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Remarks by Ambassador Michael Froman at the CSIS Asian Architecture Conference

Remarks by Ambassador Michael Froman at the CSIS Asian Architecture Conference

September 22, 2015
Washington, D.C.

*As Delivered*

Thank you, Matt, for the kind introduction.  You’ve been well trained.

This conference on architecture is timely, because we’re involved in one of the largest architectural efforts in many decades.  And it’s important we get it right, because just as the best buildings outlast their architects, the standards and rules we’re putting in place today will shape the global economy for decades to come.  But this isn’t about designing structures that look good on paper, as blueprints or as models; it’s about setting standards, establishing rules of the road, and promoting habits of cooperation that will have a meaningful impact on behavior.  As Winston Churchill once said, “We shape our buildings, and afterwards, our buildings shape us.”

Architecting the Future Global Trading System

The Trans-Pacific Partnership is a next-generation trade agreement, and as far as blueprints go, it’s an ambitious one. It will set the rules of the road for trade and investment for nearly 40 percent of the global economy. When completed—and we are close—TPP will help bring jobs to our shores, stability to a region in flux, and higher standards to the global economy.

TPP is a critical part of our overall Asian architecture.  It is perhaps the most concrete manifestation of the President’s rebalancing strategy towards Asia.  It reflects the fact that we are a Pacific power and that our economic well-being is inextricably linked with the economic well-being of this region – the home to some of the largest and fastest growing economies of the world and the home to what is expected to be the largest middle class in the world.  The TPP’s significance is not just economic, it’s strategic – as a means of embedding the United States in the region, creating habits of cooperation with key partners, and forming a foundation for collaboration on a wide range of broader issues.

At the end of the day, though, the ultimate test for any trade agreement must be its economic merits: whether it supports jobs, strengthens the middle class, and promotes growth here at home.

When it comes to expanding “Made-in-America” exports, the record of the last five years is second-to-none. Under President Obama’s leadership, our exports have grown by nearly 50 percent, contributing about one-third of our economic growth between mid-2009 and 2014. And these record exports are supporting a record number of American jobs—11.7 million jobs at last count, including 1.8 million additional jobs over the last five years.  These are jobs that pay 18 percent more on average than non-export-related jobs, and – at a time with of a certain amount of economic uncertainty around the world – it’s important to remember that firms that export tend to weather economic volatility better than firms that don’t.

But the growth in global trade is slowing down, and we need to do everything in our power to remove barriers to U.S. exports and support the creation of more good, well-paying jobs here at home.  That’s where TPP comes in. 

The U.S. is already an open economy.  Our average applied tariffs are 1.4 percent.  Over 80 percent of imports from TPP countries enter the United States duty free.  We don’t use regulations as a disguised barrier to trade.  But look at TPP countries, and you’ll see that we face 70 percent tariffs on U.S. auto exports, 50 percent tariffs on U.S. machinery exports, hundreds of percent tariffs on the export of certain U.S. agricultural products.  And tariffs are really nothing more than taxes, taxes on the goods produced by American small- and medium-sized businesses and their workers, and by eliminating or greatly reducing those tariffs, TPP will deliver billions of dollars of tax cuts every year going forward.

But a tax cut is just the start.  TPP is a comprehensive agreement that will also eliminate non-tariff barriers; liberalize services trade; raise enforceable labor and environmental standards; improve the efficiency and enforcement of customs rules; strengthen the role of science in setting agricultural standards; and set and enforce balanced intellectual property standards.  This will be the first trade agreement to take on a number of issues that are shaping the 21st Century economy:  e-commerce and the digital economy, the free flow of data, the non-localization of servers, the building blocks of maintaining a free and open Internet.  It is the first trade agreement to take on the issue of state-owned enterprises, ensuring that when they engage in commercial activities, they compete on a fair and commercial basis.  For the first time, TPP explicitly takes on the issue of how trade can support development and how small and medium-sized businesses can best benefit from trade.  And, of course, underlying this agreement is a strong enforcement mechanism, including the availability of trade sanctions. 

This is what we mean by setting high standards and rules of the road.  This Administration’s trade policy is designed to advance both our interests and our values, both in the Asia-Pacific region and more broadly.  With TPP and T-TIP, we’ll have free trade with somewhere around two-thirds of the global economy.  And both are intended to be platforms to which additional countries could potentially accede.  When that kind of critical mass embraces high standards and modern rules of the road, it makes it much easier to advance those objectives at the multilateral level, across the global economy as well.

The post-war, open, rules-based trading system has served us well.  It allowed for the recovery and reconstruction of war-torn economies.  It created a foundation on which emerging economies developed, lifting hundreds of millions of people out of poverty.  It created opportunity and raised the incomes of middle class families across the United States.  But that system has also posed challenges, and has come under stress.

That’s why TPP is so important.  Because it reflects our interests and our values.  Because it updates the post-war, open, rules-based trading system. Because it raises standards and sets the rules of the road, unlocking opportunity in tomorrow’s global economy while addressing the challenges of globalization. 

And because it’s not the only game in town.  There are alternatives:  state capitalist, mercantilist models based on forced technology transfer, localization, state champions and generalized protectionism.  Models that do not recognize the link between trade, on one hand, and labor and the environment, on the other; between protecting intellectual property and maintaining an open and free Internet, on one hand, and innovation, on the other; between the appropriate application of national security and anti-monopolies, on one hand, and creating an attractive investment environment, on the other.

China’s Transition

Nowhere is this contrast starker than in Asia.  Later this week, President Xi Jinping will visit Washington, D.C., and we will have an opportunity to discuss many of these issues.  This is an important moment in U.S.-China relations, but an even more important moment in China’s economic transition.

To be sure, China’s rise over the past three-plus decades has been nothing short of remarkable. Market-based reforms and greater openness to trade and investment have led to rapid growth and increases in productivity, lifting hundreds of millions out of poverty. The peaceful rise of China is not only good for China itself, but for the Asia Pacific region, and the world.

But China is at an inflection point. Urbanization is well underway, and its demographics are deteriorating. High rates of growth from the addition of capacity and labor will fade, creating a greater need for growth through efficiency, innovation, and market-based productivity increases. But in many respects, reform and development of a market-based domestic economy slowed during the last decade. Weak intellectual property standards and persistent, or even intensified, information controls have devalued investment in science and technology. Over-investment in property and heavy industry has created high levels of debt, crippling over-capacity and the market volatility of booms and busts.

What is certain is that China’s current model is not sustainable. The model that helped China succeed during the past three decades cannot deliver the kind of success China needs during the next three decades. Looking forward, China needs to accelerate its transition from investment-led to consumer-led growth, from over-investment in heavy, export-dependent industries to the liberalization of services. Whether or not it does so will mean the difference between muddling through a slow down and charting a course for long-term, sustainable growth.

This is not just an issue for China; we all have an interest in China getting it right.  As the IMF warned just last month: “The biggest risk is that progress in reining in vulnerabilities and advancing structural reforms is too slow and that China, therefore, stays on the old growth path for too long. This would eventually result in a major slowdown in China, and would have significant negative spillovers to the global economy.”

The necessary reforms are no state secret. Transitioning to a more open and market-based economy will require bold action, including SOE reforms, pro-growth fiscal policies, legal and policy reforms to increase investor confidence, and a number of other structural reforms. Surely no one appreciates the necessity of these reforms more than China’s leaders themselves, who have incorporated bold reforms into official platforms. But increasingly, and especially in light of China’s slowing economy and recent market instability, observers are starting to question whether China has both the capacity and the commitment to follow through on these reforms.

In some important areas, there is a troubling gap between China’s official objectives and its actions. In particular, China’s Third Plenum objective of a more open attitude to trade and investment, a commitment to allow the market to play a decisive role, doesn’t square with what we’re seeing in a number of areas.

Requiring the transfer of technology, intellectual property, or user data as a de jure or de facto condition of doing business in China is not consistent with these objectives. Implementing an investment screen that focuses not only on traditional national security interests, but on “economic security” concerns as well, is not consistent with these objectives.  Applying anti-monopoly laws against foreign investors in a manner that at times appears discriminatory and overly broad, is not consistent, either. 

What some have called “innovation mercantilism” is a self-defeating strategy in the long run. According to the McKinsey Global Institute, if China wants to sustain GDP growth of 5.5-6.5% annually over the next decade, one third to one half of that growth must come from increasing total factor productivity, a rough measurement of innovation. With greater openness – to services, agricultural and manufactured goods trade; greater competition – including through a meaningful reform of the SOE sector; and fairer treatment for foreign businesses – including U.S. businesses, China can benefit from the productivity growth that trade and investment can help deliver.

We will use every opportunity to address these issues through dialogue.  We have the Joint Commission on Commerce and Trade, the Strategic and Economic Dialogue, and regular interactions between our leaders.  But when dialogue fails, we won’t hesitate to use dispute settlement, as appropriate.   Of the 19 enforcement actions taken by this Administration, over half have been against China, and we have won every case that has gone to conclusion.  

Opportunities to Send Signals

In today’s climate – one of slowing growth and increasing volatility, rising doubts and questions about confidence – it is all the more important that China sends clear signals about its economic policy intentions.  Starting with President Xi’s visit this week, China has important opportunities in the coming weeks and months to demonstrate the level of its commitment to pursue market reforms at home and to contribute to the rules-based system around the world.

Our Bilateral Investment Treaty, or BIT, negotiations are one area offering a major avenue to engage on China’s domestic reform efforts, to pursue greater market access, a more level playing field, and a substantially improved investment environment for investment. The BIT provides an important opportunity for China to send a clear and positive signal, to reaffirm its commitment to reform and to help strengthen confidence in China’s market and investment environment. In order to conclude the BIT, it’s going to need to be a high-standard agreement.  The two sides will need to reach agreement on a text that addresses critical concerns about China’s investment environment and on a negative list that is limited, narrow, and represents a substantial liberalization of the Chinese economy.

Now, let me be clear, over the past 20 months, we’ve made important progress in these negotiations. China’s revised negative list is better than its original, and certainly represents serious effort by senior Chinese leaders. Still, we are a substantial distance from the kind of high standard agreement necessary to achieve our mutual objectives.  China must also demonstrate that it is prepared to support market openings under the BIT with a domestic legal and policy regime that provides for an attractive investment environment so that what is given with one hand is not simply taken back with the other.  We look to President Xi’s visit and our other upcoming engagements with China to send a clear signal about its commitment to reform through the BIT negotiations.

Beyond the BIT, a number of important global efforts depend on the ability of the United States and China to work together constructively. China is the second largest economy in the world and the top single country trading economy in the world. As President Obama said last week, “with power comes responsibility.” We count on China to take on greater responsibility for maintaining the openness and strengthening the rules of the global trading system — commensurate with its increasing role in the global economy and the considerable benefits it has derived from that system.

For example, let’s get the Information Technology Agreement done.  With China’s help, we can reach agreement on the staging of the tariff elimination without further delay. 

Let’s move ahead expeditiously with the WTO Environmental Goods Agreement (EGA), which presents a historic opportunity for the U.S. and China to demonstrate leadership on trade and the environment. An ambitious EGA would help to lower the cost of clean energy and environmental technologies through tariff elimination, supporting green businesses while making it cheaper for both countries to address urgent environmental challenges, like air pollution and access to clean water.  No country stands to benefit more from the EGA than China, both as a producer of environmental goods and as a country that desperately needs those goods to address its significant environmental challenges.  With China’s help, we can make sure that the EGA does not get deadlocked as the ITA was for more than a year. 

And let’s work together to strengthen the multilateral trading system.  No WTO member has benefitted more from the multilateral trading system than China, and it’s in everyone’s interest that we strengthen that system so that its benefits are not only greater but also widely shared.  With China’s help, we can maximize the opportunity to reach a pragmatic agreement on a credible set of results for the Doha agenda at the WTO Ministerial in Nairobi in December.  This can pave the way for future WTO successes and a strengthened multilateral trading system.

Strengthening the Open, Rules-Based Trading System

Through TPP, we are working to strengthen the open, rules-based trading system by setting new, higher standards and upgrading the rules of the road to reflect the dynamics of the 21st Century. Through our engagement with China, we are encouraging the second largest economy in the world to redouble its efforts to achieve market reforms and to take on responsibilities commensurate with its role in the global economy.  Both of these efforts are critical to the future architecture of the Asia-Pacific region.  In the coming days, weeks, and months, we will have significant opportunities to further both these efforts.  It will be important that we and our trading partners seize those opportunities.  Thanks very much.