FROM THE OFFICE OF PUBLIC AFFAIRS

Tonight, I’d like to say a few words about the ways in which the United States Treasury Department implements U.S. foreign policy. Some of these will be familiar to you; some may not be. Certainly, I did not fully appreciate the many ways in which Treasury functions as a foreign policy institution until well after I joined the Department last year.

As a former Deputy Secretary of State, I came to Treasury intent on more fully integrating Treasury into all aspects of our foreign policy, not just the aspects that are traditionally recognized as economic. I was pleased when the President directed that "[t]he National Security Council shall have as its regular attendees . . . the Secretary of the Treasury" in addition, of course, to the President, the Vice-President, the National Security Advisor, and the Secretaries of State and Defense. The President wisely recognized that few international issues are exclusively political or military in scope. There is almost always an economic angle as well. Conversely, few issues in what we might call international economic policy are purely economic affairs.

There are also important tactical benefits to integrating international economic policy with other aspects of our foreign policy. For example there are some countries with which the United States has difficult relations. Economic and financial diplomacy through the Treasury can provide channels for positive interaction when other channels become strained.

For these reasons, one of my first acts at Treasury was to create a national security office within the Department. We’ve staffed this office with a senior foreign service officer and a senior intelligence analyst. They help ensure that the United States develops and implements an integrated foreign policy.

So, how is Treasury a foreign policy institution? Let me count the ways.

The U.S. Economy. First and foremost, we are stewards of the U.S. economy. This may sound like a counter-intuitive place to begin. But consider. The U.S. Gross Domestic Product in 2000 was nearly $10 trillion dollars. That was more than one-fifth of the total world Gross Product. Economic conditions in the United States have a lot to do with economic conditions around the globe. When we grow, the rest of the world grows with us. The converse also is true. The impact of the U.S. economy on the rest of the world is especially pronounced now, given the continued underperformance of Japan, the world’s second largest economy.

The United States, therefore, has much to contribute to the state of the world economy simply by getting things right at home.

International Financial Institutions. Second, Treasury leads U.S. participation in international financial institutions like the International Monetary Fund and the World Bank. Since we are the biggest contributor to most of these institutions, and since the executive boards use weighted voting, we have considerable voice in whether, when, how much, and under what conditions they lend to countries like Argentina or Turkey. That is a tremendous responsibility. Not only are the loan programs important to the countries that benefit from them, but they can have implications for other, associated countries as well. We have worked hard – as have many in the private sector – to dispel the notion that contagion necessarily and automatically spreads when one emerging market economy has difficulties. Now, we believe that markets are making more considered judgments about individual emerging markets. Investors are not allowing conditions in one to determine conditions in all the others. We are also working to improve the transparency and predictability of the way in which sovereign debt is restructured -- if a restructuring proves necessary -- by including collective action clauses in sovereign debt agreements.

Development. Third, together with the State Department, Treasury implements the President’s economic development agenda. Development is a difficult issue. Short of touring Africa with a rock star, it is difficult to generate sustained interest in the media, Washington, or the public for improving development. But we are determined to make a difference and to implement the President’s development agenda.

The President’s development agenda is to focus on countries that are committed to ruling justly, promoting economic freedom, and investing in their people. We will measure performance based on changes in GDP, productivity, and other quantitative measures. We are already putting money behind our ideas for change, with a 50% increase in bilateral assistance through the Millennium Challenge Account; more money for primary education programs and AIDS prevention in Africa; and increasing support for small and medium sized enterprises modeled on successful efforts in post-communist Eastern Europe. The President’s approach is a bottom-up approach. While the specifics are still being worked out, my personal prediction is that you will see even greater emphasis on results-oriented clean water programs, universal education, and HIV-AIDS prevention and treatment.

There will also be an element of our development agenda that is driven, in part, by national security considerations, as in the case of our efforts to assist in the reconstruction of Afghanistan.

In addition, we are also seeking to leverage private sector resources to promote our development agenda. As the President has said, "most funds for development do not come from international aid -- they come from domestic capital, from foreign investment, and especially from trade." Together with Under Secretary of State Alan Larson, I chair a Presidential initiative called the Partnership for Prosperity, which is a U.S./Mexico, public/private partnership to spur investment in the parts of Mexico where growth has been lagging.

Trade. Fourth, Treasury promotes trade. Of course, the United States Trade Representative has the lead in most aspects of trade negotiations. Treasury, however, takes the lead in promoting trade in financial services. In my view, such trade is crucial to international economic development and stability. East Asia and other regions have learned the limits of export-led growth. Financial services are key to countries that wish to diversify away from an export-based strategy and develop the domestic demand to sustain them when an international economic downturn causes exports to lag.

We facilitate trade in other ways as well. The USTR may negotiate trade agreements, but Treasury, which includes the Customs Service, implements the agreements. I learned this all too well as I sat hostage for months awaiting confirmation, due to concerns that Senators Helms and Hollings had with how the Customs Service interprets terms like "dyeing and finishing" and "knit to shape" with respect to textile imports from certain Caribbean and African countries.

Treasury also takes the lead in negotiating international rules in the OECD that govern the provision of official trade financing, most prominently, financing provided by official export credit agencies and aid agencies. These rules govern some $60 billion a year of official export financing. By reducing the scope for export subsidies in this official financing, Treasury helps open markets and complements USTR’s work in the WTO. There is also an important side benefit of this trade finance work, and that is budget savings. Treasury’s negotiating success has reduced the need for matching U.S. financing subsidies and produced an annual budget savings of about $800 million.

International Tax Policy. Fifth, together with Congress, we set the rules that govern the taxation of foreign income earned by U.S. corporations. Our challenge is to do so in a way that is fair both to taxpayers without foreign operations and to taxpayers with foreign operations, so that multi-national companies headquartered in the United States are not disadvantaged competing in the global marketplace. When you stop to think about it, this is an extremely important component of our international economic policy. Increasingly, the flow of goods and services is not through purchases between exporters and importers, but through transfers between affiliates of multinational corporations. The rules governing transfer pricing, interest allocation, withholding rates, foreign tax credits, and the taxation of actual or deemed dividends impacts these flows.

Also, Treasury negotiates international tax treaties. These play an important role in increasing the amount of investment flowing from the United States to other countries. In addition to tax treaties, we negotiate tax information exchange agreements. These agreements provide for the exchange of information upon request for use in civil or criminal tax cases. We’ve signed five of these and more such agreements are on the way. The agreements – such as the ones we’ve entered into with Barbuda & Antigua, the Bahamas, the British Virgin Islands, the Cayman Islands, and the Netherlands’ Antilles – help clean up the international financial system.

Transnational Financial Crime. Sixth, we work to police the international financial system. In addition to negotiating the tax information exchange agreements I just mentioned, Treasury combats international financial crime bilaterally through undercover criminal investigations, usually with the cooperation of foreign governments. We also work multilaterally, through such organizations as the Financial Action Task Force, FATF. In my view, FATF has been a particularly effective. FATF’s 40 recommendations have become the international benchmark in anti-money laundering regimes. Its Eight Special Recommendations have set the standard in fighting terrorist financing. FATF has proven highly effective at extracting commitments from nations to implement such recommendations, assessing compliance with the commitments, and "naming and shaming" nations that fail to keep their commitments.

Terrorist Finances. Seventh, we lead the nation’s fight against terrorist finances. We chair another interagency committee that sets the strategic priorities for the financial front of the war. We chair another interagency committee that implements these priorities through actions such as public designation and blocking, law enforcement action, diplomatic action, or other means. We work with foreign governments to ensure that they are doing all they can to stop the financing of terror. We work to promote the regulation and accountability of informal methods of moving money, such as hawala systems. And we work to increase the transparency of charities so that they cannot be used as fronts for terrorist support.

Well, that’s a good list to start with. We work on the U.S. economy, international financial institutions, development, trade, international tax policy, financial crime, and terrorist finances. There are other areas as well. And, of course, I could delve much more deeply into any one of these areas. But considering this list, I am struck by two observations.

The first observation is the great importance of the first item on my list – promoting growth in the U.S. economy. With the United States representing more than one-fifth of the world’s GDP and with the Japanese economic ship of state in irons, no single thing matters more for international economic policy than the health of the U.S. economy. Ironically, the U.S. economy is precisely the part of the world economy on which international policymakers spend the least amount of time. U.S. fiscal, tax, and monetary policy are driven by domestic institutions with a predominantly domestic focus.

The second observation concerns the importance of the private sector. For example, we don’t look to loans and grants from the World Bank in themselves to advance the economies of poor countries. Rather, we try to dedicate aid where it can help establish minimal conditions for local enterprises to grow, prosper, and attract foreign investment. Our efforts in development, trade, and tax policy all center around the recognition that the most important player in international economic policy is the private sector. This is true, to a degree, even in the hunt for terrorist finances. We cannot be successful in that sphere without the cooperation of the private sector. Incidentally, I am pleased to say that we have been getting that cooperation in abundance.

These are humbling observations for students of foreign relations. There can be no denying that economic policy is an important component of foreign relations. At the same time, the things that matter most in international economic policy are one or two steps removed from the attention of most foreign policymakers, and are often outside their control.

These observations also suggest a prescription. As we study foreign relations, we need to be keenly aware of the role of the private sector. Foreign service officers must be trained in the language and culture of business, in addition to the languages and cultures of the countries in which they work. And we must reward efforts to facilitate the growth of the private sector. It is sometimes hard to perceive the effects of these efforts. They don’t culminate in grand treaties. They occur incrementally, as trade, tax, and regulatory conditions improve, encouraging growth. You can’t promise foreign service officers a Rose Garden ceremony every time a new plant opens in Ghana or every time a country manages to control inflation or bring its sovereign debt rating to investment grade.

Nonetheless, we must reward international economic policymakers who succeed in the hard, incremental work of establishing the right conditions for global growth. I think organizations such as the Chicago Council on Foreign Relations can play an important role in recognizing those contributions, and educating constituencies on the true nature of international economic policy.