[Senate Hearing 112-83]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-83
 
   NAVIGATING A TURBULENT GLOBAL ECONOMY: IMPLICATIONS FOR THE UNITED 
                                 STATES

=======================================================================

                                HEARING

                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 3, 2011

                               __________

       Printed for the use of the Committee on Foreign Relations


         Available via the World Wide Web: http://www.fdsys.gov



                  U.S. GOVERNMENT PRINTING OFFICE
68-221                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


                COMMITTEE ON FOREIGN RELATIONS         

             JOHN F. KERRY, Massachusetts, Chairman        
BARBARA BOXER, California            RICHARD G. LUGAR, Indiana
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania   MARCO RUBIO, Florida
JIM WEBB, Virginia                   JAMES M. INHOFE, Oklahoma
JEANNE SHAHEEN, New Hampshire        JIM DeMINT, South Carolina
CHRISTOPHER A. COONS, Delaware       JOHNNY ISAKSON, Georgia
RICHARD J. DURBIN, Illinois          JOHN BARRASSO, Wyoming
TOM UDALL, New Mexico                MIKE LEE, Utah
              Frank G. Lowenstein, Staff Director        
        Kenneth A. Myers, Jr., Republican Staff Director        

                              (ii)        

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page

Geithner, Hon. Timothy F., Secretary of the Treasury, U.S. 
  Department of the Treasury, Washington, DC.....................     5
    Prepared statement...........................................     8
    Responses to questions submitted for the record by:
        Senator Richard G. Lugar.................................    35
        Senator Christopher A. Coons.............................    44
        Senator Marco Rubio......................................    45
        Senator Robert Menendez..................................    47
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening 
  statement......................................................     1
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     3

                                 (iii)

  


  NAVIGATING A TURBULENT GLOBAL ECONOMY: IMPLICATIONS FOR THE UNITED 
                                 STATES

                              ----------                              


                        THURSDAY, MARCH 3, 2011

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:33 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. John F. Kerry 
(chairman of the committee) presiding.
    Present: Senators Kerry, Menendez, Shaheen, Coons, Durbin, 
Udall, Lugar, Corker, Risch, Rubio, and Isakson.

            OPENING STATEMENT OF HON. JOHN F. KERRY,
                U.S. SENATOR FROM MASSACHUSETTS

    The Chairman. The hearing will come to order.
    Thank you all for coming today. And thank you very much, 
Mr. Secretary.
    We are all hugely aware of the economic challenges that 
America faces today. I've just come from a caucus meeting in 
which we did nothing but discuss the budget and the choices 
that we have to face. And I think, hopefully, we'll come 
together with a creative and thoughtful way of approaching 
these challenges. But, the truth is that the economic 
challenges we face today blur the lines between domestic and 
foreign affairs. Our economists need to think like diplomats, 
and our diplomats, frankly, need to prioritize economics, 
because our national security depends on it.
    So, it's a pleasure to have before us today the Secretary 
of the Treasury, who as an individual, both in his life before 
becoming the Secretary of Treasury, and particularly in these 
last 2 years, has been thinking in this kind of 
interdisciplinary way for many years.
    So, we're grateful to you, Mr. Secretary, for coming today 
to share your thoughts with us about this important 
interconnection.
    Two years ago, as we all know, the world faced a financial 
crisis of unprecedented magnitude and scope. Fortunately, 
governments around the globe came together to devise a 
response, including bolstering the IMF to provide support for 
faltering countries, coordinating a global economic stimulus, 
and harmonizing central bank measures to restore stability in 
the global banking system.
    I should also mention, in light of the Treasury's budget 
request, that at the urging of the G20 the multilateral 
development banks played a crucial role in driving the recovery 
and providing a safety net across the developing world. Thanks 
to this rapid and effective coordination, we avoided collapse, 
and today we are seeing a return to growth in many parts of the 
world--growth that is slow and tenuous in some parts, and 
faster in others, but, nevertheless, a very, very different 
picture from what we faced 2 years ago.
    The truth is, though, that substantial and serious risks 
remain. Some speculate that we may be headed for a double-dip 
recession. Instability in European banks and government 
finances has the potential to reverberate around the globe. And 
the revolutions that are sweeping the Middle East could 
challenge the economic growth that we all desperately need by 
dramatically increasing oil prices and providing significant 
instability in the marketplace.
    So, these are foreign policy problems as much as they are 
economic problems. In going forward, we will have to juggle our 
economic priorities with other national security interests. Let 
me be specific. An example: We have to continue to press hard 
for adjustment in the valuation of the Chinese yuan and for a 
fair and level playing field for our companies, even as we seek 
out areas of mutual cooperation on issues like North Korea, 
climate change, and unrest in South Asia and Africa.
    The events in the Middle East are not only going to have an 
immediate effect on world economic growth in the coming years, 
as I said, but they are, themselves to some measure, a 
consequence of economic dissatisfaction: youth who are 
desperate for employment, and families hungry for food or 
facing increased prices. The success of our engagement in that 
area is going to be driven with how well those nations, with 
our help, can meet the economic needs of their people.
    At the same time, much of our success, and certainly much 
of our power, stems from what we do here at home. Frankly, we 
keep slipping in estimates of global competitiveness. Every 
American should be deeply concerned about the connecting of the 
dots between the choices we make here at home and the impact 
that that leaves us with--the leverage it leaves us with, with 
respect to our interests abroad. In areas like infrastructure, 
for example, the building of America, energy, transportation, 
water, sewer treatment, schools, all of those measures.
    The most recent World Economic Forum survey ranked us, the 
United States of America, at 23rd, behind countries from both 
Europe and Asia. America is now 12th worldwide in the 
percentage of 25- to 34-year-olds with a college degree, 
trailing, among others, Russia, New Zealand, South Korea, and 
Israel.
    This year, investors have pulled $74 billion out of 
domestic stock funds and put $42 billion into foreign stock 
funds. High-profile multinational companies, including Applied 
Materials and IBM, are already opening major R&D centers in 
China. And as we look to the Googles of the future, it is 
increasingly possible that they will be founded by students 
from Tianjin University rather than MIT or Stanford.
    We need to face up to these new challenges and boldly 
embrace policies that support U.S. competitiveness. We need to 
invest in a modern infrastructure that enhances our ability to 
quickly and efficiently deliver goods and services and keep us 
competitive with other countries who offer companies faster and 
better ways of doing exactly that. We need to invest in schools 
so we can continue to produce and attract the brightest young 
scientists and engineers. And we need to nurture the spirit of 
innovation that has always made this country exceptional and 
that will enable us to transcend our current challenges.
    We all recognize that this is a time of tight budgets. But, 
I believe we must never forget to invest in our future. 
Remember that, in the 1990s--I remember those fights, as I know 
my colleague sitting to my left, Senator Lugar, does--we didn't 
just cut our way to a balanced budget, we grew our way there. 
There is nothing less than a matter of national security in 
these challenges.
    So, we've asked the Secretary here today, in order to 
provide insight into these connections--the connectedness of 
choices in Europe, choices in the Middle East, the things that 
we can do to leverage stability, and the things that we need to 
do, recognizing its connection to America's economic power. We 
want to provide insight into the implications of the economic 
instability at home and abroad. We want the Secretary to share 
with us his thoughts about the path to continued coordination 
on the international economic arena and the policies that can 
ensure competitiveness for the United States in a world of 
rising economic powers.
    So, it's a great pleasure to have you here today, Mr. 
Secretary, to consider these items. And I certainly look 
forward to your testimony.
    Senator Lugar.

          OPENING STATEMENT OF HON. RICHARD G. LUGAR,
                   U.S. SENATOR FROM INDIANA

    Senator Lugar. Mr. Chairman, I join you in welcoming 
Secretary Geithner and thank him for appearing again before the 
Foreign Relations Committee.
    The political upheaval in the Middle East, financial crises 
in Europe, continuing global food insecurity, rising demand for 
energy and other commodities; the increasing trade deficit with 
China; and ballooning foreign ownership of our debt all have 
implications for the livelihoods of Americans. Today we have 
the opportunity to learn what the administration is doing to 
address these global challenges and strengthen our economy.
    Given global financial linkages, we cannot achieve a full 
economic recovery in isolation from the rest of the world. This 
is especially true with regard to trade policy. For example, 
currently, the United States exports roughly 15 percent of our 
corn production, 45 percent of our soybean production, and 25 
percent of our pork production. Exports and investment growth 
help to sustain high-paying jobs in both our farms and 
factories.
    One of the largest employers in Rushville, IN, builds 
compressors for commercial refrigeration. Those compressors are 
integrated into other products and then sold throughout the 
world. They are prized over competing European and Asian 
products in places as far flung as Iraq for their dependability 
and superior customer service.
    Yet few may recognize how the economic health of American 
communities, large and small, depends on our ability to compete 
for exports. China, Europe, and other competitors are working 
aggressively to secure trade and investment partners. In our 
hearing yesterday, Secretary of State Clinton twice repeated, 
``We are in a competition for influence with China.'' This is 
especially true with regard to penetration of foreign markets. 
The Chinese see such linkages as essential to their economic 
future.
    With this in mind, I am especially concerned that the Obama 
administration lacks a sufficient commitment to exports and 
trade promotion. In the context of a $14 trillion national 
debt, trade promotion should be near the top of our economic 
agenda, because its job creating benefits occur without 
expensive programs that add to the deficit.
    I know Secretary Geithner and other officials understand 
the importance of trade liberalization. I also recognize that 
the administration can point to some ongoing trade initiatives. 
But there is no indication that the President is even 
considering elevating the type of bold trade vision that could 
invigorate our economy and help us compete in world markets. 
Although the President has committed to sending the trade 
agreement with South Korea to Congress for its approval, 
agreements with Colombia and Panama have languished, largely 
because of opposition expressed to President Obama by United 
States labor unions.
    Delay of these agreements has already resulted in 
significant loss of United States market share in Panama and 
Colombia. In Panama, large-scale projects, such as the $5.25 
billion Panama Canal expansion, the $1.5 billion Panama City 
Metro, and hundreds of millions of dollars in highway expansion 
contracts, have been awarded to non-American firms.
    The United States recently lost its position as Colombia's 
No. 1 agricultural supplier. Total United States agricultural 
exports to Colombia decreased from $1.8 billion in 2008 to $827 
million in 2010. United States market share is being lost to 
China, Brazil, and other countries in Latin America that 
benefit from trade accords with Colombia.
    What is most troubling is that these agreements are the 
low-hanging fruit of trade expansion opportunities. If the 
United States cannot complete trade promotion agreements with 
relatively small nations in our own hemisphere and quickly work 
through the political issues associated with them, our ability 
to execute a grander trade strategy is in serious doubt.
    Even if issues over the Colombia and Panama Free Trade 
Agreements were resolved, this would represent progress that is 
far short of what is needed in a highly competitive world.
    The President should be accelerating the priority of much 
broader trade initiatives like the Trans-Pacific Partnership 
and a revival of the Doha Round. If he does not commit the 
prestige of his office to an aggressive and broad campaign to 
open markets, he will be weakening chances for sustained 
economic growth in this country.
    A key test of administration resolve on trade will be the 
President's upcoming trip to Brazil. President Obama should 
propose that we initiate negotiations on a market access 
agreement with MERCOSUL, the Southern Common Market, which is 
led by Brazil. The export potential of such a landmark 
agreement could create enormous job growth in the United States 
and help solidify our political and strategic relations in 
South America. In addition, the President should work toward 
ratification of a bilateral tax treaty with Brazil that could 
greatly expand our economic links with that country.
    I thank the chairman for calling this timely hearing. I 
very much appreciate conversations that I have enjoyed with 
Secretary Geithner on global economic topics, as well as his 
willingness to be here today and to give us his testimony.
    I thank you, Mr. Chairman.
    The Chairman. Well, thank you, Senator Lugar.
    As always, very thoughtful comments, and I particularly 
appreciate the comments you made about the trade issue, which 
is something we need to get on; Congress needs to get that 
done. We've got three agreements that are waiting for 
ratification, and I think they are ripe, and hopefully we can 
come together around them.
    But, that said, Mr. Secretary, the floor is yours. We'll 
put your full testimony in the record, as if read in full, if 
you want, but suit yourself. And we look forward to your 
comments.
    Thank you.

    STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY OF THE 
   TREASURY, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

    Secretary Geithner. Thank you, Mr. Chairman and Ranking 
Member Lugar. And thanks for giving me a change to come and 
speak to you today. And I very much appreciated your opening 
statements, and look forward to a chance to discuss those 
questions.
    I want to start, just first, with a quick statement on 
Libya. As you know the President, last Friday, took decisive 
steps by issuing an executive order to freeze the assets of 
Muammar Gaddafi and four of his children, as well as the assets 
of the Government of Libya and its agencies, including the 
central bank and the Libyan Investment Authority, which is its 
sovereign wealth fund. And, thus far, we've found and seized 
almost $32 billion in assets; $30 billion initially, and we 
found another $1.9 just in the last couple days. And this is 
the most effective, and the quickest and the most forceful, use 
of our authorities under the Emergency Economic--International 
Emergency Powers Act that we've ever done. And I want to just 
emphasize our commitment to make sure that we're working with 
countries around the world to help make sure this broader 
effort has as much force as possible.
    I want to outline, today, our priorities on the 
international economic front. First and foremost, of course, is 
to work to strengthen and sustain the global economic expansion 
underway. And this is critically important to the United 
States, because the stronger the world is, the stronger will be 
our recovery here at home.
    Now, the balance of evidence suggests that growth is 
getting stronger, both in the United States and around the 
world. The price of oil has risen, adding to the pressures 
faced by consumers here and around the world. At this point, 
however, the impact of higher present and predicted oil prices 
are offset by other positive developments reinforcing growth 
around the world. Underlying inflation in goods and services in 
the United States is still low. And it's very important to note 
that there is still considerable spare oil production capacity 
globally. And the United States and the other major economic 
economies possess substantial strategic reserves of oil. And 
those reserves could be mobilized to help mitigate the impact 
of a major supply disruption.
    Food prices have also risen significantly, adding to the 
incomes of farmers, but also having a serious impact on 
inflation and living standards, particularly for the lowest 
income groups in developing economies. An effective global 
response to higher food prices, in low-income countries in 
particular, requires increasing investments in agriculture in 
those countries to help improve productivity in agriculture and 
help improve the quality of infrastructure in those countries. 
And this will require more support from the United States and 
other countries through programs such as the Global Agriculture 
and Food Security Program.
    Now, in Europe, as you noted, Mr. Chairman, the leaders of 
Europe are undertaking the very difficult task of designing a 
financial mechanism to support very challenging financial and 
fiscal reform efforts that are underway in several of those 
economies. This endeavor is, in many ways, as important, as 
difficult, as consequential, as complicated as the initial 
moves to monitor a union. Europe is working to build more 
effective institutions to discipline budget spending across the 
continent and to create a more effective means of dealing with 
problems with banks in the future. And they are making 
progress. And it's important that they continue to make it 
clear that they will do whatever is necessary to make sure that 
the affected countries and their banks have the financing they 
need to make these reforms work.
    Emerging economies, like China, Brazil, and India, are 
growing very rapidly. That growth is helping to support rapid 
growth in U.S. exports, which, in turn, is raising income and 
employment across the United States, in manufacturing, in high-
tech, and in agriculture.
    China is now allowing its exchange rate to gradually 
appreciate against the United States dollar. Since June of 
2010, China has allowed its currency to appreciate against the 
dollar at a pace of about 10 percent a year, in real terms. 
Nevertheless, China's currency remains substantially 
undervalued. And its real effective exchange rate, which is the 
measure of its exchange against the value of the exchange rates 
of all its trading partners, has not moved materially during 
this period.
    Now, looking beyond these immediate challenges and 
opportunities, we're working to advance four critical policy 
objectives globally.
    First, we're working in the G20 to help build consensus on 
long-term reforms that would provide the foundation for a more 
balanced, more sustainable global economy. We've got a 
framework for cooperation that includes movement to more 
flexible exchange rates by emerging economies; a type of early 
warning mechanism, to help reduce the risk that we see the 
reemergence of large external trade imbalances; and help for 
emerging economies to help manage the challenges that come with 
large flows of capital.
    A second priority: We're working very hard to build a more 
stable international financial system, with better oversight of 
the major global financial institutions, the major banks, and 
the global financial markets. And here, of course, are 
challenges to encourage the world to move to higher standards, 
more conservative standards for capital and other things, but 
with a level playing field, so that as we tighten standards 
here, we don't just see the risk move outside the United States 
to take advantage of lower standards in other countries.
    Third, we're working to open markets overseas so that our 
businesses can compete on a more level playing field there, as 
well. As you know, the President's negotiated a very strong 
trade agreement with Korea that will help create more 
opportunity for American companies in what's the 12th largest 
economy in the world, and support tens of thousands of new jobs 
here in the United States. And, of course, we want to work with 
Congress to move forward on that agreement. And we hope that 
deal--approval of that deal to improve export growth will help 
set a precedent, help pave the way for agreements with other 
countries, including the agreements with Colombia and Panama.
    Now, of course, finally, as you all understand, we have a 
very strong national security interest, national economic 
interest, in supporting growth and development in emerging 
markets and developing economies. Developments in Egypt, of 
course, underscore the stakes for the United States. As 
Secretary Gates has observed, development and security are 
inextricably linked in Egypt, Afghanistan, Pakistan, countries 
around the world. Our investments in institutions, like the 
World Bank, are among the most powerful and cost-effective ways 
we have to promote U.S. interests, our economic interests, and 
our security interests.
    Our contributions to these institutions account for only 5 
percent--5 percent of the entire U.S. foreign assistance 
budget, but they mobilize funds that total more than one and a 
half times the entire U.S. foreign assistance budget.
    The financial support these institutions can provide comes 
with tough conditions, conditions we could not impose on our 
own, that support reforms that help us export more and create 
more jobs in the United States. And it's worth emphasizing that 
if we cede influence in these institutions, or if we deprive 
them of resources, we will cede influence to China and other 
countries on the global stage.
    Many of you on this committee, after traveling to Africa, 
to Asia, to Latin America, have expressed concern about the 
dramatic expansion of commercial activity by China in other 
countries. For many countries the only alternative to financing 
from institutions like the World Bank is to turn to China.
    Now, before I close out, I want to emphasize, as you did, 
Mr. Chairman, that our ability to protect our national security 
interests and to advance our economic interests around the 
world depend, of course, on the strength of our economy at 
home. This financial crisis caused enormous damage, not just to 
the living standards of Americans, but to American credibility 
around the world. And we are just now in the process of 
repairing that damage, rebuilding confidence among the American 
people, among investors, and governments around the world.
    We have some way to go, however. And we need to be very 
careful that we work to reinforce and not jeopardize that 
improvement in confidence in the quality and care and prudence 
and competence of American economic policy. And that requires a 
relentless focus on the reforms and investments we need to 
strengthen our competitiveness over the long run. And it 
requires Washington to take the steps necessary to restore 
fiscal responsibility.
    Thank you very much. I look forward to answering your 
questions.
    [The prepared statement of Secretary Geithner follows:]

  Prepared Statement of Secretary of the Treasury Timothy F. Geithner

    Chairman Kerry, Ranking Member Lugar, members of the committee, 
thank you for inviting me to testify.
    You asked me to talk about the global economic outlook and how we 
can advance U.S. economic interests, working through international 
institutions such as the multilateral development banks.
    The global economy is now expanding after the profound crisis of 
the last 3 years, but the recovery is advancing at different speeds. 
The IMF forecasts that emerging markets will grow by 6.5 percent this 
year, while it expects growth in Europe and Japan to be 1.5 percent.
    The U.S. recovery stands in between, with growth gathering momentum 
and inflation risks modest, but with unemployment still unacceptably 
high. Consumers and businesses are now expressing more optimism about 
the future, suggesting momentum that will sustain growth in the coming 
months. Private sector analysts have raised their near-term forecasts 
and are projecting stronger growth in 2011 and 2012. However, we still 
face very substantial economic challenges. Millions of Americans remain 
out of work, and families across the country are still struggling to 
make up for losses in their savings and in the value of their homes.
    The global recovery faces several major challenges and risks in the 
near term. A few observations on each:
    First, we are witnessing historic changes in North Africa, and we 
are engaging with the economic authorities in the region and with the 
multilateral development banks to address pressing economic needs and 
chart a future that better meets the economic as well as political 
aspirations of the citizens in this region. Alongside the measures 
announced by Secretary Clinton, we will work closely with the World 
Bank, the African Development Bank and other governments to support 
investments and economic reforms that will promote private-sector job 
creation in North Africa.
    Regarding Libya, last Friday, President Obama took decisive steps 
to hold the Qadhafi regime accountable for its continued use of 
violence against unarmed civilians and its human rights abuses and to 
safeguard the assets of the people of Libya. The President issued an 
Executive order freezing the assets of Muammar Qadhafi and four of his 
children, as well as the Government of Libya and its agencies, 
including the Central Bank of Libya and the Libyan Investment 
Authority--the country's sovereign wealth fund. Thus far, at least $30 
billion in Government of Libya assets under U.S. jurisdiction have been 
frozen as a result of the Executive order issued by the President. 
Under the International Emergency Powers Act, this is the largest 
amount of assets frozen under any U.S. sanctions program to date.
    Second, in Europe, leaders are undertaking the difficult task of 
designing a financing mechanism that can help support the very 
challenging, multiyear programs of fiscal and financial reform that are 
underway in several of the member states. They are making progress. It 
is important that European leaders continue to make clear that they 
will do whatever necessary to make sure that the affected countries and 
their banks have the financing they need to enable those programs to 
succeed.
    Third, the largest emerging market economies are facing the usual 
pressures associated with strong growth. Inflation is accelerating. The 
prospect of future growth is naturally attracting foreign investment, 
putting upward pressure on exchange rates. Emerging market economies 
with flexible exchange rates have seen substantial appreciation. The 
upward pressure on those exchange rates is being accentuated by the 
fact that other major emerging markets are holding their exchange rates 
at undervalued levels and tightly limiting capital inflows, which 
serves to exacerbate price pressures within their own economies and 
shift the burden of adjustment to others.
    Fourth, rising global commodity prices--including for food and 
oil--are causing hardship in many parts of the world. The IMF estimates 
that commodity prices, in the aggregate, increased 25 percent in 2010. 
This is having a serious impact on inflation and the living standards 
of the lowest income groups in emerging markets, where food and fuel 
tend to comprise a larger share of consumption. In the United States, 
rising gasoline prices have left consumers with less money to spend, 
but underlying inflation across all goods and services is still modest.
    Developments in the Middle East have generated concern about 
potential disruption to the supply of oil, and this has put upward 
pressure on oil prices. We are monitoring this situation closely. But 
it is important to note that there is considerable spare oil production 
capacity globally, and we and other major economies possess substantial 
strategic reserves of oil. If necessary, those reserves could be 
mobilized to help mitigate the effect of a severe, sustained supply 
disruption.
    An effective global response to higher food prices requires 
increasing long-term investments in agriculture in low-income 
countries, through mechanisms such as the Global Agriculture and Food 
Security Program, the multilateral pillar of the President's Feed the 
Future Initiative. This program is designed to raise agricultural 
productivity and improve rural infrastructure to help farmers connect 
to markets.
    We also support measures to limit the potential for commodity 
market abuse and price manipulation through increased transparency and 
oversight of commodity markets and the associated derivatives markets. 
And these pressures on global commodity prices will be reduced as the 
rapidly growing emerging economies act to tighten policy.
    Fifth, the durability of the expansion will depend in part on the 
ability of advanced economies, including the United States, to deliver 
credible multiyear reforms to restore fiscal sustainability. G20 
leaders committed in Toronto last June to halve fiscal deficits by 2013 
and to stabilize debt-to-GDP ratios by 2016.
    Beyond these immediate challenges, we are working to make global 
growth more sustainable in the future, to build the foundations of a 
more stable financial system, to expand opportunities for trade, and to 
provide the support for reforms in developing and emerging economies 
that contribute to our own economic and security interests.
    First, we are pursuing a number of reforms to the international 
monetary system. The world needs a better set of incentives for 
governments to promote external sustainability and reduce the risk of 
the reemergence of large trade and current account imbalances. In the 
G20, we are moving gradually to build consensus on ways to measure 
external imbalances and identify their causes. The IMF will have a key 
role in this process, providing independent and public assessments of 
the impact of each country's policies on global economic stability and 
growth.
    A central component of this effort has to be the development of 
stronger norms for exchange rate policies that will help accommodate 
changes in the global economy. There is broad consensus that the major 
economies--not just Europe, Japan, and the United States, but also the 
large emerging economies--need to allow their exchange rates to adjust 
in response to market forces.
    Our bilateral and multilateral discussions with China have already 
yielded some progress. Since June 2010, China's authorities have 
allowed their currency to appreciate against the dollar at a pace of 
about 6 percent a year in nominal terms, and more than 10 percent a 
year in real terms, given faster inflation in China than in the United 
States.
    Nonetheless, China's currency remains substantially undervalued, 
and its real effective exchange rate--the best measure to judge its 
currency against all of its trading partners--has not moved much in 
this latest period of exchange rate reform.
    Related to this, we need a stronger consensus on policies that can 
help emerging economies manage the risks that can come with large flows 
of capital. These economies have considerable investment needs, and 
many are seeing substantial inflows of foreign capital.
    The challenge is to reduce the risk that these flows contribute to 
excess growth in credit or asset prices and leave the domestic 
financial system vulnerable to exchange rate risk. This requires 
carefully designed prudential measures in the financial sector, as a 
complement to the classic mix of monetary and fiscal restraint and 
flexibility in the nominal exchange rate.
    Second, a more stable international monetary system requires 
stronger oversight of the major global financial institutions and 
markets. The United States has demonstrated its leadership in this 
effort with the enactment of the Dodd-Frank Act and its financial 
reform last year. We have agreed with our international counterparts to 
impose tougher restraints on financial institutions' risk taking and 
leverage, to bring oversight to the derivatives markets, and to improve 
our capacity to contain the damage caused by the failure of large 
financial institutions.
    This is a complicated undertaking, and we need to be very careful 
to make sure we create a more level playing field across countries so 
that financial activity does not migrate to jurisdictions where 
standards are weaker or less rigorously applied. We also need to 
provide participants with as much clarity as we can about the reforms 
so that the markets have time and opportunity to adjust to them.
    Third, to promote growth at home we must continue to open markets 
overseas so that U.S. businesses can compete on a level playing field 
and U.S. workers can prosper. Working with Congress and with a broad 
range of stakeholders, we are pursuing our trade agenda on three 
fronts--multilaterally through the Doha Round, regionally through the 
innovative Trans-Pacific Partnership negotiations, and bilaterally 
through free trade agreements (FTAs) with Korea, Colombia, and Panama. 
Our goal is to conclude and implement enforceable, high-standard 
agreements that directly benefit our workers, our farmers, and our 
businesses.
    Our FTA with Korea does just that. It is a good deal. It will 
enhance the competitiveness of U.S. businesses in the world's 12th-
largest economy. It will support at least 70,000 American jobs. It will 
add an estimated $10-12 billion to U.S. GDP, increase goods exports to 
Korea by $10-11 billion annually, and provide access to Korea's growing 
$560 billion services market. It sends a strong signal of U.S. 
leadership and commitment to the East Asian region. And it serves our 
national security interests as the United States and Korea work 
together to ensure peace and security in the region.
    The administration intends to submit the agreement to Congress soon 
for its consideration and will work with you to get it implemented. If 
enacted quickly, this agreement can have an immediate impact on opening 
markets, stimulating U.S. growth, and supporting jobs here at home. The 
President also directed his team to address the outstanding issues 
regarding the Colombia and Panama FTAs with the objective of bringing 
those agreements to Congress for consideration as soon as the issues 
are resolved.
    Fourth, we must work to support economic reforms in emerging 
markets and developing economies, which contribute not only to our own 
long-term economic prosperity but also to our national security. As 
Secretary Gates has observed, ``Development and security are 
inextricably linked.''
    Our investments in the multilateral development banks (MDBs) are a 
critical and cost-effective component of the United States global 
economic leadership. Our leadership in the MDBs helps ensure that these 
institutions support vital U.S. interests around the world--promoting 
our national security objectives, preventing and mitigating financial 
instability, creating markets for clean energy technology, and 
contributing to economic growth here at home. Through their use of open 
and fair bidding processes for procurement and investment 
opportunities, our investments in the MDBs have a direct impact on jobs 
here at home. In exchange for our financial commitment, we leverage our 
leadership to advance policy reforms that increase the effectiveness of 
the MDBs themselves and that fight corruption and ensure best practices 
on the ground. In Africa, for instance, the alternative to MDB 
financing is low-cost financing from China--presenting recipient 
nations with the choice between MDB funding that makes hard asks of 
them for transparency and reform, and Chinese funding that comes with 
few conditions except for the enhanced political influence that flows 
to the lender.
    Our investments must also include supporting a global solution to 
the long-term security risks posed by climate change through reduced 
emissions, increased resilience, and prevention of economic losses from 
climate-related disasters. Population displacement, declines in global 
food supply, and major water shortages are all expensive destabilizing 
long-term global impacts that can be cost-effectively addressed now 
through prudent policies and investments by all countries.
    The MDBs leverage the maximum impact for every U.S. taxpayer 
dollar. We expect that the MDBs cumulatively will make $95 billion in 
financing commitments globally in 2012. In comparison, the entire U.S. 
foreign assistance budget request is $61 billion for FY 2012, of which 
the Treasury Department has requested $3.3 billion for the MDBs. In 
other words, Treasury's $3.3 billion request leverages $95 billion in 
MDB activity supportive of U.S. global interests, or over 50 percent 
more than the U.S. Government's international affairs budget.
    The cuts to Treasury's international programs that we saw in the 
House legislation would mark an unprecedented abandonment of U.S. 
commitments to institutions that play a critical role in promoting our 
national security and economic interests around the world. With these 
cuts, we would effectively be ceding the leadership and influence we 
have valued in vital institutions like the World Bank for more than 60 
years, in Republican and Democratic administrations alike. And we would 
be doing it at the very time our leadership matters most.
    Ultimately, our capacity to retain our global economic leadership 
rests on the strength and stability of the U.S. economy. Most of the 
key reforms we need to build a more robust and resilient global economy 
are in our own hands.
    The President has outlined a broad strategy to help strengthen 
economic growth with investments in education, innovation, and the 
Nation's infrastructure. Alongside those investments, we must reform 
the Nation's finances to restore fiscal responsibility. Our deficits 
are too high and they are unsustainable. Left unaddressed, these 
deficits will hurt economic growth and make us weaker as a nation.
    The President's Budget presents a detailed plan to reduce spending 
and deficits, cutting the inherited deficit in half as a share of the 
economy by the end of the President's first term. The budget includes 
proposals that will shrink deficits by more than $1 trillion over the 
next decade, essentially stabilizing the national debt held by the 
public as a share of the economy starting in 2013.
    Meaningful deficit reduction requires serious cuts to government 
spending. The budget proposes a 5-year freeze of nonsecurity 
discretionary spending at its 2010 nominal level, reducing the deficit 
by more than $400 billion over the next decade, and bringing the level 
of nonsecurity discretionary spending to its lowest share of our 
economy since the Eisenhower administration.
    But it is not enough to spend less; government must also spend more 
wisely. The President's Budget sharply restrains overall spending, 
while also investing in important areas where the government has a 
clear role to provide public goods that promote future economic growth 
and competitiveness: education, innovation, and infrastructure.

   An educated and skilled workforce is critical for the United 
        States to compete in the global economy. The need for 
        additional investment in education is striking: America has 
        fallen to ninth among advanced countries in the proportion of 
        young people with a college degree. The budget proposes 
        targeted investments in education to help us regain our 
        competitive edge.
   Investments in research and development (R&D) produce the 
        technological advancements that contribute to productivity 
        growth and improvements in U.S. living standards. The President 
        believes that government has an important role to play in 
        promoting technological progress, just as it has historically, 
        and the budget includes R&D investments for this year to 
        support basic research and clean energy.
   Infrastructure is critical to economic growth and 
        competitiveness. In addition to a $50 billion up-front 
        investment in transportation infrastructure to create jobs in 
        occupations that have been hit hard by the recession, the 
        budget lays out a long-term plan for sustained, targeted 
        investments in the most effective infrastructure programs and 
        projects.

    The President's plan provides a balanced strategy for reducing 
spending and reducing future deficits while preserving the room for the 
investments that are critical for future economic growth.
    These are the most important steps we can take today to ensure that 
the U.S. economy remains strong and vital in the years and decades 
ahead. Fundamentally, a robust economy at home is the single most 
important contribution we can make to continued U.S. economic 
leadership and to the global economy as a whole.

    The Chairman. Well, we look forward to having a good 
dialogue with you today, and I thank you for those opening 
comments.
    As you know, the House budget, passed the other day, 
significantly cuts the funding for the Department of Treasury's 
international affairs programs, including the funding of the 
shares in the Asia Development Bank. I believe that, unlike 
other multilateral programs that the United States funds from a 
year-to-year basis, that the shares, the ability of the United 
States to participate in those shares, is literally a one-time 
opportunity: use them or lose them. So, if we don't subscribe 
to these shares now in the budget, it's my understanding we 
lose them for good. And then China will, by default, end up as 
a larger shareholder than the United States for the first time. 
Is that accurate?
    Secretary Geithner. Yes. It's very important to underscore 
that if we are unable to deliver on the commitments we made as 
a country, made, of course, with close consultation of Members 
of Congress, then we face the following types of consequences 
across these institutions. And it's different across the 
institutions. In Asia, it means that we fall even further 
behind. I think now we're only sixth, in terms of importance 
and as we fall further behind, we cede more influence with 
China, we lose our capacity to veto core decisions. That would 
be hugely damaging to the United States.
    But, you need to look beyond that to the costs of further 
erosion in our position in the World Bank or of stopping the 
Inter-American Development Bank from going forward. And the 
ranking member referred to the deep economic stake we have in 
Latin America today as their economies expand. Huge economic 
stake for us in being part of that expansion.
    In many way, these institutions are as effective--they're, 
in some ways, more effective than what we do on the trade side. 
Some of the most important trade reforms that we've ever seen 
across the emerging economies that reduced trade barriers were 
put in place as part of World Bank reform programs. So, if 
these institutions are not able to operate and we do not have 
the capacity, or lose the capacity, to influence what they do, 
we face enormous risk, not just in countries like Afghanistan 
and Pakistan, where we have American lives at stake directly, 
but around the world, where we have many important interests at 
stake.
    So, we have in the past, and we can today, find a way to 
restore a gravity to our fiscal position, reduce our long-term 
deficits, and do that in a way that preserves the capacity to 
maintain investments of the institutions that have enormous 
returns.
    The Chairman. Mr. Secretary, let me just share with my 
colleagues that this relationship that you've just described 
the importance of was addressed by General Petraeus, who 
praised the United States, the efforts of the Bank, with 
respect to the Afghanistan/Pakistan peace. And he said the 
following, ``Strong partnership with the Asian Development Bank 
is part of our overall United States purpose and goals in these 
areas of critical importance.'' Can I ask you just to share 
with us, What are the national security implications of the 
other development banks commitments that we need to make, in 
terms of the funding for the fiscal year 2012 budget, like the 
World Bank and so forth? Could you speak to that, about----
    Secretary Geithner. Absolutely. I think--you know, I want 
to be careful how I say this--but, I think that it--this is 
going to be generally true across these specific cases--but, 
whether you look at Afghanistan or Pakistan or looking forward 
to Egypt, where we hope to help aid this transition and the 
reforms that'll provide more opportunity to those citizens, 
throughout Africa and in almost all regions of the world, these 
institutions--the World Bank and the Multilateral Development 
Banks, the regional banks--are, in most cases, the largest 
source of assistance available.
    And it's, of course, not just the financial resources, it's 
the conditions that come with those resources. And these are 
conditions that not just try to reduce corruption, they're 
conditions not just to improve transparency, quality of 
governance, or have better environmental safeguards for 
extractive industries; these are reforms that help open those 
economies up, strengthen property rights, make it more likely 
that their private sectors can flourish, opportunity spreads.
    And our military leaders have spoken eloquently about the 
connection to our security interests that these institutions 
provide in those countries. And without them, we would have a 
much-diminished capacity to help make sure that there is 
development alongside our efforts to bring more security in 
those countries.
    So, it would be deeply damaging to our own interests 
directly, where we have lives at risk, and to our long-term 
interests, not just to the moral imperative of trying to make 
sure that, as a nation, we're making sure that we provide more 
support against infectious diseases, that we're doing a better 
job of alleviating acute poverty in those countries; enormously 
important strategic, economic, and moral imperative. And these 
institutions are, again, the most effective means we have to 
leverage resources with conditions that work for our interests.
    The Chairman. Mr. Secretary, I met, today, with your 
nominee to succeed Stuart Levey, David Cohen. And let me just 
compliment Mr. Levey's tenure, which I think has been 
exceptional. And it's one of the most important tools. We 
worked in developing that whole concept. I remember, back when 
I was on the Banking Committee, and we were looking at the 
difficulties of the flow of money and the lack of transparency 
and so forth.
    I think your division has done an outstanding job of 
helping to track money and understand where it is, the mere 
fact that you've been able, so quickly, to identify Gaddafi 
assets or Mubarak assets. Incidentally, staggering sums, by any 
standard. To learn that there are $31 billion, or something, in 
the name Gaddafi in various parts of the world, including in 
our country, I think a lot of people are amazed by that.
    It struck me, in the conversation I had with his hopeful 
successor, David Cohen, that perhaps that's an area where we 
even need to do more. I've been struck, for a number of years--
a number of years ago, I did a major investigation on money 
laundering, money trafficking, et cetera--it's a scourge to all 
of us, in terms of good governance and the standards by which 
we operate. And, to the degree that people have places to run 
off and hide money in one tax dodge or another, they undermine 
the entire democratic system, or even governance system, of a 
country; they leave a greater burden to people who don't have 
those opportunities, and it lends itself to all kind of--other 
kinds of potentially dangerous activities: the support of 
Lashkar-e-Taiba, al-Qaeda--run the gamut. And these are the 
ways in which they get their weapons, the way they move money, 
and so forth.
    I wonder if, in light of that reality, and still the 
existence of too many of these dodges, do we need a greater 
commitment? Do we need more super computer capacity, more 
ability to have accountability for the transparency and flow of 
these kinds of funds? And wouldn't that aid us, really 
significantly even, in knowing ahead of time what kinds of 
potential damaging activities are being engaged in?
    Secretary Geithner. Mr. Chairman, I welcome your attention 
to this issue. And I could not underscore more the importance 
of making sure we preserve and sustain a very substantial 
capacity to use--to marry intelligence with effective 
sanctions, to prevent people from accessing the finance they 
need to advance a nuclear program, to finance terrorist 
activities, or to finance the whole range of illicit activities 
that threaten the fabric of our societies. And this is a 
remarkably effective program, and we are going to make sure we 
do everything we can to maximize the tools we have to pursue 
this.
    I would say that, as you know more than anybody, 
overwhelmingly, the effectiveness of our efforts depends on our 
ability to get other countries to move with us, because it 
requires a relentless focus on expanding the net on tracking 
down where the money moves, when we're effective. And one of 
the most important things we've been able to do is to encourage 
countries to adopt similar regimes to ours and to move with us 
on going after these flows of funds as quickly as possible. 
But, I welcome your support to that. And we'd be happy to talk 
more about what we need to do in the future.
    The Chairman. Well, I look forward to that. And we, very 
much, look forward to working with you. And I hope that the 
Congress will not wind up being penny wise and pound foolish in 
this process.
    Senator Lugar.
    Senator Lugar. Secretary Geithner, I mentioned in my 
opening statement the President's upcoming trip to Brazil. The 
unfortunate fact is that Chinese exports to Brazil have 
increased significantly, and thus, China has overtaken the 
United States as Brazil's leading trading partner. Now, my 
understanding is the new President of Brazil, President 
Rousseff, has signaled that she wants to work much more closely 
with the United States. Maybe some feel she's more enthusiastic 
than her predecessor. With these facts in mind, what are you 
advising the President with regard to this trip to Brazil? How 
can we forge a significantly better relationship with this very 
important friend?
    Secretary Geithner. Well, you are absolutely right about 
the importance of this and the opportunity we have now with the 
new leadership in Brazil. And I was in Brasilia, just a few 
weeks ago, and met with the percent, and she made it clear to 
the United States, to us, that she is looking for ways to build 
a closer relationship, not just economically, but 
strategically; and we want to take advantage of that. And we 
see enormous opportunity, in a whole range of economic issues, 
to build a closer relationship. It's obviously true in energy, 
there are some issues on the tax side, that you referred to, 
where we may be able to make some progress. They are eager for 
U.S. investment, U.S. technology, U.S. capital, and we want to 
take advantage of that. So, we're going to be--that's what the 
President's going to be talking with, there. And you're right 
to remind the Americans of the importance of that relationship. 
And we have a lot at stake.
    Senator Lugar. Well, I look forward to your report back to 
us on steps we might take to work with the administration in 
strengthening this relationship after the President returns. 
This is very critical given the new President and the 
opportunity to forge a stronger relationship.
    Now, regarding Colombia, I received a call, unexpectedly, 
from the President of Colombia, 2 weeks ago. I suspect he's 
been calling a number of people--pleading with us to move on 
with our pending bilateral free trade agreement. And my 
understanding is that a trade representative mission went to 
Colombia recently, and that one may be going to Panama soon. 
But, what are the barriers to progress on this issue? Why 
doesn't this move?
    Secretary Geithner. Senator, I want to just begin by 
emphasizing something you said in your opening statement, which 
is that unless we are able, as a country, to pass trade 
agreements into law that we've committed to in the past, 
agreements that work for American companies and American 
workers, then we will be unable to make progress on things 
where we have even greater interest. For example you referred 
to the Trans-Pacific Partnership, with the Doha Round. The 
world looks at us and they've seen us unable or unwilling to 
legislate these agreements, and that makes them reluctant to 
move with us on those other areas. So, a necessary condition 
for making progress in Asia and Latin America, in the most 
rapidly growing parts of the world, is to demonstrate that 
we're able to move these agreements forward.
    Now, as you know, we have a very good Korea Agreement we 
hope Congress will act on soon. And we are working very hard to 
put in place the types of changes and commitments we think 
would make it possible to move forward on Colombia and Panama. 
And the President believes it's important for us to do that. 
And, as you referred to, we're in very close consultation now, 
with the Government of Colombia, on ways that might improve the 
odds we can bring that to Congress to consider.
    Senator Lugar. Are we in close contact with the United 
States labor unions that have blocked this for years?
    Secretary Geithner. Of course. Of course, because we want 
to make sure that, when we bring this to the Congress, that we 
can get it done. And so, we are doing what we normally do in 
this context, which is to make sure that we have agreements 
that will have broad support from all the affected parties, and 
could work. So, we're talking to the Government of Colombia to 
ways we can move this forward. And again, we're hopeful we can 
come to you and find a way to do that.
    Senator Lugar. Well, I'm very hopeful. Looking at just one 
practical problem the current situations entails from the point 
of view of my Indiana constituents, even exporting soybeans to 
Brazil or Colombia is inhibited. There is a great market for 
soybeans right now----
    Secretary Geithner. Right.
    Senator Lugar [continuing]. But if you can't export 
American goods under current provisions, then it's not very 
helpful to American farmers.
    Secretary Geithner. And again, the longer we wait--you said 
it exactly right--the longer we wait, we just lose more 
business. Other countries come in and they take that business 
from the United States. It makes no sense for us, as a country.
    Senator Lugar. You mentioned in your opening statement 
United States efforts to freeze the assets of Muammar Gaddafi 
and his family, along with those of the Goverment of Libya. 
Could you explain to us and to the American people, what 
happens to this money? In other words, these bank accounts are 
there and somebody's frozen the assets; but, what happens to 
the assets themselves?
    Secretary Geithner. We hold them and prevent any transfer 
of funds from those accounts until we have a resolution of the 
underlying problems that gave rise to the act, to the seizure. 
So, they're frozen, in the purest sense of the word.
    Senator Lugar. Now, for the sake of argument, say the 
United States was to freeze the assets of former Egyptian 
President Mubarak and his associates. Meanwhile, let's say that 
the Egyptian economy continues to have problems, and that the 
income coming into the country continues to sink as world food 
prices rise. Such a state of affairs would be especially 
difficult for Egypt, as they import 60 percent of their wheat 
from the United States, for example, and it's twice as 
expensive as it was last year. So, here you have people who are 
very hungry in Egypt, and they say, ``Surely there are tens of 
billions of dollars out there, albeit acquired in a strange way 
by the former government, but regardless this ought to be 
Egyptian money. There are human beings that are suffering.'' 
Now, what sort of action do we take at this point?
    Secretary Geithner. Well, you're exactly right. The purpose 
of this, of course, is to make sure those assets can be 
preserved for the benefit of the people and the legitimate 
government of the country.
    Now, it's important to recognize, as a complement to those 
efforts, the World Bank and the African Development Bank and 
other institutions have substantial resources available and in 
the pipeline to try to make sure they can help the government 
through the transition and help make sure, again, these 
governments are pursing reforms that expand opportunity for 
their citizens. So, we have other tools available quickly that 
can be deployed to help.
    Senator Lugar. Let me ask one final question.
    As a part of the financial reform bill, a very small 
amendment was included, called the Cardin-Lugar amendment, 
after my distinguished friend, Senator Cardin, of this 
committee. And it's created quite a stir, because it requires 
American companies and financial institutions to disclose their 
transactions with governments who have sometimes failed to 
exercise transparency with regard to their revenue from the 
sale of oil, gas, and minerals.
    Now, there is some backlash from American oil firms, who 
say, ``Well, that's unfair. After all, those that are playing 
the game out there are bribing the devil out of these 
leaders.'' And Americans are not saying we want the same 
privilege, but they're just saying we're at a disadvantage by 
being so transparent. Others are ecstatic that there finally 
might be some light shed of what has been a terrible 
international scandal. Do you have any insight as to what is 
going on out there? Or any comment about this?
    Secretary Geithner. Well, I'm a long supporter of that 
specific initiative, and I think it has a very powerful effect, 
again, on, not just improving transparency about the resources 
these countries have available, but in improving the odds 
they're used for the benefit of their people. Now, you're right 
to say that you want this to be done on a global scale. And 
again, I just want emphasize again, because you do have the 
responsibility of authorizing our commitments to these 
multilateral development banks, this is exactly the types of 
reforms that these banks are able to bring about. And that 
helps to make sure that our efforts, alone, are complemented by 
a global effort that can help bring about reforms.
    Now, I commend you very much for that initiative. I think 
it's enormously promising. I'd be happy to try to give you more 
details on what we think is happening on the ground, in 
response.
    Senator Lugar. Yes. Please keep tracing it for us, if you 
will.
    Thank you.
    The Chairman. Thank you, Senator Lugar.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for your service. I think you've 
done an extraordinary job in one of the most difficult periods 
of time to be the Treasury Secretary, so I appreciate that.
    Having said that, let me ask you about an issue that 
concerns me. One of the themes of this hearing is addressing 
threats to our economic recovery. And, in that context, I think 
we have to consider China's continued undervaluation of its 
currency and the impact it has on our economy, which is 
particularly important as we seek to double our exports by 
2015.
    Now, I know that the Department, last month, issued a 
report that basically said China does not qualify as a currency 
manipulator because it had permitted some appreciation of the 
renminbi. But, it's also interesting to read, in that same 
report, the following, ``A renminbi that is below its 
equilibrium value decreases the purchasing power of China's 
consumers. Underevaluation increases the pricetag on items such 
as imported food, gasoline, new homes built with imported 
materials, a foreign automobile; it encourages Chinese firms to 
produce for export markets and cater to the preferences of 
foreign rather than domestic consumers, placing an additional 
damper on the growth of domestic demands.''
    China has largely recovered from the global financial 
crisis. It expanded its economy by 10.3 percent. However, we're 
still struggling here in the United States.
    In the Banking Committee, we raised this question with you. 
I want to raise it here again, because it seems to me, that in 
addition to market access questions, United States firms are at 
a price disadvantage because of China's currency policy. Is it 
going to take legislation from the Congress to get us to where 
we need to be? Because, I think the Chinese have visited Texas, 
and learned the Texas two-step--one step forward and two steps 
back.
    Secretary Geithner. Senator, this is a very important issue 
to us. And, of course, as you quoted in your remarks, it's 
essential for China that they move, because if they do not 
move, they're going to face the risk of much more rapid 
inflation, much more risk of future financial crises. And 
that's why they're beginning to adjust now. They have not moved 
that far yet, but if they were going to continue on the current 
pace, which I expect they will, in real terms against the 
dollar, the currency's now moving at an annual rate of about 10 
percent a year.
    And the reason why that's very important is that companies, 
of course, have to look forward, they have to look ahead as 
they make investments; they decide where to build their 
factory, where to buy from. And that competitive landscape is 
now moving in our direction definitively. And businesses around 
the world can look at China now. They see rising prices, rising 
wages, rising costs of doing business. And, with the currency 
moving, both in nonreal terms and real terms, it'll shift the 
playing field in our direction.
    Now, still undervalued substantially. They have not moved 
very much yet. They're really only moving against the dollar, 
but, of course, we care principally about the dollar. And we 
want this to be sustained over time. And we are going to 
continue to use every tool of persuasion we have, directly and 
multilaterally, to encourage them to move more quickly.
    But, it's going to happen. It's inevitable it's going to 
happen. And--because, again, if it--if they don't continue to 
move--well, let me say it differently. It's either going to 
happen through more rapid inflation, in which case, in real 
terms, it's still moving in our direction, or it's going to 
happen because the exchange rate appreciates more rapidly. But, 
the real annual rate of appreciation against the dollar now is 
north of 10 percent a year. And if that were sustained, again, 
that's a huge shift over time.
    Senator Menendez. But, what if, for argument's sake, your 
expectation that they will continue to move in this direction 
isn't realized?
    Secretary Geithner. Well, that would be of enormous concern 
to us and, I think, fundamentally unattainable for them. But, 
let's just go through that thought experiment.
    If they slow the pace of appreciation against the dollar, 
inflation is still running substantially above inflation in the 
United States, two-some--by some measures, three times the rate 
of growth in the United States. So, in real terms, the 
competitive landscape is still shifting in our direction. And 
the risk for them, if they slowed the pace of appreciation, is 
that inflation will accelerate further. That's why it's 
inevitable that they continue to move. And, of course, we want 
them to move as quickly as possible.
    Senator Menendez. Well, I would prefer, both for their 
interest and ours that they move more quickly, because it will 
result, here at home, in more jobs, and that's what this is all 
about.
    Secretary Geithner. You're exactly right.
    Senator Menendez. Taking China as an example, we continue 
to face overseas challenges that would undermine the value of 
United States intellectual property, at the expense of United 
States innovation and jobs, which is a clear threat to 
President's call, in his State of the Union, to grow innovation 
here at home. Given the fact that the Trans-Pacific Partnership 
is being billed as a regional platform that could potentially 
expand to include China and India, why would the United States 
sign on to an agreement that would potentially lower IP 
standards for the very industries that are at the core of our 
community and that we want to ensure have the exportabilities 
that would create jobs here at home? What is the administration 
going to do to ensure that that Trans-Pacific Partnership 
builds on the Corus agreement and provides the highest IP 
standards?
    Secretary Geithner. Look--and you're raising an enormously 
important issue, and you're absolutely right that we're doing 
agreements like this, that convey benefits to the participants, 
we want to make sure that they contain the highest possible 
standards for, not just the market access we get, but for 
protection of our intellectual property. So, absolutely, we 
share that objective. And we would want to make sure that any 
participant is held to the highest standards for protection.
    And we are working very, very hard to get China to 
strengthen the protections they provide to American innovators. 
And we're making a little progress, but not nearly enough yet. 
And we need to push very hard on them and others to make sure 
that we're getting the same protections that we get in lots of 
other countries.
    Senator Menendez. Well, I hope that we will take a very 
strong position, including on pharmaceuticals, for example, on 
this question of intellectual property rights, because 
otherwise our export initiatives are going to be undermined 
dramatically.
    Last, looking at China as it relates to Latin America, it 
is negotiating agreements in Latin America to increase its 
development fund in Venezuela to $12 billion, to fund $1 
billion for hydroelectric plants in Ecuador, to provide 
Argentina access to $10 billion in Chinese currency, and to 
lend Brazil $10 billion for its national oil company. Right 
now, it's the No. 1 trade partner with Argentina, Brazil, 
Chile, and Peru, in a hemisphere that we have so much interest 
in. We had the Secretary here the other day. What can we do to 
provide, in that context, American companies with a competitive 
advantage in the hemisphere?
    Secretary Geithner. You've got to start with three simple 
things that we know how to do. Where we have the chance to 
negotiate trade agreements that are in our interest, have 
strong protections for American companies and workers, we need 
to negotiate them and pass them. We need to make sure that we 
have the capacity to--and we do--the will and the capacity to 
match countries that provide export credit, to support their 
exports in those countries that violate the basic international 
commitments, which we do and we will. And it's very important 
to emphasize that we need to make sure that we have the 
capacity to make it possible for institutions, like the World 
Bank or like the IDB, to play a major role in financing 
infrastructure and other types to development initiatives in 
those countries. Because, again, those come with conditions 
that make sure there's a level playing field for everybody.
    If we're unable to do those three things--trade agreements, 
strong Ex-Im capacity, and active role for the MDBs--we will 
lose influence in those regions. And there is no reason for 
that to happen. It would be very enormously damaging to us.
    Now, these countries, of course, are deeply interested in 
strengthening ties with the United States, but we need to 
make--we need to give them--we need to make sure that we make 
it easier and more compelling for them to do that so they don't 
turn to those who are, well, I'll say it starkly, throwing 
money at them.
    Senator Menendez. Thanks. We look forward to working with 
you on that.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    And, Mr. Secretary, welcome back. It's good to see you. I 
know you've been doing a lot of work around the world, and I 
know we have a lot of challenges in a volatile environment.
    And I thank the Chairman for having this committee meeting.
    It seems to me, in spite of all this volatility and the 
many challenges that we have--and you've certainly referenced 
many of those--the greatest challenge that we have to our 
country is right here. And it's our inability to come together 
and solve our budgetary problems. Would you agree that that 
probably is a greatest of threat to our economic stability, our 
financial stability, our national security, as Admiral Mullen 
said in the last couple of weeks?
    Secretary Geithner. I would say, overwhelmingly, the 
greatest challenge we have is to make sure we're strengthening 
this recovery. And, of course, as part of that, a necessary 
condition for doing that--but it's not the only condition--is 
to find a way to come together, bipartisan basis, and lock in 
reforms that'll reduce our long-term deficits over time. If 
we're unable to do that, then future growth will be weaker. 
But, we have to make sure that we're focused on more job 
growth, more rapid economic growth, investments that are 
critical to our long-term competitiveness, as we find 
consensus, on a bipartisan basis, to reduce our long-term 
deficits.
    Senator Corker. Well, I'll look forward to talking to you 
more about that in the future. And I know, in any of these 
kinds of discussions, you're certainly going to be in the 
middle of that.
    I will say that I think there's a lot work taking place. 
Again, I look across the dais and know there's numbers of 
people working in various groups to try to solve this problem. 
The administration has not quite yet come to the table as a 
full partner. And I hope the sign that Joe Biden's going to be 
working with us is a first step. But, I would just say that, 
you know, of all the things we've talked about, this is the 
issue of the day. And I certainly hope, soon, there's going to 
be some leadership--real leadership from the White House. I say 
that, not critically. I say that it's the only thing that's 
going to cause us, of an issue of this size, to really solve 
it.
    Secretary Geithner. Well, we absolutely recognize, and the 
President recognizes--and as you know, we're beginning this 
process today--that we have to be part of the process. We, of 
course, like you to solve it on terms that make sense for the 
country, but we expect that we need to be a part of that 
process. And we will be.
    Senator Corker. Yes.
    There's a lot of discussions about the attractiveness of 
the dollar as reserve currency. You know, a lot of discussions 
around the world. What's your sense of that attractiveness, or 
the loss of attractiveness, of the U.S. dollar being a reserve 
currency?
    Secretary Geithner. I see no erosion in that, and no 
material risk to erosion in that. Unless, of course, over a 
long period of time we are unable, as a country, to put in 
place reforms, not just on the fiscal side, but more generally, 
that sustain confidence in American financial leadership. 
That's the only risk to the role of the dollar.
    There is no risk to the dollar's role that we do not 
completely control, in some sense. And, of course, although, by 
all measures, there's very substantial confidence around the 
world in the strength, security, liquidity of U.S. financial 
assets and the dollar, we have to make sure we work to earn 
that over time. It's not something we can count on. It's 
something we have to work to earn. And, critically, over time, 
it'll depend on, as it has in the past, on us demonstrating 
that when we have a problem, we're going to act to fix it.
    Senator Corker. You know, leaders of France and other 
places, at G20 meetings, are kind of pounding their chest about 
creating another type of reserve currency. Do you think that's 
more rhetorical, or do you think there's really substance 
behind that?
    Secretary Geithner. Well again, there is, I think, no 
realistic process--prospect of, for example----
    Senator Corker. SDRs.
    Secretary Geithner [continuing]. Using the SDR as a role to 
replace that. It--again, I think, no realistic prospect of that 
happening. But, there is actually--beneath that rhetoric you 
referred to, there actually is a lot of consensus on things 
like the importance of countries like China moving to a more 
flexible exchange rate, of trying to make sure we reduce the 
risks that you see these large imbalances build up in the 
future. And I think those things are very promising, and they 
are a necessary condition for a more stable international 
financial system.
    Senator Corker. You know, you're--the Secretary before you, 
a friend of yours, pushed China to consume more at a time when 
our American consumers were consuming too much, of course. 
You're doing the same thing. How do you go about, with a 
country like China, trying to rebalance? I know you've talked 
about that a great deal in other forums. How do you cause that 
rebalancing really to happen, other than just talking about it?
    Secretary Geithner. Well, what we've try to do is to make 
sure that China and other countries understand that we are 
going to change how we grow, as a country. We're not going base 
future growth of the United States on consumption fueled by 
borrowing from other countries. Our growth in the United States 
is going to come much more from investment and from exports, 
not from unsustainable financing of housing booms, excess 
consumption.
    And that changes the reality those countries face. And they 
understand that probably because they're much larger as a share 
of the world economy now, China can no longer depend on demand 
from the United States to consumption being such a substantial 
contributor to growth. So, they have no alternative but to 
shift their growth strategies to a growth strategy that relies 
more on domestic demand. They recognize that imperative, and 
they're moving that direction. But, it can't happen, unless 
they let their exchange rate move, too. Because if they don't 
let the exchange rate move, the exchange rate will work against 
that imperative to rebalancing.
    So, the--and, you know, of course, it's not just China. It 
requires a bunch of other countries around the world who have 
been--traditionally run large surpluses--to make those same 
changes. And again, I think we're making some progress in 
underscoring that reality. And that reality will force a 
judgment, in their interest, that they have to put in place 
reforms that'll help make that happen.
    Senator Corker. Dodd-Frank passed this last year, and I 
know you were highly involved in that. It's a big bill with a 
lot of pages and a lot of rules that are being generated.
    Secretary Geithner. A lot of Senator Corker in that bill, 
too.
    Senator Corker. Yes. Not enough.
    Secretary Geithner. It seems like a lot. [Laughter.]
    Senator Corker. Not enough. But I appreciate the small 
involvement.
    As you--now, any piece of legislation, no matter who passed 
it, who led it, who was involved in it--any piece of 
legislation this sweeping and this large has some unintended 
consequences or things don't work out exactly the way you 
think. Are there provisions in the bill that you've already 
seen that might be making us less competitive in other markets?
    Secretary Geithner. No, not at this stage.
    You're absolutely right that there are some things, 
technically, that, over time, you might want to adjust. But, I 
have not seen any risk yet in the design of the overall 
architecture of that, that would create a risk of us losing 
share, losing competitiveness to other countries.
    Now, in part because we've been very successful in getting 
Europe, in particular, to adopt a very similar framework of 
reforms--for example, in derivatives. Now, they're not 
completely aligned. And we're working very closely with them to 
make sure that, where they've got a slightly different model 
with the risk of slightly lower standard, that we encourage 
them to come to our standard. And that's going to take a fair 
amount of time.
    But, I'll give you an example. You know, we negotiated 
these new international capital rules, the Fed did, and the 
banking supervisors, last fall. And those raised capital 
requirements, necessarily, quite substantially, so we're 
reducing risk. And that's a global agreement with a simple 
measurable set of numbers so that we can make sure they're 
enforced evenly across countries.
    Senator Corker. Let me just ask one last brief question. I 
have a number of them, but I know my time is about up. We talk 
a lot about food prices, I know people are concerned about 
around the world, as creating havoc in some places. But, when 
you look at the demographics of the world and the population 
growth that's taking place, and where it's taking place, and 
knowing that those standards of livings in the countries that 
are growing rapidly is rising. The fact is that there's going 
to be tremendous pressure on food prices, ad infinitum. Would 
you agree or disagree?
    Secretary Geithner. I agree with that. I think that right 
now some of that pressure's being exacerbated by the fact that 
you had some bad weather, some supply disruptions. But, 
overwhelmingly, you're seeing huge growth in demand. As those 
countries develop, expand, that's going to continue, I think, 
for a long period of time. And the best response to that is to 
make sure that they're able to make, and we're able to make 
bigger investments to improve productivity in agriculture, in 
the large producing regions of the developing world.
    Senator Corker. Thank you. I look forward to seeing you 
next week.
    Secretary Geithner. It does make this a very strong farm 
economy in the United States. You know, in some ways, the 
strongest parts of the American economy today are farmers and 
ranchers, who are big beneficiaries of this.
    Senator Corker. Senator Lugar's been smiling a lot over the 
last----
    [Laughter.]
    The Chairman. Senator Shaheen.
    Senator Shaheen. Thank you, Mr. Chairman.
    And, Secretary Geithner, thank you for being here this 
afternoon.
    The events in the Middle East have pushed from the front 
pages of the paper what has been happening in Europe and 
Ireland and Greece--Portugal, Spain in particular--with respect 
to their economic situation and the impacts of debt on their 
economies. Can you describe in greater detail--I know you 
touched on this in your remarks--but whether you think the 
steps that the EU and Europeans and the IMF have taken are 
sufficient? And what is--if any, is an appropriate role for us, 
as we look at how this crisis has unfolded?
    Secretary Geithner. Very important question, and thank you 
for raising it.
    There are three things underway, which--all of which are 
necessary to an effective solution. The first are, of course, 
those governments you referred to are taking enormously 
difficult--incredibly tough, difficult things to fix their 
budget situations, fix their financial systems, and make sure 
that they're going to have the ability to grow in the future, 
be more competitive and grow. For that to work, they need 
temporary, conditional financial assistance. There is no reform 
program that has any prospects of a success unless, again, the 
governments are able to fund and banks can fund, at reasonable 
rates. And so, they need some temporary assistance for that, 
which is being providing--largely by European institutions, but 
the IMF is playing its necessary role alongside those.
    But, in addition to that, they need a more permanent 
framework that allows them to have better discipline on budget, 
to reduce the risk this happens in the future; make sure they 
have a more common European framework for handling financial 
distress, by their national financial systems. And all those 
things now are in train. Very difficult politically, very 
complicated technically, to do.
    And I think the important thing to recognize is that the 
leaders of Europe have said they will do what is necessary to 
make sure these reform programs are given a chance to work. And 
they're moving forward now to put in place a stronger set of 
financial mechanisms, short term and long term, to make that 
possible. And, of course, it's important they follow through on 
that.
    Senator Shaheen. Well, one of the things I've heard from 
some of the Europeans who have visited here and talked about 
the situation is that some of the austerity measures that have 
been demanded by participating countries are actually 
counterproductive, that they go too far as they're trying to 
recover economically. So, is that our assessment, as well?
    Secretary Geithner. Well, you know, ultimately, of course, 
that has to be a judgment of the political leaders of those 
countries and the Europeans who are providing the assistance 
they need. But, I think it's important to recognize, when you 
dig yourself that deep a hole, there is no path ahead that 
doesn't require a long program--multiyear program of reductions 
in the level of benefits, level of commitments they made--they 
were unaffordable--and changes to their competitiveness so they 
can grow in the future, and, you know, fixing broken financial 
system. Those are very difficult. There's no easy way out of 
those things. And where you see those reforms, it's important 
to recognize that they're the imperative forced on them by the 
depth of the hole that their predecessor government's dug for 
their country.
    Senator Shaheen. Well, as we look--and Senator Corker 
raised the concern that I know all of us share, about the 
deficit and debt that we're facing in this country--are there 
lessons to be learned from the European experience, that we 
should be taking to heart?
    Secretary Geithner. Well, our situation, again, for--just 
for perspective--you know, our fiscal position is 
unsustainable, our deficits are way too high and they have to 
come down dramatically over time. But, our situation is 
fundamentally different.
    Our underlying growth rates are much stronger than Europe. 
We're a much younger country. The size of our government is 
much smaller. The level of the commitments we made in Social 
Security and Medicare are much--they're rising too rapidly over 
time in health care, but they're much less expensive than those 
countries. And we are in a much better position to put in place 
a multiyear gradual program of reforms that allows the American 
people to adjust to changes ahead.
    But, I think the overwhelming imperative you want to 
recognize is that you need to put in place commitments now that 
allow us to lock in those reforms over time. You can't defer 
them indefinitely. And the longer you defer them, the risk is 
that investors around the world, and the American people, will 
say, ``We're not confident that Washington has the political 
will to fix these things.'' If you lock them in over time, you 
give--again, you give time to people to adjust, businesses have 
the certainty to plan. And the more you put it off, the more 
you risk future growth.
    Senator Shaheen. Thank you.
    Well, apropos that, as we look at the debate that's going 
on now in Congress, one of the areas that's being discussed is 
whether we should make significant cuts in funding for the SEC, 
the CFTC, and some of the other regulatory agencies. And I 
wonder if you could comment on that, even though it's not part 
of the topic of this hearing. Because, as we look at what's 
happening in the commodities markets, as we look at what's 
happening with oil, given the situation in the Middle East, I 
guess the question I have is whether we don't want those 
agencies to have full capacity that they need to be able to 
analyze and do everything we can, domestically, to regulate the 
situation. So, if you could comment on that.
    Secretary Geithner. I welcome your attention to that issue. 
And, of course, I completely agree that--you know, look at what 
this country went through in this crisis. And this crisis had 
many causes. But, the crisis was much worse than it needed to 
be; in part, because we did not have an adequate capacity in 
the United States to deter and prevent the types of abuses that 
cause enormous damage to innocent victims across the country, 
as a whole.
    And, if we learned any lesson from this crisis, it's that 
we need better oversight, better incentives, better constraints 
in risktaking, with people who have the sophistication and 
capacity to enforce those rules. So, I would be very reluctant 
to see Congress cut deeply into those enforcement resources, 
because I think the long-term costs would be devastating. 
Again, these are very modest costs for us as a country. We can 
afford them. And we've seen what the costs are when you 
underinvest in those things.
    And again, it just underscores, you know, when you approach 
a fiscal problem like this, the challenge is not simply to 
figure out how to reduce the deficits, it's how to do so in a 
way that does not undermine our capacity to grow in the future, 
to protect critical priorities. And these are things we can 
fundamentally afford.
    Senator Shaheen. And, finally, because I'm almost out of 
time, but--I know in your remarks you commented on the fact 
that we are not yet seeing an impact on inflation as the 
result--a dramatic impact on inflation--as a result of what's 
going on in the Middle East. But, how long do we think that can 
continue? And I guess I'm--I know I share the concerns that 
have been expressed in a lot of places about what the future 
impact of a continuing crisis is going to be in our economy.
    Secretary Geithner. A very important question, but a 
fundamentally uncertain question. Not something we can know 
with confidence today.
    The--you know, the way oil markets work, you can tell from 
the futures market what expectations are today about how long 
this pressure on prices will endure. And those prices sometimes 
are a guide to the future, sometimes they're not. And what they 
do show is that most people--most investors regard this as a 
temporary increase and price--expect prices to come down 
gradually over the rest of this year and beyond. So, you could 
say that's somewhat encouraging and that would give us more 
confidence; if that was right, that this impact on prices would 
have really quite modest effects on growth and no lasting 
effects on inflation.
    Senator Shaheen. Thank you.
    Senator Lugar [presiding]. Thank you very much, Senator 
Shaheen.
    Senator Rubio.
    Senator Rubio. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I noticed, in your statements--I 
apologize for missing those, but I read it before I came--one 
of the things you talked about is one of the goals of the G20 
summit or the G20 meeting in Toronto was to stabilize debt-to-
GDP ratio. With all this talk going on in these buildings about 
the debt, going forward--the debt-to-GDP ratio is really the 
one thing that we should be focused on--as far as the debt's 
impact on our country, both globally and domestically.
    Secretary Geithner. Yes. I think the very important thing 
is to make sure that people understand, you have to bring the 
deficits down to a level--the deficits down to a level where 
our national debt no--is no longer growing as a share of the 
economy, no longer taking a greater share of income over time. 
And you need to make sure that happens soon enough so that you 
stabilize that debt burden as a level--as a share of economy 
that's not going to hurt growth. And if we are successful 
together, on a bipartisan basis, in locking in reforms that 
reduce those deficits to what we call primary balance, or 
roughly 3 percent of GDP, over the next 3 to 5 years, then we 
will stabilize our debt burden as a share of economy at a level 
that is--for a time, is something we can live with. But, we 
have to go beyond that, because, even beyond that challenge, we 
have to make sure we're bringing health care growth--health 
care cost growth down more over time, or those--that debt 
burden will start to grow again in the coming decades.
    Senator Rubio. But, from a perspective of that summit or 
that meeting in Toronto, is there kind of a globally or a, 
maybe just in your mind, accepted ratio that we would look at 
as a goal that we want to be at? Not necessarily by a date----
    Secretary Geithner. Our debt to--debt/GDP or -deficit/GDP?
    Senator Rubio. Debt/GDP.
    Secretary Geithner. You know, it's very hard to know what a 
tolerable level of debt to GDP is. There's a lot of academic 
economists studies of history in this case. And one of the most 
cited one is one by Ken Rogoff and Carmen Reinhardt. And they 
conclude that if you look across countries over time, if you 
get north of 90 percent of GDP--and this should be measures as 
net debt held by the public, and it should be net of financial 
assets--then you get in a situation where, if over time that 
were to happen, that would risk threatening a future growth. 
We're no close to that, of course. And we expect--and we're 
planning not to get there.
    Senator Rubio. So are we, yes. But, yesterday we heard 
testimony--Secretary Clinton put it this way, but I think we 
would all share that view--that the United States is, from a 
global perspective, in a competition for influence. There are a 
couple of nations that are competing with us. What is the role 
of this debt, and the fact that a substantial portion of it is 
held overseas, a large percentage of it in one nation--what's 
the impact that that's having on this, what she termed, and I 
would concur, a competition for influence?
    Secretary Geithner. No impact now. You know, again, the 
biggest thing that affects our credibility and our influence is 
the confidence of Americans and investors around the world that 
we are doing things that strengthen our economy over time, make 
us more competitive and move innovative, create more 
opportunity, and, of course, as part of that, that we can 
manage competently our long-term budget problems. So, if we're 
unable to do that, the cost of that would be dramatic.
    But, at this stage, by all indications, the world is 
showing a lot of confidence in our capacity to do that. You 
know, they look at America over the decades, and they say that, 
``In the end Washington moves, acts, fixes problems.'' In fact, 
one of the great strengths of our country, as a whole, is a 
record of rising to challenge quickly enough we don't get 
behind the curve, in this case. And most countries look at the 
United States and they say, ``You're seeing again, and as we 
come out of this crisis, that same resilience is 
demonstrated.'' But, again, that's something we have to earn 
over time. We can't count on it.
    And I want emphasize that, you know, as we manage through 
this debate of how, on a bipartisan basis, we cut spending and 
cut deficits, we have to make sure that we're doing so in a way 
that will leave people more confident that we're not going to 
put off the problem and we're not cutting things that are 
central to how we grow in the future. That's our challenge, as 
a whole.
    Senator Rubio. But, in your testimony, you don't mean to 
suggest that investors and others around the world look to the 
United States and are not concerned about what they see are the 
trend lines in our spending, and perhaps the inability of our 
political process to address them now as they watch the debate 
and----
    Secretary Geithner. I don't see that concern now, but, 
again, we have to be careful we don't give them any excuses to 
be concerned. We have to justify that confidence over time. If 
you look at the price we pay to borrow, for example, that 
reflects--it's a measure, in some sense, of confidence in our 
political will to get ahead of these problems. And, so far, 
we've been able to sustain relatively modest rates for 
borrowing. And that's a reflection of that confidence. But, 
again, that's something we have to earn, and people are 
watching us now.
    And, you know, again, I think it's important that this 
expansion, this recovery underway is--it's only 18 months old. 
It follows the worst recession in generations. And we want to 
make sure the confidence is improving, but we want to sustain 
that recovery. And so, we have to make sure we get the right 
balance between the near-term imperatives of making sure jobs 
are growing more rapidly, the economy is stronger, but also 
locking in some reforms that'll restore gravity to our fiscal 
position.
    Senator Rubio. And, Mr. Secretary, it's generally accepted 
that the United States can do things, to a certain point, that 
other countries can't, because of our global reserve currency 
status, our history, as you've outlined, and so forth. But, 
even that has its limits.
    Secretary Geithner. It does.
    Senator Rubio. And so, I guess the sense I'm trying to get 
is that, around the world, global markets and investors are not 
concerned about our debt combined with the complexity of our 
tax code, combined with our regulatory----
    Secretary Geithner. Let me tell you differently. They can't 
be more concerned than we are. No one can be more concerned 
than we are, and people in the Congress and the executive 
branch. And I would say that it is enormously important that we 
come together on a bipartisan basis and find a way to lock in 
these reforms. It's not something we can put off. And if we 
fail to do that, then we'll risk losing that credibility.
    Senator Rubio. So, I guess what you're saying is, the best 
thing we can do is have a plan and show the world that we've 
got a plan to move forward on these----
    Secretary Geithner. Exactly, and----
    Senator Rubio [continuing]. Issues over a sustained period 
of time.
    Secretary Geithner [continuing]. And, of course, it can't 
be just a plan. You know, it has to be things that people will 
believe will be upheld over time, that people will act on them 
and they will bring gravity to our fiscal position. They can't 
just be promises.
    Senator Rubio. I think my last question is that--would you 
agree with the idea that the world today--well, that's--let me 
rephrase that, because that's an obvious--I was going to say 
the world, from a global economic perspective, is much 
different than it was just 10 or 15 years ago. For example, 10 
or 15 years ago, the number of nations that people would have 
the confidence to invest in was much smaller than it is now. 
And, as the United States is now increasingly in competition 
with other markets to attract capital and investment, and that 
certainly we're not living in the same--we're not living with 
the same dynamics that were in place just 15 years ago, where 
there were only a handful of places around the world that a 
serious investor would risk a serious amount of money in.
    Secretary Geithner. I agree, but I would use that reality 
to underscore another imperative, which is that, in education, 
in the quality of our infrastructure, in the quality of 
incentives we create in the United States for innovation and 
for investment, we need to be better. And if we are not better, 
we will fall behind on things that are critical, and that has 
very grave damage to our relative competitive position.
    As you said, and this is a transformative change in the 
world, for a long time we've benefited from the fact that we 
were uniquely good at those things. But, what's happened is, 
the world has stopped making terrible mistakes in the 
protection of property rights. They've gotten dramatically 
better at educating their citizens. And you see huge 
improvements, relative improvements, relative to what we're 
doing in the United States, in things that matter to future 
growth. And so, I would underscore the challenge that creates 
for us. And that makes it important that people recognize that, 
as we restore gravity to our fiscal position, we are preserving 
things that we can afford as a country; there's things we can 
afford to make sure we're making education better, 
infrastructure stronger, incentives for innovation and 
investment much more powerful.
    Senator Rubio. My last quick question is on the--and I 
think it was asked earlier by Senator Menendez, and it has to 
do with Colombia and with Panama. What are the impediments to 
that deal being consummated? And what are the chances of it--or 
the hope--that it will be submitted and passed this year?
    Secretary Geithner. Well, we're in the process of working 
very closely with the Government of Colombia, in particular, on 
some changes in Colombia that we think would make it easier for 
us to bring these agreements to the Congress with a better 
chance of them getting passed. And there's a variety of people, 
not just in the Congress, but in the executive branch, who have 
been--are actively working on this. And----
    Senator Rubio. Who has a list of those changes?
    Secretary Geithner. That's something----
    Senator Rubio. How can I see what the proposals are?
    Secretary Geithner. Yes, that's something that you'd have 
to direct to my colleagues in the executive branch. I think 
Ambassador Couric has the lead on this, but he's working with a 
coordinated process. But, we share the objective of trying to 
bring these to Congress, and we'd like to do so as soon as 
possible. But, to do so--again, we want to bring them in with 
confidence they're going to move and pass, legislatively--and 
so, we have to make sure we're bringing the best agreements we 
can.
    The Chairman [presiding]. Senator Coons.
    Senator Coons. Thank you, Mr. Chairman.
    Thank you, Secretary, for your service and for your 
appearance here in front of us today.
    I know that my home State citizens from Delaware are very 
concerned about United States-China economic relations, about 
their perception that we are slowly but consistently losing our 
competitive edge; in particular, the steady drain of 
manufacturing from the United States to China. You reference in 
your prepared comments also the relocation of research and 
development to China, and the sort of critical competitive edge 
they seem to be gaining, not just through currency manipulation 
or through low-cost labor, but also through increased 
investment in that. But, what can and should we be doing to try 
and respond to that change and to regain the edge in innovation 
with regards to China?
    Secretary Geithner. Well, the things we've all talked 
about, which are making sure their currency appreciates, that 
they protect intellectual property, in China of United States 
firms, that we have better terms for doing business there, 
those are all important. But, by far, the most important thing 
is what we do in the United States--again, I just want to--just 
to make it simple again--in education, in innovation, in 
infrastructure, in incentives for investment.
    Now, we are--the President's laid out a comprehensive set 
of plans, investments, reforms, that are within our capacity to 
afford. They are not overwhelmingly expensive, that are 
central--we know how to do that. We were remarkably good at 
doing it for a century. And there's a variety of specific 
things we can do. Your chairman has played a leadership role in 
trying to build consensus on things like a national 
infrastructure bank. We're in the process of figuring out 
whether we can find a consensus on a corporate tax reform 
program that would reduce the statuary rate, broaden the base, 
and, again, improve incentives for investment here in the 
United States. In education, of course, we're involved in a 
huge, sweeping effort to improve.
    And I think, again, there are--we should look through 
everything we do economically in the United States, and we ask 
ourselves--one question is: What does it do to the 
attractiveness of this place as a place to invest? Because we 
want our companies and companies around the world to make sure 
they're building that next plant, that next R&D facility here, 
not somewhere else. And I am very optimistic that we're going 
to have the ability to do that. Because again, even with 
China's rise, even with big improvements in competitiveness 
around the world, we still have enormously important resources, 
enormous advantages. We can't let those erode and we can't 
stand still.
    Senator Coons. Now, I am concerned about China's projection
of economic power into Africa--and also Iran's, frankly, and 
about
the moves that Iran's been making to acquire nuclear weapons. 
I'd be interested in some update about Treasury's ongoing 
efforts, through the recently enacted sanctions bill, to 
dissuade investment in Iran and to oversee the implementation 
of sanctions; in particular, to target the Iranian 
Revolutionary Guard Corps and investment in the Iranian oil 
sector.
    Secretary Geithner. We have made enormously important 
progress in denying the ability of institutions connected to 
their nuclear program and their efforts to finance terror, 
denying them access to the finance, the money they need to 
conduct those activities. And our programs directly--and our 
work with the Europeans and countries around the world--have 
been very effective in denying access to finance for a broader 
range of Iranian entities that are involved in that behavior. 
But, this is the kind of endeavor where you have to be 
constantly on it, because you find one entity and you'll--
another one will crop up somewhere else. And you have to 
constantly try to expand the net. And it requires a huge 
investment and resources to make sure we can identify and 
track. But, the biggest improvements we made are the 
legislation that Congress enacted last year, CISADA, and what 
the Europeans have done, and Russia and China have done, to 
help make sure--and countries in the gulf have done--to help 
reinforce this broader global effort.
    Senator Coons. I was recently on a trip to the Middle East 
with Senator Corker. And we had some very illuminating visits 
to the Palestinian authority, to Jordan and to Israel. And in 
all three countries, where we were predominantly focusing on 
security, the issue of economic development as a way to provide 
some escape valve for the hopes and aspirations of folks in the 
region came up. And I was wondering what role you think either 
the United States, through our assistance, or international 
financial institutions, should be playing in trying to connect 
these three economies? In particular, the entrepreneurial 
energy and inventiveness of the Israelis with the dramatic need 
for sustained growth in Jordan and the Palestinian authorities.
    Secretary Geithner. A very important question. And I 
welcome the attention to it.
    We have found--you know, experienced over time--that to 
make a difference in designing development strategies that help 
those objectives, that you need--really three things, working 
together--you need a very carefully designed U.S. direct 
assistance program through AID and State, which of course we 
have. We need the international institutions, like the World 
Bank, there with us. And we need the other major donors, 
bilateral donors that are interested in these issues, to be 
there working alongside us.
    If we don't have the direct U.S. assistance, the things are 
much less effective. But, it's even more important, in many 
ways, that we have the World Bank and other institutions there 
with us, because they have the capacity to bring about policy 
reforms in governance, corruption, transparency, that we can't 
do directly on our own. They're less political, if they do 
them. They're likely to be viewed more legitimate. And you need 
that--all pieces of that framework, for it to work.
    Senator Coons. One last question, then I'll cede to my 
colleague to the right.
    Both Senator Corker and Senator Durbin and I have been 
discussing one piece of the Dodd-Frank regulations that has to 
do with capping interchange fees for debit. Australia has 
experimented with that in the past. It's something that's 
relatively new to me as a topic of some interest or study. I 
just wondered if you had any comments on how confident you are 
that there will be savings to consumers as a result of that 
effort to cap debit interchange fees.
    Secretary Geithner. Senator, I do not have the authority, 
under Dodd-Frank, as you know, to implement or enforce those 
reforms. And I'm not that close, at the moment, to the debate 
on this. I know that there's a very active debate about how to 
do this, how to make sure that it has those benefits. I'd be 
happy, if you like, to respond in writing or to ask my 
colleagues from the Fed to respond in writing. And I know 
they're working through it. And again, they want to make sure 
that they're achieving the intent of the law in a way that 
makes sure those benefits go to consumers, go to the intended--
to merchants, go to the intended parties.
    Senator Coons. Well, thank you. I will submit something to 
you in writing. It's something I'm really wrestling with.
    I've gotten some strong input. And Senator Durbin and I 
have recently discussed it. And I think it's something that 
deserves some study and some really balanced review to make 
sure that we understand its impact and whether there are or are 
not unintended consequences to it.
    But, thank you very much for your testimony today, Mr. 
Secretary.
    The Chairman. Thank you, Senator Coons.
    Mr. Secretary, I have a must-be-at 4 o'clock meeting that 
I've got to be at. Senator Lugar will close out. We think we 
just have Senator Durbin.
    But, I want to thank you for being here today. I think this 
has been enormously helpful. I know a lot of people don't 
ordinarily think--I mean, they--obviously, they know there's a 
connection, but they're not focused necessarily on the 
institutions or the choices that we have, and the policy 
choices that we have, and how it has a long-term impact.
    One of the things, I don't know if you have time, in my 
absence, to comment on is perhaps the European condition, 
particularly, sort of, Spain and some of the challenges it has, 
and the French investment in Spain, and German investment, and 
how that cascade might or might not infect us. And I think 
people would be interested. Perhaps, just part of the record, 
you could do that.
    So, thank you very, very much for being part of this. And 
we, all of us, look forward to working with you on these 
issues.
    Senator Durbin.
    Senator Durbin. Thank you, Mr. Chairman.
    Mr. Secretary, roughly, we have about a third of the 
population of China, and we have a gross domestic product that 
is about three times their size. An interesting contrast. So, 
our production, per person, is dramatically larger than China. 
We spend a lot of time talking about China. Within the last 
month, I guess, they officially passed Japan, in terms of the 
size of their economy. And I wonder, as I overhear people say 
things that I've said myself, whether it still holds true that, 
when it comes to a market economy, the government can't pick 
winners and losers over the long run.
    Because it appears to me that, in China, they are making a 
lot of selections that appear to have some vision to them, at 
least from where I'm sitting. One good example is in solar 
electricity. We invented it 50 years ago, Bell Labs, with great 
pride. And yet, today in China, as a percentage of GDP, they 
are investing 10 times more in renewable energy than the United 
States, and they're building a solar panel production facility 
in Rockford, IL, 30 or 40 miles away from where these solar 
panels were invented. It appears they're picking winners and 
losers. Have you seen them pick a lot of losers?
    Secretary Geithner. I've seen no successful example--
doesn't mean it won't happen in the future--of a state-run 
economy, a state-run financial system allocating capital, 
determining what technologies succeed, and have that really 
work over time on a meaningful scale. But, I do believe--and 
I'm not sure this is where you were going--I do think, in the 
United States, even though, in general, we don't embrace that 
basic strategy, we do think in some areas there is a very 
strong case for targeted investments by the government.
    Clean energy is one of those, because, of course, the 
overall benefits don't get captured by the innovator or by the 
company. Classic case for government support. But, you've seen 
in things--you know, for example, technologies supported by 
DARPA, by other things, national security things, very good 
examples of why there is, in some circumstances, the government 
for going beyond just general support for innovation and for 
basic science, and targeting specific things that have overall 
benefits to growth or society.
    Senator Durbin. And so, I spoke at a law school 
commencement in Chicago last year. And when we got to the 
master's degree program, there weren't many. About 20. 
Surprisingly, most of them were women and most of them were 
from China. I was a little bit surprised.
    Secretary Geithner. In what discipline?
    Senator Durbin. In law.
    Secretary Geithner. In law.
    Senator Durbin. Master's degree in taxation, that was what 
they were focusing on. And I thought, now this is an amazing 
thing, that China would identify women to come to law school in 
the United States for a master's degree in taxation. It seems 
that they have some long-term thinking here, and long-term 
planning. And I don't want to overstate what they've achieved, 
but I am humbled sometimes by their effort, when you look at 
the size of their economy compared to ours.
    Senator Coons mentioned Africa. When I visited Ethiopia, 
with Prime Minister Meles, and said to him, ``Tell me about the 
presence of China in Ethiopia,'' we went on for a half an hour. 
And he basically said to me, ``You've given up. The United 
States has given up the continent of Africa. China comes in 
with concessional loans--forgiveness loans--with the 
understanding they're going to build our infrastructure and, in 
the process, embed engineers and construction companies into 
our economy.'' So, it was no surprise Ethiopia just awarded its 
major national telecommunications contract to China. That is 
thinking ahead, from their point of view.
    I'd like to kind of come full circle here. As we focus, as 
we have to focus, on reducing spending in the United States, 
and raising revenue--those are the only two ways to deal with 
the deficit--how can we expect to compete with this aggressive 
nation, with a much smaller economy that apparently is picking 
new markets, new sources of raw materials and energy that will 
feed this growing economy for a long time to come?
    Secretary Geithner. Well, of course you're right. I think 
it's essential. And you--and it's not important--it's not just 
that you want to make sure that we are making the investments 
we need to stay competitive--and that's going to require larger 
investments, like an infrastructure in education and 
innovation, than we have done in the past--but, you also need 
to make sure we bring a long-term perspective to our fiscal 
problems, because you cannot run a country--expect no business 
to have to go year by year, with deep uncertainty about what 
the tax regime is, what the consequences are for the 
incentives; companies depend on these areas. They need to be 
long-term things that the market, the business can count on. 
And, just as a complement, you were part of a bipartisan 
effort, the Fiscal Commission, that would try to do just that, 
which is to lock in the long-term types of changes that will 
allow people to plan for the future and know with confidence 
that a tax incentive that exists here today will be there 
tomorrow. And we don't go year by year--not just 2 weeks to 2 
weeks, of course, which would be a crazy way to run a country, 
but year by year, in this case. So, I absolutely--I agree with 
you. We need to make sure we're bringing the same long-term 
approach to the strategy, competitiveness that you see in some 
countries around the world.
    Senator Durbin. So, let me talk about the short term. I've 
worked with this deficit commission, I continue to work with my 
Republican colleagues, and I know that they are focused, maybe 
some even fixated, on the deficit. And the old cliche, ``If the 
only tool you have is a hammer, every problem looks like a 
nail,'' the answer to every question is, ``Cut taxes and cut 
the deficit.'' And I happen to think it's more complicated than 
that.
    An example: Would you know where the fasted computer in the 
world is located today?
    Secretary Geithner. Well, I think it's in China.
    Senator Durbin. It's in China. And we are now trying to 
create the next fastest computer, at Argonne National 
Laboratory. The House Republican budget will reduce the number 
of engineers, scientists, and support staff, at that national 
laboratory, by one-third for the remainder of this year, and 
cut back 50 percent of their efforts to build this new 
computer, along with a lot of other things.
    What I'm hearing from the administration, I think--I 
certainly agree with--but, I think, in the perspective of the 
deficit commission, makes sense. We said, ``Get serious about 
the deficit after you're out of the woods with the recession.'' 
You can't reduce this deficit dramatically with 15 million 
people out of work and businesses not expanding. So, whether 
it's a national laboratory or education and training, it 
strikes me that our immediate need is to make certain that we 
have a growth plan for this economy. And that's what I'd say to 
my conservative friends. Yes, serious about the deficit, but 
first serious about putting the recession behind us.
    I don't want to put words in your mouth, but I think you 
might agree.
    Secretary Geithner. Well, I completely agree. But, I think 
that you found a way, in the commission, to do both. And I 
think the test of a credible fiscal reform/deficit-reduction 
program is that, one, it be phased in over time so we're 
protecting the expansion; two, that it have multiyear 
commitments, so people can plan, they can adjust for the 
changes that are going to come; three, that you're preserving 
fundamentally critical investments, I think just like you 
referred to, so that we're not just cutting spending, but we're 
doing so in a way that preserves the capacity for us to finance 
things in education that we--are absolutely essential.
    And remember that the nondefense discretionary part of the 
budget is 12 percent of the budget. It is not a material 
contributor to our long-term deficits. And if you want to bring 
a credible approach to fiscal responsibility, you have to take 
the more comprehensive look across the principal drivers of 
those deficits, long term and short term, or you'll end up, as 
people have said, eating our future.
    Senator Durbin. One last question, and it will be short.
    I don't know if you've run across this book, but ``Make It 
In America,'' by Andrew Liveris, who's the chairman and the CEO 
of Dow, says that--one thing here--I don't know if this--if you 
can verify this or whether you can check on it--``According to 
the Manufacturing Institute, in 2008 the United States had a 
surplus of $21 billion with its free trade partners.'' His 
point was that, where we have reached free trade agreements, 
we're winning; where we haven't, we're losing. Is that--do you 
think that's----
    Secretary Geithner. Oh, absolutely. And I'll----
    Senator Durbin [continuing]. Accurate?
    Secretary Geithner [continuing]. Remember--think about the 
world. Our trade barriers are much lower than the average trade 
barriers for countries. So, any time we do an agreement, by 
definition, those agreements lower their barriers. Ours are 
already very low. So, we benefit disproportionally from any 
agreement we do. And it's even better or worse than that, you 
can say, because when we don't do it, other countries just come 
in and they negotiate those concessions we do not always get.
    Senator Durbin. In 2010, the European Union had 11 free 
trade agreements under negotiation, China had 15. So--we had 
one.
    Thank you very much. Appreciate your testimony.
    Secretary Geithner. Thank you.
    Senator Lugar [presiding]. We're delighted that Senator 
Durbin has joined our committee. He is a very prominent leader 
in the Senate, and has very strong ideas about free trade, 
which were expressed in a bipartisan way today, and augmented, 
Mr. Secretary, by your counsel.
    Secretary Geithner. And fiscal responsibility.
    Senator Lugar. Yes. Hear, hear.
    Senator Durbin. Good question.
    Senator Lugar. There you go.
    We really thank you, as I expressed and I know the thoughts 
of our chairman, for your availability to be here at this 
hearing, and the attention you have given to the committee and 
to our individual members.
    We believe this is very important and just simply want to 
acknowledge your thoughtfulness and your readiness to assist us 
as we try to think through the issues discussed at today's 
hearing. I think you've understood the sincerity, of our 
questions and our testimony, and, likewise, that the trade 
agreements are tremendously important. Now, there are domestic 
political problems, as well as international ones, but we've 
got to surmount those for the good of our country.
    We thank you for your leadership and for your testimony.
    And, with that, the hearing is adjourned.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


   Responses of Treasury Secretary Timothy F. Geithner to Questions 
                  Submitted by the Following Senators

            QUESTIONS SUBMITTED BY SENATOR RICHARD G. LUGAR

    Question. I appreciated your expression of strong support for the 
Cardin-Lugar amendment to the Dodd-Frank bill which required 
transparency of extractive industries payments to governments. What is 
the administration, Treasury Department, and State Department doing to 
encourage other countries to adopt similar requirements? What are the 
MDBs doing to encourage such disclosure?

    Answer. The administration, Treasury, and State are working with 
our allies around the world to promote more transparency in extractive 
industries. One component of this is encouraging our friends and allies 
to adopt policies that promote disclosure of extractive industry (EI) 
payments.
    First, in the United States, we are improving extractive industry 
transparency through new disclosure requirements in Dodd Frank, known 
as the Cardin amendment. The SEC is currently writing rules to 
implement this new disclosure requirement. French and U.K. authorities 
have voiced support for stronger European Union-wide transparency 
requirements, while the European Commission recently announced it will 
table by November a proposal to ask firms to disclose country-by-
country EI payments. Australia voiced similar support for enhancing 
transparency requirements in mining-heavy provinces.
    Cardin-style requirements, however, provide only half of the data 
needed to help expose EI corruption: although they do make firm EI 
payment data available, they do not have power to disclose government 
EI receipts. The discrepancy between payments and receipts is a primary 
source of corruption in many resource-rich countries. This is why 
Cardin-style requirements complement but do not substitute for--the 
broader implementation and goals of the Extractive Industry 
Transparency Initiative (EITI), the second prong of our efforts to 
improve extractive industry transparency.
    The United States is a strong supporter of the EITI, through our 
role on the EITI Board, our bilateral contributions to the multidonor 
trust fund, and our outreach and advocacy.

   We have urged the IFIs to support the EITI. All of them have 
        endorsed the EITI and are advancing its principles.
   Treasury has promoted the EITI in our bilateral policy 
        dialogue, such as with Liberia and Indonesia. In addition, 
        through our Office of Technical Assistance (OTA), Treasury 
        fields teams of expert advisers in ministries to help countries 
        build capacity in fiscal management, including in auditing 
        firms that report EI revenues.
   As Under Secretary of State Hormats emphasized in his 
        address to the recent EITI Global Conference, as a result of 
        the EITI, almost half a billion people now have access to 
        information on the revenue their countries receive from their 
        extractive industries sector.

    The third prong of promoting extractive industry transparency is 
working with the MDBs to ensure that they are advancing disclosure of 
extractive industry (EI) revenues, through their policy, operational, 
and diagnostic work.

   For example, the World Bank has helped many countries to 
        implement their EITI revenue transparency commitments, while 
        supporting institutional development, fiscal management, and 
        legal and regulatory reform. The Bank also conducts outreach 
        and advocacy in non-EITI countries. For example, the Bank has 
        supported efforts to promote transparency and support for the 
        EITI in Colombia and Ethiopia and to build transparent and 
        effective fiscal and regulatory frameworks in transit countries 
        such as Bulgaria impact regulations.
   The IFC, the World Bank's private sector arm, is updating 
        its Social and Environmental Sustainability Policy. The updated 
        policy, due to be finalized and to enter into force later in 
        2011, is expected to continue the requirement that clients 
        disclose material project payments to the host government, and 
        to strengthen the contract disclosure requirements.
   Since the issuance of the SFRC report,\1\ the IDB has 
        endorsed EITI and strengthened the scrutiny of revenue 
        transparency in their due diligence process, as was the case 
        for the proposed investment in the Pueblo Viejo gold mine in 
        the Dominican Republic in 2010 which was withdrawn.
---------------------------------------------------------------------------
    \1\ ``The Petroleum and Poverty Paradox: Assessing U.S. and 
International Community Efforts to Fight the Resource Curse,'' Report 
by the Minority Staff to the Members of the Senate Foreign Relations 
Committee, October 16, 2008.
---------------------------------------------------------------------------
   The African Development Bank has supported the efforts of 
        the Central African Republic (now compliant), Madagascar, 
        Malawi, Sierra Leone, and Tanzania to become EITI candidate 
        countries, including by helping to finance their EITI work 
        plans, establish EITI secretariats, and build internal capacity 
        to manage EI resources.
   The Asian Development Bank has promoted resource revenue 
        transparency in its policy dialogue related to country 
        strategies and project preparation with the Governments of 
        Bangladesh, China, Indonesia, Mongolia, Kazakhstan, Kyrgyzstan, 
        Pakistan, Papua New Guinea, Timor L'este, Mongolia, Kazakhstan, 
        Kyrgyzstan, Uzbekistan, and Vietnam. The AsDB is launching a 
        ``Regional Knowledge Sharing Platform on Revenue Management in 
        Resource Rich Countries,'' to provide a forum for peer-to-peer 
        learning for policymakers. The launch took place on April 14-
        15, 2011, and was organized in conjunction with a seminar on 
        the same topic which will take place at the annual meeting in 
        Hanoi (May 3-6, 2011).

    Question. As you noted in your written testimony, the 
``developments in the Middle East have generated concern about 
potential disruption to the supply of oil, and this has put upward 
pressure on oil prices.'' Americans send nearly a billion dollars a day 
overseas to buy increasingly expensive oil, money that could be better 
invested at home. Despite some successes in fuel efficiency and 
biofuels, our country is still vulnerable to world oil prices and 
threats to oil supply. Would you please describe the financial impact 
that high oil prices are having on the American economy. At what point 
do high gas prices erode consumer spending and threaten our economic 
recovery?

    Answer. Oil prices have been trending up since early 2009, largely 
reflecting an increase in world oil demand linked to stronger global 
economic growth. (From the end of 2009 to the end of 2010 the world 
economy grew 4.7 percent.) The benchmark front-month futures price of 
West Texas Intermediate crude oil nearly doubled during 2009, from 
roughly $40 per barrel at the beginning of the year to about $80 per 
barrel at the start of 2010. During 2010, oil traded in a range of $70 
to $90 per barrel, ending the year at around $90 per barrel.
    Over the past 5 months the price of oil has jumped sharply and is 
currently hovering near $100 per barrel. The retail price of regular 
unleaded gasoline has risen from just under $3 per gallon to more than 
$4 per gallon. Part of the recent rapid escalation in prices is likely 
due to concerns about actual and potential supply disruptions resulting 
from political unrest in the Middle East and North Africa.
    We are monitoring oil prices and developments in world oil markets 
very closely. We understand that sudden price increases triggered by 
actual or expected supply disruptions tend to increase market 
uncertainty. Heightened uncertainty has the potential to change 
consumption and investment behavior with negative consequences for 
economic activity. As consumers spend more of their income on gasoline, 
they have less to spend on other goods and services. Similarly, rising 
fuel prices put upward pressure on businesses costs of production and 
can affect future hiring and investment plans. Some energy-intensive 
industries, such as the chemicals industry, are particularly vulnerable 
to sharp increases in energy prices.



    Higher energy prices can be a drag on the economy, to the extent 
that they depress aggregate demand for other nonoil goods and services. 
However, the U.S. economy is far less vulnerable to sudden oil price 
increases now than in the 1970s and early 1980s. Over the past several 
decades, the U.S. economy has become much less energy intensive. 
Services are a larger share of GDP, and are less energy-intensive than 
manufacturing. In addition, businesses have adopted more energy-
efficient technologies.
    At present, the U.S. economy is growing at a moderate pace. The 
recovery is increasingly being powered by private domestic demand 
rather than government stimulus. The recent jump in oil prices is 
without a doubt having an impact on households and businesses alike. 
However, the underlying components of growth will likely remain in 
place in 2011 and will continue to support the ongoing recovery.

    Question. Our reliance on foreign oil significantly constrains our 
foreign policy options. The Iranian regime, the target of significant 
U.S. and international sanctions due to its continuing nuclear program, 
reaps tremendous benefits from increased oil prices. Has Treasury, or 
other parts of the administration, quantified the impact on the 
effectiveness of the sanctions regime when oil is trading at $100 or 
$110 a barrel?

    Answer. U.S. and international sanctions imposed on Iran are 
intended to protect against Iranian abuse of the international 
financial and commercial sectors and increase pressure on the Iranian 
regime. The impact of these sanctions is difficult to quantify, but in 
general terms, given the significant proportion of the Iranian economy 
that oil revenues constitute, an increase in oil prices tends to ease 
pressure on Iran. However, there are many signs that the sanctions are 
having a significant effect and creating the leverage necessary to 
support diplomatic efforts.
    Targeted actions by the Treasury Department against illicit actors 
involved in Iran's WMD proliferation activities and support for 
terrorism, along with broad outreach to foreign governments and private 
sectors throughout the world, have highlighted the risks of conducting 
business with Iran. Recognizing these risks, many governments, 
including the EU, Norway, Switzerland, Japan, South Korea, Australia, 
and others, have also adopted robust sanctions on Iran, and many 
private sector actors have gone beyond strict legal requirements and 
terminated all business with Iran. As a result, many banks will no 
longer do business with Iranian banks, the international insurance 
market has largely stopped providing coverage for Iranian entities, and 
many companies have withdrawn investment from Iran. Iran faces not only 
a sharply reduced access to international financial services and an 
increase in transaction costs, but also a diminishing number of willing 
business partners.

    Question. For the past several years, the United States has 
maintained the world's largest current account deficit which the 
combines the balances on trade in goods and services, income, and net 
unilateral current transfers. According to the IMF, the U.S. current 
account deficit reached $467 billion in 2010 and is predicted to rise 
to $602 billion by 2015. Meanwhile, China has maintained the world's 
largest current account surplus at $270 billion in 2010, and is 
forecasted to reach to $778 billion by 2015. How does China's trade and 
investment strategy differ from the U.S. approach? What steps are the 
Chinese taking to secure economic partners and commodities? What does 
our rising current account deficit mean for our economic growth?

    Answer. China, like all other countries, has a strong interest in 
pursuing its trade and investment policy objectives, and the prosperity 
of its firms and its people, just as we do here in the United States. 
What's important to us is that China pursues its objectives in a way 
that does not disadvantage American firms and workers in their 
competition with Chinese firms here in the United States, in China, and 
in global markets. This is a top priority for the administration, and 
we will continue to vigorously engage with the Chinese leadership to 
bring about a more level playing field for U.S. firms and workers. At 
the recently concluded meeting of the Strategic and Economic Dialogue 
(S&ED), we secured important commitments from China that should help in 
this regard, including in the areas of intellectual property rights 
protection and enforcement, government procurement opportunities 
unlinked to unfair innovation policies, enhanced regulatory 
transparency, and fair and transparent provision of export credits.
    The United States-China economic relationship offers great promise 
and potential. We are now exporting more than $100 billion a year in 
goods and services to China, which supports more than half a million 
American jobs. The $45 billion in contracts finalized during President 
Hu's visit in January offer a concrete illustration of that growth.
    China's economic policies, including its exchange rate policy, are 
important to all of China's trading partners, not just the United 
States. To support global recovery and ensure strong, sustained, and 
more balanced global growth into the future, the United States, China, 
and the other members of the G20 group of nations have committed to 
policy measures that will strengthen domestic demand-led growth in 
major surplus economies, including China, and raise national saving in 
major deficit economies, including the United States. China's large 
current account surplus is a reflection of China's very high national 
saving, by both households and enterprises, and the low share of 
household income in total national income. Stronger growth of domestic 
demand in China, particularly household consumption, that reduces 
China's trade and current account surpluses, would be a powerful 
impetus to global growth and create expanded opportunities for American 
firms and workers. A stronger RMB is an indispensible part of this 
process of reorienting Chinese growth, along with measures to raise 
household income and give Chinese citizens greater income security and 
more confidence to spend.
    At S&ED III, China committed to expand its domestic consumption and 
imports in order to promote a more balanced trade relationship with the 
United States, and pledged to strengthen efforts in a number of policy 
areas critical to promoting domestic consumption-led growth, including: 
increasing wages and household income as a share of China's economy; 
steadily increasing minimum wages; reducing barriers to private and 
foreign investment in the domestic service sector; and implementing 
market-based financial sector reforms that will allow China's 
households and private firms to more easily access capital and 
financial services.
    But in any discussion of China, it is important for Americans--
including the administration and Congress--to understand that the 
solutions to our challenges in the United States rest first and 
foremost here at home and not in China. Fundamentally, how many jobs 
and how much wealth we create will be the result of the choices we make 
in the United States--not the choices of others.
    With respect to the current account deficit of the United States, 
it is much smaller today than several years ago. In 2010, the deficit 
was $470.2 billion or 3.1 percent of U.S. GDP. That was more than $300 
billion smaller than the 2006 current account deficit of $802.6 
billion; and less than half the 2006 current account deficit-to-GDP 
ratio of 6.5 percent. Recently, the current account deficit has been 
widening, which reflects relatively strong final demand growth in the 
United States in 2010 compared to our major trading partners, and 
rising oil prices.
    As noted above, a key international economic objective of the 
administration is better balanced global growth, where countries with 
external surpluses boost domestic demand at the same time as countries 
with external deficits, such as the United States, save more. That is 
why the President proposed to the Leaders of the G20 in September 2009 
the creation of a Framework for Strong, Sustainable, and Balanced 
Growth. Stronger demand growth abroad will boost U.S. exports and 
strengthen U.S. growth. The President has emphasized the increasing 
role that exports must play in the U.S. economy, and his National 
Export Initiative (NEI) sets the goal of doubling U.S. exports by 2015. 
The NEI is focused on five priority areas: (1) improving trade advocacy 
and export promotion efforts; (2) increasing access to credit, 
especially for small and midsize businesses; (3) removing barriers to 
the sale of U.S. goods and services abroad; (4) robustly enforcing 
trade laws; and (5) pursuing policies at the global level to promote 
strong, sustainable, and balanced growth.

    Question. In your written testimony, you noted that the 
multilateral development banks ``play a critical role in promoting our 
national security and economic interests around the world.'' During the 
hearing you mentioned some examples of where the MDBs were helpful. 
From your perspective, what are the most important roles that the MDBs 
play in ensuring our interests?

    Answer. The United States depends on MDBs to support our national 
security objectives in key frontline states by fostering economic 
development and reform and addressing the root causes of conflict and 
instability. For example, in Afghanistan, the World Bank and Asian 
Development Bank are the second- and third-largest donors after the 
United States. These institutions are investing heavily in water, 
power, and transportation, sectors that are critical to underpin long 
term stability. Only the MDBs have the resources and technical capacity 
to finance large infrastructure projects globally, which are often the 
key to unlocking growth potential in developing and emerging markets.
    As events unfold in the Middle East, the MDBs become even more 
important to our national security, as they will be a critical tool in 
restoring stability and promoting a return to growth. For example, in 
Egypt and Tunisia, the MDBs can support economic reforms that will 
promote job creation, particularly for the region's youth.
    Promoting peace, security, and stability around the world requires 
tackling critical, long-term drivers of volatility and conflict: food 
security, environmental degradation, and climate change. Left 
unaddressed, these risks will undermine our broader development 
efforts, and roll back hard-won gains in poverty reduction and economic 
growth, which can lead to desperation, radicalization, and increased 
risk of conflict. The recent volatility and spike in food commodity 
prices--in some cases exceeding their 2008 highs--lend a particular 
urgency to the food security challenge, particularly in poor countries 
where higher food prices have dramatic and negative impacts on the 
livelihoods of the poor and create social instability
    The United States also depends on MDBs to support U.S. economic 
objectives. The MDBs are the first responders to financial crisis and 
among the most powerful export promotion programs we have. In 2008, 
when the global economy faced one of the worst financial crises in 
recent history, the MDBs moved swiftly to restore finance and credit 
for world trade. At a time when few institutions were lending, the MDBs 
provided $222 billion in financing to developing countries, helping 
restore economic growth and trade. These resources reached more than 
130 countries, representing 44 percent of the world economy, and 31 
percent of America's export markets. Their support helped to restore 
global growth in key markets that are critical for U.S. businesses and 
jobs. The scale of their response illustrates the indispensability of 
the MDBs for their leverage, speed, and reach.
    U.S. investments in the MDBs help generate new engines of growth 
globally that ultimately support more jobs here at home. The developing 
world represents the fastest source of growth in U.S. exports. Over the 
last 20 years, MDB assistance has helped nurture emerging markets that 
have become key export markets for the United States. The World Bank 
and regional development banks have provided financing and policy 
assistance to reduce trade barriers, improve private sector 
development, increase educational access, build infrastructure, and 
promote open markets.

    Question. Should the United States not fund, or not fully fund, the 
MDBs, how exactly will our ``leadership and influence'' in the MDBs be 
reduced?

    Answer. If the United States fails to purchase the shares that it 
agreed to buy in the capital increase negotiations, the relative 
shareholding of the United States will become diluted. Voting power is 
adjusted to reflect contributions as they come in from shareholders, 
such that delayed contributions will have an impact on the United 
States current voting power. Any shares allocated to a country that are 
not paid for within the allotted subscription period will be moved to 
the Bank's unallocated capital, potentially making them available for 
other shareholders to acquire.
    In the case of the International Bank for Reconstruction and 
Development (IBRD), if the GCI request is not funded at all, our 
shareholding will fall from 16.8 percent to 11.6 percent, and the 
United States will lose the ability to veto changes to the Bank's 
Articles of Agreement. In the case of the Asian Development Bank 
(AsDB), if the United States fails to make its contributions, 
shareholding will fall from 15.6 percent to 5.2 percent and the United 
States will lose the ability to exercise a joint veto with Japan. 
Because other member countries have already elected to pay for their 
subscriptions, China now has a larger voting share than the United 
States and is second behind only Japan. If the United States fails to 
make its GCI payments on time, China will gain more influence on bank 
policy and reforms, which would likely alter the strategic direction of 
the Bank. In the case of the African Development Bank (AfDB), United 
States shareholding will fall from 6.6 percent to 2.2 percent and the 
ability of the United States to have its own Board chair could be 
jeopardized if United States does not fulfill its GCI commitment. In 
addition, credit rating agencies closely monitor shareholder support 
for the AfDB and the United States failure to participate in the GCI 
could potentially impact the AfDB's credit rating. In the case of the 
Inter-American Development Bank (IDB), without a United States 
contribution, no general capital increase is possible.

    Question. Why do you think our ``leadership and influence'' at the 
MDBs is important?

    Answer. The United States has played a leadership role in the MDBs 
by developing a policy agenda to ensure that our financial 
contributions will be strongly leveraged by other donors and borrowers 
and that the MDBs' investments in the developing world directly support 
U.S. priorities. By leading with the agenda, we have secured an 
unprecedented number of policy commitments from the MDBs and their 
shareholders as the basis for U.S. financing commitments. For example, 
the United States commitment to IDA leveraged a commitment from China 
to prepay outstanding loans to the World Bank, which will generate over 
$2 billion in additional resources. At the IDB, the United States was 
instrumental in securing a commitment from middle-income countries in 
the region to devote $200 million annually to Haiti from interest 
earned on Bank lending to these countries. Additionally, U.S. 
leadership has also delivered critical support for Afghanistan through 
commitments from the Asian Development Bank and the World Bank to 
extend extraordinary financing to that country. We have also 
successfully improved the ways in which the MDBs do business to ensure 
effectiveness, accountability, and transparency. For example, U.S. 
leadership has resulted in the use of rigorous performance-based 
allocation systems, ensuring that financial support goes to countries 
where the banks have a willing partner with a track record of 
accountability and good policies.
    If we fall behind on our commitments, we will deprive the MDBs of 
the resources they need to carry out development priorities that are 
critically important to the national and economic security of 
Americans. Too often, the only alternative to MDB financing is low-cost 
financing from countries like China, who will tie their loans to 
conditions that help advance Chinese commercial interests, depriving 
American companies of a level playing field in competing for business. 
Unlike these countries, the MDBs have strict procurement processes and 
rigorous safeguards to strengthen property rights, protect the 
environment, and uphold the rights of vulnerable populations. As can be 
seen in many regions of the world, such as Latin America, South America 
and Africa, there has been a dramatic expansion in the scale and scope 
of activities by countries like China and Iran. In this context, it is 
vital that our commitments to the MDBs remain firm so that our global 
influence in development is sustained.

    Question. In addition, how much do the MDBs provide Egypt and for 
what types of programs? How does that compare to our bilateral 
financing?

    Answer. From 2006 through 2010, the World Bank approved $4.9 
billion in loans to Egypt. The World Bank reports that 42 percent of 
its 5-year cumulative lending to Egypt went toward financial market 
development, 27 percent toward energy, 17 percent toward transportation 
infrastructure, and 4 to 5 percent toward water and sanitation, public 
administration, and health and social services each.
    For this period, the African Development Bank (AfDB) approved $2.6 
billion in loans for Egypt. The AfDB's active portfolio of projects in 
Egypt has the following composition: power sector (60 percent), support 
for rural/urban small business and employment (12 percent), private 
sector operations (25 percent) and water sector
(3 percent).
    Over this same period, US bilateral assistance to Egypt was $13.1 
billion. In particular, USAID assistance has concentrated on economic 
growth, education, health, democracy and governance.

    Question. How will you ensure that the multilateral development 
bank reforms negotiated during the general capital increase 
negotiations will be implemented before the United States funds are 
contributed?

    Answer. The reforms negotiated for each of the MDB GCIs will play 
an essential role in improving the development effectiveness of these 
institutions. We have worked hard to ensure that they will be fully 
adopted in several different ways.
    At the World Bank, the United States helped secure a robust set of 
reforms as part of the GCI. In recent months, a significant number of 
these reforms have already been implemented, including: the disclosure 
policy agreement, a new financial framework for the Bank and 
improvements in operational effectiveness through information 
technology. These reforms represent major structural changes to the 
Bank and how it does business. Agreements to implement reforms on a new 
compensation and benefits framework and a decentralization strategy 
will take longer to implement. The strong commitment to these reforms 
demonstrated by Bank management gives us confidence that they will be 
carried through even after agreement on the GCI.
    At the Inter-American Development Bank (IDB), we worked to ensure 
that a formal review of the agreed reforms would occur midway through 
the 5-year encashment period (in March 2013). This review, to be 
conducted by the Bank's independent evaluator, will examine the Bank's 
progress on a list of 13 reforms, all of which have specified 
implementation deadlines that precede the review completion date. The 
IDB has already made strong progress on meeting these deadlines, 
including the full implementation of a new financial management process 
and introduction of a new methodology to strengthen the development 
effectiveness of its operations. Given that this evaluation precedes 
the final two encashment payments to the Bank, there is a strong 
incentive to complete the reforms on schedule.
    As part of the GCI negotiations and similar to the IDB, African 
Development Bank (AfDB) management published a detailed matrix of 
institutional reform commitments, including ambitious target dates, 
against which reform progress can be measured. In addition, AfDB 
management agreed that the bank's office of independent evaluation 
(OPEV) would undertake an assessment of progress toward GCI-related 
institutional reform commitments by the third quarter of 2012. The 
explicit purpose of this assessment is to enhance accountability and 
demonstrate reform progress to member governments and Parliaments. 
Notable reform achievements so far include development of a Bank-wide 
results framework, adoption of a comprehensive income model 
incorporating transfers to the soft loan window and ongoing 
strengthening of risk management systems/capacity.
    At the Asian Development Bank (AsDB), the United States was 
instrumental in getting agreement on a series of important reforms to 
the institutions that represent key priorities for us. These reforms 
have either already been implemented or are being implemented 
currently. As with the other institutions, we monitor the AsDB's 
activities on a regular basis and the AsDB tracks the status of its 
reforms through an internal tracking system that is updated quarterly.

    Question. What reforms and policies on technology (both the use in 
the institutions and in their programs) are Treasury promoting at the 
MDBs?

    Answer. Each of the MDB's has identified information and 
communication technology (ICT) as a key lever to improve the 
effectiveness of multilateral development assistance. The banks have 
focused on ICT a means of:

   Developing human capital and encouraging lifelong learning;
   Improving the transparency of local and regional 
        governments;
   Improving the efficiency of businesses and markets by 
        improving communications infrastructure;
   Encouraging citizen participation in democratic processes 
        and increasing the effectiveness of economic and political 
        reforms; and
   Fostering entrepreneurship and creating new employment 
        opportunities.

    Project examples include: the International Finance Corporation 
(IFC) invested $32.7 million in an undersea fiber optic cable that will 
help bring high-speed broadband services to millions in Eastern Africa. 
The International Bank for Reconstruction and Development lent $33 
million to Morocco to roll out various e-government initiatives aimed 
at improving government service delivery and simplifying public 
procedures. In an International Fund for Agricultural Development 
project in Tanzania, SMS technology is being employed by ``market 
spies'' who send price information from markets back to the farmer. 
This helps to control the behavior of ``middle men'' and begins to 
level the playing field for farmers when negotiating with traders and 
helps build networks among farmers that can facilitate sustainable 
development.
    The United States has typically advocated promoting reform in MDB 
ICT policies through IT applications, human development, and strategic 
alliances. We have also encouraged regional cooperation and networking 
to enhance local efforts and promote private sector participation.

    Question. The administration is requesting $400 million for the 
Clean Technology Fund to encourage clean energy investments in 
developing countries. Other agencies in the Federal Government also 
work with the private sector in developing new energy technologies for 
entrance into the marketplace. To what extent does Treasury work with 
other federal agencies to share information on these new technologies? 
If Treasury does collaborate with other agencies, what are they, and 
what is the mechanism you use for this coordination? Does Treasury 
share common program objectives for new technology development? Does 
Treasury work with USAID which is implementing ``USAID FORWARD,'' a 
$71.8 million effort that includes bringing science and technology 
programs forward for investment in developing countries?

    Answer. The Clean Technology Fund (CTF) seeks to promote the 
demonstration, replication, and scale-up of commercially viable 
technologies by working to reduce market challenges currently 
preventing widespread investment and uptake of such technologies.
    In this effort, Treasury works closely with other agencies--
particularly USAID, State, DOE--both at the strategic level and at the 
program and operational level. USAID Forward's focus on leveraging 
science and technology and fostering innovation is creating greater 
scope for effective collaboration with programs like CTF both 
strategically and operationally.
    Each CTF program begins with the development of a country-led 
strategy. USG country teams--including USAID and, at times, OPIC, Ex-
Im, State, MCC and USTDA--participate in on-the-ground planning 
missions alongside the MDBs and other development partners. These 
efforts improve the efficacy of our efforts by seeking to harmonize our 
multilateral CTF activities with our bilateral assistance work for that 
particular country. For example, in Indonesia the U.S. bilaterally 
sponsored Indonesia Clean Energy Development Program (ICED) and the 
Climate Investment Funds-sponsored Clean Technology Fund Investment 
Plan divided the process for developing projects. The CTF program will 
focus on the back-end of the project development processes--financing 
the renewable and energy efficiency projects. On the other hand ICED is 
working on the front end of the project development--from resource 
assessment, to supporting the development of bankable project proposals 
for funding.
    As a related example, last year the CTF provided financing for a 
Mexican wind farm that bought 27 Liberty Wind Turbines from Clipper 
Windpower, a U.S. company that makes turbines in Iowa. By using the 
concessional CTF funds to take a subordinated position, the program 
demonstrated to financiers and the market that such projects can be 
successfully funded with significantly more debt financing than was 
perceived to be the case. As a result, wind projects in Mexico are 
generally now able to acquire all commercial debt. This targeted use of 
CTF funding is considered to have been a catalyst for market 
transformation. Ex-Im provided extended term financing for Clipper as 
allowed under the OECD agreement on renewable energy exports.''
    Another aspect of interagency collaboration has been the 
implementation of a strong interagency process to review investment 
plans and projects for the CTF, including USAID, DOE, State, EPA, and 
USTDA. Additionally, when these same projects come to the multilateral 
development bank (MDB) boards for approval, the full interagency group 
that reviews MDB projects also reviews these CIF projects.
    This coordination has resulted in the development of common program 
objectives for promoting the demonstration, development and scaled-up 
deployment clean technology. These include: strengthening enabling 
environments, mobilizing sources of clean energy financing, and 
promoting knowledge and innovation. Finally, the National Security 
Staff has convened an interagency process with Treasury, State, USAID, 
and others, as well as with input from civil society and the private 
sector, to develop a more formal strategy that will guide investment 
choices across USG clean energy assistance activities.

    Question. The Treasury Department has provided the committee with 
numerous briefings on their work to strengthen global food security 
through its Global Agriculture and Food Security Program (GAFSP) while 
USAID and the State Department have briefed us on the Feed the Future 
Program (FtF). How do these programs differ? How are they the same? Do 
program managers from the two programs work together in a coordinated 
effort? If so, how?

    Answer.

   GAFSP strengthens and complements the bilateral components 
        of FtF. Of the original eight GAFSP grants, half (Ethiopia, 
        Rwanda, Haiti, and Bangladesh) are FtF focus countries. GAFSP 
        leverages additional resources to support FtF activities by 
        supporting complementary activities. For example, GAFSP's 
        investments in the water management in Bangladesh will support 
        USAID's investments in agricultural productivity and the rice 
        sector.
   USAID, Treasury, and State have collaborated in the 
        creation, operations, and diplomatic outreach associated with 
        the GAFSP. Senior officials from State, Treasury and USAID have 
        all actively sought funding for GAFSP over the last year. GAFSP 
        and FtF share a significant number of results indicators in 
        their monitoring and evaluation frameworks, which will help in 
        measuring the impact of our investments. While Treasury 
        represents the United States at GAFSP Steering Committee 
        meetings, USAID staff has attended each Steering Committee 
        meeting.
   There are also important differences between GAFSP and the 
        bilateral programs under FtF. For instance, GAFSP allows the 
        United States to leverage directly the financial resources of 
        other contributors, including nontraditional donors such as 
        Korea, and align those resources against the agricultural 
        development strategies of the poorest countries. With our $67 
        million contribution in FY 2010--8 percent of the total U.S. 
        food security resources for that year--we successfully 
        leveraged an additional $387 in contributions.
   As a multilateral mechanism, GAFSP does not earmark funds 
        for particular countries. Instead GAFSP employs an open, 
        competitive, and transparent proposal process that awards 
        grants based on evaluations from independent technical experts. 
        Countries that have high levels of hunger and poverty but have 
        also developed evidence-based, comprehensive agricultural 
        development strategies and robust proposals are prioritized for 
        GAFSP financing.
   GAFSP also leverages the significant technical capacity of 
        the multilateral development banks to achieve the goal of 
        measurably reducing hunger and poverty in the poorest countries 
        of the world. The banks have large agricultural staffs still in 
        place, which have the expertise and capacity to implement 
        GAFSP-financed projects in a timely manner.

    Question. To follow up on my question about the almost $32 billion 
in Government of Libya assets under U.S. jurisdiction have been frozen. 
How long will the assets be frozen? What is the process to return or 
otherwise resolve those assets? Who will receive the assets? What is 
the size of the Mubarak family assets that have been frozen? Would you 
list the other assets frozen by leaders and governments in the Middle 
East?

    Answer. The Libyan assets were blocked pursuant to Executive Order 
13566 signed by President Obama on February 25, 2011. The purpose of 
the blocking is twofold--to prevent Muammar Qadhafi from accessing them 
for use and to preserve them for the Libyan people. At this point, we 
are unable to predict how long the assets will be blocked. Assets 
blocked under IEEPA authorities generally remain blocked until the 
President terminates the underlying National Emergency. There is also a 
licensing mechanism in place to unblock funds when it is in the 
national interest to do so.
    There is currently no sanctions program in the United Sates 
targeting the assets of the Mubarak family. In response to events in 
Egypt, Treasury issued advisory reminding U.S. financial institutions 
of their obligations to monitor closely any financial activity that 
could potentially represent misappropriated or diverted state assets, 
proceeds of bribery or other illegal payments, or other public 
corruption proceeds. The United States does, however, have current 
sanctions against Iran and Sudan. Government of Sudan assets within the 
possession or controls of a U.S. person are blocked. The property of 
persons designated in connection with Iran's proliferation of weapons 
of mass destruction and support of terrorism is also blocked.

    Question. During the hearing, you noted a study coauthored by 
Kenneth Rogoff that indicated when debt/GDP levels had an effect on 
economic growth. Is there a similar study that looks at debt/budget 
levels? Is there an argument for looking at the budgets and not just 
the GDP levels since it is the budget levels that will determine the 
sustainability of the debt while GDP could be seen as a proxy for the 
budget levels?

    Answer. Yes, the annual deficits matter in addition to the debt 
level. That is why the FY 2012 budget focuses on reducing deficits as a 
share of GDP. The underlying target in the FY 2012 budget is to stop 
the growth in the debt to nominal GDP ratio; stabilizing the debt-to-
GDP ratio requires that the national debt grow no faster than nominal 
GDP. This is done by targeting the budget deficit in a specific way.
    The growth rate of debt depends on the interest rate paid on the 
existing debt and the size of the primary deficit (the primary deficit 
is the deficit less interest payments). Roughly speaking, if the 
primary deficit is zero, the only element that is adding to debt is 
interest payments. If interest payments are offset by the growth in 
nominal GDP, it is possible to keep the debt to nominal GDP ratio 
constant.
    In the proposed FY 2012 budget, the deficit as a percentage of GDP 
is cut in half from FY 2011 to FY 2013 (from 10.9 percent to 4.6 
percent) and it continues to fall to around 3 percent of GDP by 2017. 
It can be seen that the primary deficit by 2017 is zero and has a small 
surplus thereafter. Furthermore, after 2016 the deficit is accounted 
for by interest payments, which are about 3 percent of GDP. These 
conditions ensure the debt to GDP ratio stabilizes in 2017 at around 67 
to 68 percent of GDP, and it remains there through 2021.
    This is a significant start, but more needs to be done to constrain 
the growth of entitlement spending, and in the longer term after 2021 
it becomes particularly important.

    Question. Could you please provide me with an update of the 
designations pending or being considered under the ``Kingpin Act'' for 
Venezuelan nationals.

    Answer. Treasury does not comment on pending or possible 
designations or investigations. However South America has been, and 
continues to be, a region we carefully scrutinize as we consider 
Kingpin Act designations.

    Question. What is your understanding of the relationship between 
the Government of Iran and Venezuela's Oil Company, PDVSA (Petroleos de 
Venezuela)?

    Answer. We are aware of the growing relationship between Venezuela 
and Iran, including increased business and trade ties, and we are 
monitoring this relationship closely. We also understand that the State 
Department is reviewing reports that Venezuela has sent refined 
petroleum to Iran, which may make the companies involved subject to 
possible sanctions under the Comprehensive Iran Sanctions, 
Accountability, and Divestment Act of 2010 (CISADA). Under the Iran 
Sanctions Act of 1996, as amended by CISADA, the State Department, in 
consultation with appropriate agencies, is responsible for determining 
whether an individual or entity has engaged in sanctionable activity 
involving Iran's energy and refined petroleum sectors, and for 
determining any further course of action, including selecting sanctions 
that may be imposed. Treasury will continue to cooperate closely with 
the State Department and will remain vigilant for any financial 
transactions which might be subject to existing U.S. or international 
sanctions against Iran.
                                 ______
                                 

          Questions Submitted by Senator Christopher A. Coons

    Question. Two weeks ago, Federal Reserve Chairman Ben Bernanke said 
that small banks exempted from new limits on interchange fees may be 
forced by the marketplace to accept the proposed government-set debit 
interchange fee of 12 cents per transaction. This would render 
meaningless the exemption and cause small and community banks further 
harm.

   Considering the tight regulatory timeline for implementation 
        of debit interchange caps and the concerns of small banks, do 
        you believe the July 21 effective date is realistic?

    Answer. Under section 1075 of the Dodd-Frank Act (the ``Durbin 
Amendment''), Congress provided the Federal Reserve Board (``Board'') 
with the authority to regulate interchange fees relating to debit 
transactions and to implement certain nonexclusivity restrictions that 
would provide merchants with greater choice in selecting a debit 
network through which to route a transaction. Congress also provided an 
exemption for small bank issuers from the standards for debit card 
interchange fees established by the Board.
    The Board has been striving to meet the statutory deadlines set 
under the Dodd-Frank Act. In December 2010, the Board requested comment 
on its proposed rules to implement the Durbin Amendment. The Board is 
working diligently to review the more than 11,000 comments it received 
and to determine what changes it should make in the final rule. And as 
Chairman Bernanke stated before the ICBA on March 23, 2011, the Board 
understands that Congress intended for small issuers to be exempted 
from the standards established by the Board on debit interchange fee 
regulation and is committed to using its full authority to ensure that 
the exemption is effective.
    Many small issuers have expressed concern over the practical effect 
of this exemption. In particular, they are concerned that the exemption 
will not be effective if networks do not implement a two-tier 
interchange fee structure to differentiate between large and small bank 
issuers; and (2) that the market pressures resulting from the 
nonexclusivity restrictions will over time place downward pressure on 
debit interchange fees for small issuers. However, many large debit 
networks, including Visa, STAR, and Pulse, have announced that they 
will implement a two-tier interchange fee system. And as Chairman 
Bernanke noted, to the extent that a two-tier interchange structure 
becomes the prevailing network practice, the exemption should have some 
real effect.

    Question. As you know, Australia has experimented in regulating 
interchange fees. According to studies, this regulation has resulted in 
increased costs to consumers through higher cardholder fees and reduced 
card benefits.

   Do you believe there is any guaranteed benefit to consumers 
        from capping debit interchange fees?

    Answer. You are correct to suggest that there is no guarantee that 
customers will benefit in any particular way from capping debit 
interchange fees. That said, the Board has acknowledged the expectation 
that consumers will benefit to the extent merchants pass on their 
interchange fee savings in the form of lower prices. It is not 
practical, however, to measure the extent to which lower interchange 
fees on electronic debit transactions paid by merchants would translate 
into lower prices because of the many other factors that influence the 
prices which merchants charge their customers.
    While you're correct that there is evidence that Australian credit 
cardholders have experienced higher card fees and reduced card 
benefits, it is not clear that Australia's more recent limits on debit 
card interchange has resulted in increased banking fees. Each country's 
banking, payments, and regulatory environments are distinct. For 
example, under the Australian system, until this month, interchange 
fees for PIN debit card transactions were paid by the issuing banks to 
the merchants, opposite of the interchange flow in the United States. 
Therefore, there is some danger in comparing outcomes from different 
countries, even if comparisons appear apt initially.
                                 ______
                                 

               Questions Submitted by Senator Marco Rubio

    Question. Approval of the trade agreements with Panama and Colombia 
have been delayed for more than 5 years. In the meantime, these 
countries are negotiating and implementing similar agreements with our 
main competitors in Europe, Canada, and China. The result is that 
American workers have lost ground to our main economic competitors.

   What has been the economic cost of this delay for American 
        exporters?
   How many jobs could have been created in the United States 
        if we had these agreements in place today?
   Would the administration commit to present these treaties to 
        Congress before the Easter recess?

    Answer. The United States remains a major supplier of goods to 
Panama. However, Colombia and Panama have active trade agendas and have 
signed trade agreements with some of our main competitors, such as the 
EU and Canada. That is why Ambassador Kirk worked so intensively with 
Panama and continues to work with Colombia to resolve outstanding 
issues of concern to Members of Congress so that those trade agreements 
can be presented to Congress. As to the extent of benefits foregone to 
date because these agreements have not been ratified, that would be 
difficult to estimate as the market liberalization required by the 
agreements would only be phased in over time and the trade and 
investment flows induced by that liberalization also develop over time.
    That said, the U.S. economy clearly stands to benefit from passage 
of these agreements. As estimated by the United States International 
Trade commission (USITC) in its 2006 study of the impacts of the 
Colombia Trade Promotion Agreement (TPA) on the U.S. economy, when 
fully phased in the agreement would increase overall U.S. goods exports 
by 13.7 percent over the levels they would otherwise have achieved 
without the agreement. The USITC's 2007 report on the Panama TPA noted 
that the United States has had a trade surplus with Panama since 1989 
and showed that U.S. exports to Panama would increase by between 9 and 
145 percent in the sectors it analyzed. In the longer term, these 
benefits could be magnified by the reduction of impediments in customs 
processing, enhanced investor protections, and increased regulatory 
transparency in our partner countries, as required by these agreements.
    As to when these agreements could be submitted to Congress, I would 
refer you to United States Trade Representative, Ambassador Kirk.

    Question. As you know, Venezuela is building deep and troubling 
ties with Iran, which we have designated as the main State Sponsor of 
Terror in the world. I believe these ties are--or will soon begin to 
undermine the multilateral sanctions against the Iranian regime's 
pursuit of an illicit nuclear weapons program.

   How is your Department monitoring violations to multilateral 
        sanctions on Iran through Venezuela?

    Answer. We are aware of the growing relationship between Venezuela 
and Iran, including increased business and trade ties, and we are 
monitoring this relationship closely. In 2008, the Treasury Department 
designated Venezuelan-based Banco Internacional de Desarrollo, a 
subsidiary of the Export Development Bank of Iran (EDBI), pursuant to 
Executive Order 13382, which targets the WMD proliferators and their 
support networks. EDBI was designated for providing or attempting to 
provide financial services to Iran's Ministry of Defense for Armed 
Forces Logistics (MODAFL), which has ultimate authority over the 
Aerospace Industries Organization (AI0), the umbrella group that 
controls Iran's ballistic missile research, development, and production 
activities and organizations.
    The Treasury Department relies upon a number of authorities to 
target Iran's illicit activities. Executive Orders 13382 and 13224 
allow Treasury to prohibit transactions with, and freeze the assets of, 
entities and individuals that engage in or support WMD proliferation 
activities or terrorism, respectively. In addition, subsection 104(c) 
of the Comprehensive Iran Sanctions, Accountability, and Divestment Act 
of 2010 (CISADA) required Treasury to issue regulations (published on 
August 16, 2010) to implement the Secretary's authority to prohibit or 
impose strict conditions on the opening or maintaining in the United 
States of correspondent accounts or payable through accounts for 
foreign financial institutions found to knowingly engage in certain 
activities involving Iran. Treasury remains vigilant for any 
transactions that might be subject to existing U.S. or international 
sanctions against Iran and we continue to work with our international 
partners on robust implementation of the international sanctions 
framework. We expect Venezuela to comply with its international 
obligations under UNSCR 1929, and we will take appropriate action 
against those found to be engaged in any activities that are 
sanctionable under the U.S. or U.N. sanctions frameworks.

   Are there any open investigations into these troubling ties?

    Answer. Treasury does not comment publicly on possible or pending 
investigations.

    Question. Tourism in Cuba, including tourism travel, is owned and 
operated by the Cuban state and is, in effect, one of the main sources 
of revenue of the Castro regime. Therefore, American tourism travel to 
Cuba is statutorily prohibited, except for family, religious, cultural 
and academic purposes. The Obama administration has recently expanded 
the scope of this purposeful travel, and questions have been raised 
about what appears lax enforcement of these restrictions by the Office 
of Foreign Assets Control (OFAC) within your Department.

   What is OFAC doing to ensure robust enforcement of U.S. 
        restrictions on tourism travel to Cuba?

    Answer. In an effort to maximize the impact of our efforts and 
resources, OFAC has concentrated its Cuba travel enforcement work on 
companies in the travel industry and organizations facilitating group 
travel. Given both important resource considerations as well as the 
demand of several high-priority sanctions programs that OFAC 
administers (including against Iran, terrorism, proliferation of 
weapons of mass destruction, and, most recently, Libya), efforts 
focusing on travel companies and organizations facilitating group 
travel more effectively enforce Cuba related travel restrictions.

   Does OFAC's enforcement of the rules include audits of 
        licensed travel service providers?

    Answer. OFAC scrutinizes the transactions and conduct of the Cuba 
Service Provider community (the ``SPs'') on an ongoing basis. OFAC 
exercises its oversight primarily through specific inquiries made to 
SPs. OFAC does not currently conduct regular compliance reviews of all 
SPs because OFAC has found that dedicating enforcement resources and 
activities toward the activities of select SPs and suspected 
unauthorized SPs is a more effective method of insuring that SPs are 
conducting their business properly. In addition, OFAC requires detailed 
information from each applicant to be an SP, and conducts an 
investigation of each applicant before determining whether granting an 
SP license is consistent with the Cuban Assets Control Regulations.

   If so, what has been the result of such audits?

    Answer. In some cases, OFAC has suspended or revoked TSP 
authorizations, which effectively puts an entity out of the business of 
providing Cuba travel services. OFAC actively monitors the TSPs in 
order to better ensure that they operate in compliance with the 
applicable rules and regulations. Past reviews have also revealed 
issues which OFAC has subsequently used as the basis for training that 
OFAC offers to the licensed travel service provider community.

    Question. On March 1, 2011, the Treasury Department issued a report 
confirming China as the largest foreign holder of U.S. debt, $1.16 
trillion in total. As you know, by 2021, interest payments on the 
national debt are projected to reach $844 billion a year.

   Considering our longstanding concerns with the Chinese 
        Government's lack of transparency on their military planning 
        and expenditures, what are the strategic implications of the 
        United States beholden to China for such sums?
   How does this situation affect our interests in multilateral 
        financing institutions?

    Answer. As of March 2011, China's holdings of Treasury securities 
totaled $1,144.9 billion, or 8 percent of total public debt 
outstanding. More than 68 percent of Treasury securities are held by 
U.S. residents. Most of China's financial investments in the United 
States are concentrated in Treasury securities, likely because it is an 
extremely deep and liquid market. Chinese officials have said publicly 
that liquidity and safety are their most important objectives in 
managing their official reserves.
    With respect to the Treasury security market, Treasury has a very 
large and diversified investor base that is not reliant on any 
particular investor. This became evident during the financial crisis as 
Treasury's investor base grew. Additionally, as the saving rate in the 
United States has increased over the past 2 years, so too has the 
appetite of domestic investors for Treasuries. The Treasury market is 
the deepest and most liquid market in the world. Daily transaction 
volumes total approximately $400 billion.
    An important tool for promoting U.S. security, economic, and 
commercial interests is robust U.S. presence in the MDBs. Every dollar 
we provide the MDBs as capital is magnified by the contributions of 
other shareholders and the MDB's increased ability to borrow such that 
they can provide assistance to rival China's. As the largest 
nonregional shareholder in most MDBs, the United States exerts 
significant leadership in shaping their policies, including those 
related to procurement and combating corruption. U.S. businesses 
benefit from the level playing field that results from the strict 
procurement processes and anticorruption policies promoted by the MDBs 
in its borrowing members. In many of the markets in which the MDBs 
operate, a major alternative source of financing comes from China, 
which is often low cost, nontransparent, and tied to support for 
Chinese firms. If we do not fully fund our contributions under the 
GCIs, our leadership position within these institutions will be eroded, 
and with it our ability to maintain U.S. priorities such as 
nondiscriminatory procurement.
                                 ______
                                 

             Questions Submitted by Senator Robert Menendez

    Question. With respect to the regulatory changes made by President 
Obama in January with respect to our policy toward Cuba I am 
particularly leery of changes that enhance ``people-to-people'' 
programs. There are a lot of companies that are seeking to make a buck 
off the people-to-people programs without considering whether the 
program actually provides any benefit to the Cuban people.
    For example, one company is offering a trip to Cuba to take classes 
on ``Salsa and other popular dances like Mambo, Cha Cha Cha, and Rueda 
de Casino.''
    The regulations state, however, ``This travel category provides for 
specific licenses authorizing educational exchanges--not involving 
academic study pursuant to a degree program--when those exchanges take 
place under the auspices of an organization that sponsors and organizes 
such programs to promote people-to-people contact.''

   Has OAFC developed specific criteria to guide decisions with 
        respect to license applications, beyond the limited guidance 
        provided by the regulations, that will ensure that licensees 
        are in serving our stated policy goal of promoting people-to-
        people contact?
   What assurances or documentation is required of licensees 
        upon their return to the United States to ensure that their 
        programs are serving our policy goals?

    Answer. OFAC has recently published guidelines addressing this 
licensing category: http://www.treasury.gov/resource-center/sanctions/
Programs/Documents/cuba tr_app.pdf.

    Question. One of the themes of this hearing is addressing threats 
to our economic recovery. In that context I think we must consider 
China's continued undervaluation of its currency and its impact on our 
economy in terms--particularly as we seek to double our exports by 
2015.
    On February 4, the Treasury Department concluded in its ``Annual 
Report to Congress on International Economic and Exchange Rate 
Policies'' that China did not qualify as a currency manipulator because 
it had permitted some appreciation of the renminbi (REN-MIN-BI).
    China's undervaluation remains an important issue, as the report 
points out: ``A renimnbi which is below its equilibrium value decreases 
the purchasing power of China's consumers. Undervaluation increases the 
price tag on items such as imported food or gasoline, new homes built 
with imported materials, or a foreign automobile. It also encourages 
Chinese firms to produce for export markets and cater to the 
preferences of foreign rather than domestic consumers, placing an 
additional damper on the growth of domestic demand.''
    The same report points out that China has largely recovered from 
the global financial crisis and that in 2010, China's economy expanded 
by 10.3 percent in real terms. Meanwhile, the U.S. economy is still 
struggling. As a result, in addition to market access issues, U.S. 
firms are at a price disadvantage because of China's currency policy.

   What will it take for the China to level the playing field 
        for U.S. companies? Do we need to pass legislation to force the 
        issue?

    Answer. The currency issue remains a top priority for the 
administration, and was a focal point of discussion in the Economic 
Track of the recently concluded third meeting of the Strategic and 
Economic Dialogue (S&ED). China has begun to adjust its nominal 
exchange rate in recent months; since June 2010, China's authorities 
have allowed their currency to appreciate against the dollar by about 5 
percent nominal terms, and at a pace of about 9 percent per year in 
real terms, given higher inflation in China than in the United States. 
But, despite this, progress thus far is insufficient. China's currency 
remains substantially undervalued and more rapid progress is needed. As 
was evident in our S&ED discussions, China's leaders recognize 
increasingly that exchange rate flexibility needs to be part of China's 
efforts to rely more on its own domestic demand to generate growth, a 
key objective of China's recently released 12th Five Year Plan.
    The United States-China economic relationship offers great promise 
and potential, and we are committed to securing the best outcomes for 
American workers and businesses. Last year, U.S. exports of goods and 
services to China reached $110 billion, growing 50 percent faster than 
our exports to the rest of the world, and supporting hundreds of 
thousands of U.S. jobs across a range of sectors.
    We are using all channels available, including multilateral venues, 
to push for progress on China's economic policies, including its 
exchange rate policy. To support global recovery and ensure strong, 
sustained, and more balanced global growth into the future, the United 
States, China, and the other members of the G20 group of nations have 
committed to policy measures that will strengthen domestic demand-led 
growth in major surplus economies, including China. Stronger growth of 
domestic demand in China, particularly household consumption, which 
reduces China's trade surplus, will be a powerful impetus to global 
growth, creating new opportunities for U.S. firms and workers. A 
stronger RMB is an indispensible part of this process of reorienting 
Chinese growth.
    Although progress has been made on the exchange rate, intellectual 
property rights, and other important economic and trade issues, much 
remains to be done. As we did during the third Strategic & Economic 
Dialogue, the administration will continue to vigorously engage with 
the Chinese leadership to make the United States-China economic 
relationship more beneficial to the American people.
    But in any discussion of China, it is important for Americans--
including the administration and Congress--to understand that the 
solutions to our challenges in the United States rest first and 
foremost here at home and not in China. Fundamentally, how many jobs 
and how much wealth we create will be the result of the choices we make 
in the United States--not the choices of others.
    That means we must restore fiscal responsibility. This will require 
the government to spend less and spend more wisely, so that we can 
afford to make the investments that are critical to future growth.
    With respect to legislative measures intended to level the playing 
field for U.S. companies, I have noted in the past that it is important 
that these are both effective and consistent with our international 
obligations.

    Question. The Treasury Department cochairs the U.S.-China Strategic 
and Economic Dialogue (S&ED), whose next meeting is scheduled for May 
of this year. While the S&ED is designed to advance bilateral 
negotiations on high-level macroeconomic and geopolitical issues, a 
major concern is that trade issues relevant to the S&ED agenda are only 
addressed under the U.S.-China Joint Committee on Commerce and Trade 
(JCCT) framework. The JCCT remains the lone vehicle to address a very 
long and growing list of trade and enforcement concerns. This 
bottleneck impedes progress on trade issues that are undermining job 
creation and economic recovery.
    A critical issue confronting nonprofit and commercial publishers in 
New Jersey is the online piracy of their scientific, technical and 
medical research articles. Libraries with subscriptions to U.S. 
journals are providing the copyrighted content to third parties, who 
are then reselling the articles on sophisticated online platforms. 
China is one of the fastest-growing export markets for U.S. journal 
publishers and is now the second-largest source of scholarly research 
in the world behind the United States. U.S. publishers have played a 
key role in supporting this dynamic growth, working closely with 
Chinese researchers to improve the quality of their research through 
rigorous peer review and journal management training.
    Rampant online piracy of valuable, peer-reviewed scientific, 
technical, and medical research harms not only U.S. industry and 
investments in innovation but Chinese innovation and development goals 
as well. The publishers impacted by these alleged IPR violations 
directly and indirectly employ over 50,000 workers in the United States 
and maintain extensive operations in the State of New Jersey that 
provide more than 3,000 jobs.

   How will you ensure that the S&ED framework also addresses 
        broader trade issues that impact the S&ED agenda, such as the 
        journal piracy issue?

    Answer. The administration strongly shares your concerns, and that 
is why trade and investment issues, including intellectual property 
rights (IPR) protection and enforcement, are an important component of 
the U.S.-China Strategic and Economic (S&ED) Dialogue. The Department 
of the Treasury, the Office of the U.S. Trade Representative, the 
Department of Commerce, and other agencies, we work together closely to 
address strategic trade and investment issues in the S&ED with the 
relevant Chinese ministries. The Economic Track of the S&ED is chaired 
by Chinese Vice Premier Wang Qishan, who is the Chinese official 
responsible for trade issues, including IPR. The S&ED and the Joint 
Commission on Commerce and Trade (JCCT) are complementary efforts that 
are part of the administration's expansive, coordinated China strategy. 
The S&ED tends to focus on systemic, financial sector, and cross-
cutting trade and investment issues, while the JCCT focuses on 
resolving specific trade and investment barriers.
    At the third S&ED, we achieved important progress on a number of 
trade and investment issues, including securing Chinese commitments to 
better protect and enforce IPR; eliminate government procurement 
indigenous innovation product catalogues and revise Article 9 of the 
draft Government Procurement Law Implementing Regulations as part of 
China's implementation of President Hu's commitment not to link 
innovation policies to the provision of government procurement 
preferences; issue a Chinese measure to provide the public with advance 
notice and an an opportunity to comment on Chinese regulations and 
rules; and undertake discussions on our export financing systems, 
recognizing the importance of transparency and fairness in the 
provision of export credits. These commitments should lead to more U.S. 
jobs and boost U.S. exports to China and the world by contributing to a 
more level playing field and expanding the opportunities available to 
U.S. workers and firms.
    On IPR in particular, China pledged to improve its high-level, 
long-term IPR protection and enforcement mechanism, building on the 
current Special Campaign Against IPR Infringement and Fake and Shoddy 
Products, and to strengthen its government inspection mechanism to make 
sure that the software being used by government agencies at all levels 
is legitimate. These commitments build on the important bilateral 
commitments including those made during President Hu's visit in 
January. The administration will continue to engage China vigorously to 
ensure their comprehensive implementation.
    With regard to the specific issue of journal piracy, during the 
JCCT last December, China and the United States agreed to continue 
cooperation on strengthening library IPR protection and to continue 
consultations with rights holders about library IPR protection efforts. 
China's National Copyright Administration (NCAC) described its ongoing 
efforts to investigate complaints by academic journal publishers about 
Web-based enterprises' piracy of library academic journals, and agreed 
to take prompt action at the conclusion of its investigations. We 
understand that U.S. stakeholders are engaging NCAC to follow up on the 
JCCT outcome. Also, U.S. trade officials met with NCAC in late March to 
discuss this and other important copyright issues, and library piracy 
issues were also discussed at the JCCT IPR Working Group in April.
    Trade and investment issues, including IPR protection and 
enforcement, will continue to be an important component of our S&ED 
engagement with China.

                                  
