Remarks
Jose W. Fernandez
Assistant Secretary, Bureau of Economic and Business Affairs
Baltimore, MD
February 7, 2013


Introduction and Outline

Thank you for the invitation to speak here today. I know that all of you have worked hard to be here and have demonstrated a strong interest in international studies. This conference offers you unique insights into foreign affairs and I strongly encourage you to get the most out of your experience by taking full advantage of the opportunity to ask questions of the speakers, participate actively in the committees, and discuss issues with your peers.

I would like to talk to you today about economic issues and their place in foreign policy. It is a topic that I deal with on a daily basis as head of the Department of State’s Bureau of Economic and Business Affairs. As I was preparing my remarks for today, I asked myself the question I ask before I address any audience: “What's at stake and why should it matter to you?” Or in other words, “why should you care?”

The answer is simple: now, more than ever, you can't afford to ignore economic policy. I challenge you as you sit in your committees over the next three days to find a case where economics does not play a role in nearly every kind of foreign policy challenge, whether it takes the form of stability in a volatile Middle East or balancing the ascendance of China. This fusion of diplomacy, security, and economic issues is what former Secretary of State Hillary Clinton called economic statecraft. To maintain U.S. strategic leadership, we must strengthen and consolidate our economic leadership.

Economic statecraft is not a new idea nor is former Secretary Clinton a lone voice in the wilderness stressing the importance of this issue. Our new Secretary of State, John Kerry, echoes these sentiments. During his testimony before the Senate while he was being confirmed, he said that “more than ever, foreign policy is economic policy.” It is telling that in recent years, two of the strongest advocates for a robust diplomacy and development budget were former Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, and former Secretary of Defense Robert Gates. They recognized, as Harry Truman said more than 60 years ago, “Our relations foreign and economic are indivisible.”

Now you’re asking yourself, “Okay, this sounds great, but what does it actually mean? How do you accomplish this enormous mandate?”

I am not here to give you an exhaustive list of all of the things that everyone in my bureau of nearly 200 people does. However, I hope to illustrate our work with three key examples of how economics and diplomacy intersect. The first two use economic policy to ensure that an ascendant China plays by the global rules and to promote stability in the Middle East. The third and final example is a global one, but an issue of vital importance to anyone who uses email or the Internet (I’m going to go out on a limb here and say that includes everyone in this room): Internet freedom.

Addressing the Ascendance of China

As I stated before, the convergence of diplomacy, economics, and security is not a new concept. Concern over the security of trade routes and access to natural resources, for example, has been a driving factor in diplomacy for more than two millennia. What has changed is that nations are becoming major powers based purely on economic strength and without the comparable military might that is traditionally associated with great power status. China is perhaps the clearest example of this. Its return to the status of a global power presents enormous potential for both our countries. China has already benefitted greatly from its integration into the global, rules-based trading system that the United States championed following the end of World War II. As the world’s second largest and fastest-growing major economy, China also offers huge opportunities for U.S. businesses, workers, farmers, and ranchers. Those opportunities represent potential jobs for your generation.

At the center of all of our economic policies toward China is one driving motive: to get China to play by the rules that they have agreed to so that everyone can benefit. As the international system adjusts to China’s increasing role, we need to agree on the basic rules that apply to all countries in the commercial arena. There are a number of areas we work in, but I want to highlight just two that have an impact on you and your futures directly. The first is a strong commitment to protection and enforcement of intellectual property rights, and the second is the creation of a level playing field in which all companies can compete under the same rules.

IPR observance is critical to the U.S. economy and our recovery, which is why we are so adamant that this is an issue that needs to be addressed. According to a 2010 report on trade, if China raised its intellectual property rights standards to those of the United States, it could translate into well over 900,000 new jobs in U.S. intellectual property intensive firms, such as engineering, software development, and entertainment. As you can see, the stakes are extremely high. We’re potentially talking about your future jobs here. 900,000 of them.

But currently, China has several practices that prevent those 900,000 jobs from being created. For example, corporate spying has cost U.S. companies billions of dollars. In one instance, Chinese hackers stole technology that cost a U.S. company $1 billion and 20 years to develop. Online piracy is another concern. One recent report indicated that the rate of software piracy in China is 77 percent, a cost to legitimate producers of nearly $9 billion.

We are working with China on resolving these issues and welcome positive steps China has taken in recent years. Last year, for example, China agreed to strengthen its efforts to protect IPR in several areas. One of these was by intensifying efforts to ensure that Chinese government agencies at all levels use legitimate software. We hope that this progress continues, and we will certainly continue our efforts to push this issue.

The second major topic we are working on with China is to encourage its state-owned enterprises to act more like commercial enterprises. If China wants to have state-owned enterprises, that is purely China’s own choice. But if those companies receive benefits that give them an artificial competitive advantage, then we have concerns, because we believe that the rules of economic engagement should apply equally to all companies, private or state-owned. No company should be given special benefits, such as cheaper energy or land or below-market interest rates, unless all companies have access to those benefits. These benefits and preferential treatment distort the playing field for other companies.

And why do we care if the playing field is distorted? Because we want companies to win based on better performance, business practices, and innovation, not based on government support. History shows that when companies win based on external assistance and not on their own merits, they often have unearned competitive advantages and ultimately this leads to inefficient, bloated, and uncompetitive firms. That makes sense if you think about it. If you know that you start out with a huge advantage over your competition, then you don’t feel the need to try as hard to compete. When governments help their domestic firms in an improper manner, it puts U.S. companies, which have some of the most productive workers in the world, excellent technology, and talented innovators at a disadvantage. They still have to pay taxes, dividends, rent, and obtain financing at market rates, while remaining competitive in global markets.

Our strategy to meet the state capitalism challenge involves the deployment of a robust set of policy tools that will level the playing field and open markets for fair competition. We are working to implement free trade agreements, bilateral investment treaties, and World Trade Organization accession commitments. These policies will counter measures abroad that distort markets and limit market access and competition. So in both IPR and SOE’s with China, we see the intersection of economics and foreign policy.

Promoting Stability and Prosperity in the MENA Region

Now let’s turn to a completely different part of the world and talk about a completely different set of issues: stability and prosperity in the Middle East and North Africa, which you hear about in the news every day.

The United States has long held the view that one of the most effective ways to combat extremism is by giving young, disillusioned, and impoverished people opportunity. Nowhere is this more relevant than in the countries of the Middle East and North Africa, where individuals under age 25 make up 40 to 60 percent of the population, and about a quarter are unemployed. Many estimate that countries in the region collectively will need to create 50 million jobs over the next decade just to maintain the current dismal employment levels.

We work on several different levels to address this issue in the region, two of which I will highlight: (1) through government-to-government dialogue and (2) by engaging the private sector directly.

We engage governments throughout the region to create environments in which economies can grow and businesses can flourish. We do this because one way we can help democratic transitions succeed is to help prevent economic crises from undermining political progress. When we have a stable Middle East, we have fewer security concerns and more trading partners. That’s a good thing all around.

In the interest of promoting trade and investment between the United States and countries throughout the region, we’ve signed five Free Trade Agreements and another five Bilateral Investment Treaties. We also have Trade and Investment Framework Agreements with twelve countries in the region. As it stands today, our trade between the United States and the countries of the Gulf Cooperation Council—or GCC—totaled almost $100 billion last year. Those countries, together, ranked tenth as an export market for the United States last year (that’s more than our exports to Japan and France put together), while the GCC was the sixth largest supplier of imports to the United States, mostly in oil.

I will be the first to admit that government initiatives can only have a limited effect. That’s because the success of all of these agreements, dialogues, and projects lies in the ability of the private sector to take advantage of the opportunities that they create. We need private partners and businesses to work with us, not just because of budget issues, but because the level of expertise in the private sector is invaluable to economies across North Africa and around the world. For many countries, this is a critical point in their economic history, and private sector know-how, more than assistance dollars, is what they need.

One of the most effective ways we work with the private sector is through the promotion of entrepreneurship. A key example of our efforts in this arena is the Department’s Global Entrepreneurship Program. With the help of over 100 private partners, including companies, universities, and NGOs, the Global Entrepreneurship Program seeks to empower local people and businesses to become full participants in their economies through entrepreneurship. In many countries, the Global Entrepreneurship Program works with local business and communities not only to foster the ideal of innovation, but also to provide tools for people to create new businesses, to build a new life for themselves.

Another vehicle that we created to promote entrepreneurship is the Partnership for a New Beginning’s North Africa Partnership for Economic Opportunity, or PNB-NAPEO, as we call it for short. PNB-NAPEO is a public-private partnership with leading companies and NGOs in the United States and North Africa. It focuses on building cross-border ties from the bottom up among Maghreb entrepreneurs, business leaders and youth innovators. We have held two high-level annual conferences, most recently Marrakech, where we had more than 400 U.S. and Maghreb entrepreneurs, investors, and educators. This past July, the Algeria PNB-NAPEO local board sponsored an entrepreneurship training program that brought together students from Algeria, Morocco and Tunisia in an intra-regional exchange that was one of the first of its kind in this fragmented region, and in the next few months we will host visits to the Maghreb by U.S. universities and private equity entrepreneurs. And just last month, we welcomed a delegation of private equity and venture capital professionals from the five PNB-NAPEO countries to New York and Silicon Valley, where they met with American counterparts.

We will continue to be a convening partner and bring together foreign governments and entrepreneurs and our private sector. We will work across the region with private partners eager to contribute to the economic development of the countries in which they operate. This isn’t charity. This is not altruism. This kind of engagement will not just benefit the countries of the Middle East and North Africa. It will create stable trading partners, more opportunities for U.S. companies, and a safer, more secure world. And why does this matter to you? Because 95 percent of the world’s consumers live outside of the United States. They are our export market, and jobs related to exports are on average higher paying and more stable than other jobs. There are currently over 10 million American jobs supported by exports. We want to make sure that number grows and that you can take advantage of them in the future.

Preserving Internet Freedom

That brings us to our final example for the day: Internet freedom. The Internet is big business and growing fast. One consulting group estimates that the Internet economy in G20 countries is around $2.3 trillion. That’s roughly the same size as the entire British economy. Four years from now, this figure could double, resulting in the addition of another Britain to the global economy by the next U.S. presidential election, when many of you will be able to vote for the first time.

The Internet doesn’t just make the global economy bigger; it makes it better. Several groups argue that broadband connectivity positively impacts labor productivity – a multiplier effect – and job creation worldwide. Some governments, like the United States, recognize that having an open Internet is the best way to be open for business and investment. An open, interoperable and secure Internet is one of the best opportunities for American businesses to expand and develop. And this makes sense. When a young artisan in a developing country looks to sell her products, she now has the potential to be more successful faster if she can connect to the global marketplace than if she simply goes to the local market and sells her wares in a street stall. With the Internet, she will reach more customers in more places, more of whom are willing to pay her more for her products.

But, despite the benefits of an open Internet, we continue to see countries try to harness the economic power of the Internet while controlling political and cultural content. Some countries are devoting great resources to purge their online spaces, or, like Iran or Cuba, attempting to isolate their people inside what amounts to a national intranet – a digital bubble. Such attempts may succeed for a limited time in some places; but they will come at a cost to a nation’s education system, its political stability, its social mobility, and its economic potential. And, these are costs that no nation can afford over the long run. The Internet is needed in today’s world to attract capital, spark innovation, nurture the entrepreneurial spirit of our people and provide the climate in which they develop enterprises that can provide jobs and sustainable growth.

We recently got some insight into what the world thinks about this debate in December in Dubai at the World Conference on International Telecommunication, or what we call WCIT-12. Some countries have proposed new rules to allow for more government oversight of the Internet, and a role for the International Telecommunication Union (ITU) (a UN body) in Internet governance. Further provisions related to security and spam that could justify regulation of content, including political and cultural speech.

The United States and our like-minded allies were not willing to sign on to these new rules. We remain fully committed to the inclusive multi-stakeholder Internet governance model, which is a pillar of the Internet's great success. Coordinated governmental action by like-minded countries in support of Internet freedom is essential as we grapple with increasingly complex policy issues. Our goal is to maintain that environment for continued success, and to expand it around the globe, so that we continue the trend of bigger and better economic growth that the Internet has provided so far.

Conclusion

I hope that my discussion of these three major topics—balancing a rising China, promoting stability in the Middle East and North Africa, and preserving Internet freedom—accomplish what I initially set out to do: demonstrate what is at stake here and how the intersection of economics and foreign policy matters to you. The bottom line is this: in all of these areas, we are talking about your futures, your jobs. And more than that: it’s about promoting a peaceful, stable and hopeful world for you to live in because more likely than not your future job will depend on the state of the world economy and our country’s ability to compete in it. Whether you choose to go into government, business, non-profit work, or academia, the stakes are high for all of us.

I am going to stop here and save the remainder of our time for your questions. As I said at the beginning, I encourage you to take full advantage of being at this conference, and that means asking questions.

Thank you.