FROM THE OFFICE OF PUBLIC AFFAIRS

This afternoon I would like to discuss the U.S. Treasury’s role, not as a domestic agency, but as a foreign policy institution.  There can be no denying the Treasury’s influence and effect on U.S. foreign policy. 

Consider Treasury’s role.  Treasury controls some of the key financial levers of U.S. foreign policy.  It guides U.S. participation in the major international financial institutions, such as the World Bank, International Monetary Fund, and several regional development banks.  Treasury is at the vanguard of President Bush’s development agenda and his efforts to reform the effectiveness of foreign assistance.  Treasury also possesses a high degree of technical competence on international issues, from terrorist finance to international tax policy to money laundering to the financial aspects of trade policy.   

Despite the clear nexus between these core Treasury activities and U.S. foreign policy, I am always struck that many people are puzzled by Treasury’s perspective in the interagency process.  Some attribute to us a purely marginal role in traditional foreign policy matters.  Others believe Treasury is essentially a domestic agency.  Both views hold kernels of truth.  After all, Treasury is the key steward of a more than $10 trillion U.S. economy.    

But we also appreciate that U.S. economic performance disproportionately impacts the global economy.  Consider that in 2001, U.S. gross domestic product accounted for more than 20 percent of total world output.  When you factor in Japan’s underperformance and Europe’s recently sluggish growth, the U.S. economy’s impact on the global economy is even more profound.  When the United States grows, the rest of the world grows, and vice-versa. 

That is why the number of Treasury policymakers who focus on international economic affairs is roughly comparable to that of those who deal with domestic issues.  Each day, Treasury policymakers work on major international issues.  Let’s explore a few.

I. Financial Levers of U.S. Foreign Policy

Treasury leads our nation’s fight to disrupt the flow of money to terrorists and their supporters.  We chair an interagency committee that sets the strategic priorities for the financial front of the war on terrorism and works on the implementation of these priorities, through actions such as public designation and asset freezing, law enforcement, diplomacy, and cooperation with and through multilateral institutions. 

Our most public weapon in the financial war on terrorism has been the public designation of terrorist-related entities and the blocking of their assets.  To date, we have blocked more than the $123 million.  Our actions have also significantly disrupted and deterred further terrorist finance.  By working with our allies to implement an international mechanism for designation and freezing, we have made it much harder for terrorists to hide their money in the world’s banks or send it abroad through formal financial channels.

But our strategy goes well beyond designation and blocking.  We and our allies have vigorously engaged multilateral institutions such as the IMF, the World Bank, the UN, and the Financial Action Task Force (FATF) in an effort to set improved standards for transferring funds abroad through less traditional means.  For example, new standards have been set to protect charitable institutions from being abused as vehicles for terrorist financing, and new principles are being established to regulate informal systems of transferring money, often known as hawala. 

Of course, we cannot fight the financial war on terrorism alone – and we haven’t had to.  Over 200 countries and jurisdictions have joined us in issuing blocking orders.  We will continue to work with members of the international community to set new standards, to assess country performance, and to assist one another in this fight.  While I am generally pleased with our overall successes to date, I believe we can always do better – and we will.

Another important area where Treasury impacts U.S. foreign policy is through U.S. participation in the major international financial institutions, a number of which I have already mentioned, such as the International Monetary Fund, the World Bank and the multilateral development banks.  The U.S. is the biggest contributor to most of these institutions.  Since the executive boards use weighted voting, we have a considerable voice in whether, when, how much, and under what conditions they lend to countries like Argentina, Brazil or Turkey. This is a tremendous responsibility.

Consider the notion of financial contagion, for example.  The Bush Administration has worked hard – as have many in the private sector – to dispel the fiction that contagion necessarily and automatically spreads when one emerging market economy faces difficulties.  Already, we believe that investors are beginning to make better judgments about specific emerging markets.  They are no longer allowing conditions in one country to lead inexorably to crises in others.  Current examples of so-called contagion, such as the impact of Argentina on Uruguay, can be explained in other ways, for example, by examining the close economic linkages between specific countries. 

Treasury is also working to improve the transparency and predictability of the way in which sovereign debt is restructured – if such restructuring proves necessary – such as by including collective action clauses in sovereign debt agreements.  We also have encouraged the IMF to study whether a Sovereign Debt Restructuring Mechanism might serve well as a possible complement over time to such collective action clauses. 

In addition to leading U.S. participation in the major international financial institutions, Treasury, in cooperation with the State Department and USAID, also implements the President’s international development agenda.  Development is a complex international issue.  Bridging the gap between the needs of the poorest countries and their capacity to use external and domestic resources effectively is a challenge. 

We are convinced that the international community can do a better job in combating poverty by focusing on measures to increase productivity and hence living standards.  One way is to focus on the factors that enable people and countries to become more productive, such as policies that encourage a strong private sector, that improve the quality of education and health care, and that increase access to safe water.  A second complementary way is to insist on the better use of public funds by demanding measurable results.

These principles are reflected in the President’s development agenda and his newly proposed Millennium Challenge Account, or MCA.   The concept that underlies the MCA is a simple one.  Countries that are committed to ruling justly, to promoting economic freedom, and to investing in their people will receive more U.S. assistance.   Country performance will be measured on the basis of clear, concrete and objective criteria that closely correlate to economic growth and poverty reduction.

Already we are putting money behind our ideas, with the MCA representing a 50% increase in our core bilateral assistance program.  This means a $5 billion annual increase over current levels, phased in over three years, and more U.S. money for programs that raise productivity growth, such as programs for primary education, communicable disease prevention and clean water.  The approach is geared to producing real results for real people.

Our development responsibilities also give us an important role in post-conflict assistance.  Take our recent efforts to aid in the reconstruction of Afghanistan.  On December 4, President Bush signed the Afghanistan Freedom Support Act, which confirms our long-term financial commitment to rehabilitation and rebuilding of Afghanistan.  The next few years will be critical ones for the country’s future.  Afghanistan’s government needs to develop administrative, financial and legal structures, and it needs to produce results that will change the lives of the Afghan people.  This means better roads, improved public services, and enhanced security for the Afghan people so that they may earn their livelihoods in peace. 

II. Treasury’s Technical Expertise on International Issues:  Trade, FSC & International Taxation

The U.S. Treasury is also an institution with an impressive technical capacity that its senior policymakers bring to bear on a number of complex international issues.  Take the issue of international trade, for example. 

While the United States Trade Representative (USTR) leads most aspects of U.S. trade negotiations, Treasury negotiates most financial services provisions of U.S. trade agreements, in part because of its close ties to the financial community and its regulators, but also because of its core competency on financial services issues.  Recently, we worked closely with USTR to finalize the U.S.-Chile Free Trade Agreement. We are working just as hard to reach an agreement with Singapore.  Treasury is also leading U.S. efforts to liberalize financial services markets worldwide as part of the new Doha round of WTO negotiations.

Though complementary to USTR’s approach on broader trade issues, Treasury’s tactics can be different, particularly in the realm of financial services.  In our discussions with foreign financial and economic officials, we are able to make the case for freer trade in financial services in the context of economic reform.  Since most developing countries have no interest in seeking access to U.S. financial services markets, haggling over concessions holds little promise.  We try to present trade liberalization as a sound policy option rather than as a negotiated concession.     

Take, for example, the “Asian Tigers,” a group of countries that now are beginning to experience the limits of export-led growth. 

Export-led growth may have served much of Asia well in the 1980’s and 1990’s, but with cheaper exports emerging from China, not to mention a recent worldwide economic slowdown, export-led growth no longer seems to be a winning strategy.  Instead, countries that are successfully weathering the global economy today are those that took steps to diversify and focused on stimulating domestic demand.  For many in this latter group, like Korea, liberalized financial services markets have been key engines of growth.  Through official dialogue, Treasury has supported Korea in these efforts.  In other countries, we are providing direct technical assistance.

Treasury also plays a leading role in resolving an international dispute that features elements of both tax and trade.  Earlier this year, a WTO appellate panel held that the extraterritorial income exclusion regime of U.S. tax law constituted a subsidy violating WTO rules.  Just two years before, a WTO appellate panel held that the foreign sales corporation provisions constituted a similar, prohibited subsidy.  The WTO arbitration panel has issued its findings on damages, authorizing retaliation of up to $4 billion a year of U.S. exports, a figure unprecedented in WTO history.  Such retaliation would have an impact on the global economy far beyond the specific U.S. products targeted. 

President Bush has made clear that the United States will comply with the WTO’s ruling.  We believe the United States has too great a stake in the WTO, and in freer trade, to turn our backs on WTO rules.  The President has also made clear that our response to the WTO’s decision must increase the competitiveness of U.S. business, and he has pledged to work closely with the Congress to create the solution.  Therefore, Treasury is working closely with Congress’ tax-writing committees to develop legislation that will meaningfully amend our tax law to honor our WTO obligations and preserve the competitiveness of U.S. businesses operating in the global marketplace.

Together with Congress, Treasury has the responsibility of setting the rules that govern the taxation of foreign income earned by U.S. corporations.  Our challenge is to set these rules in a way that is fair to taxpayers both with foreign operations and without them.  A necessary goal is to ensure that companies headquartered in the United States are not disadvantaged when competing in the global marketplace. 

This is particularly important because most goods and services no longer flow through purchases between exporters and importers, but through transfers between the affiliates of multinational corporations. Therefore, the rules governing transfer pricing, interest allocation, withholding rates, foreign tax credits, and the taxation of actual or deemed dividends impact these flows significantly.

In a related sphere, Treasury also negotiates international tax treaties. These treaties help increase the amount of investment between the United States and other countries. In addition, we negotiate international tax information exchange agreements, which provide for the exchange of information upon request for use in civil or criminal tax cases. In the past year, we have signed eight of these agreements with significant financial centers around the world, and more are on the way. The agreements – such as the ones we have entered into with Antigua and Barbuda, the Bahamas, the British Virgin Islands, the Cayman Islands, the Netherlands Antilles, Guernsey, Jersey, and the Isle of Man – help clean up the international financial system.  Tax evasion, money laundering and terrorist finance flourish together.

III.  Conclusion

While Treasury’s core international activities center on boosting growth in the U.S. economy, reforming the international financial institutions, promoting economic development and freer trade, enhancing international tax policy and fighting financial crime and terrorist finance, there are still other areas where Treasury engages abroad.  Treasury, for instance, chairs an important dialogue with the European Union on financial and regulatory issues, data privacy, and accounting reform, among other issues.  Treasury, as I mentioned before, also provides technical assistance to a number of countries around the globe.  I could delve much more deeply into any of these areas, but considering the list I have just reviewed, I’d like to cite a couple of observations. 

My first observation is the great importance of the first item:  promoting growth in the U.S. economy.  With the U.S. economy growing faster than other major developed economies, albeit not as fast as we would like, no single thing matters more for international economic policy – and especially the developing world’s future – than the health of the U.S. economy. 
Ironically, the U.S. economy is the very part of the world economy on which practitioners of foreign relations spend the least amount of time. U.S. fiscal, tax, and monetary policy are driven by government institutions where a domestic perspective predominates.

My second observation concerns the importance of the private sector.  For example, in advancing the economies of poor countries, we cannot rely on loans and grants from international financial institutions to do the job.  Rather, we try to focus the U.S. development agenda on helping to establish minimal conditions in which local enterprises can grow, prosper, and attract foreign investment.  Our efforts in the area of development, as well as on trade and tax policy, center on the recognition that the private sector is the most important implementer of international economic policy.  This is true, to a degree, even in the hunt for terrorist finance. We cannot be successful in stemming terrorist finance without the cooperation of private sector financial institutions. Incidentally, I am pleased to say that we have been getting their cooperation in abundance. 

Economic policy is well recognized today as an essential component of foreign relations.  At the same time, the things that matter most in the international economic policy arena are one or two steps removed from the focal point of most foreign policy executives, both here and abroad.  Therefore, the U.S. Treasury must and will continue its leadership on the hard, incremental work of establishing the right conditions for worldwide economic growth.