Robert D. Hormats
Under Secretary for Economic, Energy and Agricultural Affairs
Hosted by Mayor Villaraigosa
Los Angeles City Hall
Los Angeles, CA
September 13, 2011

Thank you Mayor Villaraigosa for that kind introduction. It is a pleasure to be back in Los Angeles, but it is a special pleasure to be speaking here at the invitation of the mayor. In my capacity as Under Secretary of State for Economic, Energy, and Agricultural Affairs, I know first-hand the international economic significance of Los Angeles. It is one of the most critical links between America and the global economy. You have a mayor who understands the importance of that link, and who works hard to cultivate it, particularly with respect to Asia. I’ve read with interest recent reports by the Los Angeles Economic Development Council, which demonstrate the dimensions of this region’s connections with the countries of the Pacific Rim.

  • Countries in the Asia-Pacific region were the destination for nearly two-thirds of L.A.’s $105.3 billion worth of exports in 2010.
  • Your ports and airports handle approximately 40% of two-way trade between the United States and China;$190 billion in trade passed through them to and from China in 2010.
  • Southern California’s two-way trade with Japan increased by 26% to $53 billion in 2010. And trade with South Korea increased an incredible 37 percent to $24 billion.

These well-established and growing economic connections with Asia makes you well-positioned to take advantage of the President’s National Export Initiative (NEI) and other trade policies I will be discussing. Los Angeles – and indeed all of California – with its innovative sprit, entrepreneurial people, and openness to the global economy also represent the keys to American competiveness in a changing and more interconnected global economy. The world of the early 21st century is increasingly linked by new technologies, rapid increases in international trade and financial flows, global supply chain networks, a diffusion of innovative centers around the world, and the rapid proliferation of competitive companies. It poses both tremendous opportunities for trade and investment – and job creation – as well as new challenges for America.

In Asia alone, hundreds of millions of people have been lifted out of poverty. They are now part of a rising middle class and form a new generation of engineers, scientists, entrepreneurs and innovators. They can and will be major competitors, but they can also be important consumers for American goods and services – from computers to movies to agricultural products.

And young people in greater numbers than ever before are now connecting to the global community, and demanding their own opportunities and freedom. We see this most vividly today in the Middle East, but it is truly a global phenomenon. They want the same opportunities that American kids want.

What we see when we look at the sweep of events over the last couple of decades is that power in the global system is shifting from West to East, from military to economic instruments, and from countries which are highly indebted financially to those with more available funds.

During the Cold War, nations focused on building and projecting military power. In the early 21st century, most are focused on building and projecting economic power.

These changes reflect an emerging global system where economic competition is intense – and very different from that of recent generations. We face a wide range of competitors. But, in a networked world, many of these also will be vital partners as well as tough competitors because increasingly innovation is a cross-company, cross-border phenomenon. A handful of these rising economic powers will account for much of the world’s growth this year and for years to come. A few of them wield enormous financial power and exert great influence in global institutions.

We also are witnessing the growing role of State-sponsored and supported enterprises, and sovereign wealth funds, which are producing a new model of state-led capitalism. This is beginning to compete with the more open market-driven trading and investment model that has been the primary driver of innovation and global growth in the last few decades. The emergence of this model has the potential to dramatically change a global economic system that has facilitated not only our own prosperity, but also the prosperity of countless others around the world, including the Asia-Pacific region.

How we respond to this changing landscape will have enormous implications for our prosperity and security here at home, and for our influence around the world. In this environment, to have a successful foreign and national security policy we must have a strong economy here at home with robust job creation and sustainable finances.

At the same time, a well-constructed international economic policy that boosts exports and attracts foreign investment and supports the interests of American companies is necessary to strengthen our domestic economy. Because no matter what happens in China or elsewhere, our success in the global economy depends on our policies at home. If we have issues with China or anyone else, we should certainly raise them, but blaming China for our problems is not the answer to our problems. The answers must be found at home.

It also is necessary to reinforce the global economic order on which U.S. prosperity and opportunity increasingly rests. In a globalizing world, these two goals – a strong domestic economy and an effective foreign economic policy – are intimately linked. Each reinforces the other, and both are critical to a strong foreign and national security policy.

I want to speak to you today about what we in the State Department and other agencies in the Obama Administration are doing to address the challenges we face today, and likely will for some time to come.

  • First, what we need to do to ensure economic strength at home, because that is also the source of our strength abroad and of the global economy.
  • Second, how we can utilize U.S. international economic policy to strengthen our economy at home with particular emphasis on private sector-led job creation.
  • Third, what new international rules and norms are required for a fair and well functioning global system in the 21stcentury.
  • And fourth, how the structure of international economic cooperation can be strengthened in Asia.

I. Building a Strong Domestic Economy
First, to build strong economies at home, governments throughout the industrialized world need to strengthen their economic structures and build a solid foundation for more sustainable and inclusive economic growth and job creation. Most governments in the Western World, including the United States, for several decades have been living beyond their means and making financial promises that cannot be kept.

By now many people have come to recognize that this course is not sustainable. But the political process in most nations has found it difficult to change course. And public expectations of their politicians make it difficult even for those who do see the need to make the necessary changes to take bold action.

But the fact remains: we all must bring spending and revenue into balance over the medium term and promise only what can be paid for without placing a terrible burden on future generations. The public mindset needs to change, and political leaders in many nations need to start the process of changing it. This is needed if they are to have the political support required to fundamentally alter policy.

A new approach to public policy is needed that is realistic and sustainable. For large numbers of people in Europe and the U.S., household consumption will need to be ratcheted down while savings are rebuilt. Likewise, government services will also have to be ratcheted down for a large portion of the population, while sparing those who most need assistance.

The focus of our programs in the U.S. will need to be on strengthening investment in education, infrastructure and research and development – all designed to make our country and our workers more productive, innovative and competitive. The resources must come from a higher rate of savings and from using domestic and foreign capital, and tax revenue, for more productive purposes.

This requires a new paradigm. Recovery cannot be based on increased borrowing to feed unsustainable consumption in the industrialized nations. It must be based, in this country, on investing our savings wisely to strengthen America’s economic future and to create new opportunities for American workers in competitive and creative industries.

It is, quite simply, a national imperative – if we want to have a prosperous future with good jobs – to invest far more in those parts of our economy that will make our citizens and businesses more innovative and competitive. The world is doing this at a rapid pace. We must do it even more rapidly.

And the consensus on the improved tax, revenue, regulatory, and spending policies needed to produce this result will not come from acrimonious, divisive debates in Washington. It requires a search for innovative answers and sustainable solutions of the kind that have been so vital to America’s past successes.

In his speech to Congress last week, the President announced a comprehensive jobs plan that aims to help America’s small businesses hire and grow, rebuild and modernize America, provide pathways back to work for Americans looking for jobs, and grant tax relief to every American worker. Now we need to implement this plan, and at the same time, pursue an international economic policy that also supports job growth.

II. An International Economic Policy that Supports Private Sector Jobs
Under Secretary Clinton’s leadership, the primary task of the State Department’s international economic policy is to promote American economic success in the global economy. That means crafting policies that help create and sustain the growth of well-paying, productive American private sector jobs. We do so by using a wide range of tools: promoting exports, protecting intellectual property rights, attracting foreign investment, and supporting a fair international business environment.

Success also requires that we strengthen the rules and institutions of the global economy in ways that are consistent with our long-term interests. We are taking action in several key areas:

The President’s National Export Initiative
The President has set the goal of doubling American exports over five years to support two million new U.S. jobs. To achieve this goal, we have mobilized senior officials in the Department and in our embassies abroad.

As Secretary Clinton has noted, “Other businesses from other countries have a strong partnership with their government; whether it’s state-owned enterprises from China or private companies from Europe, they often have much more support from their governments than we have in recent years given to our businesses.”

We believe that American businesses should receive the same enthusiastic and forceful support from the top levels of our government as foreign competitors receive from theirs. This is vital to creating jobs at home. Exports currently support 10 million American jobs. We know that by helping more companies, including more and more small and medium sized companies, to export and tap new markets, we can substantially boost that figure.

But we also know that many of the largest American companies are our biggest exporters. They frequently must compete against national champions abroad, supported by foreign governments. So we work closely with them to actively advocate for their export sales – and do likewise for smaller companies as well. The profits our companies make from sales abroad play a key role in funding more research and investment at home. And that will lead to additional well-paying jobs for Americans.

There is a temptation during periods of high domestic unemployment to turn inward. But that is exactly what we should not do. That would cost us jobs, not increase them. Instead, we must take greater advantage of opportunities to increase our exports. With 95 percent of all the world’s consumers living abroad, expanding trade must be a central component of any job creation strategy. We have a “force in the field” of 1,000 economic officers around the world in our embassies. They are committed to this effort.

Protecting American Intellectual Property
Our greatest assets in today’s knowledge-based economy are the ingenuity and creativity of the American people. No state understands this better than California. The creativity of cell phone makers in San Diego, internet companies of Silicon Valley, and the entertainment industry in Los Angeles are among the most important generators of high quality jobs. And all are threatened by piracy and forced transfers of intellectual property.

The President has declared the Administration’s commitment to “aggressively protect our intellectual property… It is essential to our prosperity and it will only become more so in this century.”

My colleagues and I meet regularly with business leaders, union officials, and the technology, entertainment and pharmaceutical industries to identify problems in this area and forge effective responses. Protecting our intellectual property – the patents, copyrights, trademarks, innovative technologies, and creative products that drive our economic growth – against piracy, counterfeiting, forced transfer, and discriminatory procurement practices is a core economic interest of the United States.

The stakes for American jobs are high. The information and telecommunications sector alone – one of the many sectors in our country that depend on intellectual property and constant innovation – employs five million people. The entertainment industry in this region employs several hundred thousand of people, and many more depend on it indirectly.

And we want to enable American workers and businesses to continue innovating, creating, and designing the products that will ensure our prosperity for years to come. Ensuring that their innovative products are protected against intellectual property theft is essential to doing this.

Ensuring a Welcoming Environment for Foreign Investment in the United States
President Obama recently reaffirmed the United States’ commitment to an open investment policy. Foreign investment – from the early days of our Republic – has made an important contribution to American economic growth. Investments by foreign-based companies in the U.S. support roughly 5.5 million American jobs in highly unionized and largely non-unionized states alike.

About 4.6 percent of all American private sector workers are employed by foreign-based multinational companies that invest here; two million of these are in manufacturing jobs. Foreign investments account for nearly 15 percent of the research and development in the U.S. and 18.5 percent of our goods exports.

In a highly competitive world, it is vital that we work to make sure that America remains a destination of choice for foreign investors. In pursuing foreign investment, the State Department is engaging in creative ways both with business communities – at home and abroad – and with government at all levels. For example, we have brought together the National Governors Association and their Chinese counterparts to build greater trade and investment ties.

Governors and mayors know the best ways to create jobs through investment from overseas. They understand firsthand the local impact these investments can have. The first U.S.-China Governors Forum was held in Salt Lake City this July, and I am planning to participate in the next forum in China in October. Governors, mayors and other officials, as well as American Chambers of Commerce, can be “force multipliers” in this area. As we are required by budgetary realities to conduct a more frugal foreign policy, they will all be more important.

III. Forging a Competitive International Economic System
The third key element of our foreign economic policy is to forge an international economic system that addresses the challenges of the 21st century. A major priority is to strengthen and adapt the international economic system. To do so, we need new, or newly-adapted, institutions and norms that are rules-based, transparent, and fair, so that all workers and companies can have the chance to compete on their own merits. Fortunately, we do not have to build all of these from the ground up.

To provide some historical perspective: the last time the international economy underwent a profound structural change was at the end of the Second World War. And that was even greater than the one we face today. All the institutions that had existed before the War, had failed to prevent it and to avert and quickly end the Depression that preceded it. The global system was thoroughly discredited. In this environment, visionary statesmen like Truman, Marshall, and Acheson built a new world order of remarkable strength and longevity. This included truly global institutions, such as the U.N. In economic policy, it included the IMF, the World Bank, the Marshall Plan, the GATT (later the WTO), the OECD, and the regional development banks. A full measure of the success of these institutions can be seen in the fact that when the Iron Curtain eventually came down – and the Bamboo Curtain along with it – these regions sought to re-join the global economy within the framework of the existing international system created after World War II.

But the international economic geography has changed dramatically over the last decade. New economic powers have become important players in global finance, trade, investment, and technological innovation. We need to encourage rising economic powers to assume responsibility for the international economic system consistent with their commercial and financial strength and the benefits they derive from its openness and stability. Their doing so also will significantly improve prospects for American firms and job growth.

Increased engagement in such forums as the G-20 and in bilateral arrangements such as the Strategic and Economic Dialogue with China, the U.S.-India Strategic Dialogue, and the U.S.-Russian Bilateral Presidential Commission will be important instruments to establish a more solid framework for our relationships, and will serve to strengthen the global economy.

We especially have focused over the past year on how we ensure that American business can compete on the basis of fair international rules and practices in situations where state-owned or state-supported companies receive preferential treatment. Such practices give them a competitive advantage over private sector firms – and harm American companies and American jobs. It is not up to the U.S. to question the wisdom of other nations in establishing state enterprises. But it is very much a U.S. concern if the playing field is not level between them and their American competitors.

SOEs and SSEs (State-Supported Enterprises) in several cases have gained domestic and international market share in large part because they are enjoying financial support, tax preferences, regulatory privileges and immunities from anti-trust law not generally available to privately-owned competitors. These privileges are often reinforced with discriminatory market access or government purchasing policies. The Organization for Economic Cooperation and Development (OECD) is working on principles for “competitive neutrality.” We hope for constructive participation of emerging economic powers such as China, Russia, Brazil, and others.

IV. Centrality of the Asia Pacific Region
As Secretary Clinton said during a speech at the East-West Center in Honolulu in January 2010, “America’s future is linked to the future of the Asia-Pacific region.” The leaders of the region’s economies will gather in Honolulu this November when President Obama hosts the Asia-Pacific Economic Cooperation (APEC) Summit. Preparations are in full swing. I just came from San Francisco, where I hosted the APEC Energy Policy Roundtable yesterday. I’ll return tomorrow to speak at the APEC Women and Economy Summit. This is an important new agenda item this year.

We also are focusing this year on the Korea Free Trade Agreement (KORUS) and the Trans-Pacific Partnership (TPP). I want to explain how we see all three of these Asia-focused initiatives advancing U.S. economic interests.

U.S. Policy and APEC
APEC is of critical importance to the U.S. economy. Seven of America’s top 15 trading partners are members. Sixty percent of U.S. goods exports are going to other APEC economies. And last year, U.S. exports to APEC members grew much faster than exports to rest of the world. The 21 member economies together represent more than half the global economy and 44 percent of world trade.

We want to make progress towards building a seamless economy in the Asia-Pacific by finding practical and concrete ways to strengthen regional economic integration, expand trade, and advance regulatory cooperation and convergence. There are several characteristics of APEC that are particularly valuable, including:

  • It is a mechanism to prevent barriers to trade from emerging and reduce those that do exist, including cumbersome regulatory barriers.
  • It includes a process that translates high-level commitments into tangible results.
  • It focuses on private sector engagement.

As host of APEC 2011, we want first to strengthen regional economic integration and expand trade by advancing common trade and investment practices. Second, we want to find ways to promote environmentally sustainable growth by reducing barriers to trade in environmental goods and services. We also want to streamline import procedures for advanced technology vehicles. Third, we want to advance regulatory cooperation and convergence to reduce excessive burdens on trading in the region.

Korea-U.S. Free Trade Agreement (KORUS)
In line with these objectives, we seek urgent Congressional passage of the KORUS. Passage will be an important signal of our economic commitment to region. When passed, it will cement closer political and strategic partnership with a key ally – and support a lot of American jobs. If it fails, American jobs will be lost and so will America’s credibility in the region. KORUS will offer market-opening opportunities that will help to achieve our export objectives.

This is why President Obama is pursuing congressional approval of KORUS, together with necessary Trade Adjustment Assistance, as soon as possible. He is also seeking passage of our FTAs with the Colombia and Panama. The passage of the three trade agreements – with South Korea, Colombia, and Panama – are critical to the credibility of America’s international economic policy.

Failure to pass them – especially after the sorry spectacle of the recent debate in Washington over the debt ceiling and the expression of willingness of some to place America’s full faith and credit in jeopardy – would deal an enormous blow to U.S. global economic leadership and credibility. It would also have serious negative consequences for our economy in a world in which most other countries are busily negotiating trade agreements that one-by-one undermine U.S. market share and American jobs. It would also badly harm our nation’s foreign policy in a world in which the projection of economic influence is a critical component of a country’s ability to project its foreign policy influence.

Trans-Pacific Partnership (TPP)
Looking ahead, the United States, along with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam, are aiming at crafting a high-standard trade agreement that addresses new and emerging challenges. The TPP will address cross-cutting issues such as making regulatory systems more compatible. Doing so will enable U.S. companies to operate more seamlessly in TPP markets and help small- and medium-sized enterprises – a special focus of TPP – to participate more actively in international trade.

The U.S. and its TPP partners are working to reach the broad outlines of an agreement by the APEC Leaders’ meeting in November. The United States also is working to ensure TPP reflects shared values, including worker rights and environmental protection. Our goal is to create not just more growth, but better growth. We believe this needs to include strong protections for workers, the environment, intellectual property, and innovation.

Earlier generations of Americans had a vision of an international system that would sustain America’s peace and prosperity. Today, we face the challenge of how to move forward in a very different world. We’re implementing this vision at home, abroad, and particularly importantly, in the Asia-Pacific region.

We want to construct a more robust and resilient international economic system in this newly globalized world – of new powers and new economic models for global competition – that will enable American businesses and American workers to take greater advantage of global economic opportunities. And strengthen our economy so we can compete.

We cannot do this on a partisan basis. Both parties need to join in a united effort to invest in our future and support a proactive international economic policy. Both parties need to come together to strengthen our recovery and put our country on a sound, long-term fiscal footing.

Our international economic policy also seeks to enable larger numbers of people in the Asia-Pacific region to actively participate and enjoy the benefits of growth and prosperity – which will greatly benefit our country. And we need to have global norms and rules that promote fair competition among all participants – competition not distorted by artificial government support.

Since WWII, we have had a system that has allowed whole new waves of people to reap benefits of the global economy. The system must continue to allow new people to join and contribute, and must adapt for the challenges of the 21st century. The rules must accommodate rising powers, but at the same time, rising powers must take responsibility for a system that enabled their emergence.

We look forward this year to forging closer partnerships with Asia. And as we do so, we are confident that America will benefit from these deepening ties. Thank you very much.