As prepared for delivery
SAN FRANCISCO - Let me begin by thanking George Shultz for the kind introduction, and I want to thank Jack and the members of the Asia Society for having me here today. I have had the honor to follow George at three of the finest agencies of the federal government, OMB, the State Department and now Treasury.
At each, after a generation, George is remembered and admired for his intellect, integrity and leadership, and one can only hope to leave behind the kind of lasting legacy that inspires others who follow. The Asia Society is dedicated to shared prosperity, and no issue is of deeper concern right now on the international stage.
In a world that is changing fast and getting smaller, the challenge for every nation is how to serve our national interests and also work together to make sure economic gains are broadly achieved.
Seventy years ago, as one of the darkest chapters in world history was coming to a close, President Franklin Roosevelt called for the creation of new international financial institutions.
Recognizing that rampant economic nationalism and protectionism deepened the Great Depression and the slide to war, he said these international institutions would make the difference between “a world caught again in the maelstrom of panic and economic warfare ...and a world in which the members strive for a better life through mutual trust, cooperation and assistance.”
The international architecture began at Bretton Woods with the World Bank and the International Monetary Fund, and was followed with the predecessor to the World Trade Organization —creating the foundation for economic growth, free markets, and financial stability around the globe.
That architecture has made possible an extraordinary period of world-wide growth and prosperity that has lasted for generations. And with the help of these institutions, millions of people have been lifted out of poverty. Nowhere is this truer than in China.
In the almost four decades since it began market-oriented economic reform and turned to the global market, China’s per capita income has grown 19-fold, lifting 680 million Chinese out of poverty. China’s share of global GDP has increased from about 3 percent in 1990 to roughly 13 percent in 2014. This transformation was certainly driven by Chinese policy choices but it was also fueled by the availability of open markets and a rules-based global trading system, along with the investments, advice and experience of the international financial institutions.
For instance, the World Bank and Asian Development Bank have worked together in partnership for more than 30 years, and over the course of that partnership, they have invested more than $70 billion to support China’s efforts to help the Chinese people climb the ladder of prosperity.
I returned today from meetings in Beijing, where I had frank and constructive conversations with Chinese leaders about the state of our two economies, the bilateral issues we face, and the implementation of China’s Third Plenum reforms. In particular we discussed China’s goal of having the market play a “decisive role” in China’s economy, and I made clear that along with reforms, it is important to avoid new policies — including technology policies — that work counter to this goal. I emphasized that the United States welcomes an emergent China that advances peace, prosperity, and stability. Continued strong growth in China, particularly growth based increasingly on consumer spending, supports global growth and prosperity. We welcome China having a significant role in the global economic and financial architecture, along with a growing sense of responsibility for it.
Both our nations have a strong stake in that architecture, and we welcome China as a partner in maintaining and advancing high standards in institutions as we work together to address the challenges of the 21st century.
With China’s economic growth and emerging focus on driving international development, there is considerable interest in how China will integrate into the framework for international economic relations sustained since World War II, how it will use its new influence, and what ideas and ideals it will promote.
I believe that it is in China’s interest to continue embracing the international financial system, which provided the foundation for its four decades of growth and prosperity. But I also understand that China looks back at a history that was shaped while it was a developing economy.
There is a broad spectrum from totally embracing the legacy of Bretton Woods, to starting with a blank slate and writing new rules. The question is where on this spectrum China will land.
And while we begin any conversation based on the lessons we have learned since the Bretton Woods agreements about high standards in trade and investment, development, financial transparency, and macroeconomic and exchange rate policies, we also acknowledge that much has evolved as we learned from our experiences.
As we engage with China about the right approach to high standards for the international financial system, neither the United States nor China can afford to walk away from the institutions that make up the international economic architecture.
I am encouraged by my conversations with China’s leaders, which reflect a strong desire to remain deeply engaged in existing international institutions and a strong desire to benefit from the lessons learned over the past 70 years as new organizations are launched. China’s drive to reform and recognition of the need for high standards reflects the importance of our ongoing engagement.
I would like to discuss today why working together to maintain high standards is in our shared interest. Very early in the Obama Administration we decided to expand the U.S.-China Strategic & Economic Dialogue to serve as a platform to address the most important issues in our bilateral economic and strategic relationship.
From the beginning, a central goal was to strengthen our cooperation with China in the many areas where our interests overlap, to candidly seek resolution of issues on which we have differences, and to strengthen China’s stake and role in the global system. And over time, the S&ED and other high-level engagements have produced real results for the American people:
Since early 2009, U.S. exports of goods to China have roughly doubled, growing much faster than our exports to the rest of the world. Last year, the United States exported around $166 billion in goods and services to China.
Since China de-pegged its exchange rate from the dollar in 2005, the RMB has appreciated approximately 33 percent. Since 2010, the RMB has appreciated approximately 20 percent on a trade-weighted basis. China is also enhancing the transparency of its reserve data, including by adopting the IMF standards for data reporting.
China and the U.S. reached a bilateral agreement on expanding the Information Technology Agreement and China’s commitment in the S&ED to negotiate a Bilateral Investment Treaty with the United States under which U.S. firms would be treated like Chinese firms and given non-discriminatory market access, subject only to a specified list of exceptions.
Together, the United States and China account for a third of global GDP and more than 40 percent of global GDP growth in the last three years. And while we cannot take on all of the world’s challenges, as the world’s two largest economies, we each have a strong interest, as well as a joint responsibility, to pursue policies that support the global economy.
An open and increasingly liberalized global trading system — a system we helped to shape — remains crucial to China’s growth and prosperity, as well as to our own. America’s open economy has fueled growth and opportunity for our businesses, workers, and farmers: it gives us a large and growing market for U.S. goods and services, allows us to leverage our unique ability to specialize in high value-added, technologically intensive products, from agriculture to microprocessors, and supports high-paying export-driven jobs. We have enjoyed tremendous benefits from the global economy, but our workers and firms suffer when there are unfair anticompetitive practices at play. This is why we remain so focused on ensuring high standards in trade agreements and on using the G-20, G-7, and intensive bilateral engagement to prevent countries from trying to grow exports based on persistently undervalued exchange rates.
In the Trans-Pacific Partnership, or TPP, the United States and its 11 negotiating partners are working intensively on an open platform that would set the standard for trade agreements in the Asia Pacific region and to which countries that are willing and able to meet the high standards could potentially accede.
China knows it can enhance its economic growth by opening its economy, but many barriers will need to be removed to achieve this goal. And I believe it is in our common interest to continue to break down barriers to trade and investment, maintain open markets, and protect our workers and the environment by setting high standards.
At the 2013 S&ED, the United States and China announced the start of substantive negotiations on a U.S.-China Bilateral Investment Treaty that incorporates all stages of investment, including the pre-establishment phase.
In what amounts to a sea-change in approach, China committed that the BIT would cover all sectors of the economy, opening all economic areas except for those set out in a negotiated “negative list.” China’s commitment to negotiate on the premise of non-discrimination, fairness, openness, and transparency offers a substantial opportunity to promote investment, and if achieved, will help level the playing field for American businesses to invest and compete in China. But we have been clear – a successful BIT with China will need to have ambitious standards for investment and include real opportunities for our workers and firms.
For that reason, it is critical that the negative list be short, limited in scope and narrowly defined.
As all of you here in the Bay Area and Silicon Valley know well, strong economic growth thrives best in a business climate where incentives to innovate are protected.
The costs of developing a new technology can be enormous, and if goods, services, and technologies can be easily pirated and copied at little expense, there is a dampening effect on innovation. This is true for the United States.
It is also true for China, where the shift towards the development of domestic technology has already begun, and where future economic success will increasingly depend on the ability to generate new technologies. Open and fair competition is critical to innovation. China cannot become a leader in innovation by mandating indigenous technology, either through the transfer of technology as a condition of investment, or by requiring the use of indigenous technology, as China proposes to do with its “secure and controllable” Information Communication Technology measures in the financial sector.
During my meetings in Beijing yesterday, I underscored that policies designed to block foreign technology by imposing unfair disclosure terms or outright bans would damage our bilateral economic relationship. It is important that China and the United States work with others to establish and maintain clear rules in cyberspace. We both have a strong interest in making sure that intellectual property, including trade secrets, is protected and violations are prosecuted strictly and effectively. Cyber-enabled theft of commercial technology or trade secrets, a modern form of piracy, is unacceptable — particularly by state-enabled actors.
China faces enormously complex challenges in making the transition necessary to sustain its growth in the future. These challenges include shifting toward an economy more driven by consumer spending than investment and exports; more driven by services than energy-intensive heavy industry; more driven by innovation and technology than greater inputs of physical capital; and more driven by private businesses than state-owned enterprises.
China’s Third Plenum economic reforms — which promised a “decisive role” for the market in allocating resources — represent a credible and serious path for making the transition in each of these areas.
And while Chinese authorities formulated the Third Plenum to ensure their country’s own long-term prosperity, there is a striking overlap between where China wants to go and what we are urging them to do, such as increased market access, state-owned enterprise and administrative reform, factor price reform, and financial reform.
China moving towards a more market-determined exchange rate has been an important part of our agenda for years, and it remains at the top of our economic engagement with China today. It is important that China continue to move towards a market determined exchange rate. China’s failure to allow the market to play a decisive role in setting the exchange rate has adversely impacted the global economy.
While China has made progress on this front in recent years, its failure over time to allow the exchange rate to adjust has also exacerbated China’s external imbalances through its large trade surplus, and impeded its internal rebalancing by favoring resource allocation to investment, heavy industry, and exports, rather than to relatively employment-intensive economic sectors like services.
At last year’s S&ED, China committed to reduce its foreign exchange intervention as conditions permit. And intervention appears to have declined since. We expect China to continue to refrain from intervention across different market conditions, including in times of market pressure for a stronger RMB.
In a further step toward embracing international standards, at the November 2014 G-20 Summit, President Xi announced that China will subscribe to the IMF’s Special Data Dissemination Standard for reporting foreign exchange reserves. This will bring an important and welcome increase in the transparency of China’s foreign exchange reserves.
If China wants the RMB to increasingly be an international currency, a natural next step in the liberalization and reform of the Chinese economy, China will need to successfully complete difficult fundamental reforms, such as capital account liberalization, a more market-determined exchange rate, interest rate liberalization, as well as strengthening of financial regulation and supervision. This will leave China’s economy more balanced internally and externally. Internally it would be less dependent on investment and artificially low interest rates. Externally it would be less dependent on exports and an undervalued exchange rate.
In sum, as China reforms and liberalizes in a prudent yet thorough manner, RMB internationalization can be constructive for China and the world. China has expressed interest in having the RMB qualify for inclusion in the Special Drawing Rights basket, the IMF’s international reserve asset currently composed of the dollar, euro, pound, and yen. While further liberalization and reform are needed for the RMB to meet this standard, we encourage the process of completing these necessary reforms, and qualifying would reflect important progress.
The international financial institutions continue to provide the best framework for multilateral cooperation on international finance and development. China, the United States, and the world economy have benefitted enormously from the global financial architecture. Both the U.S. and China have a strong interest in preserving and advancing these institutions. China rightly wants to play a greater role, not simply because its economy is large, but because it has a strong interest in, and a responsibility for, maintaining and advancing global stability and growth, and the financial institutions that support these goals.
Simply put, it is not in China’s interest to turn its back on the norms developed over the last 70 years that have been critical to China’s and America’s long-term economic prosperity. And this week’s conversations in Beijing confirmed that this is a shared view.
And the U.S. needs to demonstrate its ongoing leadership and commitment by approving the IMF quota reforms. As I have often said, a strong and well-resourced IMF is in America’s economic and strategic interest, and that is why the Administration strongly supports the 2010 IMF reforms and why Congress needs to pass legislation approving them as soon as possible.
This legislation is essential to modernizing the IMF’s governance and bolstering its ability to respond to urgent international crises — and will preserve the strong role of the United States in the institution without increasing our financial commitment. The IMF repeatedly serves as a first responder, a global economic firefighter aligned with our national security priorities. The IMF is lending to our allies in the Middle East, our largest trading partners, and providing Ukraine with the financial resources it needs to withstand Russian aggression. The IMF was one of the first responders to the Ebola crisis last year.
There is an unfortunate irony here.
The United States proposed the G-20 process at the Finance Minister level in 1999, chaired the first G-20 Leaders meeting in 2009, advocated forcefully and successfully for greater emerging market representation on the IMF’s Executive Board. Congressional approval of IMF reforms will send a clear message to our friends and foes that America is determined to maintain our leading role within the international financial system. And, if the United States does not continue to play its part, others, including China, will step forward to do so.
China’s role in international development has grown and will continue to grow with its economy.
As a dynamic, expanding economy that has lifted millions of its own citizens out of poverty, it makes absolute sense that China now become a contributor to broader international efforts to alleviate poverty elsewhere, a new role for a nation that has long seen itself as the world’s largest developing country. The World Bank and regional development banks do this with concessional windows that support the poorest and most vulnerable countries through grants and loans at below-market rate interest rates. We anticipate that China’s contributions to these concessional windows will increase given the size and growth of the Chinese economy.
During my trip, we discussed the need for America and China to continue our work to address climate change. The joint action on climate change that President Obama and President Xi announced in November injected momentum into the international climate talks and demonstrated that the world’s two largest economies are committed to limiting greenhouse gas emissions and expanding clean energy deployment. We had good discussions about working together on international climate finance. There is more work to be done to fight climate change and the United States looks forward to continuing our close cooperation with China to shape high standards.
We have made clear to China that the United States stands ready to welcome new additions to the international development architecture, including the Asian Infrastructure Investment Bank, provided that these institutions complement existing international financial institutions and that they share the international community's strong commitment to genuine multilateral decision making and ever-improving lending standards and safeguards. The standards and safeguards are designed to foster sustainable development by curbing corruption, preventing environmental damage, and ensuring protection of both laborers and affected communities.
I was encouraged by my conversations in Beijing in which China’s leaders made clear that they aspire to meet high standards and welcome partnership. Our consistent focus on standards has already had an impact and, as lending begins, the test will be the character of the projects funded and their impact on the people and country they serve. Having the AIIB co-finance projects with existing institutions will help demonstrate a commitment to the highest standards of governance, environmental and social safeguards, and debt-sustainability.
The United States recognizes that it bears a special responsibility for the sound functioning of the international financial system given the significant impact of the U.S. economy on global economic conditions and the dollar’s role in international finance system. That responsibility begins at home, through sound fiscal, monetary, and regulatory policies. But our responsibility also extends abroad, including the need to embrace the increased role of emerging markets to reinforce multilateral rules of the road and international cooperation.
To be clear, China and other emerging markets deserve to have their voices heard. They will have an important role in setting rules and standards for the multilateral system in the future. But it is also true that the slate is not blank. There is accumulated experience and knowledge — developed multilaterally and internationally — that should be preserved and built upon. China is much more likely to succeed, and the rest of the world with it, by aiming high.
Let me close by pointing out that, as President Obama has said, America and China have worked to integrate China into the global economy because it is good for China, it is good for America, and it is good for the world.
Together, the United States and China are the globe’s two largest economies, and the actions we take to build prosperity, promote stability, and protect the environment will shape the 21st century. That is why it is in everyone’s interests for China to be a strong international partner. The United States welcomes China’s growing involvement in the global economic architecture, as China assumes a more significant role on the international stage, it falls on China to assume more significant responsibilities. These responsibilities reach far beyond any single issue. They encompass sustainable growth, environmental and worker safeguards, market reforms, the free flow of commerce and access to markets, ideas, and innovation, and the rule of law.
China has important choices to make. These choices will affect the lives of millions today and determine the future for generations to come. The stakes are high. But let me be clear, whenever China works to advance economic opportunity, durable development, and human dignity, America will work with China.