The Asia Foundation
San Francisco, CA
I would like to start by expressing my appreciation to The Asia Foundation for organizing this event. I would also like to thank CalAPEC, the World Affairs Council, Cal-Asia, and the Federal Reserve Bank of San Francisco for acting as co-sponsors. It is a pleasure to be with you here in San Francisco.
As some of you may know, this year the United States is the host nation of the Asia Pacific Economic Cooperation forum—APEC. APEC was founded in 1989 to encourage trade liberalization in the Pacific region, and now includes 21 member economies in Asia and the Americas. The U.S. Department of the Treasury is responsible for leading work on macroeconomic and financial issues with other finance ministries. I have just come from our first event, a day-long meeting with finance officials held here at the San Francisco Fed.
For this evening’s event, I would like to spend a few moments considering the dynamic economic relationship between the United States and Asia. The relationship is dynamic in two senses—it is both growing rapidly and changing rapidly. This dynamic relationship offers enormous economic opportunities for the United States, but also large challenges. I would like to describe some of what we at Treasury are doing in the context of APEC and the G-20, and in our bilateral conversations to make sure that we meet these challenges together with our Asian partners, ensuring the continued close economic relations crucial for rapidly expanding trade in the region and robust job creation here at home. And I look forward to hearing your comments and perspectives given the long and close ties between this city and the Pacific Rim.
Over the past few decades, Asia has undergone a stunning economic transformation. Two generations ago, per capita incomes in much of developing Asia were on par with those in Africa.
Since 1980, per capita incomes in emerging Asia have risen six-fold, lifting hundreds of millions of people from poverty, and elevating many to a middle class standard of living. And over the past decade, the Asia-Pacific economies have accounted for 70 percent of the overall increase in global economic output.
Today the countries of the Pacific Rim, including the United States, generate 54 percent of world output and 44 percent of global trade, collectively forming the world’s largest and most dynamic economic space. Almost 60 percent of total U.S. exports now go to the economies of the Pacific Rim, and six out of America’s 10 largest trading partners are in the region. Over 60 percent of the international students in our universities are from Asia.
These facts will not be surprising to any of you here. In the Bay Area, trade with Asia is already woven deeply into the fabric of your economy. But it bears remembering how recent a phenomenon this is and how profound a change it implies for the world economy.
Looking forward, the role of the Pacific Rim in the global economy will become even more important. The rapidly developing countries in East Asia have emerged robustly from the global financial crisis. While the crisis had a sharp negative impact on trade and activity in late 2008, the growth slowdown was short-lived, and these economies have quickly rebounded to achieve previous rates of growth.
Led by economies of East Asia, the IMF estimates that the emerging markets are growing by an average of 6.5 percent this year, at around twice the speed of our economy, and some face overheating concerns. By contrast, Europe is expected to grow at around half the speed of the United States, held back by weakened financial and fiscal sectors and rapidly aging populations.
It is understandable that at this difficult moment in our recovery, with our unemployment still far too high, many in the United States look across the Pacific with a sense of anxiety, concerned that East Asia’s – and more specifically, China’s – growth is coming at the expense of U.S. jobs.
In fact, strong growth and rapid development in China and the rest of East Asia are an enormous opportunity for U.S. firms and U.S. workers. Our exports to China are growing at twice the rate of our exports to the rest of the world. And the United States is on track to export more than $100 billion of goods and services to China this year. These exports are supporting hundreds of thousands of jobs across the nation, many of them here in California.
But continued strong growth is not assured. The United States and our partners in the Pacific Rim will need to navigate some key challenges in the next few years.
A central challenge will be to bring about a more balanced pattern of demand growth that will avoid large trade imbalances so as to ensure that global growth can be both strong and sustained.
The past decade started off well for the global economy, but strong growth was based on a burst of expenditure and falling saving rates by American households that could not be sustained. The United States served as the world’s consumer of last resort, and several countries in East Asia skewed their economies towards exports, including through policies to keep their exchange rates at undervalued levels.
But growth based on falling U.S. saving rates and a large U.S. current account deficit was unsustainable. The loss of household wealth brought on by the crisis has already led to a sharp rise in U.S. saving rates. Public savings will also need to be raised as the economic recovery continues. The President’s budget aims at bringing our deficit down by half by FY 2013, an important step toward stabilizing the public debt to GDP ratio at a reasonable level.
Given higher household saving and needed fiscal deficit reduction in the United States, global growth will need to become less reliant on U.S. domestic demand.
Accordingly, to assure global growth at sufficient rates, other countries must step up. Surplus economies – and many of the biggest of these are in East Asia – must act to strengthen domestic demand.
Again, to some degree this is already happening, as China and others realized the need to reduce reliance on the external sector as exports collapsed during the crisis. These efforts worked on a broad range of fronts, including macroeconomic, structural and regulatory changes to increase household incomes and strengthen safety nets, and to remove financial and regulatory impediments to investment in services and other sectors aimed at domestic demand. But this progress needs to be sustained.
One of the most important policy shifts to ensure sustained rebalancing will be allowing greater exchange-rate flexibility in surplus economies. Allowing exchange rates to appreciate in line with market forces will raise household disposable incomes in real terms, supporting consumption, and help shift resources from producing for export to producing for the domestic market. More flexible exchange rates will also provide more scope for monetary policy to address over-heating pressures.
This is also starting to happen but too slowly. Since last June, China has allowed the RMB to appreciate by around 3.8 percent against the dollar, or around 10 percent in real terms on an annual basis, taking into account China’s higher inflation rate. But China’s currency remains substantially undervalued, and this is putting pressure on its neighbors and trading partners to adopt measures to prevent their own currencies from appreciating.
The global rebalancing agenda is at the core of multilateral and bilateral economic policy cooperation. In Paris last weekend, G-20 Finance Ministers reconfirmed their commitment to coordinated policy action to achieve strong, sustainable and balanced growth, including by enhancing exchange rate flexibility to better reflect underlying fundamentals. Ministers made important progress in agreeing on indicators that would be used to identify excessively large imbalances that require policy actions. This work should produce concrete results by the end of the year.
The rebalancing agenda will also be front and center for us in our discussions with finance officials at APEC. We began that conversation today at our first APEC finance deputies meeting. We had useful discussions on continuing imbalances in the regional outlook, sharing experience and best practices on how to deal with volatile capital flows and how to encourage productive infrastructure investment.
Let me now turn to a second major challenge that we must face together with partners around the Pacific Rim, that of ensuring a level playing field for U.S. and Asian businesses, including free and fair access to each other’s markets and appropriate protection for investment and intellectual property rights. As East Asian emerging markets continue to develop, they will provide ever expanding markets for U.S. exports, a profitable destination for our investment, and a source of inward investment into the United States. Over time, they will increasingly generate new technologies and ideas that will enrich all of our lives.
We have already seen this happen with countries like Japan, Korea and Singapore, whose living standards, capacity for innovation, and use of technology are on a par with or exceed what we see in many countries in the West. We should naturally expect a similar pattern to be followed by China and other rapidly growing emerging Asian countries, as they also move up the value chain.
But as trade and investment grow in volume and complexity, international institutions and agreements must keep pace. That means continued efforts to reduce barriers to trade and investment, including “next generation” agreements that expand free trade while ensuring a level playing field for companies and workers
In the coming weeks, we will submit to Congress a Free Trade Agreement with Korea. The agreement will strengthen a vital strategic alliance and enhance job growth, supporting at least 70,000 American jobs and boosting annual exports of American goods by $11 billion.
We are currently in negotiations with eight of APEC’s most dynamic economies to launch the Trans-Pacific Partnership, or TPP, which will better integrate the Asia-Pacific economies, foster trade and investment, and create jobs on both sides of the Pacific. For example, in addition to the high standards of the previous U.S. free trade agreements, we expect that the TPP will address regulatory transparency, reduce behind-the-border obstacles to trade and investment, better integrate small- and medium-sized enterprises into international trade and investment, and take into account modern supply chains to further facilitate regional integration. The TPP will also be a "living agreement" designed with the capacity both to add additional countries willing to take on TPP obligations and to review, and update, provisions to ensure they keep pace with evolving technology and business practices. Many other APEC economies are closely monitoring the negotiations with a view to joining the accession process.
I would also emphasize that we have been working hard in our bilateral relationship with China to level the playing field for U.S. firms, including with respect to China’s indigenous innovation policies and government procurement, as well as protecting and enforcing intellectual property rights. As with many successful economies before it, Chinese leaders are focused on increasing domestic technological sophistication and ability to innovate. While promoting innovation is a laudable goal, Chinese innovation policies that limit market access or otherwise disadvantage foreign firms, technologies, products and services are of serious concern to the Administration and U.S. industry.
As we have seen in other successful economies, critical factors in China’s development of a robust innovative capacity must include innovation policies that are consistent with the key principle of non-discrimination, strong protection and enforcement of intellectual property rights and opening up opportunities for government procurement to new entrants. While much work remains to be done in these areas, we do see progress, including through the important commitments China made during the recent visit by President Hu. As we continue to engage with China, we will work on implementation of those commitments and continue to press for further progress.
Finally let me underline the U.S. commitment to continuing to deepen multilateral cooperation with Asia for shared prosperity. As Asian economies continue to grow, it is right and proper that they are full partners in the global economic and financial architecture of which Asia has been a beneficiary – helping to shape it, and committed to preserving and strengthening it.
The United States has supported the rising prominence of the G-20 as the primary forum for global economic and financial cooperation, reflecting the importance we place on giving major Asian and Pacific economies like Australia, China, India, Indonesia, Japan, and Korea a strong role in shaping global economic outcomes.
We see APEC as a critical forum for economic and political partnership for a broader range of economies on both sides of the Pacific, bringing together advanced and emerging economies with strong shared interests in reducing barriers to trade and investment. It is clear that the U.S.-Asian relationship must play an even more central role in underpinning global economic stability after the crisis. The great challenges of the day cannot be solved without our cooperation. The United States looks forward to continuing to play a leadership role in shaping the economic and financial future of the region, bilaterally and through organizations such as APEC, for the benefit of our country and others in the region. But we recognize the importance of partnership and shared responsibility as together we must take the decisions crucial to the continuing prosperity of the Pacific Rim.
I would now be happy to take your questions.