FROM THE OFFICE OF PUBLIC AFFAIRS

I would like to talk today about the crucial issue of how the United States engages with the rest of the global economy at the dawn of a new century.

Let me focus my remarks on four issues:

• First, the national security and economic case for support for open markets around the world.
• Second the case for supporting global economic development more directly, including through our support for the international financial institutions (IFIs).
• Third, the generalized decline in support for global engagement in the United States, and the implications for both the quantity and the quality of our global leadership.
• Fourth, some of the reasons for this generalized decline - and how these need to be addressed.

Let me begin, however, with a few words about the broader context.

I. A Special Time for the United States

It is, in many ways, a critical moment in our nation's history. America is the world's largest economy and strongest nation with no single, dominant competitor. At the same time, Americans are growing wary of global entanglements. Market ideas are in ascendancy; there is high regard for business and the rights of capital; but while successful investors are heroes, those at the bottom of the ladder still feel insecure. Internationally, the breakdown of empires and the absence of large power balances have made the world ripe for ethnic and nationalist conflicts.

I suppose I could be describing the latter part of the 1990s. I am actually describing the late 1920s. That was a time of high optimism, a time when continued peace and stability was widely foreseen; yet over the next 15 years the world system would spiral out of control, first economically and then politically. The period of depression and World War that followed are perhaps the darkest two decades of this century and, arguably, among the darkest of this millennium.

History does not repeat itself. Any historical analogy between the world of today and the world of the 1920s is surely imperfect. But it does remind us that there have been other times in our history when the United States' reluctance to engage fully with other nations and to help manage changes in the balance of global economic power has had major consequences.

A generation of post-war leaders was determined that we would not make that mistake again. They helped to shape a global vision of an America committed to create an ever-widening circle of ever more prosperous, ever more international economies. This is a vision that has been at the center of US foreign and economic policy - during Republican and Democrat Administrations alike - for the bulk of our postwar history. And it is a vision that has served our country extraordinarily well.

In many ways, the United States in the final decade of the 20^th century is the most successful economy that there has ever been. And yet, at another critical time in our history, the fundamental choice for this country - to be a force for the right kind of global integration - is under threat in a way that it has not been in 50 years.

• That threat does not spring from a single party or agenda - although partisanship and the particular interest have played their role.
• That threat does not clothe itself in the language of protection or nationalistic retreat - although these surely have their proponents.
• And it does not come in a single battle that will be won or lost - although some of the decisions that we make in the coming days will be very important to the long-term result

The risk we face at this special time is more diffuse than any of these - but no less dangerous. It is the risk of what one might call the malign neglect of our global standing: the risk that little by little, in countless different ways for countless different reasons, we will wear away at our capacity to lead the world in a direction that will support our deepest long-term national interests and values - and in a manner that can inspire ever-increasing global support.

There are two sets of reasons why the United States needs to continue to be a vigorous proponent of open markets policies.

The crucial link between closer economic integration and our national security is this: we are much less likely as a nation to be drawn into conflict if nations of the world are strong, confident, and forging ever-closer connections than if they are financially unstable and disconnected. In short, trade promotes prosperity, and by promoting prosperity, promotes peace.

Fifty years ago, the challenge the world faced was the economic reconstruction of war- ravaged Europe and Japan - and ensuring that the mistakes of the inter-war years would not be repeated. Today we face a very different challenge: the challenge of integrating the five billion people of the developing world into the global economy that is being born out of the embers of the Cold War. But the right course for the United States is the same as it was in 1945.

There may never have been so radical a change in the balance of global economic power as there has been in the emerging markets of the world, particular in Asia, in the past 25 years. The fact that it has taken place without major conflict is in no small part a tribute to increased integration of the world's economies and support for cooperative institutions to cement that integration.

By supporting liberalization in these countries, we invest in our future security and we invest in the spread of our core values. Examples such as Korea, Taiwan and Argentina illustrate that economic development and openness bring democratization in its wake, and there is no better way to spur this process than by integrating these economies into the global marketplace

But even if there were no strategic or broader national security case for open markets and interchange between nations, I believe that there would be a compelling economic case for integration, rooted in our standard of living. Perhaps you will pardon me the slightly academic approach of making this point through an analogy.

Imagine a country all of whose harbors were filled with rocks so that ships and goods could not come in, though some could go out. And imagine that it was proposed to remove the rocks from the harbors. Many people would say that this would be a good thing to do:

• It would provide citizens with a wider choice of consumer goods, at lower prices.
• It would provide producers with a wider choice of inputs, and lower costs, making them more competitive and able to hire more workers and raise their wages.
• It would provide more competition as a spur to productivity and new ideas - and as a result, lower inflation and lower costs of capital.

To be sure, the removal of those rocks would bring about change in the economy. But every day and in every way our market economy - by bringing about improvements in technology, communications and transportation - is bringing down natural barriers and making communication and trade that much easier. The question is whether we should respond differently to man-made barriers to trade.

It bears emphasis that this is not even a symmetrical argument - because we start out more open, so liberalization agreements with other countries always tends to reduce their trade barriers more than it reduces ours. To take just one example, the tariff reductions achieved in NAFTA with Mexico were five times as large in Mexico as in the US.

In other words, an open markets approach is not just good economic policy; it's good even from a mercantilist standpoint as well. And it is especially good policy for the United States because of our strategic position, because of the diversity of our population, and because of the size and strength of our economy. We stand at the hub of a world trading system. And the bigger that world trading system is, the more open it is, the more we will benefit from our position at its hub.

Whatever our broader trade policy might dictate, it cannot be right that the richest country in the world, the richest country that there has ever been, is unable to provide preferential access to its markets to a countries in Africa where 500 million people live, nearly half on incomes of less than one dollar a day. That is why the African Growth and Opportunity Act - which has had strong supporters on both sides of the Congressional aisle - is such a crucial piece of legislation. We hoped it would pass last year. It needs to pass this year.

What is true in Africa is also true much closer to home, in the Caribbean. NAFTA was a very important step, but it had the consequence of hurting some of our other neighbors who did not benefit from the preferences that were provided to Mexican goods. The right trade preferences for the Caribbean - as reflected in the strengthened version of the Caribbean Basin Initiative now before Congress - will help make their economies much stronger and our economy safer.

We always - and rightly - tend to respond to and focus on the problems that one can locate on a map, in places such as Kossovo or East Timor. What we may focus on too little are the things that can help prevent such problems occurring in the future. That is why our support for global development institutions, our support for open markets; and our support for strong policy are so important.

Ten years ago, when the Berlin Wall came tumbling down the United States defense budget was $107 billion higher in real terms than it is today. Reasonable people can debate how much of this ought to be invested in forward defense of our core interests through support for the IFIs and other foreign operations. But it would be hard to make the case that the right answer is to spend a good deal less on these things than we did before.

The Foreign Operations bill that the President vetoed last week appropriated only $12.7 billion for these kinds of investments. That is nearly $7 billion, or 35 percent less than the $19.4 billion average that was spent under President Reagan and President Bush. To take just one crucial piece of this: in 1991, President Bush requested a $1.8 billion contribution to the IFIs. For 2000, President Clinton requested just $1.4 billion. But Congress cut that request to just $895 million - or less than half the level of spending in 1991.

The President's International Affairs request for these and other international priorities is not large by historical standards - and it is barely one percent of the total federal budget. It represents high return investments in America's core interests and its global leadership - investments that for more than 50 years have enjoyed strong bipartisan support.

Every dollar we contribute to the multilateral development banks leverages more than $45 in official lending, to countries where more than three-quarters of the world's people live. Quite simply, they are the most effective tools we have for investing in the markets of tomorrow.

These programs help to promote changes that reflect core American values: such as freer markets, greater transparency and public participation strengthened property rights and open borders. And they are at the cutting edge of global efforts to combat major new threats such as AIDS, which is already devastating Africa and now threatens to erase twenty years of economic development in Asia.

• Not so long ago, the United States annual commitment to the IFIs came to $1.9 billion. Today that has been cut to $1.2 billion. Yet the Congressional bill would prevent us from meeting even this reduced obligation.
• Not so long ago, United States arrears to these institutions that we were so central to creating were $1.5 billion. Today that debt has been reduced to $335 million. The Congressional bill would reverse that progress, and our arrears next year would rise to more than $665 million.

The same bill would also fatally undermine a global effort to reduce the debt of the poorest countries. Yet writing off debts owed by countries that will never be able to repay them is sound financial accounting. It is also a moral imperative at a time when a new generation of African leaders is trying to throw off the legacies of the Cold War and open up their economies. That is what the Heavily Indebted Poor Country initiative is about. It will not write off the debts of countries that are not working to reform. It will help build future markets in countries that are committed to helping themselves.

At a time when the wars that the world faces are more likely to be born of ethnic divisions and poor governance within countries than ideological power struggles between them - and when conflicts in Africa have killed more people in the 1990s than in every other region combined - investing a tiny fraction of our budget in programs that can help these countries build a better future is not an investment that a nine trillion dollar economy should find it difficult to make.

I have spoken of the aspects of our global engagement that Treasury is most involved with. But of course the generalized domestic distrust of global involvement shows up in other ways:

• In visible rejections of multilateral policies and institutions: including the widespread opposition we have seen to the World Trade Organization; the sixty-plus times that the US has imposed unilateral economic sanctions since 1993; and the failure to pay our dues to the United Nations which may soon cause us to lose our seat in the General Assembly.
• And, no less clearly, we see it in the rising demands that we make on other countries as conditions for United States support. Each of these, considered individually, may be wise - but cumulatively, they risk the erosion over time of broader global support.

It is a striking irony of this time that the economy that has gained most from rising global integration and cooperation seems to need ever-greater assurance that these things are in its interest - and will invest an ever-decreasing amount in their support. And that irony, we can be sure, is not lost on other nations. In all of these ways, the United States' reduced faith in the benefits of global engagement threatens to reduce the world's faith in us, and so to undermine our global authority.

Of course, in our support for global institutions and agreements we must always ensure that core American interests and values are protected. But the stock of global goodwill is not infinite. When we choose to deplete it in a given instance - the consequences for the next time we need that goodwill must always be taken into account.

If we want to have an opportunity to shape the right kind of global economy - one that supports our interests and values and where there are common rules that enable it to work for all - we have to be part of the process. And we have to be seen to be participating constructively and in good faith.

I have tried to reflect on why, when the security benefits are so compelling and the economic benefits so clear, it so difficult to make the case for open trade and broader economic integration in America today. Three reasons stand out:

The first is the natural human tendency to internalize the good news and externalize the bad. How many people working hard at a badly managed firm, with out-dated technology, pin the blame for their layoff on foreign competition? How many people, when offered a raise or promotion in a labor-short industry following a surge of export demand, assign the credit to open international markets, rather than considering it to be a deserved reward to their own skill?

It is the nature of the trading process that when there are costs, those costs are apparent and attributed to trade, even when the main cause is something else - and when there are benefits, the link with trade is seldom if ever made. That makes the case for integration that much more difficult to make.

The second reason why we have a hard time making a compelling case for global integration is that the compelling geopolitical rationale that the Cold War provided is no more. Historians have written at length about the oscillations of the United States between isolationism and global engagement. It greatly simplifies, but perhaps does not distort, that work to say that our global engagement has typically been in response to a dire threat.

Today's threats - of rising disorder and impoverishment overseas - do not have the emergency character that the threats of an earlier time have had. Yet we saw in the inter-war years what could happen when the United States shunned cooperation and turned inward, at a time of great national strength That is the danger we must work to avoid today, just as those visionary leaders did after 1945.

The third reason is that trade - and integration more generally - tend to become the lens through which all kinds of concerns about a changing world are projected. Whether the root concern is new technology, or deregulation - all of the economic insecurities that this new economy can produce tend to come together when the subject is trade.

That is why it is so essential that we work to equip workers with the education and skills to manage the transition process and to seize the opportunities that come with it. If we compare our time to that postwar period of remarkable American internationalism, the absence of a single, major threat is one major difference. A different kind of political process is another. I doubt anyone ever focus-grouped the Marshall Plan - and I am not sure how well it would have done if they had. But that postwar period was also a time when opportunity and protection was being given to the American middle class.

To a degree that historians have perhaps under-emphasized, the GI Bill of Rights was an integral part of the strategy behind the Marshall Plan - just as our interstate highway system was partly the result of an effort to marshal our Cold War defenses. President Clinton had a clear understanding of these issues at the start of this Administration when he decided to establish the National Economic Council - a body that stands for the recognition that our domestic and our international economic policies will always be intertwined.

For all of these reasons, the case for vigorous United States engagement with the world and support for open markets is surely more difficult to make today than it was forty or fifty years ago. But the risks for our future capacity to lead the world - and to bequeath a safe and prosperous global economy to our children and their children - are every bit as great as they were then. Thank you.