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Press Center

 Remarks of Under Secretary Sheets at the National Press Club, Event hosted by Brookings Institution


12/3/2014

 

WASHINGTON - Although we are seeing a strengthening recovery in the United States, the overall performance of the global economy continues to fall short of aspirations.  We have not yet achieved the G-20 Leaders’ desired outcome of strong, sustainable, and balanced growth.  From the weak economic news in Japan and Europe, to the outbreak of the Ebola virus, to the ongoing developments in Ukraine, the challenges facing economic policymakers remain as essential and urgent as ever. 

With this in mind, I would like to highlight a series of six issues that the Office of International Affairs at the U.S. Treasury sees as its core policy agenda for the years ahead.  Along the way, I will also discuss some major initiatives that we are pursuing to address these issues.  My comments will not be exhaustive, but they will frame what we see as our key challenges and opportunities in the international economic sphere.

Let me begin by noting that our work is grounded, first and foremost, in supporting a growing and vibrant U.S. economy.  Our economy benefits from – and in many ways depends on – an international economic and financial environment that is conducive to sustained, job-rich, and inclusive growth.  This is equally true for our partners around the world.  This shared reality provides the foundation for our collaboration in multilateral settings, including the G-20, and for the valuable ongoing dialogue that we have with many partners bilaterally.

Strengthening and Rebalancing Global Growth

I was recently in Brisbane, Australia for the G-20 Leaders’ Summit, where we had vigorous discussions about growth and global rebalancing.  These discussions reflected not only the varying economic trajectories of the countries involved, but also a persistent and deeper asymmetry in the international economic landscape.  As countries with current account deficits accrue external indebtedness, they often face market pressures to adjust.  But surplus countries have not faced symmetric pressures.  The historical record highlights that some countries have been able to engineer policies – particularly policies to suppress domestic consumption – that have allowed their current account balances to remain in meaningful surplus for long periods.  

This asymmetry has unwelcome implications for the global economy.  To the extent that global adjustment is driven by demand compression in deficit countries, global trade and output will contract.  This is a “lose-lose” proposition, with adverse effects on global employment and economic welfare.  In contrast, a more balanced adjustment, in which surplus countries move to strengthen domestic demand, offers the prospect of “win-win” outcomes.  Rising demand in surplus countries reflects increased desired levels of consumption and investment – which is a good thing – and spurs exports and production in the rest of the world – which, of course, is also a good thing.

Unfortunately, we are not seeing the policies that would drive such “win-win” rebalancing and growth often enough in the world today.  In Europe, for example, the recovery remains fragile and uneven with weak demand, and some countries are still overly dependent on exports for growth.  As Secretary Lew highlighted in Brisbane, status quo policies in Europe have not been sufficient to achieve our shared G-20 growth objectives.  It is critical that countries with large external surpluses and fiscal space pursue demand-boosting policies, such as investment in infrastructure.

Although its external surpluses have receded, Japan also has a role to play in supporting rebalancing and achieving “win-win” global growth.  The country’s recent data make an urgent case for a reinvigorated application of all three arrows of Prime Minister Abe’s economic plan – particularly structural reforms that would support domestic demand growth.  Sustained Japanese economic recovery and escape from deflation are vital not only for Japan, but also for the global economy.  Prime Minister Abe has now postponed the consumption tax, but it is still important – as Secretary Lew said last month – for the fiscal stimulus measures the government is preparing to more than fully offset the impact of expiring stimulus measures.

To achieve desired rebalancing, policymakers must work together toward mutually beneficial growth strategies.  This is why we have advocated in the G-20 and elsewhere the importance of boosting demand.  We are encouraged that there is a growing consensus on this issue; in Brisbane, Leaders agreed for the first time that a “shortfall in demand” is holding back the global economy.  This shared understanding is an important step, but it only opens the next chapter in an ongoing dialogue regarding the necessary roles of surplus and deficit economies in supporting balanced global growth. 

Deepening Engagement with Emerging-Market Giants

A closely related priority for us is to continue, and deepen, our engagement with the world economy’s emerging giants, notably China and India in Asia, as well as Mexico and Brazil in Latin America. 

We are committed over the next two years to finding ways to continue to strengthen our bilateral relationship with China – such as by advancing negotiations on a high-standard bilateral investment treaty – and to work together in multilateral settings. 

China faces challenges in maintaining its own growth in the years ahead.  The country’s expansion over the past three decades – although extraordinary by any measure – was based heavily on abundant cheap labor, outsized investment, an emphasis on industry, and rapid growth in exports.  This is no longer a viable model of growth for China, or for the world economy.  The ambitious Third Party Plenum reforms are squarely aimed at achieving sustainable growth by rebalancing toward household consumption instead of exports, and toward the services sector instead of industry.  One critical piece of this agenda – and one on which we are actively engaged with the Chinese – is the continued reform and development of the financial sector, in order to increase its capacity to provide financing to the new, small, and private enterprises that will drive future growth. 

Also critical to China’s success – and an area of particular importance to us at the Treasury – is China accelerating its move to a market-determined exchange rate.  China has made real progress, but more work remains to be done.  At this past S&ED in July, China committed to move to a market-determined exchange rate and to reduce intervention as conditions permit.  If China continues to live up to this commitment, as it has in the months since the S&ED, and allows the exchange rate to adjust, the result would be increased household purchasing power and stronger domestic demand.  This would support a shift in China’s economy away from investment and exports, and toward services and consumption-led growth.  It would also promote a “win-win” growth scenario by increasing opportunities for U.S. firms and workers to sell into a growing Chinese domestic market.

At this past S&ED, China also affirmed it was engaged in technical discussions with the IMF to subscribe to the Special Data Dissemination Standard (SDDS) to increase the reliability and transparency of its economic and financial data.  In Brisbane, President Xi announced that China would take this important step and formally subscribe to the SDDS.  This promises to increase the transparency of China’s foreign exchange reserves and support the move to a more market-determined exchange rate.   

We also have an important window of opportunity to deepen our economic engagement with India.  Prime Minister Modi’s sweeping election victory and economic reform platform have the potential to transform India – by restoring higher growth and expanding economic opportunities in what will soon become the world’s most populous country.  India and its people share with the United States an entrepreneurial spirit, a commitment to a vibrant private sector, and a record of economic growth built largely on domestic demand.

Over the next two years, we plan to focus significant attention on the U.S.-India Economic and Financial Partnership – the U.S. Treasury’s main vehicle to engage on economic issues with India.  Through this Partnership, we will support India in its growth and reform efforts and encourage the greater opening of India’s economy to U.S. firms.  This is, again, a “win-win” proposition.  We can create new growth and employment opportunities in the United States by further opening this growing market for U.S. exports, improving the climate for U.S. investment in India, and leveling the playing field for U.S. companies.  For India, faster growth, deeper financial markets, and greater openness to trade and foreign investment promise to raise incomes, reduce poverty, and bring many more Indians into the global middle class.

There are also important dynamics drawing us toward our neighbors in Latin America and the Caribbean.  For example, many of the countries in this hemisphere have made meaningful strides in creating a vibrant middle class.  This growing consumer demand can be a bridge to deeper trade and investment linkages with the United States.  Fortunately, we have strong economic ties throughout the region, including through free trade agreements with Mexico, Chile, Peru, Colombia, and the countries participating in the CAFTA-DR agreement.  We are strong supporters of the aspirations of the Pacific Alliance for deeper integration among their own economies, with the United States, and with the Asia-Pacific region.  And there is potential for a broader U.S. relationship with Brazil – the region’s largest economy.  With the retrenchment of commodity prices, the challenges in Latin America and the Caribbean include raising saving, increasing productivity through investment in human and physical capital, and generating jobs.  I look forward to engaging my counterparts across the region on these issues.  

Framing a Resilient Global Financial System

Achieving strong global growth, although important, is not enough.  To be sustained, growth must be built on a resilient financial foundation.  This reality has prompted our work in the years since the financial crisis on an ambitious program of cooperative international financial regulatory reforms within the G-20.  Ongoing implementation of this agenda is essential to create a safer and sounder global financial system and help ensure a race to the top in which all countries implement high-quality standards.  And we have made important progress.  Today, banks are generally better capitalized, less leveraged, and have stronger liquidity buffers than in the years before the crisis.  G-20 countries have implemented financial sector reforms in other key areas as well, including promoting more resilient over-the-counter derivatives markets and market-based financing.  In both areas, the United States has forged ahead as a leader in reform.

Brisbane marked a significant milestone in this effort.  The total loss absorbing capacity (TLAC) standard announced in Australia reflects the collective determination of G-20 countries to help protect taxpayers from bearing the costs of a systemically important cross-border bank’s failure.  Building on our work to bolster bank capital and liquidity, this TLAC standard will help authorities resolve failing global banks in a more orderly manner.  The United States encourages the Financial Stability Board to finalize this important standard by the end of 2015. 

We should similarly remain engaged across the entirety of our financial reform agenda, particularly as the FSB shifts from the initial phases of reform toward greater focus on evaluating implementation milestones and monitoring emerging risks and vulnerabilities.

Facilitating Access to Capital

This discussion gives rise to another of our priorities—finding ways to enhance access to capital in developing countries.  Expanding access to financial services for the over 2 billion unbanked people in the world promises to open new possibilities as the financial wherewithal in these populations grows.  Expanding access to finance and deepening financial markets in Africa, the Middle East and other developing regions will support businesses, empower entrepreneurs, boost household incomes, and ultimately help fuel growth across developing economies.  This is why we are working in the G-20 and with other partners to broaden access for developing countries, and to make access to capital within these countries more inclusive. 

This is a challenge that must be met in a variety of ways.  The World Bank and the other multilateral development banks should use their balance sheets to catalyze private investment.  Steps should also be taken to strengthen financial intermediation and encourage the growth of financial markets in countries where investment has been too scarce.  Investment capital in advanced economies is increasingly restless and looking for higher rates of return, so developing countries with sound policy environments should be well-placed to attract investment. 

Let me highlight one particular aspect of this challenge.  Treasury is deeply engaged, along with the G-20 and the multilateral development banks, in an ongoing effort to ensure that personal remittances can be sent between countries in a reliable, safe, and efficient way.  Global remittances are estimated by the World Bank to total more than US$500 billion annually, and are on a rising trajectory.  In many countries, remittance inflows surpass the level of official development assistance.  Remittances help the world’s poor meet basic needs, and we need to further explore their potential as a source of development finance. 

Treasury’s technical assistance program helps developing and transition countries build a regulatory environment and systems infrastructure that increase access to capital and financial services in a variety of ways – not only by facilitating remittances, but also by supporting traditional financial institutions and new digital platforms.  We are also working with our G-20 partners to tackle these issues.  In Brisbane, we encouraged countries to take steps to strengthen remittance markets and facilitate competition that could reduce the costs of sending remittances across borders.  And, we are continuing to deepen our understanding of these markets, including by supporting a major data collection effort at the World Bank.  These data will also help us identify vulnerabilities, as well as risk management practices, across this increasingly prominent market.

Another important aspect of broadening access to capital is what is now termed “climate finance.”  The United States has been a leader in efforts to catalyze finance to support lower-carbon technologies and enhanced energy efficiency, and to help communities adapt and become more resilient to the impacts of climate change.  President Obama recently announced a $3 billion pledge toward the new Green Climate Fund.  This Fund will be a leading source for channeling resources for both mitigation and adaptation, and is designed to work with the private sector to mobilize funds from investors who might otherwise remain on the sideline.  These investments in clean technologies and climate resilience are designed ultimately to reduce costs and spur innovation and job growth.  Treasury will work to shape the international climate finance architecture, so that we are maximizing value for money and advancing key U.S. priorities.

 

Promoting Open Trade and Investment

The next area I will touch on is our work promoting more open trade and investment.  Increased U.S. access to foreign markets, and the consequent rise in exports of our goods and services, is an important source of job creation in the United States.  Imports provide choices for U.S. consumers and foster productivity improvements.  Openness to inbound and outbound investment strengthens capital formation in the United States, while expanding the canvas on which U.S. firms are able to compete and invest.  There are few policy measures that can do more to deliver job creation and sustained high-quality growth than ambitious and balanced trade and investment agreements.

The President’s recent visit to Asia advanced negotiation of the Trans-Pacific Partnership (TPP).  This landmark agreement will further open trade and investment among twelve dynamic economies in the Pacific Rim, and this ambitious market-opening will be complemented with high standards on labor, environment, intellectual property rights, and state-owned enterprises.  Asia’s middle class will increasingly play a pivotal role as consumers in global markets in the decades to come.  Thus, TPP will further integrate the U.S. economy with a rapidly growing region of the world.  These negotiations have progressed significantly in recent months, and TPP Leaders have made finishing the agreement a top priority.  Additionally, the agreement’s architecture is designed to be inclusive – it will remain open in the years ahead for other countries in the region willing to meet its high standards.  

While TPP has been in the headlines recently, we also continue to work toward a broad-based Transatlantic Trade and Investment Partnership (T-TIP) with the European Union and on promoting services trade through a plurilateral Trade in Services Agreement.  Of course, we are also vigorously engaged in strengthening the multilateral trading system.  Our commitment to the WTO was demonstrated in the recent breakthroughs with China regarding the Information Technology Agreement (ITA) and with India on implementing the Trade Facilitation Agreement (TFA).  We are hopeful that these developments will give momentum to multilateral efforts. 

 

Enhancing U.S. Leadership in the IMF

Finally, I turn to an issue that is both timely and important.  We at Treasury—and the Administration more broadly—are firmly committed to securing approval for the 2010 IMF quota and governance reforms.  The IMF has played a central role in promoting international monetary cooperation and global economic growth since its inception. The U.S. economy and our national security directly benefit from the IMF’s efforts to prevent and respond to global economic and financial turbulence, and we benefit as well from our central role at the Fund. 

The 2010 reforms preserve the U.S. role in this institution, and do so without increasing financial commitments from the United States.  Without these reforms, emerging economies may well look outside the IMF and the international economic system that we helped design, potentially undermining the Fund’s ability to serve as a first responder for financial crises around the world, and also our national security and economic well-being.  The rest of the world has already enacted these reforms.  We should too. 

This discussion underscores a related issue.  Currently, there are six nominees to positions as Executive Directors or Alternate Executive Directors at the IMF and the multilateral development banks that remain unconfirmed by the Senate.  Operating without a full U.S. leadership team in place in these institutions limits our reach and influence at a time when we are working on a range of pressing challenges.  Seeing the Administration’s talented nominees confirmed is a critical step in our efforts to advance U.S. interests in these institutions.

Concluding Thoughts

I will stop there, in the spirit of focusing on priorities and being selective.  As I mentioned at the outset, this list of issues is hardly exhaustive, but these six represent the pillars of our work program.  Treasury has analytical priorities to pursue out of concern and out of necessity.  We cannot focus solely on today’s challenges but must also anticipate tomorrow’s.  In this spirit, we will actively explore a number of issues on the horizon for economic policymakers.  We are, for example, continuing to deepen our understanding of global demographic trends and what they are likely to mean for economic performance and for the ebb and flow of capital and labor resources across countries in the decades to come.  We are also focused on broadening our understanding of the macroeconomic significance of small and medium sized enterprises, which contribute meaningfully to job creation in the United States and elsewhere.

In many areas that I’ve discussed today, we may see tangible results in the near term – like the progress we have made recently on financial reform, climate finance, and the multilateral trading system.  But even these concrete steps are frequently the result of the often unnoticed and gradual work that we do every day in building stronger relationships and deeper shared understanding.

We look forward to working with all of our partners in the United States and around the world to build an ever more durable foundation for shared economic prosperity.

 

Thank you. 

 

 

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