinese firms do not face
anything remotely approaching these types of restrictions when
investing in the United States.
---------------------------------------------------------------------------
\34\ Paragraph 256 of China's Working Party Report (one of the
paragraphs that is legally binding).
---------------------------------------------------------------------------
In addition, China's outward investment regime and programs like
Made in China 2025 could be challenged under the WTO's GA TT Article
XXlll ``non-violation'' given the non-market nature of China's outward
investment scheme. As the Section 301 Report notes: ``Market-based
considerations . . . do not appear to be the primary driver of much of
China's outbound investment and acquisition activity in areas targeted
by its industrial policies. Instead, China directs and supports its
firms to seek technologies that enhance China's development goals in
each strategic sector.'' \35\ Yet China, in joining the WTO, was
becoming part of an organization calling for the ``participation of . .
. economies in the world trading system, based upon open, market-
oriented policies and the commitments set out in the Uruguay Round
Agreements and Decisions.'' \36\
---------------------------------------------------------------------------
\35\ Findings of the Investigation Into China's Acts, Policies, And
Practices Related to Technology Transfer, Intellectual Property, And
Innovation Under Section 301 of the Trade Act Of 1974, Office of the
United States Trade Representative, March 22, 2018, pg. 148.
\36\ Marrakesh Declaration of 15 April 1994.
---------------------------------------------------------------------------
4. Theft of Trade Secrets and Other Intelelectual Property
The fourth area identified by the Section 301 Report are cyber
intrusions into U.S. commercial networks targeting confidential
business information held by U.S. firms, conducted and supported by the
government of China. These cyber intrusions have allowed the Chinese
government to gain unauthorized access to a wide range of commercially-
valuable business information, including trade secrets, technical data,
negotiating positions, and sensitive and proprietary internal
communications.
The Section 301 Report and the numerous documents and studies it
references, along with the Department of Justice indictment of Chinese
government hackers for cyber intrusions and economic espionage,\37\
leave little doubt that China has engaged in serial theft of U.S.
intelelectual property rights, trade secrets in particular.
---------------------------------------------------------------------------
\37\ U.S. v. Wang Dong et al., (W. D. Pa., May I, 2014).
---------------------------------------------------------------------------
The clear claim under the WTO is a violation of the WTO's Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS). TRIPS
covers the broad array of intellectual property rights (i.e., patents,
copyrights, trademarks, trade secrets, industrial designs, geographical
indications, integrated circuits) and provides both minimum standards
of protection and a broad-based requirement for enforcement. For
example, Article 39 of the TRIPS Agreement provides that people and
companies ``shall have the possibility of preventing infonnation
lawfully within their control from being disclosed to, acquired by, or
used by others without their consent . . . '' while TRIPs Article 41
imposes an affinnative obligation on all WTO Members: ``Members shall
ensure that enforcement procedures . . . are available under their law
so as to pennit effective action against any act of infringement of
intellectual property rights covered by this Agreement, including
expeditious remedies to prevent infringements and remedies which
constitute a deterrent to further infringements.'' Engaging in and
permitting the theft, whether through cyber intrusions or not, is a
violation of the basic requirement that China's laws and its efforts to
enforce intellectual property rights ``must have real force in the real
world of commerce.''\38\
---------------------------------------------------------------------------
\38\ James Bacchus, ``How the World Trade Organization Can Curb
China's Intellectual Property Transgressions,'' CATO, March 22, 2018.
---------------------------------------------------------------------------
5. Investment Restrictions
As noted above, Chinese government officials at times use China's
current foreign investment approval process to restrict or unreasonably
delay market entry for foreign companies, to require foreign companies
to take on a Chinese partner, or to extract valuable, deal-specific
commercial concessions as a price for market entry.\39\ Foreign
companies are often told that they will have to transfer technology,
conduct research and development in China or satisfy performance
requirements relating to exportation or the use of local content if
they want their investments approved.\40\
---------------------------------------------------------------------------
\39\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018, pp. 83-95.
\40\ For example, in October 2012, MOF, MIIT and MOST issued two
new measures establishing a fiscal support fund for manufacturers of
New Energy Vehicles (NEVs) and NEV batteries. As foreign automobile
manufacturers are required to form 50-percent joint ventures with
Chinese partners, these requirements could effectively require them to
transfer core NEV technology to their Chinese joint-venture partners in
order to receive the available government funding.
---------------------------------------------------------------------------
In addition, in the name of security, a number of additional
restrictions have been placed on foreign investment. The National
Security law includes a more restrictive national security review
process and other significant restrictions on foreign investment, such
as restrictions on the purchase, sale and use of foreign ICT products
and services, cross-border data flow restrictions and data localization
requirements.'' \41\
---------------------------------------------------------------------------
\41\ The recently enacted Cybersecurity Law adds additional
restrictions to those in the National Security law.
---------------------------------------------------------------------------
The Catalogue Guiding Foreign Investmellf in Industry (Foreign
Investment Catalogue), imposes significant restrictions in key services
sectors, extractive industries, agriculture and certain manuefacturing
industries.
A number of the provisions in these laws and catalogues violate the
commitment China made in its Protocol of Accession: ``China shall
ensure that . . . the right of importation or investment by national
and sub-national authorities, is not conditioned on: whether competing
domestic suppliers of such products exist; or performance requirements
of any kind, such as local content, offsets, the transfer of
technology, export performance or the conduct of research and
development in China.'' \42\ These also violate China's basic
commitment to national treatment, requiring that China treat foreign
companies no less favorably than it treats Chinese companies.\43\
---------------------------------------------------------------------------
\42\ China's Protocol of Accession to the WTO, Section 7.3
\43\ China's basic national treatment commitment is underscored in
Paragraph 18 of the Working Party Report (one of the legally binding
paragraphs): ``The representative of China further confirmed that China
would provide the same treatment to Chinese enterprises, including
foreign-funded enterprises, and foreign enterprises and individuals in
China.''
---------------------------------------------------------------------------
6. Lack of An Independent Judiciary
The WTO rules require all members to ensure the conformity of its
laws, regulations and administrative procedures with the requiren1ents
of the WTO Agreement. Among those requirements is the maintenance of
judicial, arbitral or administrative tribunals or procedures for the
review and correction of administrative actions relating to trade
matters, where the tribunals responsible for such reviews are: a)
impartial, b) independent of administrative agencies subject to such
review, and c) have no substantial interest in the outcome of the
matter under review.'' \44\
---------------------------------------------------------------------------
\44\ Article X.3(b) of the GATT.
---------------------------------------------------------------------------
When China joined the WTO, it expressly committed to .. establish
or designate, and maintain tribunals, contact points and procedures for
the prompt review of all administrative actions relating to the
implementation of laws, regulations, judicial decisions and
administrative rulings of general application referred to in Article X:
1 of the GATT 1994, Article VI of the GATS and the relevant provisions
of the TRIPS Agreement. Such tribunals shall be impartial and
independent of the agency entrusted with administrative enforcement and
shall not haye any substantial interest in the outcome of the matter.''
\45\
---------------------------------------------------------------------------
\45\ China's Protocol of Accession to the WTO, 2(D) Judicial
Review.
---------------------------------------------------------------------------
Yet China's National People's Congress and local peoples'
congresses, as controlled by the Chinese Communist Party, maintain the
power to dictate the outcomes of proceedings of all agencies entrusted
with administrative enforcement of WTO-related rules, of the tribunals
that review the decisions of administrative agencies, and all other
judicial organs engaged in further reviews of actions and decisions by
trade-related agencies and reviewing tribunals, such as China's Supreme
People's Court.\46\ Because this means that China's legal system allows
the Chinese Communist Party to secure discrete administrative, legal
and economic outcomes related to China's WTO obligations, China has
violated its commitment to establish and maintain an independent
judiciary and to provide for uniform, independent judicial review of
administrative actions relating to WTO obligations and commitments.
---------------------------------------------------------------------------
\46\ ``China's top judge has fired a warning shot at judicial
refonners by formally acknowledging that China's court system is not
independent of the Communist Party and rejecting attempts to make it
so.'' Financial Times, July 20, 2018.
---------------------------------------------------------------------------
7. Subsidies
Many regard the WTO's difficulty in regulating subsidies as among
its greatest weaknesses, particularly when it comes to the size and the
nature of the subsidies being provided in China. For example,
subsidization and the resultant overcapacity have been problems in
China, particularly with State-Owned-Enterprises (SOEs) which are
provided with a variety of free or below-cost resources (such as land
and raw materials), raising questions as to whether inputs provided by
such SOEs to downstream manufacturers should be treated as government
subsidies. The provisions of the WTO's Agreement on Subsidies and
Countervailing Measures (ASCM) makes proving the existence of such
subsidies difficult. Specifically, the agreement defines a subsidy as a
``financial contribution by a government or any public body.'' \47\ The
WTO Appellate Body has interpreted ``public body'' to mean government
or governmental entities that exercise governmental functions\48\ --
i.e., that the entity must possess, exercise, or be vested with
``governmental authority'' and be performing a ``governmental
function.'' This interpretation effectively takes Chinese SOEs out of
the definition of subsidy and renders the WTO framework ineffective in
addressing these cases.
---------------------------------------------------------------------------
\47\ See Article I of the SCM Agreement. Assuming that a measure is
a subsidy within the meaning of the SCM Agreement, it nevertheless is
not subject to the SCM Agreement unless it has been specifically
provided to an enterprise or industry or group of enterprises or
industries.
\48\ See United States--Definitive Anti-Dumping and Countervailing
Duties on Certain Products From China, WT/DS379/AB/R.
---------------------------------------------------------------------------
Second, demonstrating the existence of a subsidy also requires
showing that a benefit was provided to the subsidy recipient, with
``benefit'' being defined as making the recipient better off than they
would have been absent the subsidy. Such a demonstration requires a
comparison to a market benchmark to determine whether the terms of a
loan or the price of a government purchase were more favorable than
market-based terms. Because of the nature of China's economy,
benchmarks are often hard to prove.
Moreover, remedies available under the WTO subsidy rules are
perceived to be inadequate in addressing concerns about China. The ASCM
does not provide an outright ban on subsidies but rather allows
countries to take one of two actions when faced with subsidized goods:
1) countervailing duty actions if the subsidized goods are coming into
their markets and causing injury to their domestic producers, with the
amount of the duty equal to the portion of the cost of production that
has been covered by the subsidy, or 2) adverse effects cases at the
WTO, if the damage from trade in the subsidized product is causing hann
in third-country markets.\49\ The problem with countervailing duties is
that they may simply push the subsidized goods into other markets, thus
suppressing prices. The problem with adverse effects cases is that
remedies in the WTO are prospective only so the requirement to ``remove
the adverse effects of the subsidy'' often does little to dismantle the
capacity that China has built to produce those goods in the first
place.
---------------------------------------------------------------------------
\49\ Part V, Agreement on Subsidies and Countervailing Measures.
---------------------------------------------------------------------------
In recent years, it appears that China has begun to tie subsidies
to lists of qualified manufacturers located in China. For example, the
central government and certain local governments provide subsidies in
connection with the purchase ofNEYs, but they only make these subsidies
available when certain Chinese-made NEVs, not imported NEVs, are
purchased. China appears to pursue similar policies involving NEV
batteries, leading to lost sales by U.S.-based manufacturers.\50\
---------------------------------------------------------------------------
\50\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018; pg.90.
---------------------------------------------------------------------------
China made two basic commitments with respect to subsidies when it
joined the WTO: I) to notify the WTO of all the subsidies it granted or
maintained, and 2) to eliminate all export contingent and import
substitution subsidies. It also made general national treatment
commitments not to discriminate against foreigners. It appears that
China is violating all three commitments. The hope in bringing a broad
challenge would be to force a long-overdue discussion about what the
WTO can do to change its approach to disciplining subsidies, along with
achieving a fonnal finding that China is in breach and must bring its
measures into compliance.
8. Export Restraints
In some situations, China has used its border taxes to encourage
the export of certain finished products over other finished products
within a particular sector. For example, in the past, China has
targeted value-added steel products, particularly wire products and
steel pipe and tube products, causing a surge in exports of these
products, many of which ended up in the U.S. market. Furthermore,
despite its commitments to the contrary, China has taken no steps to
abandon its use of trade-distortive VAT export rebates. Export taxes on
any products other than those specified in Annex 6 to China's Protocol
of Accession are prohibited and ripe for challenge.\51\
---------------------------------------------------------------------------
\51\ ``China shall eliminate all taxes and charges applied to
exports unless specifically provided for in Annex 6 of this Protocol or
applied in conformity with the provisions of Article VIII of the GATT
1994.'' Section 11.3, China's Protocol of Accession to the WTO.
---------------------------------------------------------------------------
9. Standards
China seems to be actively pursuing the development of unique
requirements, despite the existence of well-established international
standards, as a means for protecting domestic companies from competing
foreign standards and technologies. Indeed, China has already adopted
unique standards for digital televisions, and it is trying to develop
unique standards and technical regulations in a number of other
sectors, including, for example, autos, telecommunications equipment,
Internet protocols, wireless local area networks, radio frequency
identification tag technology, audio and video coding and fertilizer as
well as software encryption `and mobile phone batteries. This strategy
has the potential to create significant barriers to entry into China's
market, as the cost of compliance will be high for foreign companies,
while China will also be placing its own companies at a disadvantage in
its export markets, where international standards prevail. There are
also concerns that integrating its domestic standards requirements into
its certification or accreditation schemes would make them de facto
mandatory.\52\
---------------------------------------------------------------------------
\52\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018, pp. 60-61.
---------------------------------------------------------------------------
China's standards are subject to the WTO requirements on standards,
both those contained in the Agreement on Sanitary and Phytosanitary
Standards (SPS Agreement) (relating to food, animal and plant
standards) and the Agreement on Technical Barriers to Trade (TBT). Both
Agreements contain basic national treatment requirements, preferences
for the harmonization of standards with those set by recognized
international standards organizations and a basic requirement that
standards not be more trade restrictive than necessary to fulfill a
legitimate objective. To the extent that China's standards can be shown
to have effectively created unnecessary obstacles to trade or to have
unreasonably departed from international standards, they can be
challenged at the WTO.
10. Services
China's commitments with respect to services are those found in its
GATS (General Agreement on Trade in Services) schedules and in more
recent commitments China has made to improve on those initial
commitments. The problem is that in a number of sectors, China has not
followed through previously agreed upon changes. For example:
Insurance: \53\ While China allows wholly foreign-owned
subsidiaries in the non-life (i.e., property and casualty) insurance
sector, the market share of foreign-invested companies in this sector
is only about two percent. Some U.S. insurance companies established in
China sometimes encounter difficulties in getting the Chinese
regulatory authorities to issue timely approvals of their requests to
open up new internal branches to expand their operations. In November
2017, China announced that it would be easing certain of its foreign
equity restrictions in the insurance services sector, but to date it
has not done so.
---------------------------------------------------------------------------
\53\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018, p. 125
---------------------------------------------------------------------------
Securities and management services: \54\ China only permits foreign
companies to establish as Chinese-foreign joint ventures, with foreign
equity capped at 49 percent. In November 2017, China announced that it
would be easing certain of its foreign equity restrictions in the
securities and asset management services sectors, but to date it has
not done so.
---------------------------------------------------------------------------
\54\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018, p. 20.
---------------------------------------------------------------------------
Legal services:\55\ China has issued measures intended to implement
the legal services commitments that it made upon joining the WTO.
However, these measures restrict the types of legal services that can
be provided by foreign law finns, including through a prohibition on
foreign law finns hiring lawyers qualified to practice Chinese law, and
impose lengthy delays for the establishment of new offices.
---------------------------------------------------------------------------
\55\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018, p. 129.
---------------------------------------------------------------------------
The WTO case should work to hold China to all of the commitments it
has made to open up its services sector.
11. Agriculture
U.S. exporters continued to be confronted with non-transparent
application of sanitary and phytosanitary (SPS) measures, many of which
have appeared to lack scientific bases and have impeded market access
for many U.S. agricultural products. China's seemingly unnecessary and
arbitrary inspection-related import requirements also continued to
impose burdens and regulatory uncertainty on U.S. agricultural
producers exporting to China, as did the registration and certification
requirements that China imposes, or proposes to impose, on U.S. food
manufacturers.\56\
---------------------------------------------------------------------------
\56\ 2017 Report to Congress on China's WTO Compliance, USTR,
January 2018, p. 96.
---------------------------------------------------------------------------
Any SPS measures adopted without a sound scientific basis or
without a risk assessment or without being based on certain
international standards are clearly subject to challenge at the WTO,
with past cases indicating a high likelihood that any such measures
would be struck down. The inspection-related requirements may also
violate the WTO's Agreement on Pre-shipment Inspection, which contains
both non-discrimination and transparency requirements.
Transparency\57\
---------------------------------------------------------------------------
\57\ 2017 Report 10 Congress on China's WTO Compliance, USTR,
January 2018, p. 137 to 141.
---------------------------------------------------------------------------
The issue of transparency and access to China's laws, regulations
and rules was of key concern to WTO members when China joined in 2001.
China's Protocol of Accession and five paragraphs of its Working Party
clearly commit China to making all laws, regulations and other measures
pertaining to trade readily available and, upon request, available
prior to their implementation or enforcement, along with making them
available in one or more of the official languages of the WTO (English,
French and Spanish). As the following examples show, China has not
lived up to these commitments and can be challenged on these (and
other) transparency failures at the WTO:
Publication of laws: While trade-related administrative regulations
and departmental rules are more commonly (but still not regularly)
published in the journal, it is less common for other measures such as
opinions, circulars, orders, directives and notices to be published,
even though they are in fact all binding legal measures. In addition,
China does not normally publish in the journal certain types of trade-
related measures, such as subsidy measures, nor does it nonnally
publish sub-central government trade-related measures in the journal.
Notice and comment procedures: At the May 2011 S&ED meeting, China
committed to issue a measure implementing the requirement to publish
all proposed trade and economic related administrative regulations and
departmental rules on the website of the State Council's Legislative
Affairs Office (SCLAO) for a public comment period of not less than 30
days. In April 2012, the SCLAO issued two measures that appear to
address this requirement. Since then, despite continuing U.S.
engagement, little noticeable improvement in the publication of
departmental rules for public comment appears to have taken place, even
though China confirmed that those two SCLAO measures are binding on
central government ministries.
13. Non-violation
Last, but certainly not least, a broad and deep case at the WTO
should include a non-violation claim under Article XXIII of the GATT,
focused on the myriad ways in which China's economy fails to meet the
Marrakesh Declaration that the WTO was designed as a world trading
system ``based upon open, market-oriented policies.'' The non-violation
clause of Article XXIII represents a real-world attempt to solve the
broader problem of contractual incompleteness. It provides a legal
cause of action against measures that do not violate the treaty but
that nevertheless upset the reasonable expectations of the parties and
can be aimed at policies that might otherwise be beyond the reach of
the GATT/WTO agreements.\58\ Non-violation claims have been rare.\59\
WTO members generally agree that ``the non-violation nullification or
impairment remedy should be approached with caution and treated as an
exceptional concept. The reason for this caution is straightforward.
Members negotiate the rules that they agree to follow and only
exceptionally would expect to be challenged for actions not in
contravention of those rules.'' \60\
---------------------------------------------------------------------------
\58\ Article XXIII provides:
Nullification or Impairment
1. If any contracting party should consider that any benefit
accruing to it directly or indirectly under this Agreement is being
nullified or impaired or that the attainment of any objective of the
Agreement is being impeded as the result of:
(a) the failure of another contracting party to carry out its
obligations under this Agreement, or
(b) the application by another contracting party of any measure,
whether or not it conflicts with the provisions of this Agreement, or
(c) the existence of any other situation, the contracting party
may, with a view to the satisfactory adjustment of the matter, make
written representations or proposals to the other contracting party or
parties which it considers to be concerned. Any contracting party thus
approached shall give sympathetic consideration to the representations
or proposals made to it.
\59\ ``Although the non-violation remedy is an important and
accepted tool of WTO/GATT dispute settlement and has been 'on the
books' for almost 50 years, we note that there have only been eight
cases in which panels or working parties have substantively considered
Article XX111: l(b) claims.'' Panel Report, Japan-Film, para. 10.36.
\60\ Panel Report, Japan-Film, para. 10.36.
---------------------------------------------------------------------------
However, the wide-spread concerns with China's economy and the
difficulties it has raised for WTO members suggests that this is indeed
the time for an exceptional approach. As made clear in Harvard Law
Professor Mark Wu's ``China Inc.'' analysis, China's economy is
structured differently from any other major economy and is different in
ways that were not anticipated by WTO negotiators.\61\ It is the
complex web of overlapping networks and relationships, both formal and
informal, between the state, the Communist Party, SOEs, private
enterprises, financial institutions, investors and others with Chinese
government oversight over state assets (SASAC), financial sector
organization (Central Huijin Investment Ltd.), heavy state planning,
placement of Communist party officials in key positions, specific forms
of corporate networks and state-private sector linkages that make
China's economy so unique and so hard for the trading rules to deal
with.\62\
---------------------------------------------------------------------------
\61\ Mark Wu, ``The `China, Inc.' Challenge to Global Trade
Governance,'' Harvard International Law Journal, Vol. 57, Spring 2016,
pp. 261-324.
\62\ Mark Wu at 284.
---------------------------------------------------------------------------
It is exactly for this type of situation that the non-violation
nullification and impairment clause was drafted. The United States and
all other WTO members had legitimate expectations that China would
increasingly behave as a market economy--that it would achieve a
discernable separation between its government and its private sector,
that private property rights and an understanding of who controls and
makes decisions in major enterprises would be clear, that subsidies
would be curtailed, that theft of IP rights would be punished and
diminished in amount, that S0Es would make purchases based on
commercial considerations, that the Communist Party would not, by fiat,
occupy critical seats within major ``private'' enterprises, and that
standards and reguelations would be published for all to see. It is
this collective failure by China, in addition to the specific
violations of individual provisions noted above, that should form the
core of a big, bold WTO case.
G. Objectives of Such a WTO Case
Most WTO disputes have as their goal a ruling by the Dispute
Settlement Body that the measures complained about violate one or more
provisions of the WTO Agreements, after which the responding party
brings its measures into compliance, often by removing or amending the
offending measures. Here, while one of the goals would indeed be to
seek certain specific rulings of that type, the goals would be much
broader--
1. to seek a common understanding of where the current set of rules
are failing and need to be changed (with disciplines on
subsidies at the top of that list);
2. to begin the process of scoping out exactly what those rule changes
would look like to accommodate the views of the broader WTO
membership;
3. to seek recognition from China of where and to what degree its
economic structure can or cannot fit within a fair, transparent
and market-based trading system; and
4. to give China the opportunity to make a choice that is its
sovereign right to make-whether it wants to change its system
to one that does fit within the parameters of the WTO or not.
As former USTR official Harry Broadman put it, ``There's no right
or wrong here. If China's choice results in conduct that does not
square with the rules of the WTO . . . so be it. Beijing should then
exit the WTO gracefully or be shown the door.'' \63\ The hope would be
that both China and the coalition of parties to the dispute would
appreciate that the trading system is better off with China as part of
it, that the WTO rules are in some places and in some ways part of the
problem and need to be changed, but that tinkering at the margins will
not suffice.
---------------------------------------------------------------------------
\63\ Harry G. Broadman, ``The Coalition-Based Trade Strategy Trump
Should Pursue Toward China,'' Forbes, April 9, 2018.
---------------------------------------------------------------------------
H. Conclusion
The concerns with China are global concerns. The tools used to
address the concerns and the solution sought should be global as well.
And that means using the WTO. And it means fixing the WTO, particularly
its dispute settlement system, to ensure that the WTO is ready and able
to take on the challenge that China presents to the world trading
system.
Saving Multilateralism--Renovating the House of Global
Economic Governance for the 21st Century
by Jennifer Hillman--The German Marshall
Fund of the United States\1\
---------------------------------------------------------------------------
\1\ Jennifer Hillman is a Professor from Practice at the Georgetown
University Law Center. She is a former member of the WTO Appellate Body
and also served as a Commissioner at the U.S. International Trade
Commission and as an Ambassador and General Counsel in the Office of
the United States Trade Representative.
---------------------------------------------------------------------------
[included as a supplement to ms. hillman's prepared statement]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
----------
Examining the Debt Implications of the Belt and Road Initiative from a
Policy Perspective
John Hurley, Scott Morris, and Gailyn Portelance
[entered into the record by senator para.young]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Responses to Additional Questions for the Record Submitted to
Scott Morris by Senator Robert Menendez
Multilateral Development Banks
In your testimony you state ``the MDBs have been rated as the
most effective development institutions by multiple systematic
reviews of aid and development finance.''
Question 1. Please provide support for that statement.
Answer. See the information provided below.
Nancy Birdsall and Homi Kharas (2010 and 2014). The Quality of
Official Development Assistance (QuODA), 1st and 3rd Eds.
Washington, DC: Center for Global Development; Global Economy
and Development at Brookings.
William Easterly and Tobias Pfutze (2008). ``Where Does the Money
Go? Best and Worst Practices in Foreign Aid,'' Journal of
Economic Perspectives 22(2): 29-52.
Stephen Knack, F. Halsey Rogers, and Nicholas Eubank (2010). ``Aid
Quality and Donor Rankings,'' World Development 39(11): 1907-
17.
Samantha Custer, Zachary Rice, Takaaki Masaki, Rebecca Latourell,
and Bradly Parks (2015). Listening to Leaders: Which
Development Partners Do They Prefer and Why? Williamsburg, VA:
AidData at William and Mary
UK Department of International Development (2011). Multilateral Aid
Review: Ensuing maximum value for money for UK aid through
multilateral organisations.
UK Department of International Development (2016). Raising the
Standard: the Multilateral Development Review 2016.
In your testimony you state ``by my estimates, one-third to
nearly half of the bank's lending in China is not appropriately
focused.''
Question 2. Please explain.
Answer. See the attached report, ``Examining World Bank Lending to
China: Graduation or Modulation?'' Expected publication date January
2019.
[The report referred to above follows:]
Examining World Bank Lending to China:
Graduation or Modulation
Scott Morris and Gailyn Portelance
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
----------
[all]