[Senate Hearing 115-621]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-621

         INSERT TITLE HEREMULTILATERAL ECONOMIC INSTITUTIONS 
                        AND U.S. FOREIGN POLICY

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

                                 HEARING

                               BEFORE THE

                      SUBCOMMITTEE ON MULTILATERAL

                       INTERNATIONAL DEVELOPMENT,

                     MULTILATERAL INSTITUTIONS AND

                    INTERNATIONAL ECONOMIC, ENERGY,

                        AND ENVIRONMENTAL POLICY

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           NOVEMBER 27, 2018

                               __________

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                 COMMITTEE ON FOREIGN RELATIONS        

                BOB CORKER, Tennessee, Chairman        
JAMES E. RISCH, Idaho                ROBERT MENENDEZ, New Jersey
MARCO RUBIO, Florida                 BENJAMIN L. CARDIN, Maryland
RON JOHNSON, Wisconsin               JEANNE SHAHEEN, New Hampshire
JEFF FLAKE, Arizona                  CHRISTOPHER A. COONS, Delaware
CORY GARDNER, Colorado               TOM UDALL, New Mexico
TODD, YOUNG, Indiana                 CHRISTOPHER MURPHY, Connecticut
JOHN BARRASSO, Wyoming               TIM KAINE, Virginia
JOHNNY ISAKSON, Georgia              EDWARD J. MARKEY, Massachusetts
ROB PORTMAN, Ohio                    JEFF MERKLEY, Oregon
RAND PAUL, Kentucky                  CORY A. BOOKER, New Jersey
                  Todd Womack, Staff Director        
            Jessica Lewis, Democratic Staff Director        
                    John Dutton, Chief Clerk        




           SUBCOMMITTEE ON MULTILATERAL INTERNATIONAL        
             DEVELOPMENT, MULTILATERAL INSTITUTIONS        
              AND INTERNATIONAL ECONOMIC, ENERGY,        
                    AND ENVIRONMENTAL POLICY        

                 TODD, YOUNG, Indiana, Chairman        
JEFF FLAKE, Arizona                  JEFF MERKLEY, Oregon
CORY GARDNER, Colorado               TOM UDALL, New Mexico
JOHN BARRASSO, Wyoming               CHRISTOPHER A. COONS, Delaware
ROB PORTMAN, Ohio                    EDWARD J. MARKEY, Massachusetts

                              (ii)        

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Young, Hon. Todd, U.S. Senator from Indiana......................     1


Merkley, Hon. Jeff, U.S. Senator from Oregon.....................     3


Malpass, Hon. David, Under Secretary, International Affairs, U.S. 
  Department of the Treasury, Washington, DC.....................     4

    Prepared statement...........................................    52

    Responses to additional questions submitted for the record by 
      Senator Menendez...........................................    64


De Marcellus, Hon. Roland, acting deputy assistant secretary, 
  International Finance and Development, Bureau of Economic and 
  Business Affairs, U.S. Department of State, Washington, DC.....     6

    Prepared statement...........................................     7


Lowery, Hon. Clay, visiting fellow, Center for Global 
  Development, Arlington, VA.....................................    21

    Prepared statement...........................................    22


Hillman, Jennifer, Professor, Georgetown Law Center, Washington, 
  DC.............................................................    25

    Prepared statement...........................................    65

    Saving Multilateralism--Renovating the House of Global 
      Economic Governance for the 21st Century--by Jennifer 
      Hillman--The German Marshall Fund of the United States--
      [included as a supplement to Ms. Hillman's prepared 
      statement].................................................    80


Lee, Thea, president, Economic Policy Institute, Washington, DC..    27

    Prepared statement...........................................    29


Morris, Scott, senior fellow and director, United States 
  Development Policy Initiative, Center for Global Development, 
  Bethesda, MD...................................................    32

    Prepared statement...........................................    33

    Examining the Debt Implications of the Belt and Road 
      Initiative from a Policy Perspective--by John Hurley, Scott 
      Morris, and Gailyn Portelance--[entered into the hearing 
      record by Senator Young]...................................   143

    Responses to additional questions submitted for the record by 
      Senator Robert Menendez....................................   182

    Examining World Bank Lending to China: Graduation or 
      Modulation--Scott Morris and Gailyn Portelance--[included 
      in the hearing record as part of Scott Morris's response to 
      a question from Senator Menendez]].........................   183



Segal, Stephanie, senior fellow and deputy director, Simon Chair 
  in Political Economy, Center for Strategic and International 
  Studies, Washington, DC........................................    37

    Prepared statement...........................................    38

                                 (iii)

  

 
       MULTILATERAL ECONOMIC INSTITUTIONS AND U.S. FOREIGN POLICY

                              ----------                              


                       TUESDAY, NOVEMBER 27, 2018

                               U.S. Senate,
        Subcommittee on Multilateral International 
       Development, Multilateral Institutions, and 
 International Economic, Energy, and Environmental 
                                             Policy
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:39 p.m. in 
Room SD-419, Dirksen Senate Office Building, Hon. Todd Young, 
chairman of the subcommittee, presiding.
    Present: Senators Young [presiding] and Merkley.

             OPENING STATEMENT OF HON. TODD YOUNG, 
                   U.S. SENATOR FROM INDIANA

    Senator Young. Good afternoon. This hearing of the Senate 
Foreign Relations Subcommittee on Multilateral International 
Development, Multilateral Institutions, and International 
Economic, Energy, and Environmental Policy will come to order.
    Once again, I want to thank the ranking member, Senator 
Merkley. Today's hearing represents our subcommittee's eighth 
hearing during the 115th Congress. I am grateful for our 
continued partnership on this and many other issues.
    The title for today's hearing is ``Multilateral Economic 
Institutions and U.S. Foreign Policy.''
    We will divide today's hearing into two separate panels. 
Our first panel will consist of two administration witnesses: 
the Honorable David Malpass, Under Secretary for International 
Affairs at the U.S. Department of Treasury and the Honorable 
Roland de Marcellus, Acting Deputy Assistant Secretary for 
International Finance and Development at the U.S. Department of 
State. I want to welcome both of you.
    Our second panel today will consist of five distinguished 
experts and former officials from previous administrations. I 
will introduce each of them following this panel.
    Now, given this important topic and our excellent witnesses 
here today, I am, of course, eager to hear from each of you, 
but before we do, allow me to frame this conversation somewhat.
    In July of 1944, delegates from 44 nations met in Bretton 
Woods, New Hampshire to establish new rules and institutions 
for the post-World War II international economic system. These 
nations, led by the United States and informed by lessons 
regarding the causes of World War II, sought to create 
institutions that would catalyze economic growth, reduce 
poverty, expand trade, and promote financial stability. The 
primary result of these negotiations were the International 
Monetary Fund and the International Bank for Reconstruction and 
Development, which is now part of the World Bank group.
    At risk of ruining the surprise, allow me to say the 
following up front. The U.S. is not and should not be neutral 
when it comes to the continued success of these institutions. 
The U.S. helped create these multilateral institutions for good 
reasons, and Americans have been among the leading 
beneficiaries.
    While the IMF, World Bank, and regional development banks 
are not perfect and they require reform, on balance, they have 
promoted and sustained the open rules-based international 
economic order that has facilitated decades of extraordinary 
economic growth for both Americans and people around the world. 
They have helped lift millions out of poverty, doing good, 
creating international customers for American companies, and 
promoting peace, stability and prosperity. That is why I 
believe the U.S. should continue to support these institutions, 
pushing them to fulfill their important purposes and implement 
reforms where necessary.
    If we fail to lead and remain engaged in these 
multinational fora, others nations will step forward and 
replace us, namely China. In a vacuum created by the absence of 
U.S. leadership, Beijing would twist these organizations to 
their purposes and state capitalist model. Absent U.S. 
leadership and engagement, China would expedite the creation of 
alternatives to the institutions that have done so much good 
and serve the interests of Americans and millions around the 
world. Less powerful and prosperous nations would have little 
choice but to reluctantly bandwagon with Beijing. That would 
represent a negative outcome for Americans and for pretty much 
everyone other than the Chinese Communist Party. A coercive 
international economic order dominated by China would look very 
different.
    Now, to be clear, most developing countries, and 
particularly those in Asia, do not want to be forced to choose 
between the United States and China. Many countries have 
genuine development needs, and they will find one way or 
another to address those needs. However, developing countries 
do want choices. The U.S. should ensure developing countries 
have an alternative to the Chinese model, which often involves 
poor transparency, unsustainable debt, and the creation of 
dependence, which is frequently exploited later for China's 
strategic advantage.
    We should use our voice and our votes in these 
international financial institutions to demand greater 
transparency from China and to ensure Beijing is not saddling 
developing countries with unsustainable debt burdens.
    Simultaneously, we should lead with our strength, the 
private sector. We should ensure U.S. federal policies, laws, 
and institutions, as well as U.S. official development 
assistance, focus on catalyzing private investment, making 
clear that the United States want prosperous and independent 
trading partners, not dependent debtors to extort in order to 
gain access to a port.
    I look forward to discussing with our witnesses how these 
international financial institutions have benefited Americans, 
how they are performing and what reforms may be necessary. I am 
interested in discussing how the U.S. is or should be using our 
voice and our vote in these international financial 
institutions to address the lack of transparency from China we 
have seen in the developing world and some of the resulting 
debt burdens inflicted on developing countries.
    I would also like to hear from our witnesses on the 
upcoming G20 summit and what key U.S. objectives the 
administration is or should be pursuing there.
    So with those thoughts in mind, I would now like to call on 
Ranking Member Merkley for his opening remarks. Senator 
Merkley?

                STATEMENT OF HON. JEFF MERKLEY, 
                    U.S. SENATOR FROM OREGON

    Senator Merkley. Thank you very much, Senator Young, in 
organizing this hearing and for your partnership over the last 
2 years. I think this subcommittee has examined a number of 
important issues and done so with a real policy framework, 
intentional effort to get to the bottom of the story. And well 
done.
    I expect we will hear from our State and Treasury 
Department witnesses about the value of U.S. contributions to 
the IMF and the World Bank, the value that they have in 
supporting a transparent development agenda that seeks to 
assist countries expand their economies. These efforts are 
particularly relevant in a world where so many countries seek 
financing from China, whose loans come with lax to nonexistent 
labor and environmental standards and whose repayment terms are 
clouded in mystery. These are important issues, and I look 
forward to hearing from our government witnesses the 
administration's current efforts in this area.
    But China's opaque financing does not just affect the 
developing world. I hope to hear from our second panel about 
how Beijing's anticompetitive behavior has violated the 
commitments it made to us and to the world community when we 
supported its membership in the World Trade Organization, an 
other multilateral economic institution that affects U.S. 
foreign policy and workers here at home. Those violations 
include the theft of intellectual property, weak labor and 
environmental standards, and forcing U.S. and foreign companies 
to transfer technology.
    The Chinese Government provides subsidized loans, export 
credits, loan forgiveness and more for state-owned enterprises. 
These firms use these unfair advantages to shrink market share 
for U.S. firms who do not receive the same benefits from 
Washington and are forced to lay off workers.
    I want to note that when I was reading the materials for 
this hearing, it really emphasized the debt trap that China is 
using as an instrument of foreign policy. And it reminded me of 
a book I read in college called ``The Debt Trap.'' But this 
book was about the IMF's policy 45 years ago and about how we 
had many loans that went to the elite in developing countries, 
how the elite banked those funds overseas, and how subsequent 
governments were left in these poor countries to repay the 
debt, leaving them in an extraordinarily vulnerable situation 
in terms of policies that would benefit their citizens versus 
benefit foreign investors.
    It has been many, many decades in which the IMF's practices 
are very different. But now we have China adopting a debt trap 
model, adopting a model in which they are setting up a system 
where they can exercise leverage in a fashion that is not 
beneficial to the development of the welfare of the citizens of 
many countries. And I think it merits this full investigation, 
and I certainly appreciate you scheduling this hearing.
    Senator Young. Well, again, I want to welcome our 
witnesses. Know that your full written statements will be 
included in the record. I thank you for the thoughtfulness of 
those statements.
    I would ask each of you to summarize your written 
statement, however, within 5 minutes so that we can engage in a 
more extended question and answer period. So let us go in the 
order that I announced you. Under Secretary Malpass?

STATEMENT OF HON. DAVID MALPASS, UNDER SECRETARY, INTERNATIONAL 
AFFAIRS, UNITED STATES DEPARTMENT OF THE TREASURY, WASHINGTON, 
                              D.C.

    Mr. Malpass. Thank you very much, Senator Young, and thank 
you, Senator Merkley. Thanks for holding the hearing.
    While there has been substantial economic progress in the 
United States, growth abroad has softened materially, causing 
challenges for international economic policy. Our goal is to 
achieve faster U.S. and global growth in ways that improve 
after-tax wages for American workers.
    I would like to describe some of our major 2018 
international policies in order to create the context for our 
work in the international financial institutions, the IFIs.
    We have engaged repeatedly with China on our trade and 
investment concerns and the problems caused by their One Belt, 
One Road initiative. It often leaves countries with excessive 
debt and poor quality projects. If countries default on these 
debts, China often gains influence over the host governments 
and may take ownership of the underlying assets. We have built 
a common awareness of these concerns in the G7 and the G20. In 
lending, China often fails to adhere to international standards 
in areas such as anti-corruption, export credits, and finding 
coordinated and sustainable solutions to payment difficulties, 
such as those sought in the Paris Club.
    In addition to that work on China, we built a common 
awareness, as I mentioned in the concerns, in the G7 and G20 
that is important. Secretary Mnuchin has pushed forward an 
initiative on debt transparency that will increase public 
disclosure and broaden the existing definition of international 
debt beyond traditional bonds and loans. We will be working 
with the IMF and the World Bank in this initiative. It should 
reduce the frequency and severity of developing country crises 
and help push back on China's over-lending.
    With Congress' support, we have also enhanced America's 
national security through FIRRMA, which has strengthened and 
modernized the Committee on Foreign Investment in the United 
States, CFIUS. CFIUS launched an innovative pilot program on 
November 10th, which includes requiring declarations for 
certain foreign investments in U.S. businesses involved in 
critical technologies in 27 specific industries.
    We have worked multilaterally to forge a new currency 
consensus in the G20 to recognize the growth and investment 
benefits of currency stability. The U.S.-Mexico-Canada 
agreement, to be signed later this week, includes the first 
currency chapter in a trade agreement. We also reached an 
understanding with South Korea on currency stability and 
transparency at the time of the update of KORUS.
    Argentina's new IMF program includes a nominal monetary 
anchor and an important commitment to leaving currency 
intervention unsterilized. Those policies quickly stopped 
Argentina's mid-2018 currency crisis, and they are dramatically 
reducing the rate of inflation. By expressly limiting the 
growth of the monetary base, a policy that the United States 
strongly supported, the central bank was able to arrest the 
precipitous decline in the exchange rate.
    Treasury also this year launched the America Crece 
initiative to promote growth in the western hemisphere. In 
2018, we signed energy framework agreements with Panama and 
Chile. We expect to sign one with Jamaica tomorrow and hope to 
conclude one with Argentina in the near future.
    We have refocused the Financial Stability Board on its 
systemic risk mandate, including the adoption of an activities-
based approach on insurance activities and wind-down of work 
streams unrelated to stability issues and the evaluation of the 
effectiveness of existing policies before developing new 
policies. I served on the nominations committee for FSB 
leadership and was pleased with yesterday's announcement of Fed 
Vice Chairman Randy Quarles as the FSB's next chairman, the 
first American to serve in that role.
    Looking into 2019, we will continue our work on debt 
transparency, the implementation of FIRRMA, the energy 
initiatives, and China's unfair trade practices and lack of 
reciprocity and market access. We maintain active economic 
dialogues with other countries to assess systemic 
vulnerabilities and to support democratic principles and 
institutions.
    In Latin America notably in the western hemisphere, we have 
emphasized the risks and challenges posed by ``The Troika of 
Tyranny,'' namely Venezuela, Cuba, and Nicaragua.
    As Brexit approaches, Treasury is analyzing risks to the 
international financial system. We are working toward improved 
trade arrangements with the EU. The administration has notified 
Congress on October 16th of its intent to start trade 
negotiations with the UK, once it leaves the EU in March of 
2019. And we continue to work to streamline the G20.
    I am going to stop at this point and leave discussion of 
the IFIs to my State Department colleague, Secretary de 
Marcellus. Thank you.


    [Mr. Malpass's prepared statement is located at the end of 
this transcript.]


    Senator Young. Thank you, Secretary Malpass.
    Secretary de Marcellus?

STATEMENT OF HON. ROLAND DE MARCELLUS, ACTING DEPUTY ASSISTANT 
  SECRETARY, INTERNATIONAL FINANCE AND DEVELOPMENT, BUREAU OF 
  ECONOMIC AND BUSINESS AFFAIRS, UNITED STATES DEPARTMENT OF 
                    STATE, WASHINGTON, D.C.

    Mr. de Marcellus. Thank you very much. Chairman Young, 
Ranking Member Merkley, thank you so much for holding these 
hearings. It is certainly an honor to be here today and a 
particular honor to testify with Under Secretary Malpass.
    Senator, as you noted in your opening statement, the United 
States was the leading force in establishing the World Bank and 
IMF. And though Treasury has the lead for the oversight of the 
IFIs, international financial institutions, the State 
Department has been working closely with Treasury from the very 
beginning to be sure that these institutions advance our 
interests. We created them and we remain in the IFIs to advance 
our national security interests, our foreign policy interests, 
and our economic interests, as well as promoting the wellbeing 
of people globally.
    The question is sometimes asked, which is better? 
Multilateral assistance or bilateral assistance? To me it is 
like asking, when you build a house, which tool is better, the 
nail gun or the power drill? It really depends on the task at 
hand at that very moment. Now, we might use the nail gun or 
bilateral assistance more often, but we do not want be at the 
job site without the power drill.
    Now, that said, the tools can always be improved and 
reformed. And Under Secretary Malpass' written statement goes 
into excellent detail on the reforms that we are looking for 
across the IFIs, and we are very supportive of those.
    One advantage that the IFIs offer is the leveraging of 
resources since their resources so exceed our own because of 
the other donors, as well as the access to capital markets.
    In addition, we can leverage the skills of the very 
talented staff at IFIs, provide advice to developing countries 
around the world on issues like procurement, fiscal policy, 
anti-corruption, or debt sustainability and many other issues.
    I would like to just focus on three areas where the IFIs 
advance our interests. One, by providing stability in 
strategically important areas such as the Middle East. Two, by 
advancing our economic interests. And three, by offering a best 
practice alternative to the Chinese lending model.
    In terms of the Middle East, when our vital ally, Jordan, 
was threatened with massive refugee flows from Syria, it 
threatened to destabilize the country. So we turned to the 
World Bank to help. The World Bank set up the Global 
Concessional Financing Facility, or GCFF, to help pool funds to 
assist countries facing refugee flows, initially Jordan. The 
United States put in, so far, $35 million to this fund. We were 
a founding donor. Other countries then followed our lead and 
put in, so far, another $244 million as of the middle of this 
year.
    Now, what happened is the World Bank and the European Bank 
for Reconstruction and Development then extended loans--they 
were low interest, thanks to these contributions--to help the 
Syrian refugees and their Jordanian host communities with clean 
water, education, health, job opportunities.
    So in sum, $35 million from us went to about $1.5 billion 
in low interest support for a key regional ally, Jordan.
    Now, going to our economic interests, as you noted and the 
Under Secretary noted, the IMF and the banks have been working 
to advance prosperity around the world. So this creates better 
conditions for expanding the U.S. and global economy, thus 
giving us larger markets for export and support for American 
jobs. America's fastest growing export markets, now 
representing 40 percent of our exports, are in developing 
countries.
    The IFIs also help by promoting in these countries a 
transparent business climate and helping to raise global 
procurement standards, fight corruption, and unleash private 
investment. This helps our companies compete better.
    Third and lastly, the IFIs promote and provide transparent 
financing terms, offering, as you noted, borrowers a better 
alternative for their people to the opaque terms and financing 
offered by China in their lending practices. This has already 
led to unsustainable debt levels in several cases. The IMF is 
working alongside the World Bank, as the Under Secretary has 
noted, to bring transparency to countries external debts, 
helping to shed light on these and to counter these predatory 
lending practices.
    But in addition, as Senator Merkley noted, development 
banks employ policies aligned with American laws and American 
values to safeguard the environment and people. Unlike lenders 
with little to no regard for these standards, the banks require 
borrowing governments to address environmental and social 
impacts associated with the projects. These requirements 
support sustainable development and lasting results.
    So in closing, I would like to reemphasize the State 
Department's commitment to working with Treasury to ensure that 
the IFIs advance our national security, our foreign policy, and 
our economic interests globally. Over 7 decades, this has 
benefited exporters and taxpayers, promoting American 
prosperity and security.
    We also appreciate Congress' interest, your engagement, and 
continued support on these issues.
    So thank you again for holding this hearing, and I look 
forward to your questions. Thank you.
    [Mr. de Marcellus's prepared statement follows:]


             Prepared Statement of Hon. Roland de Marcellus

    Chairman Young, Ranking Member Merkley, and Members of the 
Subcommittee, it is my honor to appear before you today to discuss the 
important role that the International Financial Institutions (IFIs) 
play in advancing our national security, foreign policy, and economic 
interests globally. IFIs include the International Monetary Fund (IMF) 
and the Multilateral Development Banks (MDBs), which include the World 
Bank, Inter-American Development Bank, the European Bank for 
Reconstruction and Development, the African Development Bank, and the 
Asian Development Bank.
Enhancing U.S. Leadership
    The United States was the leading force in establishing the World 
Bank and International Monetary Fund (IMF) in 1944. The Department of 
the Treasury has the lead for oversight of the IFIs, but the Department 
of State has been working closely with Treasury from the very beginning 
to advance our interests. Our objective was then and is now to 
strengthen the international economy for the benefit of the American 
people and U.S. interests globally.
    I would like to describe briefly how these institutions work at the 
most general level. First, they pool contributions from countries 
around the world. The staff of the institution then works with 
recipient countries to develop projects and programs for the benefit of 
the recipients' economic development in the case of the Multilateral 
Development Banks, or financial stability in the case of the IMF. Those 
projects and programs then come to the board of the institution for a 
vote of approval. The United States has the largest vote at nearly all 
of the IFIs and considerable influence. The Treasury Department gives 
directions to our representatives at the institutions on how to vote in 
each case. They do so, however, in close coordination with other 
agencies, particularly the State Department.
Getting Bang for the Buck
    We created the IFIs, and remain engaged in them, to advance our 
national security, foreign policy, and economic objectives as well as 
to promote the wellbeing of people throughout the world. The question 
is sometimes asked, which is better--bilateral assistance or 
multilateral assistance? It is like asking which tool is better for 
building a house--a nail gun or a power drill? It depends on the 
particular task at hand. In building the house, we might use the nail 
gun (or bilateral assistance) more often, but we certainly want the 
power drill at the job site as well.
    As I alluded to earlier, the resources of the IFIs far exceed our 
own contributions because these institutions draw heavily from other 
donors and leverage resources from the international capital markets. 
For example, in the World Bank's non-concessional lending arm, the 
International Bank for Reconstruction and Development (IBRD), every 
dollar invested from the United States is combined with about five 
additional dollars from other countries. These combined six dollars 
allow World Bank/IBRD to raise additional financing on international 
capital markets, amounting to up to 30 dollars it can then lend for 
development assistance. These loans are repaid to the IBRD--with 
interest--by the borrowing governments, which finances future IBRD 
loans. Our contributions, multiplied by the others, contribute to 
global economic growth and stability that directly benefit American 
workers and exporters. In addition, we are able to leverage the highly 
skilled staff at the IFIs, who provide expert advice to developing 
countries on issues ranging from anti-corruption and proper procurement 
practices to fiscal policy and debt sustainability, and countless other 
issues.
Enhancing American National Security
    The IFIs can also advance our national security. Outward migration 
and destabilizing threats have frequently come from the world's fragile 
and conflict-affected countries. Support to these vulnerable countries 
is a key priority of the IFIs. For example, the World Bank administers 
multi-donor trust funds and convenes top financial and policy experts 
to develop strategies to promote growth and development in countries 
such as Afghanistan, Liberia, and South Sudan. These engagements 
decrease the cost of U.S. support and help to meet our policy 
objectives.
    Another excellent example is Jordan, which has been deeply affected 
by the crisis in neighboring Syria. President Trump stated in his 
remarks on September 25 to the U.N. General Assembly: ``As we see in 
Jordan, the most compassionate policy is to place refugees as close to 
their homes as possible to ease their eventual return to be part of the 
rebuilding process. This approach also stretches finite resources to 
help far more people, increasing the impact of every dollar spent.''
    It is in that spirit that we had worked with the World Bank to 
create the Global Concessional Financing Facility (GCFF), an innovative 
financing mechanism created to help countries--initially Jordan--cope 
with refugee crises. This is a perfect example of the leveraging that 
stretches our contributions further. The United States was a founding 
donor to the GCFF and has contributed a total of $35 million. Other 
countries quickly followed our lead and by mid-2018 had provided a 
total of approximately $244 million more. Those contributions combined 
with loans from the World Bank and the European Bank for Reconstruction 
and Development resulted in $1.45 billion of low-interest loans to 
Jordan explicitly to support the refugees and assist the Jordanian host 
communities. In sum, our $35 million contribution resulted in almost 
$1.5 billion provided to help Jordan support hundreds of thousands of 
Syrian refugees.
    The IMF is another key partner in U.S. efforts to support 
macroeconomic stability and advance economic reforms in strategically 
important countries such as Ukraine, Iraq, and Egypt. The IMF's work 
has complemented and supported many of our foreign policy objectives. 
With its powerful voice on economic and financial governance issues 
globally, the IMF has provided impetus for governments to undertake 
necessary economic reforms aimed at boosting growth of real median 
incomes. A good current example is Argentina, where, with IMF support, 
the Macri Government is making important economic reforms to put itself 
on sustainable financial footing. This will help the Argentine 
Government continue on a path towards sound economic management and 
restore growth, important for global economic stability.
Expanding Markets for U.S. Exports
    Promoting prosperity around the world helps create better 
conditions for expanding the U.S. and global economy, creating and 
increasing markets for U.S. exporters and supporting American jobs. 
America's fastest growing export markets--now representing roughly 40 
percent of U.S. exports--are developing countries. The IFIs help these 
countries to unleash their economic potential, which has helped to lift 
tens of millions of their citizens out of poverty. As their prosperity 
has increased, so has their purchasing power, expanding the number of 
reliable consumers around the world for U.S. products and services.
Improving Business Climate and Standards
    The IFIs also help U.S. exporters by promoting a transparent 
business climate and helping to raise global procurement standards, 
combat corruption, and unleash private investment. For example, the 
World Bank's annual Doing Business report incentivizes countries to 
undertake reforms to make it easier to open and operate a business. 
This enables U.S. companies to better compete in the developing world. 
Thanks in part to U.S. leadership, the IFIs engage with developing 
countries to strengthen governance and legal frameworks, including 
respect for the rule of law and property rights. As another example, 
the World Bank has helped countries around the world establish 
functional and accountable customs procedures, providing U.S. exporters 
with faster, more predictable clearance of goods.
    Specifically, the Multilateral Development Banks champion 
transparent and fair global standards for financing and procurement, 
with open, transparent bidding and terms. Public procurement accounts 
for 10 to 15 percent of the world economy. By improving procurement 
standards in developing economies, the MDBs help level the playing 
field for U.S. business to compete for public contracts globally. The 
Department of State has worked to expand opportunities for U.S. 
companies to participate in MDB projects. One initiative to increase 
such opportunities is the BIDS platform (which stands for Business 
Information Database System). BIDS (bids.state.gov) aggregates MDB 
project opportunities and helps link U.S. companies to relevant U.S. 
Government economic officers at overseas posts who can help them 
navigate the local market.
    The transparent financing terms practiced by the MDBs offer 
governments a better alternative for their people than the opaque terms 
and financing proffered by some countries in bilateral lending that 
have helped lead to unsustainable sovereign debt in several cases. At 
the same time, our engagement at the IMF gives us the ability to press 
for stringent policy requirements for countries to qualify for IMF 
programs. For example, the IMF works alongside the World Bank to bring 
transparency to countries' external debts, helping to shed light on and 
counter predatory lending practices by other countries.
Protecting People and the Environment
    The MDBs employ policies aligned with American laws and values to 
safeguard people and the environment. Unlike those willing to provide 
financing to governments with little to no regard for these standards, 
the MDBs require the borrowing governments to address environmental and 
social risks in order to receive support for investment projects. 
Examples of these requirements include conducting environmental and 
social impact assessments, consulting with affected communities about 
potential project impacts, and restoring the livelihoods of displaced 
people. These requirements not only support sustainable development, 
they provide additional opportunities for U.S. companies, which lead 
the world in practices that account for environmental and social 
impact.
Confronting Global Health Threats
    The IFIs support U.S. global health security interests by helping 
address pandemic risks and diseases before they migrate to or affect 
the United States. For example, in response to the 20142015 Ebola 
outbreak in West Africa, the World Bank provided quick-disbursing 
funding for a rapid response to the disease outbreak. Helping control 
Ebola saves us money at home. The National Institutes of Health has 
estimated the cost of caring for Ebola at as much as $50,000 per 
patient per day. Treating just two Ebola cases in Nebraska in 2014 cost 
$1.16 million. MDBs also help to prevent disease outbreaks from 
becoming a pandemic by helping countries to strengthen their health 
systems, which also boosts the impact of our bilateral health 
assistance.
    In closing, I would like to reiterate that the Department of State 
is committed to working with the Department of Treasury to ensure that 
the International Financial Institutions advance our national security, 
foreign policy, and economic interests globally. Our contributions to 
the IFIs leverage other countries' resources to deliver global economic 
growth and development. Over seven decades, this has directly 
benefitted U.S. exporters, workers, and taxpayers, promoting American 
prosperity and strength.


    Senator Young. Well, thank you both for that helpful 
summary. In fact, you have preempted some of my sort of 
foundational questions.
    But I would like to begin with a bit of history here, as 
you did, Secretary de Marcellus, indicating in your prepared 
testimony that the World Bank and IMF were created through U.S. 
leadership in large measure back in 1944. And the United States 
was compelled because of that unique moment in history in which 
it found itself as we were nearing the end of a World War. We 
had suffered through a Great Depression.
    Do the lessons or dangers that were felt in 1944 still have 
some relevance to today as we think about the appropriate role 
that the IMF and World Bank are playing? Are they serving 
different needs than were felt back in--you know, 60 years ago, 
70 years ago?
    Mr. de Marcellus. Thank you very much. I would invite 
Secretary Malpass to amplify on this because he certainly has 
very good insights on this question.
    I would say many of the issues remain the same at the macro 
level of building economic prosperity, to advance the global 
economy, and American interests.
    However, the world has changed. And the focus at the time 
of creation was really on reconstructing Europe and our allies 
in Western Europe. Now it is really more on poor developing 
countries who need more work on governance and more 
foundational help, for instance, on health systems, the work 
that the World Bank does to prevent pandemic health threats 
from hitting U.S. shores in the country. It would not have 
applied so much in 1944 but is now part of their work.
    And then, of course, we have something new in that China is 
an emerging donor but a large one, which is a new development 
we have not seen, at the same time and as has been noted, it is 
a significant factor in the international system. Therefore, 
the IMF, World Bank, and other development banks have a new 
role, as has been noted, to provide an alternative but also in 
helping countries, borrowers, understand what is really an 
offer from China, helping them understand and analyze the 
terms.
    So there are many new ways and countless other ways that 
the development banks and IMF have adjusted to time over the 7 
decades.
    Senator Young. Secretary Malpass, so in addition to 
stability with the example of the Middle East, more 
specifically the Jordan example, very powerful, global 
prosperity--40 percent of our export markets, as Secretary de 
Marcellus indicated, are located in developing countries. And 
then lastly, an alternative to the opaque Chinese model.
    Are there other rationales for these institutions that we 
should be thinking about?
    Mr. Malpass. In the World Bank, we have advocated a shift, 
a graduation of countries from being borrowers to not 
borrowing, and that way leaving more resources for poorer 
countries.
    So one of the things going on now is the conflict state 
problem or the fragile state problem where both the IMF and the 
multilateral development banks have some expertise in helping 
those situations. So one of the goals is to get the focus of 
the organizations toward those needier countries or weaker 
governments.
    Senator Young. Very good.
    Secretary Malpass, how do you believe the IMF and World 
Bank are doing in fulfilling their missions? You have itemized 
a whole lot of reforms that the administration is already well 
on its way, fairly deeply involved in at the executive level. 
Maybe you could identify the leading couple of reforms that you 
believe need to occur, how the United States should be using 
its voice and its vote to advance those reforms, and then if 
you have an opportunity to reflect on how Congress might 
provide additional authorities or assistance on any of these 
fronts, please volunteer that to us.
    Mr. Malpass. Thank you, Senator. I will make three areas of 
comment.
    One is how different the world financial environment is 
today from when the institutions were founded. So there's much 
more availability of private capital often, and countries have 
been able to build local currency financing structures, which 
simply did not exist really prior to 1990. And so that is a sea 
change, a seismic shift in the way the institutions operate.
    So the reforms that we have encouraged in them are this 
graduation concept, so to stop lending to countries that do not 
really need the money, to have differential pricing in the 
loans so that better-off countries pay more in interest for the 
loans that they are doing, to have an increased focus on the 
quality of the loans and the transparency of those loans.
    And then I would also say in the World Bank, a capital 
increase that has recently been agreed on by the member 
countries. There was a substantial focus on creating a 
sustainable lending concept. So that means that the World Bank 
would not suddenly lend a lot at the beginning of a capital 
cycle and then need more money as it goes along. So the hope is 
that this will create a sustainable platform where they will 
not have to keep having capital increases.
    So from the standpoint then of the IMF, I will mention 
three reforms that we have been working on there.
    One is with regard to fiscal policy, making it more growth 
oriented. In some decades, the tendency was to think of it as a 
repayment mechanism from countries that had gotten over-
indebted. And so one of the shifts we are looking for is to 
have it be more integrally involved in creating a higher median 
income for the country that it is working in.
    A second is the type of privatizations being done. 
Sometimes in the past there would be a tendency and emphasis on 
selling assets from the government for the highest price rather 
than thinking of it as the greatest benefit to the nation's 
growth. And you can often get more benefit by stopping a 
monopoly rather than selling a monopoly for the highest price 
to the high bidder.
    And the third that I will mention is we are no longer on 
the gold standard. That was one of the formative purposes of 
the IMF. And so in that regard, IMF is still, under article 1, 
seeking stability of exchange rates rather than competitive 
devaluation. So I mentioned in my opening remarks that thrust 
of administration policy.
    So as far as what Congress can do in this, I think holding 
this hearing is very good, and then being engaged in thinking 
about these policies. This is truly a seismic shift in global 
finance toward a global situation where capital is available 
where countries are implementing good policies. And so in that 
regard, Congress can both be aware, be knowledgeable, and be 
engaged in encouraging that effort. My goal--one of my goals--
is to see quite a few more countries--let us say five or 10 
more countries--growing really fast as we go into 2019 and 
2020.
    Senator Young. Well, thank you, that is helpful.
    This Senator, I know Senator Merkley, intends to stay 
engaged on these issues. And if there are some concrete things 
we can do to be of assistance to help you as you walk your way 
through these reforms, please let us know.
    Mr. Malpass. Senator, I am sorry. If I may interrupt. One 
thing I forgot to mention. You know, we are bound by a great 
number of mandates from Congress, legislative mandates. There 
are nearly 100. And while we share many of the goals of many of 
the mandates, the cost of managing those is actually 
substantial. We bear a lot at Treasury. The State Department 
bears a substantial cost to managing those mandates, which tend 
not to expire. So these may be things that made sense 20 years 
ago that do not need to be on the books now. So taking a look 
at that would help us a lot.
    Senator Young. Well, we will require your expertise and 
assistance and that of your team. But I would request that you 
identify those 100, 100-plus mandates, indicate how precisely 
they impede your ability to advance reforms and open markets, 
enhance stability, and present an alternative to China in the 
case of the World Bank. And let us know how we can be helpful.
    Mr. Malpass. Thank you.
    Senator Young. We would like to take a look at that and 
work together on a bipartisan basis.
    But before I turn it over to Senator Merkley--and I will 
give you due time to ask all that is on your mind, Jeff--I just 
would like for my own benefit and for all of those who are 
watching--Secretary de Marcellus, you mentioned leveraging $35 
million in the case of Jordan, 35 million U.S. dollars, as I 
understood it, into $1.5 billion through use of IFIs. Can you 
walk me through exactly how that works?
    Mr. de Marcellus. Thank you, Senator. I would be very happy 
to.
    So Jordan, since it is a higher income country, does not 
qualify for low interest loans from the World Bank. Therefore, 
when they took on all of these refugees, we and they did not 
think it was fair for them to take market-based loans for 
people from another country. And it would be hard for them to 
sell to the Jordanian people that they were going to take 
market-based loans. They really needed lower interest loans.
    So what we did was set up this fund where donors--so our 
$35 million plus the $244 million from others. We go and 
basically buy down the interest rate on these loans, turning 
what would be a normal loan for the World Bank into a discount, 
very low interest loan, which is more appropriate to the need 
and in recognition of Jordan's contributions to managing this 
horrible humanitarian situation.
    So what it does is basically by paying off the interest, 
you are able to leverage much larger amounts. That is how you 
get from $35 million up to almost $300 million in total donors. 
Then you take the entire loan amount down to this rate. That is 
how you get to $1.5 billion.
    Senator Young. Thank you much.
    Senator Merkley?
    Senator Merkley. Thank you both very much.
    So I wanted to start with a letter that a group of Senators 
sent on August 16th that asked this question about whether IMF 
funds are essentially being used to repay Chinese debt. And to 
give you an example of this, Pakistan is a good example of a 
country that has a significant amount of Chinese investment. I 
think the number I have is $62 billion. They owe a lot of money 
back to China, Chinese banks, and they are seeking an IMF 
bailout. I think it is a $12 billion bailout. And they have 
asked the U.S. to make sure that we do not block this.
    Is that IMF money essentially going to help Pakistan repay 
Chinese banks? Why is that a good economic development 
strategy?
    Mr. Malpass. Senator, I do not think that would be a good 
development strategy. And so the IMF team just came back from 
Pakistan. I had people in Pakistan 2 weeks ago. One of the 
things we are pushing hard for is full transparency of the 
debt. You mentioned Chinese debt. But one of the challenges is 
they have not disclosed the terms of--in many cases, they have 
not disclosed the terms of that debt. That means the interest 
rate, the maturity, and when it would have to be repaid.
    In general terms, we think that the maturity of the Chinese 
debt comes after the IMF would have been repaid. So from the 
standpoint of IMF money being used to pay Chinese money, I 
would say a challenge is to find a program that will cause 
substantial economic reform in Pakistan and that will allow it 
to be funded, that Pakistan be funded and have an ability to 
survive in financial terms going forward.
    And I will take this moment to say with China in general, 
this problem is not unique to Pakistan. China is lending in 
many countries where the terms of the loans are simply not 
given, and that gives China a lot of leverage within its 
program. And it is something that we are pushing back on very 
hard in the Paris Club, in the OECD, in the IMF, the World 
Bank, at the G20 and in the G7.
    Senator Merkley. So when you say that terms are not given, 
do you mean not given to the borrower or not given to the 
international community?
    Mr. Malpass. In some cases, both. So they are not made 
public. They are not available to the international community, 
but sometimes they are not even available to certain parts 
inside the government itself. And that is an issue because 
China may make a loan, but not really want the terms of the 
loan to be disclosed even within the government that it is 
lending to.
    Senator Merkley. So Senator Young and I both referred to 
this Chinese debt trap strategy, and I am just going to restate 
it simply and see if you all concur that this is their strategy 
or if we are perhaps mischaracterizing the situation.
    But China often lends to developing countries that may have 
an interest in a particular--building a port, building a 
highway, building a prestige project of some sort that involves 
a significant amount of debt. They often use their own workers, 
that is, Chinese workers, to build the project. It is often 
very opaque in terms of the terms. It often involves a--these 
are not gifts, but these are Chinese loans. So, therefore, 
repayment is necessary. The government is often reluctant to 
disclose the terms without transparency. So perhaps the country 
is getting a very poor deal. And the result is now China has 
significant leverage to apply for other national interests that 
China has.
    Is that a fair characterization of the Chinese debt trap 
model?
    Mr. Malpass. I share many of those concerns. Yes, sir.
    So I will give you an example where China then does not 
work with the international community on some of these. There 
is a group called the International Working Group on Export 
Credits where there is an effort to have disclosure of the 
export credits that are going to countries, such as countries 
in Africa or to Pakistan. China simply has stood aside from 
that group. They attend meetings but then do not engage to 
describe which of their institutions are making those loans.
    And a second is the Paris Club itself where China is now--
for many countries in the world, China is the biggest creditor. 
And yet, it does not participate in the Paris Club, which is an 
organization of creditor countries that tries to have 
rationality within the restructuring process when a country 
basically cannot repay.
    So I am describing constructive ways that China could be 
better involved and yet simply it has chosen not to be.
    Senator Merkley. Please go ahead, yes.
    Mr. de Marcellus. If I could add to that. One of the most 
prominent examples of what you have described is in Sri Lanka, 
the Hambantota Port, where, after Sri Lanka could not pay the 
debts, China converted the port to their own ownership for a 
99-year lease, as well as 15,000 acres of land.
    But when that happened, that was noticed around the world. 
We hear about it all over the world. As you have seen, that 
became a campaign issue in many elections around the world 
where opposition groups are criticizing the volume of Chinese 
lending and the terms and all of the other drawbacks that you 
already elaborated.
    So Malaysia, we saw Prime Minister Mahathir canceling 
billions of dollars of Chinese projects.
    The Maldives, a new government ran against basically 
Chinese lending, and won. And they are now opening up the 
Chinese books. In fact, it was in the press this morning that 
they discovered that some of the Chinese projects ran massively 
up in cost overruns, like tripled the market price for a 
hospital.
    In Africa, Sierra Leone, a new government criticized 
Chinese lending and then canceled an airport project--it was 
$300 million--on the rational basis that the existing airport 
was not fully utilized.
    And Burma scaled back a port from $7.3 billion to $1.3 
billion.
    So we see this happening more and more. I think countries 
are beginning to notice the down side and they are getting more 
savvy. I do not want to overstate it that these governments 
will not go back to China for more loans, but we think they are 
getting more sophisticated when they do it.
    But then going to your earlier statement where you held up 
the book, ``The Debt Trap,'' when the IMF and the West over-
lent in many cases and built up debt burdens in the developing 
world, we dealt with it. We owned up to it. We did debt 
forgiveness. So by the same token, if China makes the same 
types of mistakes we might have made 45 years ago, we would 
look to them to do some sort of forgiveness for these countries 
so they are not saddled with debt forever crippling them. So I 
think that is something that the entire world would like to 
see.
    But thank you for raising that issue. It is certainly one 
of intense interest.
    Senator Merkley. One of the reasons it was such a problem 
was corruption. So there would be an IMF loan to a government 
where the elite would essentially funnel off massive amounts of 
the loan, and the remaining amount of the money and its 
development project could not possibly generate enough economic 
development to pay the loan back. So it was a bad investment.
    And then the terms of the IMF agreement were essentially 
that to pay back the loan, you had to engage in austerity. So 
you had an elite that now had been super enriched by this deal 
because of the corruption, and you had a population that was 
now suffering the austerity necessary to try to find some path 
to pay it back, which was not a good deal for the people of a 
country. And as you say, we wrestled with it. We have 
transparency around it. We had an academic debate. We had an 
institutional debate.
    I am not sure that those mechanisms--in fact, I am quite 
sure those mechanisms are not present in the Chinese 
consideration of the impact of their debt trap. It seems to me 
this is a case where it is a deliberate strategy to create 
leverage rather than a strategy gone awry, if you will, which 
if it is a deliberate strategy, you do not necessarily have any 
plan or desire to remedy it.
    As you point out, in Sri Lanka, for 99 years they have a 
massive port owned. I know I have heard from the national 
security side. Our concern is it might also become a military 
base outpost for China.
    So I am wondering, as we push to kind of draw attention to 
this strategy, are there other things that we should consider 
doing? For example, should we push for a policy in the IMF and 
World Bank that no loan, no grant project will go to any 
country that does not have complete transparency for its 
international borrowing?
    Mr. Malpass. Senator, those are very good points.
    So within the transparency initiative that I mentioned in 
my remarks, we are working in the IMF and the World Bank to 
encourage them to include terms in loans, so when they do make 
a loan to a country, say that the country is expected to make 
transparent all of the lending that it gets. Otherwise, you 
would be the lender into a situation where someone else has 
better terms than you do.
    And then within that framework, we are also trying to make 
sure that we are talking about debt in a broadly construed 
context because one of the things that happens, financial 
markets are very innovative. So as soon as you find one 
loophole that you are closing, then there is an ability to find 
another. And one of the things going on is the promise of 
collateral or of payments in kind in future years. So China 
will make a loan to a country in dollars or in real currency 
today and then commit that country, get someone in the country 
to commit to ship them oil for the next 15 years. Well, that 
takes money from the people of the country and puts it in the 
pockets of the elite in the near term.
    So Secretary Mnuchin's initiative on that, which we discuss 
in the G20, the G7, and have made substantial progress on, is 
exactly in line with that. And I think Congress can be 
insistent--as countries kind of look for alternatives, they 
often come to Congress and say, can you not finance this, we 
are in trouble--saying, look, at a minimum there has got to be 
full transparency of whatever debt you are taking on.
    Senator Merkley. Thank you.
    Senator Young. Mr. de Marcellus, in your prepared 
statement, you wrote about the transparent financing terms 
practiced by multilateral development banks. And you contrasted 
that with the opaque terms that some of the bilateral lending, 
particularly with China, we see around the world. And you 
indicated that has, in turn, led to sovereign debt, which 
creates global financial fragility and instability.
    You have also referred to predatory lending practices by 
some countries, particularly China. You discussed actions in 
Sri Lanka in particular. Malaysia is another country.
    The Vice President of the United States just recently said 
infrastructure loans to governments across the Indo-Pacific too 
often come with strings attached and lead to staggering debt.
    IMF Managing Director Lagarde, with whom I met this 
morning, has also expressed concern regarding a problematic 
increase in debt, potentially limiting other spending as debt 
service rises and creating balance of payment challenges.
    Mr. Under Secretary, how is the U.S. specifically using its 
voice, its votes, and leverage in international financial 
institutions to encourage more transparency from China in its 
projects in the developing world, as well as an end to the 
imposition of unsustainable debt arrangements on developing 
countries? And, Mr. Malpass, if you prefer to chime in, please 
feel at liberty.
    Mr. de Marcellus. I will start and he can amplify.
    Senator Young. If you would like to privately confer for a 
moment and then respond collectively, that is also okay. 
[Laughter.]
    Mr. de Marcellus. As the Vice President said, there are 
problems there. Some Chinese loans are linked to resource 
extraction. Some appear to jeopardize countries' sovereignty. 
Some burden countries with unsustainable debt. Some have 
adverse environmental impacts. Many are implemented by Chinese 
SOEs and Chinese labor. Most appear not to be commercially 
viable, and then almost none are transparent. So we have to 
address all of those.
    On the transparency, as Under Secretary Malpass described, 
working through the G20 and within the IMF and World Bank, we 
are working on debt sustainability frameworks for low income 
countries. So when they go into a low income country, they have 
to have a full picture. And Managing Director Lagarde has 
recognized this, and it has been very clear on the need for 
transparency when the IFIs go in. When we Western donors or the 
IFIs lend, that is not linked to resource extraction. They are 
weighed against debt sustainability frameworks. The information 
is shared with IMF.
    And getting to the point earlier about these non-
commercially viable projects--and as Under Secretary Malpass 
stressed earlier, what is new in the world is the private 
sector. So the best option is the private sector building these 
projects, and when they do it, they are darned sure it is 
commercially viable so you do not get that problem.
    Senator Young. Just following up on that briefly, how can 
the U.S. better, more effectively catalyze private investment 
in the developing world?
    Mr. de Marcellus. I think Congress has helped us in a great 
degree with the BUILD Act and the new Development Finance 
Corporation. Thank you for action on that. It is going to be 
able to give us new tools to try to fill the gap. They cannot 
replace, it should not replace the private sector, but if there 
are gaps to get the private sector off the sidelines--and there 
are also--now I will defer to Under Secretary Malpass as well--
framework details. But at the G20, we are working on trying to 
develop infrastructure as an asset class for institutional 
investors to again to get the very large institutional money 
off the sidelines to build this infrastructure.
    And then within the Indo-Pacific strategy, within that 
region, Secretary Pompeo announced a series of initiatives in 
power and digital and just general infrastructure to try to 
work with our private sector and again have our whole 
government work with them to try to fill the gaps. If there is 
a regulation that has to be fixed, if there is some other 
element that needs to be addressed to help the private sector 
get engaged, just be there on the ground, through our 
embassies, the Commerce Department, Treasury, USAID.
    Senator Young. Sort of wraparound services, as it were.
    Mr. de Marcellus. Correct.
    Senator Young. Mr. Malpass?
    Mr. Malpass. I will add to those points. I wanted to give a 
concrete example.
    So as a country gets over-indebted, it typically has gone 
to the Paris Club. As I mentioned earlier, China has not 
accepted the invitation to be in the Paris Club. So it is the 
biggest creditor.
    And I will mention one specific country. Congo-Brazzaville 
has in recent years borrowed way too much money. Much of it was 
borrowed from China. The problem is that other countries cannot 
then lend or even make--the private sector certainly does not 
want to invest into Congo-Brazzaville while there is this 
overhang of Chinese debt. But China will not say how much it 
thinks it is owed and the country itself also does not know the 
terms and is not able to say how much it is owed.
    And further, China does not have a process to reschedule or 
to forgive that debt, as Secretary de Marcellus was saying. The 
developed countries have a technique for when a country really 
has failed, to forgive that debt and let the country start to 
rebuild. China has rejected that as a process.
    Yes, sir, Senator?
    Senator Young. Well, so this is instructive.
    In the second panel, Ms. Segal in her prepared testimony 
noted China's reluctance to participate in certain 
international arrangements, the Paris Club in particular. And 
on the Paris Club website, China is listed as an ad hoc 
participant, not a permanent member.
    So for those who may not be familiar with it, what is the 
Paris Club? Why does it matter? And what explains Chinese 
reluctance to become an official member of the Paris Club?
    Mr. Malpass. Yes, sir.
    I myself have not been to the Paris Club, though I know 
some about it from my previous stint at Treasury and now my 
current stint. It is under my purview. It is a group of 
creditors that meets in Paris--of official creditors. So that 
would be, for example, the export-import kinds of banks around 
the world, the military lending that goes on, and other forms 
of official credit.
    So they sit down when a country has failed. It is almost 
like, in my very lay terms, a bankruptcy process where a 
country is unable to pay. Then the creditors get together and 
think about what to do. And oftentimes that means extending the 
terms of loans or actually organizing the forgiveness of debt.
    So as an ad hoc member, China was invited, and this has 
been going on for several years. It predates the current 
administration. They sit in the same room with other creditors. 
They listen to the disclosure of data. It would almost be like 
you could go and sit in a bankruptcy proceeding and hear 
everybody else's debt but you do not tell the group what you 
are owed by that company. And so the country then works with 
the creditors. China hears the information.
    So what has been done in recent meetings--they meet 
monthly. So in recent meetings, the rest of the world has asked 
China to step out of the room when certain debts are discussed 
because China, by not participating, needs to be excluded from 
the group. And we are now at the point where we, the U.S., have 
suggested to the other participants in the Paris Club that 
China not be invited to future meetings if it is not going to 
participate in a given discussion. So it is a disclosure issue 
where they could be playing a constructive role in the world. 
They are the biggest creditor in many countries, and they 
should be doing this but have declined.
    Senator Young. Just very briefly. This subcommittee hearing 
is on multilateral economic institutions and U.S. foreign 
policy once again. So many of the challenges and concerns that 
many of us vocalize with respect to China and its predatory 
economic practices are shared by our G7 partners, by G20 member 
countries. And I just would like your thoughts. You can give us 
a letter grade or your qualitative assessment of how the United 
States is doing on a multilateral basis in working with other 
countries to address these concerns and these predatory 
practices.
    Mr. Malpass. You know, will give us a B-plus or an A-minus. 
And the reason for that, while there is a lot of criticism of 
the U.S. for trying to stop international activity, the reality 
is the Trump administration but the U.S. Government as a whole 
is a leader in almost all of the international organizations 
that are going on, leading in a direction of more freedom of 
higher per capita incomes, better economic growth.
    And the way to do that does not mean that we want the 
organizations to spend more money. In fact, one of the things 
that I have tried to get us to do is have these multilateral 
bodies have a lot fewer meetings and less talk and more action 
within them. And we have been somewhat successful in the G20, 
in the OECD framework, and in other frameworks in scaling back 
their work streams. I mentioned the Financial Stability Board, 
FSB, early in my remarks.
    Senator Young. Thank you. I am going to give Senator 
Merkley--allow him to close out this panel. And thank you, 
gentlemen.
    Senator Merkley. So I was reading that the World Bank has 
some $60 billion of projects in China. And I was thinking about 
that, as I have seen China evolve from my first trip there, an 
economy based on bicycles to another trip with a few more ring 
roads around Beijing and a system choked with cars to yet 
another trip where I witnessed massive new metro systems and a 
200-mile per hour train system.
    Should we still be sending development loans to China?
    Mr. Malpass. In my view, no. In the World Bank reforms that 
have been put on the table and the World Bank management has 
committed to this year, they will be winding down, graduating 
China from IBRD lending. That is the part of the World Bank 
that is currently still lending to China.
    However, the Asian Development Bank still lends and plans 
to continue lending and could, I think, substantially scale 
back and discontinue that lending.
    So I agree with the thrust of your point, Senator Merkley.
    And not to defend, but I would say to Senator Young's very 
good question, how is the U.S. engaged in these, we can state 
reforms and really push hard for them, but in a lot of cases, 
we do not have control of the organizations and they do not 
want to go in the direction that we are indicating.
    With regard to China, final point, the world community is 
pretty much in line now recognizing that China has been taking 
advantage of the system. So there is actually good support 
within the G7 and even in the G20 and bigger bodies that China 
has got to change and got to stop taking these loans--wind down 
its borrowing from the institutions.
    Senator Merkley. And finally, last Friday, the Trump 
administration released its National Climate Assessment that 
got a lot of attention, despite being released the day after 
Thanksgiving, because it laid out the already massive damage 
that is happening in the U.S. due to climate chaos and how 
those impacts will accelerate over the years to come.
    Should our international institutions of lending adopt a 
strategy of only financing or primarily financing renewable 
strategies, non-carbon-burning strategies, given the grave 
consequences we are facing from carbon pollution?
    Mr. Malpass. In most cases, the organizations try to have 
high quality projects that are transparent where there are 
environmental assessments as appropriate for the projects. The 
projects are aimed at helping the people of the country get 
forward in terms of the availability of energy, the 
availability of even heating in certain countries.
    So I would say the policy structure--as I mentioned before, 
we have nearly 100 congressional mandates, many of which--maybe 
the majority--are aimed at environmental practices within the 
multilateral development banks. So I do not know that 
additional--so I do not think additional legislation is needed 
in this regard. I would say that projects are monitored, and 
there is a substantial amount of evaluation done of 
environmental impacts now. Thank you.
    Senator Merkley. A lengthy answer avoiding the core point 
of the question, but thank you.
    Mr. Malpass. Thank you, sir.
    Senator Young. Well, I thank you gentlemen for your time, 
your testimony, and your service. Note that I plan to keep the 
hearing record open for 48 hours, and I would appreciate you 
both submitting timely responses to any questions that may have 
been submitted for the record in my absence when I had to step 
out for a couple minutes. Thanks again for being here today.
    If your schedules permit you to stay for the second panel, 
I of course would welcome you to do so. However, I understand 
if your schedules require you to depart.
    This concludes the first panel. We will now take a few 
moments to transition and permit panel number 2 witnesses to 
take their positions. [Pause.]
    Senator Young. Our second panel today consists of five 
former members of previous administrations and expert 
witnesses. And I thank all of you for being here today.
    The Honorable Clay Lowery, a Visiting Fellow at the Center 
for Global Development, who has also served as Assistant 
Secretary for International Affairs at the Treasury Department 
from 2005 to 2009.
    Mr. Scott Morris, Senior Fellow and Director of the U.S. 
Development Policy Program at the Center for Global 
Development. He also previously served as Deputy Assistant 
Secretary for Development Finance and Debt at the U.S. Treasury 
from 2009 through 2012.
    Ms. Jennifer Hillman, Professor in Practice, Georgetown Law 
Center.
    Ms. Thea Lee, President of the Economic Policy Institute.
    And Ms. Stephanie Segal, Senior Fellow and Deputy Director 
of the Simon Chair in Political Economy at the Center for 
Strategic and International Studies.
    I welcome each of you. Thank you again for being here. Your 
full written statements will be included in the record. I would 
ask each of you to summarize your written statement within 5 
minutes so we can engage in an extended Q&A and conclude the 
hearing around 4:30. So that is roughly 45 minutes from now.
    Why do we not go in the order that I announced you. Once 
again, Mr. Lowery.

  STATEMENT OF HON. CLAY LOWERY, VISITING FELLOW, CENTER FOR 
            GLOBAL DEVELOPMENT, ARLINGTON, VIRGINIA

    Mr. Lowery. Chairman Young, Ranking Member Merkley, thank 
you for the opportunity to testify on multilateral economic 
institutions and U.S. foreign policy.
    I am going to skip the portion that I had about the 
multilateral economic institutions. I think the government 
witnesses covered it very well about the reforms that are 
needed, as well as the importance to our national interests.
    So when thinking about these institutions in terms of our 
foreign policy, the committee asked, in particular, about the 
U.S. relationship with China, as we heard in some of the debate 
earlier. So I begin with the Trump administration's national 
security strategy that refers to China as a strategic 
competitor.
    Through its section 301 investigations and other actions, 
the administration has gone even further and accused China of 
being an unfair competitor. And this analysis to me seems fair 
and accurate.
    But to compete, the U.S. should not just criticize. It 
needs to have an affirmative strategy. And this starts with 
emphasizing U.S. strengths and seizing opportunities to 
demonstrate better U.S. alternatives. And our strengths in my 
opinion start with, one, our model of the private sector, not 
government support leading the way; and two, our deep and 
longstanding relationships with allies around the world who 
share our values and our ideals, not just having transactional 
arrangements.
    So while China may have spent a trillion dollars in its 
Belt and Road Initiative over the last 5 years, I think it is 
far more important that just in the Indo-Pacific region alone, 
the U.S. has over $1.4 trillion in trade annually and invested 
over $900 billion in the region as of 2017. These are U.S. 
strengths, and we should use official tools, whether bilateral 
or multilateral, to highlight and leverage such strengths.
    This is why I think the Trump administration and Congress, 
particularly this committee, deserve praise for rethinking OPIC 
and strengthening it through the BUILD Act.
    The closest multilateral model to this approach is the 
International Finance Corporation, which is the window at the 
World Bank that finances productive private enterprises in the 
least developed countries.
    To work in riskier countries, the IFC is probably going to 
need to issue more capital. And so recently IFC shareholders, 
including the United States, reached agreement that will allow 
the IFC to increase significantly its investments in the 
poorest countries and the most fragile countries, while the 
U.S. will not have to provide any new money to this and still 
retain its veto power. This deal strikes me as a solid 
accomplishment by the Trump administration.
    On the other hand, the Trump administration has taken a 
number of steps that undermine the strengths of the United 
States, and I will just name two.
    First was walking away from the Trans-Pacific Partnership. 
There is no other way to put it. This was reckless and a gift 
to China. Instead of helping to establish higher standards and 
better market access for our private sector, we are stuck 
trying to cobble together bilateral deals that appear to rely 
on a model of managed trade.
    Second, the administration has not taken advantage of 
building a coalition to confront China, but has instead 
threatened to impose tariffs on our closest allies on the 
laughable justification that importing automobiles threatens 
our national security. In other words, rather than making China 
the outlier because of its behavior, the administration's 
unpredictability and unreliability on trade could cost us 
allies that we need to address the real challenges posed by 
China.
    So this leads me to my last point, which is what can 
Congress do.
    To supplement the strong bipartisan work that Congress did 
on establishing the International Development Finance 
Corporation, Congress should also work with the administration 
on the multilateral economic institutions. Let us just take the 
World Bank as an example. I see three areas of action for 
Congress.
    First, approve and fund the capital increase for the IBRD.
    Second, authorize the capital increase for the IFC, which 
is not going to cost any money in our appropriations.
    And third, work with the administration on the upcoming 
2019 IDA replenishment.
    And finally, while this hearing is not about international 
trade, this committee may want to consider asserting its role 
on U.S. trade policy, particularly as it concerns China. I 
would encourage the committee to press the administration to 
develop and share its end goal for the current trade war or at 
least a framework agreement that would address the legitimate 
concerns with China's trade practices.
    Thank you. I am happy to field any questions.
    [Mr. Lowery's prepared statement follows:]


                 Prepared Statement of Hon. Clay Lowery

    Chairman Young, Ranking Member Merkley, and members of the 
subcommittee, thank you for the opportunity to testify on the 
Multilateral Economic Institutions and U.S. Foreign Policy.
    My name is Clay Lowery and I am Managing Director of Rock Creek 
Global Advisors, a consulting firm that advises companies on 
international economic and financial policy matters. I also serve as a 
visiting fellow at the Center for Global Development and as a senior 
advisor to the Center for Strategic and International Studies.
    From 2005 to 2009, I was the Assistant Secretary of International 
Affairs for the Treasury Department, which exercises U.S. executive 
oversight of our involvement in the International Monetary Fund and the 
Multilateral Development Banks (MDBs), and is a key player in making 
U.S. foreign policy.
    My testimony today, however, reflects my own views.
    In my testimony, I will discuss (i) U.S. interests in the 
multilateral economic institutions, (ii) how to think about this in 
terms of our ``competition'' with China, and (iii) some recommendations 
on the role Congress should play.
The U.S. Role in the Multilateral Economic Institutions
    The United States and its allies established the IMF, the World 
Bank, and the GATT--the predecessor of the World Trade Organization--at 
the Bretton Woods conference of 1944. The idea at the time--one that is 
still true today--was that international cooperation on key economic, 
financial and trade issues and maintaining an open, rules-based 
economic order are important for global stability and prosperity. Since 
then, the U.S. has also been a founding member, a substantial 
contributor, and a leader of the key regional development banks: the 
Asian, African, Inter-American, and European development banks.
    While each of these institutions has different mandates, tools, 
financing mechanisms and/or member countries, they broadly have similar 
objectives: to promote economic and financial stability, increase 
economic growth in a sustainable manner, and strive to maintain an 
open, competitive and well-coordinated international economic order.
    As a large shareholder in these multilateral institutions, the U.S. 
Government should constantly be looking for ways to improve them. 
However, it is worth noting that these institutions have wellserved 
U.S. national interests over the decades, including by:

   Promoting global financial stability, which is a core objective of 
        the IMF for example, and is critical to U.S. economic growth, 
        exports, and job creation.
   Financing infrastructure and human capital development to foster 
        prosperity overall and to support the construction of the 
        actual roads and ports that allow U.S. exporters to get their 
        products and services to market.
   Assisting with the ``soft infrastructure'' of property rights, the 
        rule of law, bureaucratic efficiency, and stronger 
        environmental and social standards, which improve the business 
        environment and levels the playing field for U.S. businesses 
        and workers.
   Leveraging resources through other countries' contributions and 
        through capital markets. President Trump often expresses his 
        concern that other countries are not sharing the burden fairly 
        in international institutions. In the case of the IMF and the 
        MDBs, this criticism has no merit. For instance, every dollar 
        that the U.S. puts into the International Development 
        Association (IDA), which is the concessional loan- and grant-
        making ``window'' of the World Bank, leads to 16 dollars in 
        contributions by others.

    Maybe just as importantly, these institutions support U.S. foreign 
policy goals, and the U.S. calls upon them time and time again--whether 
it is to (i) finance infrastructure in frontline states such as 
Afghanistan, (ii) provide non-humanitarian financial support to rebuild 
countries that have been devastated by natural disasters, or (iii) 
boost economies that are the source of refugee flows to mitigate the 
problems of mass migrations.
    These institutions have received continuous support from the 
Treasury and State Departments in both Republican and Democratic 
administrations. Perhaps as importantly, previous Secretaries of 
Defense and military leaders also have strongly supported them. They 
have recognized that the IMF and the MDBs are important tools to 
conduct strong foreign policy and to provide the conditions necessary 
to keep our troops out of harm's way. They have recognized that U.S. 
leadership of these institutions is vital not only to their 
effectiveness, but to U.S. national security interests.
How does this all relate to China?
    The committee asked about these multilateral economic institutions 
and U.S. foreign policy, particularly as we think about U.S. relations 
with China. It should come as no surprise that, as China has risen to 
the near-top of the global economic and financial ladder, it has sought 
to shape the international economic order in ways that advance its own 
national interests. To do so, China is trying to alter the global rules 
and norms that it did not play a role in setting, change the governance 
structures in existing institutions to reflect its increasing strength, 
create alternative institutions that are more aligned with its economic 
model, and set standards in areas where standards are not yet defined.
    The Trump administration's National Security Strategy referred to 
China as a strategic competitor. Through its Section 301 investigation 
and other actions, the administration has gone further and accused 
China of being an unfair competitor. This analysis seems fairly 
accurate to me, and the administration should be commended for being 
willing to take on China on a number of fronts.
    I do not believe that the administration's approach on these issues 
has been flawless and I have a number of criticisms. For today's 
hearing, however, I will focus on the multilateral economic 
institutions, and how best to use them to promote the interests I 
discussed earlier.
    First, the United States should have an affirmative strategy. 
Rather than simply complaining about China's attempts to alter the 
system, pointing out its flaws, or trying to mirror China's approach, 
the U.S. should highlight its own strengths and seize opportunities to 
demonstrate the better U.S. alternatives.
    The U.S. strengths are abundant and well-recognized. Broadly 
speaking, we have a system that relies on strong rule of law, 
protection of property rights, and a very robust private sector. Our 
companies, farmers, and workers are internationally competitive, 
particularly in technology and high-value manufacturing, which are 
areas that leverage American ingenuity, innovation, and highly-
developed capital markets. Just as importantly, we have deep and 
longstanding relationships with allies around the world who share our 
values and ideals.
    In fact, I'd argue that often the people and governments of these 
countries want the U.S. to succeed, not because it will help President 
Trump or the U.S. gain more power, but because it also helps them. This 
is a significant difference from the model China seems to be promoting.
    While China may have spent $1 trillion in its Belt and Road 
Initiative (BRI) over the last five years, I think it far more 
important that--just in the Indo-Pacific region--the U.S. has over $1.4 
trillion in trade annually and invested over $900 billion in the region 
as of 2017. These are U.S. strengths and we should use official tools--
whether bilateral or multilateral--to highlight and leverage such 
strengths.
    This is why I think the Trump administration deserves praise for 
rethinking the Overseas Private Investment Corporation (OPIC) and 
working with Congress to strengthen it through the BUILD Act. If it 
works well, the new International Development Finance Corporation 
(IDFC) should catalyze U.S. private capital in ways that challenge 
China's development model and leverage U.S. strengths. I also applaud 
the administration for going further by working with Japan and 
Australia to leverage this model.
    The closest multilateral model to this approach is the 
International Finance Corporation (IFC), which is the ``window'' at the 
World Bank that finances the establishment, improvement, and expansion 
of productive private enterprises in less developed countries. In order 
for the IFC to be more effective going forward, it needs to be in 
countries where private sector investors won't go--unless incentivized. 
That way, instead of countries having to turn to a state-led model with 
countries such as China providing the financing and expertise, the IFC 
can work with an emerging private sector to advance similar objectives 
and in ways that are more in line with U.S. values and interests.
    To work in riskier countries, the IFC will need to issue more 
capital. Recently, IFC shareholders, including the U.S., reached 
agreement to increase the IFC's capital. As part of the agreement, (i) 
the IFC will increase significantly its investments in the poorest and 
most fragile countries, (ii) the U.S. will not have to provide any new 
money, and (iii) the U.S. will still retain enough voting shares to 
maintain its veto power over major decisions at the IFC. This strikes 
me as a solid accomplishment by the Trump administration.
    On the other hand, the administration has taken a number of steps 
that undermine the strengths of the United States--particularly as 
concerns a ``strategic competition'' with China. First and foremost was 
walking away from the Trans-Pacific Partnership (TPP). There is no 
other way to put it: this was reckless and a gift to China. Instead of 
helping to establish higher standards and better market access, and 
working with allies and partners in the region to advance our 
commercial and strategic interests, the U.S. is stuck on the outside 
trying to cobble together bilateral deals that appear to rely on the 
model of managed trade. Perhaps just as importantly, by withdrawing 
from this significant initiative, we have undercut another one of our 
strengths, which is our allies' confidence in U.S. leadership.
    Secondly, the administration has exacerbated this loss of 
confidence through its approach to addressing legitimate concerns with 
China's trade practices. Instead of working with our allies to build a 
coalition to confront China, the administration has been trying to 
justify imposing more and more tariffs, including on our closest 
allies, based on the laughable proposition that importing autos and 
auto parts threatens national security. Rather than making China the 
outlier because of its behavior, the administration's unpredictability 
and unreliability on trade could cost us allies that we need to address 
the real challenges posed by China.
    Third, the administration seems overly focused on U.S. trade in 
goods, despite the fact that trade in services is a major American 
strength. While this approach may play well politically among some in 
the U.S., it fails to accurately assess U.S. competitive strengths and 
how best to leverage them to compete with China over the long term.
What Can Congress Do?
    This leads me to my last point, which is: what can Congress do?
    Congress, particularly this committee, deserves a lot of credit for 
its bipartisan leadership in modernizing and expanding our own 
development finance institution through the BUILD act. The new IDFC 
could demonstrate that there are preferable alternatives to China's 
international economic development model, while also helping meet U.S. 
foreign policy goals and promoting development around the world.
    To supplement these efforts, Congress should work with the 
administration on its multilateral economic institution strategy. Just 
in the World Bank, I see three areas of action for Congress:

 1. Funding the capital increase for the IBRD. The administration has 
        done a solid job of promoting reforms during the negotiation 
        for the capital increase, including re-allocating resources 
        away from China and other middle-income countries and to 
        lesser-developed countries. Congress should authorize and 
        appropriate the funds to continue to allow the U.S. to be the 
        leading player in the World Bank.
 2. Authorize the capital increase for the IFC. As noted above, this 
        multilateral model aligns with U.S. strengths and requires only 
        authorization, not appropriation. While some have questioned 
        whether the agreement reached can be implemented in full, it is 
        worth taking some risk when there are no more U.S. taxpayer 
        resources at stake.
 3. Work with the administration on the 2019 IDA replenishment. Next 
        year, the administration will be negotiating the replenishment 
        of IDA. This is an area where the U.S. can work with China as 
        another donor. If there are IDA reforms that Congress believes 
        should be introduced or expanded upon, then it should voice 
        those to the administration as early in 2019 as possible.

    These are just a few examples and do not include the regional 
development banks, which may also require oversight and reform. Just 
over the Thanksgiving weekend, for instance, former Secretary of State 
and Treasury George Schultz authored an op-ed suggesting changes at the 
IDB to allocate more resources to addressing economic challenges in 
Central American countries as a way to better approach the refugee 
problem. Serious ideas such as these should be examined and explored.
    Finally, while this hearing is not about international trade, this 
committee may want to consider asserting its role on U.S. trade policy, 
particularly as it concerns China. The administration's approach of 
conflating national security with international economic policy, 
attacking our allies whose help we need to confront and negotiate with 
China, and imposing successive rounds of tariffs instead of negotiating 
new commitments, does not appear consistent with the principle of 
strong Congressional oversight on trade. I would encourage this 
committee to press the administration to develop and share its end-goal 
for the current trade war or a framework agreement that would address 
the legitimate concerns with China's trade practices.
    Thank you and I'm happy to field any questions.


    Senator Young. Plenty to follow up on there. Thank you, Mr. 
Lowery.
    I am going to go down the line with your indulgence. I had 
indicated I would go in the order in which I introduced you, 
but you are not seated in that order. So Ms. Hillman.

   STATEMENT OF JENNIFER HILLMAN, PROFESSOR, GEORGETOWN LAW 
                    CENTER, WASHINGTON, D.C.

    Ms. Hillman. Well, thank you very much. That makes it a lot 
easier on all of us.
    Thank you, Chairman Young and Senator Merkley. I very much 
appreciate the opportunity to appear before you, particularly 
at this time when the international economic order that, as 
Chairman Young mentioned, the United States worked so hard to 
create and nurture is at such a critical inflection point I 
think with the United States in particular headed down a 
potentially dangerous, unilateral, and isolationist road.
    The major problem I think with the approach that we are 
taking is that the problems that we are confronting, whether 
that is the struggle around the world for good jobs that pay a 
living wage, whether that is climate change, whether that is 
the widening of the wealth gap or the rise of extremism and 
threats to national security. These are not problems that can 
be isolated or solved by the United States alone. These are 
increasingly complex problems that overlap with one another and 
that will require global solutions.
    And yet, these problems are arising at a time when our 
international economic institutions are under siege. They are 
responding to a backlash from globalization. They are being 
attacked from outdated mandates that do not address the 21st 
century problems that they need to deal with. And they are 
being questioned in terms of their effectiveness, their 
relevance and their legitimacy.
    I would say the crisis is the most acute at the World Trade 
Organization. And yet, the United States needs the United 
States more than ever if we are to take on China.
    Why the crisis at the WTO? Well, there are a number of 
sources of frustration outlined in my written testimony. I will 
mention just two.
    First, there is a lack of balance at the WTO between the 
weak negotiating arm of the WTO with members having reached 
only one agreement on trade facilitation since 1995 compared to 
the very strong--some would say even too strong--dispute 
settlement arm of the WTO, while the executive part of it is 
viewed as highly competent but lacking in the authority to 
drive any meaningful change.
    And it is this lack of balance that appears to be the 
primary driver for the United States' decision to block any 
process to reappoint members of the WTO's appellate body. So we 
are now down to just the bare minimum of three members sitting 
on that appellate body, and any even discussion about how to 
put new members on the appellate body has been blocked by the 
United States.
    Secondly I will mention a recently willingness, led by the 
United States, to impose tariffs that violate the WTO's basic 
rules, which leads many to question what is the point of having 
a rules-based organization if its major members regularly flout 
those rules.
    So I believe it is critical that the WTO and its WTO 
dispute settlement system be fixed immediately as the United 
States needs to take the WTO path if it is going to fix the 
problems that we have with China. And in my view that is what 
ought to happen, is that we ought to be bringing a big and bold 
case based on a coalition of countries working together to take 
on China. Why?
    First, it represents the best opportunity to bring enough 
leverage together by the trading interests of the coalition to 
put sufficient pressure on China to make it clear that 
fundamental reform is needed.
    Second, a comprehensive WTO case would restore confidence 
in the WTO and the rules of the trading system.
    Third, in the past, countries have been reluctant to take 
on China for fear of retaliation. But a broad coalition-based 
case would lessen the likelihood that China would or could 
effectively retaliate against all of the trading partners that 
would be in this coalition.
    Fourth, the evidentiary burdens of bringing a case against 
China because of its lack of transparency are formidable, but a 
coalition case would allow you to pool all of the evidence that 
has been being collected against China from the United States, 
the European Union, Japan, Canada, and others.
    And finally, WTO cases have already been tried but with 
limited success. The problem is that the challenges were 
narrow, limited to a few Chinese measures or to a particular 
industry or set of producers. No panel has yet been requested 
to rule on the Chinese system as a whole, and that is what I 
would recommend, that there be a WTO case to hold China to the 
specific commitments that it made when it joined the WTO as 
well as a broad, overarching what is referred to as a non-
violation case that would basically say, China, you promised 
when you became a member of the WTO that you would become a 
market-oriented economy and you have not done so. If anything, 
you have gone the other way. And you would bring a case at the 
WTO that says, A, you are violating that basic overarching 
notion of being a market economy, and B, you are violating--and 
I have laid out in my written testimony--12 very specific 
commitments that you made that you are now violating.
    And my own view would be if you bring this kind of big, 
bold coalition case against China, that will be the best way to 
result in the big structural reforms that we really need to see 
within China and that we ought to use the multilateral 
institution of the WTO and use the leverage and the power that 
it creates with its binding dispute settlement mechanism to be 
the best tool that we can engage in to take on China.


    [Ms. Hillman's prepared statement is located at the end of 
this transcript.]


    Senator Young. Thank you, Ms. Hillman.
    Ms. Lee?

          STATEMENT OF THEA LEE, PRESIDENT, ECONOMIC 
               POLICY INSTITUTE, WASHINGTON, D.C.

    Ms. Lee. Thank you, Chairman Young, Ranking Member Merkley, 
for the invitation to participate in today's important hearing.
    Today's hearing provides an opportunity to review U.S. 
engagement with multilateral economic institutions and the 
importance of both using our influence in those institutions 
strategically and balancing international engagement with the 
use of appropriate unilateral tools and domestic policies.
    I would argue that past U.S. trade policy has failed 
American workers, as well as many domestic producers, and has 
undermined democratic decision-making authority with respect to 
environmental and consumer protections.
    Going forward, Congress and the executive branch should 
articulate and implement a new approach to global economic 
integration, one that prioritizes good jobs and strong 
communities and that supports domestic democratic decision-
making, where possible. This strategy is most likely to succeed 
if implemented with the cooperation and support of key allies 
and the multilateral economic institutions, as I think both Mr. 
Lowery and Ms. Hillman discussed.
    Enforceable multilateral rules are essential to a well 
functioning global system. But the WTO, the organization tasked 
with defining those rules has struggled in recent years to 
achieve consensus on new rules and to enforce existing rules.
    For American workers, the WTO has often appeared to be an 
obstacle to a reformed trade policy.
    First, WTO rules are lopsided towards corporate investors 
over those of workers--to its corporate interests over those of 
workers, consumers and the environment. Investors' rights are 
prominently protected by provisions on investment, financial 
flows, intellectual property rights, among others, while 
protections for workers' rights are almost completely absent. 
The WTO has failed to address systematic currency manipulation 
or misalignment, as well as the use of permissive tax laws to 
attract investment. I would argue that both of these are key 
areas where multilateral trade rules ought to be available and 
enforceable.
    The U.S. Government has not used its considerable clout at 
the WTO to press for deep reforms along these lines. Even if it 
were to do so, it would only succeed if it were able to build a 
coalition with other industrialized countries and key 
developing and emerging nations. But perhaps the current moment 
of stalemate and rising tension could be an opportunity to 
build such a coalition.
    Second, with respect to enforcement, the United States has 
not been able to manage its trade relationship with China 
effectively since China's accession to the WTO. The U.S. goods 
trade deficit with China hit $375 billion in 2017, up from $83 
billion in 2001. The growth of the trade deficit with China 
during this period was responsible for the loss of 3.4 million 
U.S. jobs in all 50 States and in every congressional district. 
Nearly three-fourths of the jobs lost were in manufacturing.
    And that is one of the reasons why getting trade policy 
right is so important. The jobs displaced by flawed trade 
policy are, for the most part, manufacturing jobs which provide 
excellent wages and benefits, especially compared with jobs in 
the service sector.
    EPI research has shown that the wage-suppressing effects of 
our poor approach to globalization and trade have hit all 
workers without college degrees across the country, not just 
those in manufacturing who have lost jobs directly to import 
competition.
    These widespread wage impacts are more in the aggregate 
than the more concentrated losses in directly trade-impacted 
sectors.
    The key elements of needed trade policy reform include the 
following.
    First of all, address currency misalignment. The U.S. must 
abandon our strong dollar dogma and target a currency that 
allows for a manageable and stable trade deficit.
    We should also ensure that our tax and spending policies 
are in line with a sustainable value for the dollar. Last 
year's tax bill and spending policies contributed to a higher 
value dollar, which is one reason why our trade deficit is 
growing.
    The WTO and the IMF have not provided any support or 
guidance for addressing currency misalignment despite the fact 
that each of those organizations in principle have some 
jurisdiction in that area. In the medium and long term, the 
U.S. Government should seek to strengthen and clarify currency 
tools at both the WTO and the IMF. Ultimately, the goal should 
be to bring countries to the table to negotiate a new Plaza 
Accord, as was last done in 1985. This is the single most 
effective way to rebalance global trade flows, and supportive 
action from the multilateral economic institutions could be 
crucial in incentivizing such a deal.
    We should make access to the U.S. market contingent on 
respect and enforcement of internationally recognized core 
labor rights. The WTO, in particular, must recognize that 
violation of core workers' rights is as much an unfair trade 
policy as the violation of patents or copyrights.
    And finally, we need to develop and commit to a concrete 
economic plan to help workers in America, focusing on skills, 
workforce development, job quality, infrastructure, clean 
energy transition, and expanding a strong social safety net. We 
need a tax system that supports this plan, but our current 
system rewards capital over labor and outsourcing over domestic 
production. It remains riddled with unproductive loopholes and 
especially after last year's changes, it failed to raise 
adequate revenue to fund needed investments. We must ensure 
that American workers and businesses have the tools and skills 
they need to compete successfully in a dynamic global economy.
    Thank you for your attention. I look forward to your 
questions.
    [The prepared statement of Ms. Lee follows:]


                   Prepared Statement of Thea Mei Lee

    Thank you, Chairman Young, Ranking Member Merkley, and members of 
the subcommittee, for the invitation to participate in today's 
important hearing. I am the president of the Economic Policy 
Institute--a nonprofit, nonpartisan think tank, which has analyzed the 
effects of economic policy on the lives of America's working families 
for over three decades.
    Our country is at a critical moment with respect to international 
trade and investment policy. We need clarity regarding our strategic 
goals and priorities in the global economy. At the same time, we 
urgently need to align our trade policy with our domestic choices on 
tax policy, infrastructure, workforce development, regulation, and 
labor markets.
    Today's hearing provides an opportunity to review U.S. engagement 
with multilateral economic institutions, and the importance of both 
using our influence in those institutions strategically and balancing 
international engagement with the use of appropriate unilateral tools 
and domestic policies.
    Over the last several decades, the U.S. Government has consciously 
chosen to accelerate our integration into the global economy, with a 
particular set of priorities focused on accommodating the concerns of 
multinational corporations that invest and operate both in the United 
States and abroad. The vehicles for this accelerated integration 
include the negotiation of more than a dozen bilateral and regional 
trade agreements, a corporate-centered agenda at the World Trade 
Organization and the international financial institutions, and 
inconsistent and lackluster enforcement of U.S. trade laws.
    At the same time, the U.S. Government has dramatically under-
invested in crucial infrastructure, education, and skills training, 
while workplace protections and the social safety net have eroded, and 
the tax code has become more regressive. Our macroeconomic policy has 
tended to weight concerns about inflation more heavily than the goal of 
achieving and maintaining full employment. On net, these global and 
domestic choices have exacerbated growing inequality and wage 
stagnation, and contributed to the erosion of the middle class and the 
manufacturing sector. This has deepened geographical, as well as class 
and race, divisions in the United States.
Critique of current trade policy
    Past U.S. trade policy has failed American workers--as well as many 
domestic producers--and has undermined democratic decision-making 
authority with respect to environmental and consumer protections. Going 
forward, Congress and the executive branch should articulate and 
implement a new approach to global economic integration--one that 
prioritizes good jobs and strong communities, and that supports 
domestic democratic decision-making where possible. This strategy is 
most likely to succeed if implemented with the cooperation and support 
of key allies and the multilateral economic institutions. Transparency 
and predictability are essential elements.
    The World Trade Organization (WTO) is the global organization 
tasked with defining multilateral trade rules. The 168 members of the 
WTO constitute about 98 percent of the global economy. While 
enforceable multilateral rules are essential to a well-functioning 
global system, the WTO has struggled on several fronts in recent years. 
First, it has become increasingly difficult to achieve consensus on new 
rules, and key areas like currency misalignment, climate change 
abatement, and coordination of tax regimes are not even on the agenda. 
Second, enforcement of existing rules has been contentious, and the 
member states are currently locked in a disagreement over dispute 
settlement.
    For American workers, the WTO has often appeared to be an obstacle 
to a reformed trade policy--both in terms of the inadequacy of the 
current rules and problems with enforcement.
    First, WTO rules are lopsided towards corporate interests over 
those of workers, consumers, and the environment. Investors' rights are 
prominently protected by provisions on investment, financial flows, and 
intellectual property rights, among others, while protections for 
workers' rights are almost completely absent (with the exception of a 
minor clause on prison labor). The WTO's regulatory rules also tend to 
favor corporate interests in weaker regulation over stronger domestic 
protections for consumers or the environment. In addition, the WTO has 
failed to address systematic currency manipulation or misalignment, as 
well as the use of permissive tax laws to attract investment. I would 
argue both of these are key areas where multilateral trade rules ought 
to be available and enforceable.
    The U.S. Government has not used its considerable clout at the WTO 
to press for deep reforms along these lines. Even if it were to do so, 
it would only succeed if it were able to build a coalition with other 
industrialized countries and key developing and emerging nations. 
Perhaps the current moment of stalemate and rising tension could be an 
opportunity to build such a coalition.
    And second, with respect to enforcement, the United States has not 
been able to manage its trade relationship with China effectively since 
China's accession to the WTO in 2001. This is, in our view, the most 
pressing U.S. trade concern, along with other countries that run 
persistent current account surpluses. The United States ran a goods 
trade deficit with China of $375 billion in 2017--up from $83 billion 
in 2001. This is the largest single bilateral trade deficit between any 
two countries in the history of the world--and it continues to trend 
upwards, despite twenty U.S. challenges to China at the WTO, despite 
earnest annual bilateral talks and commitments, and despite all the 
``reform'' commitments China made upon accession. Currency misalignment 
is at the center of our trade imbalance with China.
    The growth of the U.S. trade deficit with China between 2001 and 
2017 was responsible for the loss of 3.4 million U.S. jobs--in all 50 
states and in every congressional district. Nearly three-fourths (74.4 
percent) of the jobs lost were in manufacturing.\1\
---------------------------------------------------------------------------
    \1\ Robert E. Scott and Zane Mokhiber, ``The China Toll Deepens,'' 
October 23, 2018.
---------------------------------------------------------------------------
    And our trade problems with China are getting worse, not better. 
The U.S. trade deficit with China is up almost 10 percent through 
September of 2018 (year to date, over the same period last year).
    The composition of imports from China is changing in fundamental 
ways, with significant, negative implications for certain kinds of 
high-skill, high-wage jobs once thought to be the hallmark of the U.S. 
economy. Since it entered the WTO in 2001, China has moved rapidly 
``upscale,'' from low-tech, low-skilled, labor-intensive industries 
such as apparel, footwear, and basic electronics to more capital- and 
skills-intensive industries such as computers, electrical machinery, 
and motor vehicle parts. China has developed a rapidly growing trade 
surplus in these specific industries, and in high-tech products in 
general.
    The jobs displaced by flawed trade policies are often manufacturing 
jobs, which provide excellent wages and benefits, especially compared 
with jobs in the service sector, where employment has been growing. 
These manufacturing jobs are often unionized, and have generally 
provided higher than average wages, on-the-job training, and benefits 
like health care and retirement security.\2\
---------------------------------------------------------------------------
    \2\ Robert E. Scott, ``We Still Haven't Recovered Well-paying 
Construction and Manufacturing Jobs,'' Economic Policy Institute, 
August 16, 2017.
---------------------------------------------------------------------------
    And EPI research has shown that the wage-suppressing effects of our 
poor approach to globalization and trade have hit all workers without 
college degrees across the country--of all races and ethnicities--not 
just those in manufacturing who have lost jobs directly to import 
competition. While trade-displaced workers face the largest individual 
losses, in the aggregate the wider effects of across-the-board downward 
pressure on wages are much more significant.\3\
---------------------------------------------------------------------------
    \3\ Josh Bivens, Adding Insult to Injury: How Bad Policy Decisions 
Have Amplified Globalization's Costs for American Workers, Economic 
Policy Institute, July 11, 2017.
---------------------------------------------------------------------------
What we should be doing on trade policy
    We urgently need to work together to develop and implement a 
strategic trade policy that aligns with our values and goals, and that 
complements our domestic policy to create good, skilled jobs in 
manufacturing, in agriculture, and in the service sector.
    The key elements of reform include the following:

    Address currency misalignment. The United States must abandon our 
strong dollar dogma and target a currency that allows for a manageable 
and stable trade deficit. We absolutely can manage the value of the 
U.S. dollar, and we need to set it at a level that essentially balances 
trade. This will give U.S. manufacturing the breathing room it needs to 
gain back some of the few million jobs it has lost in recent decades. 
(More information can be found in a 2017 EPI report on the pervasive 
negative impact currency misalignment has had on American jobs and 
wages.) \4\ Our multilateral economic institutions tasked with 
addressing currency--the WTO and the International Monetary Fund--have 
not provided any support or guidance for addressing currency 
misalignment. In the immediate term, we should test the multilateral 
institutions by taking necessary steps to manage the dollar, but in the 
medium and long term, the U.S. Government should seek to strengthen and 
clarify currency tools at both the WTO and the IMF. This multilateral 
action can send a strong message to those countries that run large, 
persistent trade surpluses and have undervalued currencies. Ultimately, 
the goal should be to bring countries to the table to negotiate a new 
``Plaza Accord,'' as was last done in 1985. This is the single most 
effective way to rebalance global trade flows,\5\ and supportive action 
from the multilateral economic institutions could be crucial in 
incentivizing such a deal.
---------------------------------------------------------------------------
    \4\ Robert E. Scott, Growth in U.S.-China Trade Deficit between 
2001 and 2015 Cost 3.4 Million Jobs: Here's How to Rebalance Trade and 
Rebuild American Manufacturing, Economic Policy Institute, January 31, 
2017.
    \5\ Robert E. Scott, Re-Balancing U.S. Trade and Capital Accounts, 
Economic Policy Institute, Working Paper#286, 2009.

    Moratorium on new trade agreements. There is no reason to devote 
policy resources to chasing a ``better trade deal''--certainly not by 
negotiating agreements that incentivize outsourcing and boost the 
profits of the multinational corporations that actively subvert the 
bargaining power of American workers. Policymakers who want to work 
across international borders could instead focus on eliminating tax 
havens or harmonizing climate policies to ensure that countries do not 
free ride on others' efforts to mitigate greenhouse gas emissions. The 
most effective and appropriate way to address these concerns would be 
for the multilateral economic institutions to provide a forum, 
eventually moving toward consensus rules and enforcement capacity. 
(Recommendations in a 2017 report by EPI address how to reorient 
national policy toward measures that will benefit the United States and 
other countries.) \6\
---------------------------------------------------------------------------
    \6\ Josh Bivens, Adding Insult to Injury: How Bad Policy Decisions 
Have Amplified Globalization's Costs for American Workers, Economic 
Policy Institute, July 11, 2017.
---------------------------------------------------------------------------
    Make access to the U.S. market contingent on respect and 
enforcement of internationally recognized core labor rights. These core 
labor standards include the right of freedom of association and the 
right to bargain collectively, as well as freedom from discrimination, 
forced labor, and child labor (as outlined by the International Labour 
Organization in the Declaration on Fundamental Principles and Rights at 
Work). Enforcing these core labor rights is win-win for workers in all 
countries.\7\ While the U.S. has included labor rights provisions in 
our trade agreements for many years, these rights still suffer from 
unnecessary loopholes and ambiguity in definition, and they have not 
been effectively and consistently enforced. We need a new approach and 
commitment, and the WTO in particular must recognize that violation of 
internationally recognized workers' rights is as much an unfair trade 
policy as the violation of patents or copyrights.
---------------------------------------------------------------------------
    \7\ Thomas I. Palley, ``The Economic Case for Labor Standards: A 
Layman's Guide,'' Richmond Journal of Global Law & Business, vol. 2, 
issue 2, 2001.
---------------------------------------------------------------------------
    And finally, but just as significantly, we need to develop and 
commit to a concrete economic plan to help workers in America--by 
focusing on skills and workforce development, job quality, 
infrastructure, the clean energy transition, and expanding a strong 
social safety net. The U.S. Government has its own responsibility to 
develop and implement a coherent long-term economic strategy with 
respect to both manufacturing and services, both trade-related and 
domestic. We have failed to invest adequately in infrastructure and 
skills for decades, and business has not filled the void. We have a tax 
system that rewards capital over labor, and outsourcing over domestic 
production. It remains riddled with unproductive loopholes, and--
especially after last year's changes--it fails to raise adequate 
revenue to fund needed investments. We must use domestic tax, 
infrastructure, and workforce development policies to ensure that 
American workers and businesses have the tools and skills they need to 
compete successfully in a dynamic global economy.
    Thank you for your attention, and I look forward to your questions.


    Senator Young. Thank you, Ms. Lee.
    Mr. Morris?

 STATEMENT OF SCOTT MORRIS, SENIOR FELLOW AND DIRECTOR, UNITED 
    STATES DEVELOPMENT POLICY INITIATIVE, CENTER FOR GLOBAL 
                DEVELOPMENT, BETHESDA, MARYLAND

    Mr. Morris. Thank you, Mr. Chairman, Senator Merkley.
    Let me start by saying I very much agree with the case that 
has been made, in particular, for the multilateral development 
banks. So I am not going to repeat in any detail what we have 
already heard.
    I do want to say, though, on these institutions--I want to 
make the point that U.S. leadership depends on our willingness 
to provide financial support. So the administration's support 
for the capital increase of the World Bank is a positive move 
in my view, and while a capital increase does not benefit the 
poorest countries, it will support many countries in Asia, 
Africa, and Latin America where the U.S. has important 
interests and ties.
    At the same time, the administration has scaled back 
support for the MDBs' efforts in the poorest countries. These 
cuts diminish U.S. standing and limit the MDBs' ability to 
engage where they are needed the most.
    So while I believe the capital increase merits your 
support, it should not happen on the backs of other critical 
MDB commitments.
    Senator Merkley, you raised the question of China's 
borrowing from the MDBs, and I do want to address that point. I 
should say, as we already heard from the administration, that 
this has been something that this administration and, frankly, 
the Obama administration was critical of.
    That said, I think it is actually misguided to push too 
hard on this issue, particularly when there is a better 
alternative. Specifically the capital increase agreement itself 
requires China and other relatively wealthier borrowers to pay 
higher interest rates on their World Bank loans. Higher loan 
charges will increase bank revenues, easing the financing 
burden on shareholders and creating better incentives for the 
bank's borrowers.
    But it is also important to recognize how World Bank 
lending to China can actually benefit us. In a forthcoming 
paper, I examine the bank's projects in China, a significant 
share of which is aimed at the critical task of reducing the 
country's massive carbon emissions. The damaging effects from 
climate change are not contained within our national borders, 
and positive action taken in one country ultimately benefits 
others, including our own.
    Finally, let me turn to China's financing activities in 
other developing countries.
    In some respects, China's lending is like that of the MDBs 
in providing capital to invest in transport and energy 
infrastructure, which is sorely needed to spur economic growth. 
But it is also increasingly clear, as we have heard, that 
China's lending is pushing some countries into over-
indebtedness.
    Earlier this year, my colleagues and I detailed the debt 
problems facing China's Belt and Road Initiative and pointed to 
failures in China's approach that are harming some countries. 
Within the Belt and Road, this includes countries like 
Djibouti, which hosts U.S. and Chinese military bases, as well 
as Pakistan, Mongolia, and Laos.
    A key priority for U.S. policy should be to effect a change 
in behavior by bringing China into the norms and disciplines of 
other major creditor countries.
    We can also respond by offering developing countries more 
options. That should start with strong support for the MDBs, 
which are readymade to lend at scale and with high standards. 
The recently enacted BUILD Act will also usefully bring more 
U.S.-led development finance to bear globally.
    That said, the new Development Finance Corporation should 
be additional and not a substitute for traditional assistance. 
U.S. leadership through longstanding programs like PEPFAR is 
doing vital work measured in lives saved, and they deserve 
sustained support.
    It is also important to recognize the essential value of 
this Development Finance Corporation. Yes, it will deliver more 
financing, but it is in the standards attached to that 
financing that will distinguish the institution.
    The BUILD Act lays important markers on project 
effectiveness and social and environmental safeguards, things 
like ensuring that local communities are consulted and 
compensated if they are displaced by a road project. It will 
take diligence to make these things a reality and sustain them 
over time.
    Let me close by highlighting the risk of going too far when 
it comes to competing with China. There is a difference between 
offering choices to developing countries and forcing them to 
choose. It would be a costly mistake to seek to carve up the 
developing world in Cold War fashion between clients of the 
U.S. and clients of China. Chinese finance is a reality, and 
where it is delivering something of value to developing 
countries, we will not convince them otherwise.
    Chinese officials are sensitive to the backlash on the debt 
issue right now. And now is the time to exploit that by seeking 
a change in policy and practice, not by drawing battle lines in 
the developing world that are unlikely to hold, but by working 
with allies to pressure Chinese officials in settings that 
matter to them, settings like the World Bank, the IMF, and the 
G20.
    Thank you.
    [Mr. Morris's prepared statement follows:]


                 Prepared Statement of Scott A. Morris

    Chairman Young, Senator Merkley, thank you for the opportunity to 
testify today. My name is Scott Morris and I am a senior fellow and 
director of the U.S. development policy program at the Center for 
Global Development, a non-partisan think tank in Washington, DC. I 
previously served as the Deputy Assistant Secretary for Development 
Finance and Debt at the U.S. Treasury from 2009 through 2012.
    You have raised a critical set of issues and challenges in this 
hearing, and I will try to do justice to at least some of them. I will 
focus my remarks on the importance of the International Financial 
Institutions (IFIs) for U.S. interests, the role that China is playing 
today in development finance, and the U.S. response to China's 
emergence as a leading development actor.
The Value of the IFIs
    All the IFIs, which includes the IMF as well as the leading 
multilateral development banks (MDBs), \1\ have been key partners for 
the United States since the creation of the World Bank and IMF over 
seven decades ago. This is not coincidental. The United States has been 
the leading architect and remains the largest shareholder or ``owner'' 
across the IFIs.
---------------------------------------------------------------------------
    \1\ The World Bank, Inter-American Development Bank, Asian 
Development Bank, African Development Bank, and the European Bank for 
Reconstruction and Development.
---------------------------------------------------------------------------
    But even if they were of our making, how do they continue to serve 
our interests? Let me try to answer that question by focusing on the 
multilateral development banks.


   First, the MDBs amplify U.S. assistance, both by drawing in other 
        countries' money and by their own AAA-rated borrowing on 
        capital markets. In 2017, the United States contributed $1.8 
        billion to MDB programs (just 5 percent of the U.S. foreign 
        assistance budget). In doing so, we directly leveraged over 
        $120 billion in MDB on-the-ground assistance that year. That's 
        three and half times as much as the U.S. spends directly on 
        foreign assistance globally.

   Second, by virtue of their lending model, the MDBs can operate at a 
        scale and across a range of sectors (infrastructure in 
        particular), that the United States alone cannot, given our 
        reliance on grant financing in our bilateral programs. This 
        includes a presence in a wide range of developing countries and 
        settings, including places where we have U.S. troops on the 
        ground. This is why U.S. military leadership past and present 
        has been among the leading advocates for the MDBs.

   Finally, the MDBs have been rated as the most effective development 
        institutions by multiple systematic reviews of aid and 
        development finance. More so than any other financing 
        mechanism, this means that U.S. taxpayers stand a greater 
        chance of getting the results that they pay for and not paying 
        more than they should when it comes to MDB-financed projects. 
        Surveys of developing country officials also reveal a strong 
        preference for working with the MDBs compared to other sources 
        of aid, suggesting that when we pursue our development 
        objectives through these institutions, we stand a good chance 
        of having committed partners on the other side of the 
        transaction.


    Continued U.S. leadership in these institutions depends on our 
willingness to provide financial support, and on this point the Trump 
administration's record is mixed. Last spring, Treasury Secretary 
Mnuchin announced U.S. support for a capital increase at the World 
Bank, a positive move that will enable the bank to continue to operate 
in a large group of developing countries, the so-called ``middle income 
countries.'' These World Bank borrowers are not among the poorest but 
include countries like India and the Philippines where the United 
States has important ties and interests. I hope this committee will 
give timely consideration to the capital increase when the 
administration brings it forward next year.
    At the same time, the administration's support for the MDBs when it 
comes to the poorest countries has not been as strong. The 
administration has scaled back commitments for the World Bank's low-
income country financing arm, the International Development Association 
(IDA), as well as those of the other MDBs. This has been a mistake. It 
diminishes U.S. standing and limits the potential to fully engage in 
poorest countries where they are needed the most.
    Looking ahead, given the administration's overall posture on the 
foreign assistance budget, there's a risk that the U.S. contribution 
for the World Bank's capital increase will come at the expense of our 
other multilateral contributions, and particularly IDA. But if there is 
to be a trade off in the budget to make room for the capital increase, 
this is not the right one. It will mean that the poorest countries will 
shoulder the burden of more financing for middle income countries at 
the World Bank. Surely there must be room in the remaining 95 percent 
of the foreign assistance budget to absorb this important and modest 
funding commitment.
China's Borrowing from the World Bank and ADB
    Let me turn now to the question of China's relationship with the 
MDBs, particularly the World Bank and Asian Development Bank (ADB). In 
both cases, China remains one of the largest borrowers, something that 
has attracted criticism from the Trump administration and the Obama 
administration before it. Yet, neither administration has succeeded in 
halting MDB lending to China by fiat, and I want to encourage a 
different way of thinking about this issue.
    First, we should recognize that much of the value of the IFIs for 
the United States derives from their multilateral character. It greatly 
oversimplifies things to suggest they are strictly a U.S. tool, 
available to do our bidding no matter what the issue. The reality is 
that when we want to get something done in these multilateral 
institutions, we need to work with other countries. In turn, these 
institutions are most effective when they have the buy-in of the 
largest number of their member countries. And when the United States is 
seeking something from them that doesn't have broad-based support, it 
can be a tough road.
    China's borrowing from the World Bank and ADB is such a case. I 
think it's misguided to push too hard on this issue, particularly when 
there is a better alternative with broader support, one that the Trump 
administration has already had some success in pursuing. Our objectives 
here ought to be twofold: to make the most of MDB engagement in China 
in terms of U.S. interests and to extract the most from China in 
return.
    Making the most of China's borrowing means recognizing the value of 
some areas of this engagement and ensuring that the MDBs are 
appropriately focused on these areas. In some forthcoming research, I 
look in detail at World Bank projects in China. A significant share of 
the bank's China portfolio is aimed at reducing the country's massive 
carbon emissions, which is essential if we are to reduce the pace of 
climate change and its harmful effects, detailed just last week in the 
government's report on climate change. We know well that the damaging 
effects from climate change are not contained within national borders, 
and positive action taken in one country ultimately benefits other 
countries. From an economist's perspective, this aspect of the MDBs' 
work in China is a classic global public good and something that 
ultimately benefits us, even as we sit here 7,000 miles away.
    There are other areas of World Bank lending that aren't nearly as 
compelling, and by my estimates, one-third to nearly half of the bank's 
lending in China is not appropriately focused. The capital increase 
agreement negotiated by the U.S. Treasury rightly seeks to reign in 
these areas of financing by laying out what sorts of activities are 
appropriate for the bank's relatively wealthier borrowers.
    More importantly, the agreement also asks more of China and other 
relatively wealthier borrowers in the form of higher prices on their 
World Bank loans. Through higher loan charges, the bank will increase 
revenues, which eases the financing burden on shareholders, and will 
also create better incentives for the bank's borrowers. I think there 
is more scope over time to further differentiate the lending terms for 
China and other borrowers to a degree that their borrowing can 
genuinely be viewed as financially profitable for the institution.
Responding to China's Global Financing
    Let me turn to what China is doing outside of the multilateral 
institutions and how the United States is responding. Over the course 
of a decade, China has become the leading bilateral source of 
development assistance globally, slightly surpassing the United States. 
Of course, the two countries look very different in the composition of 
their assistance. The United States mostly provides grant support in 
the health and humanitarian sectors, while China mostly provides loans 
to support infrastructure projects.
    In some respects, China's lending is like that of the MDBs in that 
it is providing development country governments access to capital to 
invest in roads, bridges, and energy infrastructure, all of which are 
sorely needed to spur economic growth. But it's also increasingly clear 
that China's lending lacks important constraints, and the evidence 
suggests that Chinese development finance is pushing some countries 
into over-indebtedness with all the problems that come with 
unsustainable debt burdens.
    In research earlier this year at the Center for Global Development, 
my colleagues and I detailed the debt problems facing China's Belt and 
Road initiative and pointed to the failures in China's approach that 
are pushing some countries into debt crises. Within the Belt and Road, 
this includes countries like Djibouti, which is host to ports and 
military bases for multiple countries, as well as China's neighbors 
Pakistan, Mongolia, and Laos.
    While I am skeptical about overuse of the term ``debt trap 
diplomacy'' to characterize China's lending program, we don't have to 
have a clear understanding of China's motivations in every instance in 
order to recognize that policy failures on China's part are 
contributing to debt problems when they arise. As a result, a key 
priority for U.S. policy should be to affect a change in behavior by 
bringing China into the norms and disciplines of other major creditor 
countries, something we describe in detail in our research paper.
    But we can also respond to the problematic aspects of China's 
lending by offering developing countries better alternatives. That 
should start with strong support for the MDBs, which are ready made to 
lend at scale and with high standards.
    But we can also do more bilaterally, and one response from the 
administration, spurred by leadership in this committee, holds promise. 
The expansion of OPIC's lending authority and other reforms contained 
in the BUILD Act have the potential to bring more U.S.-led development 
finance to bear globally, expanding the mix of financing tools on offer 
in the U.S. assistance portfolio. The new U.S. Development Finance 
Corporation should better enable the United States to go beyond 
traditional assistance in the health and humanitarian sectors to 
provide larger scale financing in infrastructure and other growth-
oriented sectors.
    As much as I think the BUILD Act is a positive step forward, my 
optimism comes with some caveats. First, the U.S. DFC should be 
additional and not a substitute for traditional assistance. U.S. 
leadership through long-standing programs like PEPFAR is highly valued 
in developing countries and is doing vital worked measured in lives 
saved. And as I noted earlier, strong U.S. contributions to 
multilateral funds like IDA are critical in maintaining our leadership 
in these institutions. It would be a fundamental mistake to allow the 
aid budget to be gutted on the heels of the BUILD Act.
    When it comes to the new DFC itself, it is important to recognize 
its essential value, particularly vis-a-vis Chinese finance. Yes, more 
financing overall is a good thing. But it is in the standards attached 
to that financing that will distinguish the DFC. The legislation lays 
important markers on project effectiveness and social and environmental 
safeguards. But it will take diligence and hard work to make these 
things a reality and to sustain them over time.
    Too often, the experience of other development finance institutions 
suggests, for example, that time and resource-intensive environmental 
impact assessments are viewed as red tape in the face of competitive 
pressures. Positioning the new DFC so prominently as a competitor to 
China only heightens my concern on this point. I encourage this 
committee in its oversight to adhere to a strong sense of what ought to 
distinguish U.S. finance from the worst characteristics of Chinese 
finance-things like ensuring that local communities are consulted and 
fully compensated when they are negatively affected by a road project, 
or ensuring that a negative environmental impact assessment carries 
enough weight to alter or even halt a potential project.
    Finally, I'll close by highlighting the risk of going too far when 
it comes to using development finance to compete with China. Yes, we 
should offer developing countries a ``clear choice'' by distinguishing 
our approach to assistance from the problematic features of Chinese 
finance. Here, we can and should do a better job with our developing 
country partners--both by clearly identifying problems such as non-
competitive procurement and by supporting their efforts to be smarter 
borrowers when China is the creditor.
    But there's a difference between offering choices and forcing 
countries to choose. It would be a costly mistake to seek to carve up 
the developing world in Cold War fashion between clients of the United 
States and clients of China. Chinese development finance is a reality, 
and even with its problematic features, it is undoubtedly delivering 
something of value to a wide range of developing countries. Where that 
is the case, we will not convince these countries otherwise.
    Where Chinese finance is causing problems, the U.S. objective 
should be to change Chinese behavior, working with key allies in the 
G7, India, and Australia, and through multilateral settings like the 
IMF and World Bank. Chinese officials are showing signs of feeling the 
pressure of a backlash on the debt issue. Now is the time to exploit 
that by seeking change: not by drawing battle lines in the developing 
world that are unlikely to hold, but by pressuring Chinese officials in 
settings that matter to them, settings like the G20, the IMF, and the 
World Bank.
    Thank you.


    Senator Young. Thank you, Mr. Morris.
    Ms. Segal?

    STATEMENT OF STEPHANIE SEGAL, SENIOR FELLOW AND DEPUTY 
    DIRECTOR, SIMON CHAIR IN POLITICAL ECONOMY, CENTER FOR 
     STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, D.C.

    Ms. Segal. Mr. Chairman, Mr. Ranking Member, thank you for 
the opportunity to contribute to today's discussion. I was 
asked to speak about the International Monetary Fund and also 
to address China's strategic approach to projecting economic 
power and influence globally.
    The IMF was created to foster the stability of the 
international monetary system, and it does this by engaging in 
three principal activities. First, it monitors the economic 
developments of its members through IMF surveillance. Second, 
it provides loans to IMF members facing balance of payments 
needs. And third, it enhances the technical competence of IMF 
members through capacity development.
    The global economy has changed considerably since the IMF's 
founding. Economic liberalization has extended beyond trade to 
now include financial and human capital flows. We are also 
witnessing the emergence of China as a global power and as a 
challenger to U.S. economic supremacy. This context makes the 
activities of the IMF, that is, surveillance, lending, and 
capacity building, more important than ever.
    In terms of surveillance, the IMF's most recent evaluation 
of the Chinese economy took place in July, and thanks to 
efforts championed by the United States to promote 
transparency, the Fund's report on China can be accessed by 
anyone with an unrestricted Internet connection. Because of IMF 
surveillance, Chinese authorities and the rest of the world 
receive a technical assessment of China's economy from highly 
trained economists. Having a fact-based discussion on a common 
set of indicators, something that is required by the Fund's 
articles of agreement for all Fund members, is valuable in and 
of itself. That is the good news.
    Where IMF lending is concerned, China and specifically its 
Belt and Road Initiative, or BRI, is playing a less 
constructive role. According to the U.S.-China Economic and 
Security Review Commission, the BRI is a well resourced, whole-
of-government concept for regional and global connectivity. BRI 
financing comes from Chinese policy banks, state-owned 
commercial banks, the Silk Road Fund, as well as the Asian 
Infrastructure Investment Bank and the new Development Bank.
    Some projects will deliver the benefits that recipient 
countries hope for. But reports from BRI countries suggest that 
the return on other projects will not live up to expectations. 
A recent report noted that Chinese lending to Pakistan, Angola, 
and Zambia have complicated the countries' prospects for an IMF 
program due largely to nonexistent information on the maturity, 
cost, and terms of Chinese loans. Missing terms or contingent 
liabilities left out of official statistics would compromise a 
key piece of IMF due diligence, that is, the debt 
sustainability analysis.
    The IMF's Managing Director is correct to call for absolute 
transparency on the nature, size, and terms of debts in order 
to determine the debt sustainability of any country seeking IMF 
assistance.
    Separate but related to comprehensive data reporting is 
China's reluctance to join the Paris Club. Given China's role 
as the largest single bilateral creditor to post-HIPC, low 
income countries, its failure to join with other creditor 
nations in seeking cooperative approaches to data collection 
and to debt relief undermines recipient countries, fellow 
creditors, and the integrity of the system.
    The issue of data is where the Fund's work on capacity 
development is particularly relevant. The IMF should be ready 
to assist China in boosting its capacity to track credit and 
credit-like instruments and make this information public. 
Capacity development should also be prioritized for recipient 
countries so that they can assess financing terms and reduce 
any information asymmetries between borrowers and creditors. 
Expanding the envelope of data that member countries are 
obligated to provide in the context of IMF surveillance is also 
worth exploring.
    So to close, IMF activities advance our national interest 
by boosting transparency, by promoting global financial 
stability, and by enhancing the technical capacity around the 
world. Maintaining U.S. support for the IMF through our policy 
engagement and in the context of periodic IMF resource reviews 
represents a responsible use of our own scarce national 
resources.
    In addition to support for the IMF and the other IFIs, the 
United States can help countries that have limited options to 
finance needed investments. Passage of the BUILD Act, along 
with the recently announced Indo-Pacific Transparency 
Initiative, allows the United States to offer a positive agenda 
for infrastructure investment.
    Again, I thank the subcommittee for the chance to offer my 
thoughts, and I look forward to any questions.
    [Ms. Segal's prepared statement follows:]


                 Prepared Statement of Stephanie Segal

Introduction
    Mr. Chairman, Mr. Ranking Member, Members of the Subcommittee, 
thank you for the opportunity to contribute to today's discussion on 
Multilateral Economic Institutions and U.S. Foreign Policy. I 
appreciate the opportunity to discuss this topic, and I recognize the 
good work of the Subcommittee related to the strategic role of 
economics in foreign policy and national security.
    I was asked to focus my testimony on the International Monetary 
Fund (IMF or Fund) and U.S. engagement with the institution. I will 
also address briefly China's economic rise, which has led to rapid 
changes in the international monetary system that the IMF oversees, as 
well as China's strategic and increasingly assertive approach to 
projecting its economic power and influence globally.
The International Monetary Fund
    As members of the Committee know, the IMF and its sister 
institution, the World Bank--together the Bretton Woods Institutions--
were created following World War II as part of an effort ``to establish 
a framework for economic cooperation and development that would lead to 
a more stable and prosperous global economy.'' \1\ To achieve this 
goal, the World Bank focuses on economic development and poverty 
reduction, while the IMF promotes international monetary cooperation to 
foster the stability of the international monetary system. The IMF 
engages in three principal activities to execute its mandate: First, it 
monitors the economies of its 189 members as well as the global economy 
under ``Fund surveillance''; second, it provides temporary financial 
resources to IMF members facing balance of payments needs; and third, 
it enhances the technical competence of IMF members through capacity 
development. While not without room for improvement, these activities 
have advanced U.S. interests by fostering greater transparency and 
accountability in the international system, and smoothing inevitable 
periods of adjustment.
---------------------------------------------------------------------------
    \1\ https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/
31/IMF-World-Bank. Accessed November 23, 2018.
---------------------------------------------------------------------------
    Surveillance. The IMF's bilateral surveillance activities are based 
on Article IV of the IMF's Articles of Agreement which obliges the IMF 
to conduct ``firm surveillance'' over the exchange rate policies of its 
members in order to ensure the effective operation of the international 
monetary system. IMF members, in turn, are obligated to provide the IMF 
with the information necessary for such surveillance, as well as with 
any information deemed necessary for the effective discharge of the 
Fund's duties, which is called for separately under Article VIII, 
Section 5.
    Bilateral surveillance takes the form of annual ``Article IV'' 
consultations, where an IMF country team spends time in-country, 
meeting with the monetary and fiscal authorities, political leadership, 
private sector participants, and civil society representatives among 
others to assess the country's economic and financial conditions. This 
annual review culminates in a detailed ``Article IV'' report which is 
presented to the country's authorities and IMF management, and then 
discussed by the IMF's Executive Board representing all 189 IMF member 
countries.
    Thanks to the IMF's transparency policy, championed by the United 
States, publication of Article IV reports is now ``voluntary but 
presumed'', making the vast majority of such reports available to the 
wider public.
    The IMF also conducts multilateral surveillance on regional and/or 
global economic and financial conditions. The IMF's twice-yearly World 
Economic Outlook (WEO), Global Financial Stability Report (GFSR), 
Fiscal Monitor and Regional Economic Outlooks (REOs), as well as the 
annual External Sector Report (ESR), are examples of IMF multilateral 
surveillance products which evaluate regional or global financial and 
economic conditions. The ESR, the newest of the multilateral reports 
and first piloted in 2012 with strong support from the United States, 
analyzes economic conditions in individual economies to assess if and 
how they contribute to global imbalances, as well as the role of policy 
in contributing to such imbalances.
    Separate but related to IMF surveillance is the Fund's work to 
further the provision of economic and financial data to the public 
through various data standards. While voluntary, adherence to the IMF's 
enhanced General Data Dissemination Standard (e-GDDS); Special Data 
Dissemination Standard (SDDS); and SDDS Plus have filled data gaps, 
promoted greater data transparency, and provided market participants 
around the world with high quality data essential to capital market 
development. Taken together, nearly the entire IMF membership (185 of 
189 member countries) subscribe to one of the three standards.
    Lending. IMF lending is intended to ``give confidence to members by 
making the general resources of the Fund temporarily available to them 
under adequate safeguards, thus providing them with (the) opportunity 
to correct maladjustments in their balance of payments without 
resorting to measures destructive of national or international 
prosperity.'' \2\ An IMF member therefore can smooth the adjustment to 
an economic shock by borrowing from the IMF in exchange for a set of 
conditions, generally ex ante commitments to policy reforms and 
quantified performance criteria for the duration of a lending program. 
Under a successful program, market confidence is restored, and the IMF 
is repaid as the economy adjusts and investors return to the country. 
In practice, few cases are so straight-forward, and yet the IMF has an 
excellent repayment history. During the Global Financial Crisis (GFC) 
in 2008-09, on through the ensuing euro area debt crisis, the IMF 
entered into programs and provided financial support to numerous 
countries, the vast majority of which have repaid their purchases to 
the Fund in full. A 2016 U.S. Treasury Report to Congress highlights 
that in the 24 cases of IMF exceptional access lending since 2008 there 
was only a single instance of a country not repaying in full and on 
time, and in that case (Greece in June 2015) the country quickly 
remedied the delay in its repayment to the IMF. The same report offered 
Treasury's assessment that IMF lending played an essential role in 
mitigating risks of spillover to the global economy.\3\
---------------------------------------------------------------------------
    \2\ Articles of Agreement of the International Monetary Fund, 
Article I(v): https://www.imf.org/external/pubs/ft/aa/index.htm. 
Accessed November 23, 2018.
    \3\ U.S. Department of the Treasury, U.S. Treasury Report to 
Congress on Ways to Improve the Effectiveness of the IMF and Mitigate 
Risks to U.S. Participation, June 2016.
---------------------------------------------------------------------------
    Of course, there are cases where Fund programs are unsuccessful, 
either because the program was not completed, or because even despite 
program completion, balance of payments vulnerabilities were not 
durably addressed, leading to follow-on programs. In these cases, while 
IMF program design should be examined, factors contributing to a 
program's success or failure generally go well beyond program design 
and concern the member's political will to implement sustainable 
macroeconomic policies as well as global conditions, among other 
factors.
    Currently, the IMF has $81.5 billion (SDR 58.8 billion) in credit 
outstanding, consisting of borrowing from the IMF's General Resources 
Account (GRA) as well as its concessional borrowing window, the Poverty 
Reduction and Growth Trust. The largest outstanding exposures to 
members currently engaged in IMF programs are to Argentina, Ukraine and 
Egypt. All three programs received strong support from the United 
States when they were brought to the Board for approval. While the 
circumstances giving rise to financing needs differ dramatically in 
each case, the country's importance to the United States was clearly a 
factor in garnering U.S. support for IMF program engagement. In each 
case, any bilateral assistance provided by the United States is dwarfed 
in comparison to the resources provided by the IMF.

    Capacity Development. Capacity development--covering technical 
assistance, training and other related activities in fiscal management, 
monetary policy, legal frameworks, and statistics--can be provided by 
the IMF at the request of a member, although there is no obligation for 
a member to accept such assistance. Like IMF surveillance and lending 
activities, capacity development is grounded in the IMF's Articles of 
Agreement, which provide the Fund with the ability to ``perform 
financial and technical services.consistent with the purposes of the 
Fund.'' A review of the IMF's capacity development activities completed 
this month underscores the importance of capacity development 
activities to meeting the Fund's core mandate of fostering the 
stability of the international monetary system.\4\ In particular, the 
review highlights the importance of integrating the Fund's capacity 
development and surveillance activities; as well as continuing to 
prioritize the provision of capacity development assistance to fragile 
states where needs are greatest.
---------------------------------------------------------------------------
    \4\ International Monetary Fund, 2018 Review of the Fund's Capacity 
Development Strategy--Overview Paper, November 2018.
---------------------------------------------------------------------------
An Evolving International System
    The global economy and international monetary system have changed 
considerably since the IMF's founding in 1945. The global economy is 
much more integrated now than in the wake of the Second World War, and 
economic liberalization has extended beyond trade to include financial 
and human capital flows. Liberalization has been good for living 
standards in the United States and around the world, yet we are 
experiencing a backlash, ironically coming from the center of the 
international system. In addition, in less than a generation we have 
witnessed the emergence of China as a global power and challenger to 
U.S. economic supremacy, which has likely exacerbated the backlash 
against economic liberalization, in part because China's own impressive 
growth has exploited liberalization without offering the same opening 
to the rest of the world. Finally, the uncertainty around the impacts 
of technological change on productivity, economic growth and the 
distribution of economic gains means the global economy is headed into 
unchartered territory. Neither the backlash to globalization nor 
technological disruption are the focus of today's hearing, so I won't 
spend more time on these issues here except to offer that they 
underscore the Fund's importance; the principal activities of the IMF--
surveillance, lending and capacity development--are more important now 
than ever.

    China's Rise. In 1980, the U.S. economy was nearly ten times the 
size of China's, and per capita GDP in the United States was more than 
40 times China's. By 2000, the difference narrowed only marginally in 
U.S. dollar terms; however, under purchasing power parity--which 
assesses economic size by equalizing price levels between countries--
the difference narrowed to slightly less than three times, reflecting 
both a weak renminbi and China's low cost of living. By 2017, the U.S. 
economy, at just over $19 trillion, was little more than one-and-one-
half times the size of China's. But under purchasing power parity, the 
Chinese economy had already overtaken the United States as the world's 
largest. One can debate the merits of U.S. dollar versus purchasing 
power parity measures, but the trend is clear. Given that China's GDP 
per capita is still just a fraction of U.S. GDP per capita, we should 
expect the rate of Chinese economic growth to continue to outpace the 
United States, even as the U.S. economy grows in absolute terms.
    China's economy (in U.S. dollars), can be expected to overtake the 
United States within a generation. The fact that China's economy, 
fueled by 1.4 billion Chinese consumers, will overtake the United 
States, a country one-fourth its size by population, should not be seen 
as a threat so much as a high probability event. Furthermore, China's 
economic size tells us little about how its leaders will manage its 
many challenges, ranging from population aging to environmental 
degradation to financial sector vulnerabilities. But the size of 
China's economy, combined with the Government's ability and willingness 
to corral its resources to achieve strategic objectives, does merit our 
close attention.

    IMF Surveillance and China. China's economic rise and its relevance 
to the IMF can be framed around the three principle activities of the 
IMF: surveillance, lending and capacity development. In terms of 
surveillance, China meets the obligations of Fund membership. Its most 
recent Article IV discussion was held in July; and thanks to previously 
mentioned efforts championed by the United States to promote 
transparency, China's Article IV report can be downloaded by anyone 
with an unrestricted internet connection. In the report and 
accompanying materials, we read staff's assessment that Chinese data 
quality is ``barely adequate'' for Fund surveillance; that IMF 
Executive Directors support increased exchange rate flexibility and 
further capital account liberalization; and that they want China to 
allow market forces to play a more decisive role in the economy. With 
regard to China's Belt and Road Initiative (BRI), Executive Directors 
encourage China to give due attention to debt sustainability in partner 
countries. At a minimum, Chinese authorities are hearing the technical 
assessment of IMF economists, including specific shortcomings (e.g., 
data quality) and areas of vulnerability (e.g., the financial sector). 
The IMF Executive Board--that is, the international community--is 
weighing-in with messages that will formally be transmitted back to 
Beijing. It is always a question whether a staff assessment or Board 
discussion will gain traction domestically, but the question is not 
unique to China. Having a fact-based discussion on a common set of 
indicators--something required by the Fund's Articles of Agreement--is 
valuable in and of itself.

    China, BRI and IMF Lending. In contrast to IMF surveillance, 
China's BRI is playing a far less constructive role where IMF lending 
is concerned. The problem comes from loans China is making to some 
would-be borrowers of the IMF, with much of the potentially problematic 
lending happening under the auspices of the BRI, which the U.S.-China 
Economic and Security Review Commission describes as a ``well-
resourced, whole-of-government concept for regional and global 
connectivity.'' \5\ This year's Article IV report for China describes 
the BRI as an initiative which could ``bring both opportunities for 
greater connectivity and growth, but also risks (e.g. debt 
sustainability)''; and calls on China to develop ``a clearer 
overarching framework governing BRI investment, better coordination and 
oversight, more focus on debt sustainability of the partner countries, 
and a transparent mechanism for dealing with project disputes, non- 
performance and debt service problems, as well as more open procurement 
and greater transparency over contracts.'' \6\ Chinese authorities, 
however, believe these concerns are overstated, and they see project 
selection and governance as ``decisions of market entities.''
---------------------------------------------------------------------------
    \5\ U.S.-China Economic and Security Review Commission, 2018 Report 
to Congress, November 2018.
    \6\ International Monetary Fund, People's Republic of China: Staff 
Report for the 2018 Article IV Consultation, June 28, 2018.
---------------------------------------------------------------------------
    It is possible that a number of BRI projects will deliver the 
economic benefits recipient countries hope for. It is also possible, 
based on reports coming from a number of BRI countries, that the 
economic return on some of these projects will be negative. In these 
cases, far from adding to macroeconomic stability, these projects 
potentially mire the recipient countries in higher levels of debt. The 
sheer scope of the BRI is daunting. Data provided in the U.S.-China 
Economic and Security Review Commission 2018 report suggests BRI equity 
and debt funding could already top half a trillion dollars through end-
2017, coming from a mix of Chinese policy banks, Chinese state-owned 
commercial banks, the Silk Road Fund, as well as the multilateral Asian 
Infrastructure Investment Bank (AIIB) and New Development Bank (NDB).
    In a speech earlier this month at the APEC CEO Summit, Vice 
President Pence referred to ``infrastructure loans to governments'' 
with ``opaque'' terms, producing ``poor quality'' projects ``with 
strings attached and lead(-ing) to staggering debt.'' \7\ He cautioned 
countries against accepting foreign debt that could compromise their 
sovereignty, reflecting fears that at least some of the infrastructure 
projects built under the BRI are motivated by China's political or 
military ambitions rather than to benefit the local or regional 
economies. A recent report initially published in the Financial Times 
and later re-printed in Pakistan reported that Chinese lending to 
Pakistan, Angola and Zambia has complicated the countries' prospects 
for an IMF program due largely to ``non-existent'' information on the 
maturity, cost and terms of loans.\8\ The missing terms, combined with 
concerns that contingent liabilities (e.g., government guarantees) may 
not be captured in official government statistics means that a key 
component of IMF due diligence, the debt sustainability assessment or 
DSA, is compromised.
---------------------------------------------------------------------------
    \7\ https://www.whitehouse.gov/briefings-statements/remarks-vice-
president-pence-2018-apec-ceo-summit-port-moresby-papua-new-guinea/. 
Accessed November 20, 2018.
    \8\ https://www.thenews.com.pk/print/397725-imf-faces-china-debt-
dilemma-as-low-income-nations-seek-help,November 25, 2018. Accessed 
November 25, 2018.
---------------------------------------------------------------------------
    The IMF has policies and conventions, starting with its preferred 
creditor status, that protect the Fund's balance sheet, but 
comprehensive and reliable data must be the foundation for any 
assessment. IMF Managing Director Christine Lagarde is correct in 
demanding ``absolute transparency'' on the nature, size and terms of 
debts in order to determine the debt sustainability of any country 
seeking IMF financial assistance.\9\
---------------------------------------------------------------------------
    \9\ https://www.reuters.com/article/us-imf-worldbank-pakistan-
talks/imf-to-seek-absolute-transparency-of-pakistans-debts-in-bailout-
talks-idUSKCN1ML0W1, October 11, 2018. Accessed November 25, 2018.
---------------------------------------------------------------------------
    Separate but related to the issue of comprehensive data reporting 
is China's reluctance to participate in certain international 
arrangements, and the Paris Club in particular. Given China's role as 
the largest single bilateral creditor to post-HIPC low income 
countries, its failure to join with other creditor nations in seeking 
cooperative approaches to data transparency and debt relief undermines 
recipient countries, fellow creditors, and the integrity of the 
system.\10\
---------------------------------------------------------------------------
    \10\ International Monetary Fund, Macroeconomic Developments and 
Prospects in Low-Income Developing Countries-2018, March 2018, Table 4. 
Total Public and Publicly Guaranteed Debt by Creditor, 2007-16.
---------------------------------------------------------------------------
    Capacity Development: China and BRI Recipients. Data is where the 
last of the three principle functions of the IMF is particularly 
relevant. While the conventional wisdom suggests China is actively 
hiding the amount and terms of its financing, it is also possible that 
Chinese authorities, at least those in charge of managing the country's 
exposures to overseas projects, have been blindsided by the volume of 
Chinese credit abroad. Given reports of Chinese exposure to numerous 
vulnerable countries, there is likely growing concern in China 
regarding the prospects for repayment. The IMF should be ready to 
assist China is boosting its capacity to track external credit and 
credit-like instruments, including contingent liabilities, with an eye 
to making this information public. China's move earlier this year to 
create China International Development Cooperation Agency (CIDCA) to 
evaluate and administer China's foreign assistance program can be a 
good first step, but with its limited focus on official development 
assistance, it is insufficient to capture all categories of relevant 
debt and contingent liabilities. In order to be effective and credible, 
CIDCA would also need to be independent from the Government.
    Expanding the envelope of data that member countries are obligated 
to provide to the IMF in the context of surveillance is also worth 
considering.
    The IMF and World Bank, in their reporting to the G-20, have 
underscored ``that the primary responsibility for transparent debt 
recording, monitoring and reporting lies with the borrower.'' \11\ In 
this respect, IMF capacity development should be prioritized for 
recipient countries attempting to attract financing for infrastructure 
to provide these countries with the tools to assess financing terms. 
The increasing complexity of debt instruments makes this work even more 
critical to reduce information asymmetries between borrowing countries 
and their creditors. In addition to the IMF, the donor-supported Debt 
Management Facility housed at the World Bank works to strengthen low 
income countries' debt management capacity and merits support.
---------------------------------------------------------------------------
    \11\ International Monetary Fund and World Bank Group, G20 Notes on 
Strengthening Public Debt Transparency, June 13, 2018.
---------------------------------------------------------------------------
What Can the United States Do?
    U.S. influence at the IMF remains strong, reflecting America's role 
in the IMF's creation as well as the still-predominant contribution of 
the United States to the global economy. The United States currently 
holds 16.52 percent of the Fund's total voting power, giving it an 
effective veto over any change to the Articles of Agreement.\12\ The 
United States also benefits from U.S representation among senior 
management, not only at the IMF but also at the multilateral 
development banks. In addition, while the IMF's resident Board ensures 
that all members interact directly with IMF staff, management and other 
Board members, the IMF's location in Washington also benefits the 
United States. But sustaining U.S. influence is far from guaranteed. 
The United States should recognize how IMF activities advance our 
national interests, by boosting transparency and ensuring a common 
reference point for economic discussions among global participants. IMF 
lending benefits U.S. strategic priorities and promotes financial 
stability, even when individual IMF programs fall short of objectives. 
Maintaining U.S. support for the Fund, through serious political 
engagement and financial support in the context of periodic IMF quota 
reviews, constitute a responsible use of scarce national resources.
---------------------------------------------------------------------------
    \12\ Any amendment to the IMF's Articles of Agreement requires the 
approval of three-fifths of the IMF's members representing 85 percent 
of the total voting power. The next largest shareholder, Japan, holds a 
6.15 percent of total votes; while China, the third largest 
shareholder, holds 6.09 percent.
---------------------------------------------------------------------------
    In addition to supporting the IMF and the other international 
financial institutions, the United States can assist countries that are 
otherwise left with limited options to finance needed investments. In 
his speech earlier this month at the APEC CEO Summit, Vice President 
Pence underscored a renewed commitment to development financing, and 
infrastructure in particular.\13\ Recent actions, including passage of 
the BUILD Act to create a new foreign aid agency with authority to 
provide US$60 billion in funding for developing nations; along with a 
new Indo-Pacific Transparency Initiative, can equip the United States 
to offer a positive agenda for infrastructure investment, including 
private sector participation, while boosting transparency and combating 
corruption. Finally, allowing U.S. companies to compete overseas, 
including with the backing of a fully operational Export-Import Bank, 
can support a positive U.S. agenda overseas.
---------------------------------------------------------------------------
    \13\ https://www.whitehouse.gov/briefings-statements/remarks-vice-
president-pence-2018-apec-ceo-summit-port-moresby-papua-new-guinea/. 
Accessed November 20, 2018
---------------------------------------------------------------------------
    Again, I thank the Subcommittee for the opportunity to offer these 
thoughts, and I look forward to answering members' questions.


    Senator Young. I thank each of you for your summary 
testimony. There is a lot for us to deal with in a fairly short 
amount of time.
    But why do I not begin with our first three panelists, Mr. 
Lowery, Ms. Hillman, Ms. Lee. Each of you spoke to, I believe, 
the need for a more coherent and comprehensive strategy with 
respect to some of these issues we are dealing with.
    Mr. Lowery, you indicated that Congress needs to assert our 
role with respect to trade policy and perhaps pressure--you did 
not say this, but pressure this and future administrations to 
clarify our economic security strategy. I will give you an 
opportunity to respond.
    Ms. Hillman, you focused quite a bit on the WTO in your 
summary comments, indicating that there is a need to fix the 
binding dispute settlement system, and you suggested this could 
best be done by assembling a coalition. I am not aware that 
that has been written into any particular strategy document, 
certainly not in any great detail by a previous administration 
or the current administration.
    Ms. Lee, you indicated that the Congress, working with our 
executive branch, should articulate and prioritize a strategy--
your words. Most likely that would affect the sort of positive 
change I think that we all want with respect to jobs and 
incomes and economic stability if that change were pursued 
multilaterally, something you supported.
    So I think there is a means towards our getting there. In 
fact, I drafted legislation that I think would get us there. It 
is S. 2757, the National Economic Security Strategy Act of 
2018. Senator Merkley was the original cosponsor lead on this. 
It would create a statutory requirement for the periodic 
production and submission to Congress of a national economic 
security strategy.
    What do you think about this idea, Mr. Lowery? We actually 
have a written document that can be critiqued by the academic 
community that will signal to our friends and adversaries and 
partners alike exactly what our strategy is. We could seek buy-
in as we do with the National Defense Strategy or a National 
Security Strategy from the legislative branch. So we are all 
working together for the betterment of the United States and 
all we represent. Is it a good idea to have a written strategy?
    Mr. Lowery. So I had the honor of serving on the National 
Security Council staff back in 2001 and 2002. And part of the 
staff's work was the National Security Strategy, which I do 
find to be a very helpful document. In fact, I used that in my 
testimony today from the Trump administration.
    So I have read your legislation. I think it would be a very 
helpful thing. I mean, having international economics should be 
part of any strategy, whether it is the National Security 
Strategy or creating a national economic strategy to go into 
more detail, just like, for instance, on the National Security 
Strategy, there is a National Defense Strategy that relies on 
it to create more--to be more specific on how the Defense 
Department envisions this document.
    So I think that this makes a lot of sense to me. It helps 
create priorities. It helps communicate what the administration 
is trying to do, whether it is this administration, the next 
administration, or following administrations.
    Senator Young. And, of course, much of the strategy would 
be classified in nature. There would be a classified annex. As 
with our National Security Strategy, the rest of it would be 
open source.
    Ms. Hillman, thoughts.
    Ms. Hillman. I think it would be serving a great need, 
which I see very clearly right now, by helping to draw a line 
between what is economic security and what is national security 
because clearly one of the real threats to the WTO is the fact 
that the United States has imposed these tariffs on steel and 
aluminum in the name of national security. And right now, those 
tariffs are being challenged at the WTO by many of our trading 
partners. And the response of the United States has been that 
somehow we are allowed to violate all of our commitments 
because the challenge is coming to say you cannot put tariffs 
on steel of 25 percent because we agreed. We bound our tariffs 
on steel at 0 percent duties. So by charging this 25 percent 
tariff, we are breaking that commitment. We are violating the 
WTO rules. We said clearly we would not impose tariffs other 
than equally on all of the members of the WTO, and yet we are 
putting the tariffs on some but not on others. So what the 
United States is intending to say in that litigation is, oh, 
no, we are allowed to do this because we say it is in the name 
of national security.
    And the problem for the WTO is if they agree with the 
United States that you can do anything if you claim that it is 
in the name of national security, every other country can do 
this to every other product and say that they can put these 
restraints on if they simply say it is in the name of national 
security.
    And if, on the other hand, the WTO says no, United States, 
you cannot do this in the name of national security, the 
concern is that the Trump administration will withdraw from the 
WTO on the theory of, you know, sort of who are you, WTO, to 
tell us what is in our national security.
    So I think your legislation and your idea of helping to 
figure out where is that line between national security from a 
defense sort of security standpoint versus what is in our 
economic security would be immensely helpful.
    I think also going forward, as we think about whether or 
not there is going to be future tariffs under this section 232, 
it would be very helpful if there could be some of that line-
drawing.
    And the last thing. I will only comment quickly. You asked 
about whether or not there is some kind of a strategy document 
that would speak to these China issues that I was talking about 
in terms of a WTO case. The U.S.-China Economic and Review 
Security Commission just recently, very recently, released its 
annual report to the Congress, and included in their section on 
trade and China is this idea of sort of bringing a sort of 
bigger, bolder coalition case to challenge these trade issues 
with respect to China.
    Senator Young. Excellent.
    Ms. Lee?
    Ms. Lee. Thank you. Thank you, Mr. Chairman.
    I look forward to reviewing your document because it sounds 
like a very useful direction to go. And I do believe there is a 
value in articulating and putting on paper and bringing 
together all the different agencies to have a coherent 
strategy. I think that is often missing in terms of U.S. 
economic policy. And I think one issue is that we should 
recognize that there are connections between our economic 
security and foreign policy, and sometimes those are legitimate 
concerns that are not taken into account.
    I think the other reason that it is useful is that, as we 
know--and I think we have had a lot of discussion today--other 
governments, particularly China, but others as well, have a 
very concerted economic strategy, a long-term economic strategy 
that they are playing off of. And if the United States is 
passive or not coordinated, I think that we will almost 
inevitably lose out.
    Senator Young. Thank you.
    It is a bit ironic. I can go to the Internet and access 
China's strategy. I can. In a sense, I have more coherence, 
more clarity, a broader view about what their strategy is on a 
going forward basis than I do as a member of the Senate Foreign 
Relations Committee where my job is, in the main, oversight. 
And I find that not just ironic but troubling, and I think a 
number of my colleagues find it troubling as well.
    I will ask one additional question and then kick it to 
Senator Merkley. It is a follow-up to you, Ms. Hillman, with 
respect to this idea of bringing one broad case at the WTO 
against China.
    The grounds of the case would be, A, that China has just 
broadly violated the expectations of a market economy. That 
seems sort of a violation of the spirit of the WTO agreement 
and the expectations you have when invited into the WTO. But 
then there are 12 specific commitments that you indicate the 
charges should include as well that one commits to when you 
enter the WTO.
    In your assessment, why has a case like this not been 
brought?
    Ms. Hillman. I think it's an excellent question. I think 
there is a number of reasons why it has not been brought.
    Part of it is trying to bring a case as a coalition is 
difficult because you have to get everybody on the same page in 
terms of thinking about what kind of claims do we want to 
bring.
    As I mentioned, in the past, there has been really a 
reluctance because China retaliates and retaliates so quickly 
and immediately against countries that do take actions against 
China. And they retaliate very clearly in this trade sphere and 
even for fairly innocuous actions.
    When the Nobel Peace Prize is given out to a Chinese 
dissident, what is the first thing China does? It bans the 
exports of salmon because they do not want to in any way reward 
countries where the Nobel Peace Prize is given.
    When the Philippines challenges the development of the 
islands in the South China Sea at the International Court of 
Justice and wins the case, what is the first thing China does? 
Ban Philippine mangos from going from the Philippines into 
China as a way of retaliating.
    So countries have been really reluctant to take on China in 
a major way for fear that they will be the subject of this 
retaliation. Again, hence the reason why my view is if you put 
together a large coalition of countries, it does create a bit 
of a shield against this ability for China to immediately 
retaliate.
    The other part of it, again as I mentioned, is evidence. It 
is hard to get enough of this evidence, particularly because 
China is so nontransparent. You simply cannot get your hands on 
the kind of documents that you would normally need in order to 
prove these cases.
    And I think the last thing that is really important is one 
of the major and I would say the most major claim against China 
relates to the issue of subsidies, that China creates massive 
over-capacity in steel, in aluminum, in chemicals, in all of 
these products on the backs of subsidies. And the concern there 
is whether or not the disciplines for how do we get at 
subsidies in the WTO are adequate.
    Right now, when the WTO tries to take on subsidies, you go 
kind of two roads. One is you can show that the imports of 
subsidized products are coming into the U.S. market, in which 
case you can try to put a countervailing duty onto those goods 
to offset the amount of the subsidy. So 50 percent of the cost 
of production was by a subsidy. You put a 50 percent duty on. 
That may work to protect the U.S. economy, but it pushes that 
subsidized steel out into all of the rest of the world. So it 
did not solve the problem.
    If, on the other hand, what you bring is an adverse effects 
case, the problem is that the remedy is prospective only and it 
only requires China to so-call remove the adverse effects of 
the subsidy. But if that steel plant is already up, built, and 
running, it does not do you very much good to say prospectively 
that you are supposed to get rid of the adverse effects of the 
subsidy.
    So the other reason why cases have not been brought is 
because some of the rules in the WTO are probably not 
sufficient to really take on board the substance of the problem 
that we have with China.
    Senator Young. Okay. Thank you.
    I do not believe I will get to all of the questions I 
wanted to ask of all the witnesses because I do want to give 
Senator Merkley a lot of time to ask whatever might be on his 
mind. Thank you.
    Would you encourage us, Ms. Hillman, yes or no, to consider 
contacting the administration, encouraging them to assemble a 
coalition, gather evidence, and bring a case even in light of 
the infirmities with respect to some of the WTO provisions? Do 
you think it still merits----
    Ms. Hillman. Absolutely, yes. If the case wins, you have a 
lot of leverage over China to really push for it. If it loses, 
it will make it very clear where are the holes in the WTO rules 
that need to be fixed. So either way, the answer is yes.
    Senator Young. Thank you.
    Senator Merkley?
    Senator Merkley. Thank you.
    Mr. Morris, you noted that some of our loans to China are 
helping China reduce carbon pollution and that that is a 
positive thing. Do you share the viewpoint from the 
administration's report last Friday that carbon pollution is a 
significant world problem and we need to act quickly to address 
it, a point that was also made last month by the IPCC report 
that was described as a firm alarm going off saying, wake up, 
act fast on carbon?
    Mr. Morris. Absolutely I do.
    And I would make the additional point that in fact it is, 
if not the most important thing the MDBs themselves are doing 
today, among the most important. The capital increase at the 
World Bank--that agreement itself makes new commitments to 
climate finance that I think are part of what garner my support 
for that agreement. I think it is absolutely critical to their 
agendas going forward.
    Senator Merkley. Ms. Segal, do you share that view?
    Ms. Segal. I do, and I would also add the IMF focuses on 
macro-economic issues as opposed to development issues. But the 
IMF has also thought about climate and climate change as a 
macro-economic issue. And we do see that there are real macro-
economic impacts from climate change. So, yes, I do agree.
    Senator Merkley. Ms. Lee?
    Ms. Lee. Yes, absolutely.
    And I also think that the WTO could play a more 
constructive role with respect to climate change to allow 
countries that go first and go faster to implement carbon 
reducing strategies are not put at a competitive disadvantage 
through trade, so allowing border adjustable methods to adjust 
at the border for the difference in prices between countries 
that are moving quickly and countries that are moving more 
slowly.
    Senator Merkley. Ms. Hillman?
    Ms. Hillman. Yes, I totally agree. And I would only add 
that I do think I would agree with Ms. Lee that there is more 
that the WTO can do to both reduce all tariffs on anything that 
would contribute in terms of renewable energy types of goods. 
There has been a longstanding fight over exactly what products 
should be on that list, and my own view is that fight needs to 
be over with today so that you can go to zero duties and zero 
restraints of any kind on the trade in renewable energy 
materials in order to, again, make that contribution.
    I do think the WTO is also trying to work at disciplines on 
fossil fuel subsidies, which is the other way in which the 
trading system could contribute to helping.
    But the answer is unequivocally yes.
    Senator Merkley. And Mr. Lowery, I do not want to leave you 
out.
    Mr. Lowery. Thank you. I am not going to say yes or no only 
because I have not read the report, one. And secondly I clearly 
just do not have deep enough knowledge in this area. But I will 
say this. I usually would listen to a lot of scientists that 
seem to be coming to similar conclusions.
    Senator Merkley. Thank you.
    So, Mr. Morris, as you were noting about the loans to China 
and helping China reduce carbon pollution, I could not help but 
recall an article I had read about how China is the major 
financer of new coal plants around the world. So I asked my 
team to get me some facts here.
    So China is the largest investor in overseas coal projects, 
having invested $15 billion in the last few years. And they 
have another $13 billion in proposed projects.
    They are involved in planning 700 new coal plants at home 
and abroad.
    And from a different source, a New York Times article, at 
the end of 2016, China was immersed in 240 overseas coal power 
projects. And I have run into a number of these in different 
parts of the world.
    And the same articles note that just the building of these 
plants that are essentially on the drawing board completely 
overwhelms Paris. And Paris itself is not a significant ceiling 
in terms of--we will break the barriers that have been set by 
international scientists for 2 degrees under Paris.
    So some of you have already mentioned strategies that we 
could use in the international multilateral institutions to 
help take this on. But I hear this fire alarm ringing, saying 
wake up world. It is very hard. It is very hard because we have 
deeply invested ownership of fossil fuel assets around the 
world, and the owners clearly want to work hard to keep 
extracting them and burning them. And so that is an enormous 
challenge.
    But the international institutions that you all study or 
represent--share a little bit more about. And I think, Ms. Lee, 
you mentioned a specific idea that I did not completely 
capture, but maybe you would like to start by mentioning that 
idea. How can multilateral institutions really help us as a 
human civilization on this planet take on this enormous and 
immediate catastrophic challenge?
    Ms. Lee. The idea I was talking about had to do with the 
competitive differences, when countries move at different 
speeds to reduce carbon emissions. So, for example, if, let us 
say, the United States were to put on a carbon tax and raise 
the price of producing certain manufactured goods and other 
countries might move more slowly--developing countries. And 
that is certainly the idea of the Paris Accord. If production 
were to move from the United States to those places that have 
not yet reduced carbon emissions, then you are actually 
increasing emissions globally because you are moving relatively 
clean production to a relatively dirty place.
    And one way of deterring that is to allow a border 
adjustable tax that would adjust for the difference in carbon 
strategies and that would prevent the competitive gaming of 
that. And it would not penalize the countries that do the right 
thing and move more quickly. And I believe it is correct that 
wealthier countries, wealthy industrialized countries, should 
move more quickly than poorer countries, but what you do not 
want to do is end up with this terrible outcome where----
    Senator Merkley. No. I take your point on border 
adjustment.
    We recently had a report from Xcel Energy in Colorado that 
put out a request for proposals, and it came back at 2 cents 
per kilowatt hour for wind, 3 cents for solar, and both of 
those were below the cost of power from an already depreciated 
coal plant.
    Are we at the point where the dropping costs of solar and 
wind are going to dramatically change the calculations? Because 
even folks who may not share a concern about the health of our 
planet may want to be on the smart end of the cheapest energy.
    Ms. Lee. Yes, and I think that is a really positive 
development when renewable energy actually ends up being 
cheaper than the more expensive. That is a huge advantage.
    But also I think it is true--this goes, I think, back to 
the economic strategy and the long-term planning--is that some 
countries like China and Germany might have subsidized wind or 
solar panel productions at an earlier stage when it was not so 
obvious that there was an economic advantage. And that is the 
kind of thing I would like also see the United States be 
thinking ahead so that we are not brining up the rear in that 
kind of a decision.
    Senator Merkley. Yes, Scott?
    Mr. Morris. Yes. I would just say, Senator Merkley, you 
raise a good point. I do not think it has received enough 
attention. In fact, there seems to be an effect. As China goes 
greener and cleaner at home, they are pushing out dirtier 
abroad.
    I think the challenge here, which is consistent with the 
broader challenge we have talked about, is that we want to 
bring China into multilateral norms and disciplines. Well, in 
this area, we need to be sure that they exist. So that is 
things like standards for export credit agencies when it comes 
to energy finance, development finance abroad.
    You know, this institution that we are standing up under 
the BUILD Act--it is going to be really important that it has 
standards in this area that gives us some standing to try to 
enforce the massive volume of financing that is coming out of 
China and supporting these kinds of projects.
    Senator Merkley. Anyone else want to chip in on this? [No 
response.]
    Senator Merkley. So I want to turn back, Ms. Hillman, to 
your concept about this strategy for a multilateral challenge. 
I think of the whole WTO process as clunky--that is maybe on 
the complimentary side--and deeply dysfunctional, a maybe more 
accurate way to describe it.
    And also fundamentally we struck a deal. It was a 
geostrategic maneuver aimed significantly at separating China 
from Russia, keeping the communist bloc separated. And we said, 
you know what? We will give you access to our market. We will 
let you produce goods at different labor standards, different 
environmental standards, and different enforcement standards, 
and very low wages, which means you will be able to undercut 
our products. Will this not be a sweet deal for you?
    And it was a sweet deal, and it remains a sweet deal. And 
essentially every manufacturer in America said, can we not make 
a lot more money going to the cheapest place in the world to 
make things and then sell it back into the American market? And 
we saw a massive loss of manufacturing.
    Is it time to rethink this sweet deal for China? They have 
taken the proceeds from that. They are doing massive 
infrastructure at home, which I described earlier, that I have 
seen just within a few trips. They are buying up strategic 
resources around the world. This is all part of a Chinese 
national economic security strategy, their Belt and Road 
strategy. And my colleague here has said, well, America needs a 
strategy. And our strategy is kind of mired going back to our 
Cold War battle keeping Russia and China separated. And we pay 
a massive economic price for it. Is it time to rethink the 
whole thing?
    Ms. Hillman. I think it very well may be time, and part of 
why I guess I am proposing this idea is as part of a rethink, 
if you will, or resetting the table vis-a-vis China. And the 
question is sort of under what auspices or under what table 
setting, if you will, do we have the best leverage with respect 
to China. Because I do think it is clear that many countries 
around the world share many of the United States' substantive 
concerns about China, all of the concerns that you have just 
articulated, again that China has gotten away with because it 
is not just the United States that is feeling the brunt of a 
lot of the Chinese exports and, again, the products that are 
made with the low labor and the poor environmental conditions 
that you are describing. Those are affecting countries 
elsewhere in the world. So we have many allies with us that 
would agree with everything that you have just said in terms of 
what do we need to do about China.
    Where they disagree is over the United States' unilateral 
tactic in approaching it.
    And I guess where I am disagreeing is I do not think we 
have enough leverage alone to create the kind of change that we 
are really talking about in China. So my own view is that the 
only way you are going to get at exactly the issues that you 
have described is to try to put together a coalition. And I do 
think it is a large coalition that agrees with you and agrees 
that China must be dealt with.
    The question is then what do get at the end of the day, 
whether it is enough change, enough resetting of that 
relationship because I do not disagree with you that when China 
joined the WTO, the expectations were really quite different 
from what the reality has been. And over the first couple of 
years, it appeared that China was moving in the right 
direction, it was opening up its economy, it was moving in a 
more market-oriented direction, it was starting to shut down 
some of the most environmentally damaging.
    But about--I do not know--2004, 2005, there is no question 
China took a major 180 degree turn in the wrong direction from 
every aspect. It became more state-owned. It became more 
Communist Party controlled. It became more abusive on a whole 
series of labor and environmental rights.
    So I do not disagree with you. I guess what I am trying to 
say is I think you are right that we need a very dramatic 
response to China. And my only point is I think it needs to be 
a multilateral response and not just a unilateral one.
    Senator Merkley. That is a very appropriate response for a 
multilateral conversation.
    And our time has expired. So I am going to turn this back 
to the chairman. Thank you all very much.
    Senator Young. Well, thank you, Senator Merkley.
    And so many smart minds, so many topics we have covered and 
so many more questions I would like to ask, but we have run out 
of time.
    Chairman's prerogative. A couple of administrative items. 
One, I would like to draw some attention to a report, of which 
Scott Morris was one of the co-authors, for those who have an 
interest in Examining the Debt Implications of the Belt and 
Road Initiative From a Policy Perspective, the title of the 
report, I would commend it to you. Among other things, the 
report indicates that the World Bank and other MDBs should work 
toward a more detailed agreement with the Chinese Government 
when it comes to lending standards that will apply to any BRI 
project no matter the lender. With unanimous consent, I would 
like to enter this report in the record.
    Senator Merkley. Absolutely.
    Senator Young. And as the last order of business, Mr. 
Lowery, I will be submitting a question to you for the record 
because in your prepared testimony, you called walking away 
from the TPP, ``reckless and a gift to China.'' I would be very 
interested in your thoughts about where we should go from here 
with respect to multilateral trade agreements.
    Thanks again all for appearing today as witnesses, for your 
research, for your expertise.
    For the information of this member and others, the record 
will remain open until the close of business on Thursday.
    Yes?
    Senator Merkley. Thank you. I would like to ask unanimous 
consent to submit to the record a table from the Information, 
Technology and Innovation Foundation. It is a summary of what 
was referred to as China's broken WTO commitments, a dozen 
commitments where they have failed to live up to their 
promises.
    Senator Young. Without objection, and just under the wire.
    [The information referred to above follows:]


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    Senator Young. So the record will remain open until 
Thursday, including for members who may not have been present 
to, to submit questions for the record.
    Thank you again, and thank you, Senator Merkley, for our 
continued partnership.
    This hearing is now adjourned.
    [Whereupon, at 4:40 p.m., the hearing was adjourned.]



                              ----------                              



              Additional Material Submitted for the Record

                Prepared Statement of Hon. David Malpass

    Thank you for holding this hearing and for inviting me to testify.
    My testimony a year ago to Congress addressed the topic of 
achieving faster U.S. and global growth in ways that improve after-tax 
wages for American workers. While there has been substantial progress 
in the United States, growth abroad has softened materially, causing 
challenges for international economic policy. In this context, I would 
like to provide an update on some of the major policies we implemented 
over the past year, and describe our policy direction for 2019. I will 
also present a detailed explanation of our policies on the 
International Financial Institutions (IFIs).
Major Policy Developments in 2018
    In 2018, we worked to orient better the G20, G7, International 
Monetary Fund (IMF) and multilateral development banks (MDBs) toward 
growth and accountability. With engagement by the World Bank, IMF, and 
other partners, Secretary Mnuchin has pushed forward an initiative on 
debt transparency that will, in the near term, significantly increase 
public disclosure and broaden the existing definition of international 
debt beyond traditional bonds and loans. This will reduce the frequency 
and severity of developing country crises and help push back on China's 
over-lending to fragile developing nations, including those with weak 
governance. The World Bank and IMF have focused on more comprehensive 
and transparent reporting of public sector liabilities of borrowers to 
assist with our initiative.
    We engaged repeatedly with China on our trade and investment 
concerns and the problems caused by their One Belt, One Road (OBOR) 
initiative, which often leaves countries with excessive debt and poor-
quality projects. If countries default on these debts, China often 
gains influence over the host government and may take ownership of the 
underlying assets. We have built a common awareness of these concerns 
in the G7 and G20. In lending, China often fails to adhere to 
international standards in areas such as anti-corruption, export 
credits, and finding coordinated and sustainable solutions to payment 
difficulties, such as those sought in the Paris Club. With evidence 
mounting in Asia and Africa that OBOR has undermined domestic 
institutions and economic strength in borrowing countries, countries 
such as Malaysia are re-examining the costs and benefits of OBOR-
related projects.
    With Congress's bipartisan support, we have enhanced America's 
national security through the enactment and ongoing implementation of 
the Foreign Investment Risk Review Moderation Act of 2018 (FIRRMA), 
which has strengthened and modernized the Committee on Foreign 
Investment in the United States (CFIUS).
    We have worked multilaterally to forge a new currency consensus in 
the G20 and International Monetary and Financial Committee recognizing 
the growth and investment benefits of currency stability. The 
administration recently concluded the U.S.-Mexico-Canada Agreement 
(USMCA), which included the first currency chapter in a trade 
agreement, consistent with congressional directives promulgated under 
Trade Promotion Authority. We also reached an understanding with South 
Korea on currency stability and transparency at the time of the update 
to the U.S.-Korea Free Trade Agreement (KORUS). Argentina's new IMF 
program includes a nominal monetary anchor and an important commitment 
to leaving currency intervention unsterilized, policies that quickly 
stopped Argentina's mid-2018 currency crisis and are dramatically 
reducing the rate of inflation.
    Treasury also launched the America Crece (The Americas Grow) 
initiative to promote growth in the Western Hemisphere. One key element 
of this initiative is to deepen U.S. commercial ties with Latin America 
in energy and infrastructure. In 2018, we signed energy framework 
arrangements with Panama and Chile, plan to sign one with Jamaica 
tomorrow, and hope to soon conclude one with Argentina. Looking 
forward, we are working with Colombia and have identified other 
attractive partners. These energy framework arrangements seek to 
achieve a high degree of energy development, integration, faster 
economic growth, and security with our partners through heightened and 
impactful trade, investment, and finance transactions that rely 
primarily on private capital.
    We have refocused the Financial Stability Board (FSB) on its 
systemic risk mandate, including the adoption of an activities-based 
approach for insurance activities, the wind-down of work streams 
unrelated to stability issues, and the evaluation of the effectiveness 
of existing policies before developing new policies. I served on the 
nominations committee for FSB leadership and was pleased with the 
recent announcement of Federal Reserve Vice Chair Randy Quarles as the 
FSB's next Chair, the first American to serve in this role.
    We prepared and published a number of reports including: the MDB 
Evaluation Report, the Foreign Exchange Report, the report of the 
National Advisory Council on International Monetary and Financial 
Policies, the Export Credit Negotiations report, the Technical 
Assistance report, and the Exchange Stabilization Fund report.
    My testimony before Congress last year discussed the role of 
multilateral development finance in global growth and prosperity. Since 
then, we have been successful in getting the World Bank to commit to 
meaningful reforms to achieve sustainability in its lending, enforce 
its graduation policy, implement differential pricing, and agree to 
other reforms that would enhance accountability. As discussed further 
below, a 2018 package for a World Bank capital increase focuses on 
these areas and includes a new financial discipline mechanism that 
constrains annual lending levels to stop the pattern of recurrent 
capital increases.

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Policy Direction for 2019
    Looking into 2019, we are again aiming our initiatives at improving 
the U.S. and global growth. We will follow through on the ongoing 
initiatives and push forward with new ones that will contribute to our 
economic and national security. As a key part of this effort, we 
maintain active economic and financial dialogues with like-minded 
countries around the world in order to exchange views on and assess 
systemic vulnerabilities and to support democratic principles and 
institutions.
    Here in the Western Hemisphere, we have emphasized the risks and 
challenges posed by `The Troika of Tyranny,' namely Venezuela, Cuba, 
and Nicaragua. This `Troika' has actively subverted democratic 
institutions, looted its people's assets and engaged in economic 
malfeasance, which has resulted in one of the world's gravest migration 
crises, creating serious fiscal burdens and both security and public 
health risks for its neighbors in Colombia, Ecuador, Brazil, Peru, 
Panama, and Costa Rica. There are nearly 50,000 Venezuelans per day 
crossing into Colombia. Secretary Mnuchin has already held four 
meetings of finance ministers to review the crisis in Venezuela and the 
impact on its neighbors and support the broad coalition pressing for 
democratic change. In Nicaragua, we have built a strong consensus of 
donor countries to stop the multilateral development banks from lending 
to the Ortega regime, which perpetuates itself through the death, 
imprisonment, and exile of its many opponents.
    A high priority in 2019 will be the continued implementation of 
FIRRMA. Pursuant to that legislation, CFIUS launched an innovative 
pilot program on November 10, which includes requiring declarations for 
certain foreign investments in U.S. businesses involved in critical 
technologies in 27 specific industries.
    There will be substantial work to deepen our major initiative on 
debt transparency. And we will continue to challenge China's unfair 
trade practices and lack of reciprocity in trade, lending, and 
investment. We will continue our work in the G7, G20 and other forums 
to discuss the challenge to our market system from China's non-market 
policies. There is already widespread acknowledgement of the problems 
in many key countries, but more work needs to be done on strengthening 
the debt transparency and financial resiliency of market-oriented 
countries.
    As Brexit approaches, Treasury is analyzing risks to the 
international financial system and working with the EU and the UK to 
ensure continued market access for U.S. firms, including financial 
services firms, and to avoid cliff-edge risks. We are working toward an 
improved trade arrangement with the EU and would like to pursue a 
bilateral trade agreement with the UK. The administration notified 
Congress on October 16, 2018 of its intent to start trade negotiations 
with the UK once it leaves the EU in March 2019.
    Supporting the administration's trade agenda remains another high 
priority in 2019. We will continue to increase reciprocity and market 
access, particularly for U.S. financial services firms. The financial 
services chapter of the USMCA will result in the elimination of a 
Canadian data localization rule that requires U.S. firms to store data 
in Canada. Other countries continue to erect similar barriers, and we 
are continuing to engage with finance ministries and central banks to 
achieve their regulatory objectives through other means while 
protecting U.S. firms from cumbersome foreign data localization 
requirements.
    Treasury's Office of Technical Assistance (OTA) will continue its 
work to improve financial processes, including transparency, 
accountability, financial sector security and private sector-led 
growth. OTA works to improve budget and tax systems, while 
strengthening institutions charged with combating terrorist financing 
and financial crimes. For example, in Colombia, Indonesia and Uganda, 
Treasury's OTA helped governments strengthen public-private 
partnerships to finance infrastructure development in ways that 
mobilize private capital.
    In Latin America, we will be building relationships with newly 
elected governments, including in Brazil and Mexico. We have engaged 
with Mexico on strengthening donor cooperation with the Northern 
Triangle, which is an area that the incoming Mexican Government has 
also stressed as a priority.
    We continue to work to streamline the G20 and make it more 
effective. In 2019, Japan will chair the G20 while France will chair 
the G7. We will also start preparing for the United States to host the 
G7 in 2020.
    Through Treasury's seats on the boards of the Overseas Private 
Investment Corporation (OPIC), the Millennium Challenge Corporation 
(MCC), and the U.S. International Development Finance Corporation (DFC) 
(the new organization to be established under the Better Utilization of 
Investments Leading to Development Act of 2018 that will encompass 
OPIC), Treasury seeks policies that provide strong financial coherence, 
further the national interest, and promote the effective use of 
taxpayer resources. Treasury is also leading U.S. efforts in the 
International Working Group on Export Credits, and working with the 
interagency on reforms in connection with the Export-Import Bank, to 
pursue relevant reforms.
    We have been in discussions on the World Bank's request for a 
capital increase. We are seeking to improve the quality of IMF programs 
through existing cases and upcoming conditionality reviews. We will be 
notifying Congress of negotiations related to the IMF's request for a 
quota increase under the 15th Quota Review (where we are in discussions 
to review the IMF's funding needs and the makeup of their resources) 
and have notified Congress of negotiations related to the International 
Development Association (IDA) and the African Development Bank (AfDB). 
These IFI topics are discussed in more detail below.
Seismic Shifts in Global Finance
    My testimony a year ago discussed the seismic shifts that have 
occurred in the global financial landscape and that are challenging the 
relevance of the international financial institutions (IFIs). The 
structure of global interest rates has moved substantially lower after 
the inflation peaks of the late 1970s and early 1980s. Large inflows of 
private sector capital at increasingly affordable interest rates have 
materially added to growth and prosperity in many developing countries 
and dwarfed the resources of the IFIs. Similarly, emerging markets have 
gained far more access to external private capital, including directly 
from the capital markets as well as through global banks that borrow on 
the capital markets, resulting in private capital flows dwarfing 
official flows.
    But these inflows have presented challenges, including renewed debt 
sustainability risks in more vulnerable countries with weaker 
institutions and macroeconomic policies. Consequently, the availability 
of increased financing must be accompanied by a dramatically increased 
level of debt transparency, the capacity to manage liabilities 
prudently, and the capability to deploy resources toward their most 
productive use.
    Many emerging economies--particularly larger middle-income and 
upper middle-income economies--have gained access to longer maturity 
debt, increasingly in local currency. This has allowed these countries 
to build domestic yield curves, providing a solid foundation for 
ongoing market-sourced borrowing.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    In addition to greater private capital flows, there is another 
important feature in the creditor landscape: developing economies are 
grappling with significant and growing inflows from non-traditional 
official creditors such as China. While Chinese financing may fill some 
gaps in financing for infrastructure investment in developing 
countries, there are often negative repercussions associated with 
Chinese lending. China's use of non-market export credits, opaque 
financing, and exclusive procurement practices often benefits the donor 
more than the recipient and undermines debt sustainability, domestic 
institutions, and environmental and social standards. China, for 
example, does not adhere to legally binding international standards to 
criminalize bribery of foreign public officials in international 
business transactions. Its financing also often includes conditions 
that do not show up on the Government balance sheet but burden 
borrowing countries with future liabilities such as commodity 
deliveries.
    These major developments--the increase in developing country access 
to global capital markets and the surge in their official inflows from 
state-directed capital (mainly from China)--not only have profound 
consequences for developing countries, but also for the MDBs.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]



    To deliver on their policy goals--positively shaping the conditions 
for growth and higher median incomes in developing countries--the MDBs 
need to focus more on the quality of their project loans rather than 
the quantity and on helping developing countries get their policy 
environment right for using private capital inflows effectively. The 
MDBs must ensure that they themselves do not displace private capital 
or lower their lending standards to compete with China's.
Role of MDBs
    For the MDBs to effectively deliver on these goals, they must 
conduct sweeping reforms: Refocus assistance on poorer and more 
vulnerable countries. Strengthen institutions in those countries, and 
work with them to implement sound policies that attract private 
investment, deepen private markets, and accelerate economic growth. 
Potential reforms include limiting lending to defined needs and 
existing resources, introducing mechanisms to promote financial 
discipline including through budget and salary constraints, 
differentiated loan pricing, graduation of borrowers, and sustainable 
lending practices.
    We are working in the G-20 and G-7 to improve coordination among 
the IFIs. The G-20 has agreed on a set of principles whereby the IFIs 
will coordinate with each other, particularly regarding budget support 
lending. This helps ensure that the MDBs are not competing with the IMF 
to lend into difficult situations where the macroeconomic framework is 
inadequate. The MDBs are also striving to coordinate better at a 
strategic and operational level. One approach, coordinated country 
strategies, would help the MDBs and other donors avoid duplicating 
their efforts in a particular country and respond more effectively to 
the challenges it faces.
    With regard to China's excessive lending, the MDBs (alongside the 
IMF) can be an effective tool in helping vulnerable countries better 
understand the risks and implications of such lending. The MDBs present 
a better source of development finance with higher environmental, 
social, procurement, and debt sustainability standards. They can also 
help countries constructively channel bilateral loans toward growth-
positive projects that serve the borrower, not just the lender. 
Finally, the MDBs and IMF can help countries build capacity to 
negotiate transparent, non-corrupt terms for infrastructure projects 
with foreign financiers, taking into account the macroeconomic 
consequences of new non-concessional debt.
    But it is worth noting that China has made substantial inroads into 
the MDBs despite its financing practices. In combination, China is 
absorbing decades of financial knowhow into its institutions in a few 
short years, a similar pattern to its absorption of manufacturing 
technology. We are working with allies and like-minded countries to 
guide the MDBs away from what could be viewed as endorsement of China's 
geopolitical ambitions.
World Bank Capital Increase
    Regarding the World Bank's request for a capital increase, we 
secured commitments on most of the reforms discussed in my testimony 
before Congress a year ago. Though it will take time to implement, it 
is a solid reform package that better aligns the World Bank with U.S. 
national security, foreign policy, and economic priorities.
    Treasury pushed hard for the adoption of a new mechanism to limit 
World Bank lending and ensure the durability of this capital increase. 
Based on this push, the International Bank for Reconstruction and 
Development (IBRD) will adopt a new financial sustainability framework 
that restricts annual lending commitments to those that can be 
sustained in real terms over the next 10 years through organic capital 
accumulation alone. The framework also includes a buffer to allow for a 
crisis response without the World Bank having to approach the United 
States and other shareholders for a capital increase. This new 
framework is aimed at achieving financial discipline and avoiding 
future capital increase requests. IBRD Governors will review the 
framework every five years, providing them an opportunity to push for 
any needed enhancements to ensure the IBRD continues operating within 
its existing financial resources.
    As a direct result of the reform package, the IBRD committed to 
directing a bigger share of its lending to poorer countries, with the 
share of lending going to countries below the IBRD graduation income 
threshold increasing to 70 percent (from the current level of 60 
percent); and to applying its graduation policy more rigorously, 
freeing up resources for countries that most need them. The reform 
package introduced differentiated loan pricing, making it the first MDB 
to adopt differentiated pricing for non-concessional sovereign lending. 
This will provide better-off, more creditworthy countries with an 
incentive to pursue market financing, rather than IBRD financing.
    The World Bank will also constrain the growth of staff salaries, 
which are the biggest driver of increases in its administrative budget. 
Beginning with the World Bank's FY 2020 budget, the annual general 
salary adjustment for staff salaries will be capped. Management will 
also conduct a study of recruitment and retention, strengthen 
performance management, and undertake efforts to remove low performers. 
With these changes, staff compensation and World Bank administrative 
costs will grow at a slower rate than in past years.
    The IBRD capital increase is packaged with an increase in the 
capitalization of the International Finance Corporation (IFC), the part 
of the World Bank Group that focuses on lending to and investing in the 
private sector in developing countries. We declined to participate in 
the IFC capital increase based on our assessment that the IFC did not 
need more capital to be impactful. Other countries wanted to expand the 
IFC on their own, and packaged their support for the IBRD reforms to an 
IFC expansion. Our voting power will be diluted to 16.4 percent from 
21.0 percent, but we maintained our veto through a reduction in the 
IFC's veto threshold, which will be adjusted from 20 percent to 15 
percent. However, we succeeded in negotiating that shareholders will, 
in parallel, seek an amendment to the IFC Articles of Agreement to 
reduce the threshold that allows the United States to maintain our veto 
over any future IFC capital increases from 20 percent to 15 percent. We 
will also be seeking Congressional authorization to vote for such an 
amendment.
    We will work with Congress regarding the subscription to the IBRD 
capital increase. Supporting the GCI would lock in the reforms, improve 
the effectiveness of World Bank programs, and complement U.S. 
assistance for strategically important partners. In short, the package 
will encourage countries to be more self-sufficient in financing their 
development, focus official development resources on needier countries 
with less access to other sources of finance, and create a more 
financially-disciplined World Bank whose lending growth is constrained 
and therefore more sustainable. The reform package will also advance 
other U.S. foreign policy objectives, including offering developing 
countries development finance based on transparency and high standards 
to counter Chinese over-lending.
IMF's Role in Growth
    We are pursuing policies at the IMF to help make the institution 
both more effective and more focused on its core mission, including the 
purposes laid out in Article 1 of the IMF's Articles of Agreement, to 
promote high levels of employment and real income, promote exchange 
stability, maintain orderly exchange arrangements among members, and 
avoid competitive exchange depreciation.
    We have pressed the IMF to prioritize this core mission in its 
analysis of exchange rates and global imbalances. As mentioned above, 
the IMF has, in its communiques starting in October 2017, highlighted 
that sound policies and strong fundamentals are essential to the 
stability of exchange rates, contributing to robust and sustainable 
growth and investment.
    With strong U.S. support, the IMF approved in April 2018 a new 
enhanced framework for assessing corruption in its member countries. 
Under the new framework, IMF staff will assess the extent to which 
corruption is a macro-critical issue and propose policy recommendations 
to member countries. IMF lending programs may also include steps aimed 
at reducing endemic corruption.
    As countries approach the IMF for support, the United States has 
stepped up its engagement in shaping program design. We prefer programs 
with design elements that prioritize the potential for broad-based 
growth (i.e., increases in real median income, not just GDP) and allow 
countries to pivot away from policies that have not worked. This 
involves three major changes to the IMF's current approach. First, 
fiscal policy changes need to be growth oriented. The projection of a 
reduction in the fiscal deficit cannot be an end in itself, because 
spending reductions often fail to materialize and recessions often 
derail deficit reduction based on tax increases. Second, IMF programs 
have often measured the success of a privatization in terms of the 
projected proceeds for the Government, which often means continued 
monopoly power. That is a mistake since de-monopolization of critical 
sectors generally has a more lasting growth impact. Third, monetary 
policies that provide sound money are at the core of a successful 
growth program.
    The last point was recently illustrated by Argentina's first IMF 
program earlier this summer that neglected the exchange rate, which 
weakened precipitously. At the heart of the revised IMF program for 
Argentina is a commitment to a strong nominal anchor to recover 
confidence in the currency. By expressly limiting the growth of the 
monetary base, a policy that the United States strongly supported, the 
central bank was able to arrest the precipitous decline in the exchange 
rate, and the authorities there are on track to reduce interest rates 
and inflation very significantly (which had reached 6.5 percent per 
month in September and 5.4 percent in October), which will allow 
interest rates to support credit and growth. We support President 
Macri's vision for economic reforms, and believe that the monetary and 
structural reforms in the IMF program, if implemented, will place the 
Argentine economy on a path of sustainable growth.
IMF Quota Review
    The IMF is undertaking its 15th General Review of Quotas, with the 
goal of completing the review no later than the Annual Meetings in 
October 2019. The review will both assess the adequacy of the IMF's 
resources and determine whether or not to adjust members' quotas and 
quota shares. The IMF has requested a buildup in its quota resources 
and claims that it needs to be the center of the global financial 
safety net. We will be seeking a constructive size for IMF resources 
that contributes fully to the stability of the international financial 
system, but recognizes that the IMF is just one part of the global 
financial system and its various support mechanisms.

                          CURRENT IMF RESOURCES
------------------------------------------------------------------------
                                     SDR billions        USD billions
------------------------------------------------------------------------
Quota                             476                 $661
  Of which: U.S.                  83                  $115
------------------------------------------------------------------------
NAB (40)                          182                 $253
  Of which: U.S.                  28                  $39
------------------------------------------------------------------------
Bilateral loans (40)              314                 $436
  Of which: U.S.                  0                   0
------------------------------------------------------------------------
Total                             972                 $1,349
  Of which: U.S.                  111                 $154
------------------------------------------------------------------------

    Pursuant to Section 41 of the Bretton Woods Agreement Act, we will 
shortly send a notification that IMF negotiations related to quota will 
begin in 2019 to provide you with formal advance notice of discussions. 
As the IMF conducts its quota review, we will work closely with it to 
improve the approach to conditionality in lending programs in order to 
make them more growth oriented. We will be heavily engaged in an 
upcoming review of IMF compensation and benefits with the goal of 
making IMF operations less costly and inefficient. And we will ensure 
that the IMF is sufficiently and efficiently resourced to carry out its 
mission and role. In this regard, we note that the IMF has ample 
resources to achieve its mission, countries have considerable 
alternative resources to draw upon in the event of a crisis, and the 
post-crisis financial reforms have helped strengthen the overall 
resiliency of the international monetary system.
MDB Authorization Topics and Specific MDB Objectives
    We have notified Congress of the launch of negotiations on fund 
raising efforts by IDA and the AfDB.
    The negotiations for the 19th replenishment of IDA (IDA-19) were 
launched on November 15, 2018 and will be carried out over the course 
of 2019. Under discussion is the donor funding for IDA's fiscal 2021-
2023, running from July 2020-June 2023. Substantial changes were made 
to IDA's financial model and policy agenda before and during the 
current replenishment period.As a result, we expect IDA-19 to focus on 
taking stock of the IDA-18 reforms and IDA's ability to implement 
productive projects. We also have several reform priorities. First, we 
will work with other donors to ensure IDA-19 addresses rising debt 
levels among low-income countries.Second, we will seek to review and 
better target the support the World Bank provides for countries as they 
grow wealthier and transition from concessional financing under IDA to 
less-concessional financing through the IBRD. Third, we will seek to 
ensure that IDA retains a strong focus on fragile and conflict-affected 
countries, gender and development, and good governance, including in 
the area of debt management and transparency.
    The Governors of the AfDB, over a U.S. objection, have decided to 
commence negotiations on the AfDB's capital needs in December 2018. 
Given Africa's enormous development challenges, we want a strong AfDB 
to serve the continent. However, new capital alone will not achieve a 
stronger institution. The AfDB needs to make greater progress on 
ongoing institutional reforms and agree on a set of further reforms 
that would accompany any new capital to ensure that it uses such funds 
more prudently and effectively. Among other items, we hope to see the 
AfDB fill critical vacancies in its accountability functions, better 
focus its lending on areas where it is most impactful, improve the 
readiness of projects before seeking board approval, strengthen project 
supervision and monitoring, and put in place a framework for financial 
discipline.
    As with IDA, replenishment negotiations for the African Development 
Fund (AfDF), the AfDB's concessional arm, will occur in 2019. We intend 
to notify Congress of the launch of this negotiation in 2019. We are 
seeking many of the same improvements that are needed for the AfDB. In 
particular, given its relatively small scale, we want the AfDF to 
increase the selectivity of the areas it works in, with an emphasis on 
regional transport and trade facilitation, electricity access, and 
water and sanitation. As a majority of AfDF recipient countries are now 
classified as fragile, heavily affected by conflict in neighboring 
countries, or otherwise at high risk of debt distress, we also expect 
the AfDF to maintain a strong emphasis on addressing fragility, 
conflict, and violence and helping countries improve their debt 
management.
    We are strongly committed to enhancing growth and development 
within the U.S.-Mexico border region. We continue to support the North 
American Development Bank (NADB). The administration has requested in 
our FY 2019 budget that Congress authorize the United States to 
subscribe to $10 million of paid-in shares at the NADB. We and our 
Mexican partners in the NADB think that the NADB can do even more to 
improve the wellbeing of people in communities along the border. To 
that end, we included the NADB in our America Crece initiative and are 
exploring ways to boost the NADB's capabilities. The goal is to improve 
infrastructure along both sides of the border and create economic 
opportunities that increase median real incomes. We are also assessing 
whether the NADB has the right strategic and financial tools. We look 
forward to continuing these discussions once President-elect Lopez 
Obrador takes office and working with his administration and Congress 
to realize these goals.
    The European Bank for Reconstruction and Development (EBRD) and the 
Asian Development Bank (AsDB) are both currently well capitalized. Our 
paramount objective at both institutions is to ensure they remain 
focused on project quality rather than using their existing capital to 
grow more quickly without due regard for development outcomes. At the 
EBRD, this is all the more important given that most of its traditional 
countries of operation in Central and Eastern Europe have gained ample 
access to capital markets since the EBRD was created in 1991. We want 
the EBRD to focus on priority countries with less access to capital--
such as Egypt, Jordan, and countries in Central Asia and the Balkans--
while resisting calls to expand its existing geographic footprint. At 
the AsDB, our principal objectives are to develop a path to graduation, 
reduce its engagement in upper middle income countries such as China, 
and introduce higher loan prices for countries with more access to 
private capital. We also seek to introduce an enhanced financial 
sustainability mechanism to ensure that we do not encounter future 
unplanned requests for shareholder capital.
Mandates Can Complicate the Goal of High-quality MDB Programs
    Treasury is proud to have the statutory lead in representing the 
executive branch in the IFIs. This is a serious task and we execute it 
faithfully. That said, we coordinate closely with interagency 
colleagues, and we benefit from the input provided by other parts of 
the Government so that we can present a whole-of-government approach. 
For example, our State Department colleagues actively keep us abreast 
of key foreign policy priorities in countries where the IFIs are 
active; the Commerce Department informs American companies about 
procurement opportunities that come about as a result of MDB projects; 
and USAID provides technical advice regarding the soundness of 
individual projects and linkages to our bilateral assistance. As we 
consider individual projects at the MDBs, we systematically solicit 
input from any agency that is interested, and we seek to synthesize 
information so it can be provided as useful feedback to the MDBs.
    The U.S. Government seeks high quality MDB projects that not only 
address the important development needs of recipient countries but that 
are also well--designed, technically sound, growth-enhancing, and based 
on strong consultation with the recipient government, affected 
communities, civil society, and other donor partners. We want to see 
strong monitoring of MDB projects, robust evaluations of completed 
projects, and thorough results measurement frameworks baked into every 
project so we can systematically track whether projects are performing 
well or not.
    We continue to press the MDBs to achieve high standards regarding 
transparency, procurement, and environmental and social safeguards, 
with the goal of having our funds used correctly, fairly, and 
transparently. These high standards set the MDB projects apart from 
projects financed by other lenders who may provide funding, but without 
transparency and other protections.
    The MDBs have substantially improved their projects over the years, 
often with significant help from Congress, including leaders on this 
Committee. And while we work to avoid situations in which people are 
hurt or abused in a project funded through the MDBs, there are 
instances when something goes wrong with an MDB project. Hence, we are 
advocating for robust independent mechanisms that improve MDB 
accountability and enable relief and redress.
    Treasury follows numerous congressional mandates by using its voice 
and vote in international organizations. However, implementing the 
plethora of mandates is expensive, consumes significant staff time, and 
often ends up reducing the U.S. ability to influence policy in the 
direction Congress desires. Treasury is implementing a large number of 
legislatively required mandates in the IFIs. At last count, there are 
well over 100 congressional policy and directed vote mandates on the 
books. In addition, while mandates are added year by year, few are ever 
removed. We diligently follow these mandates from Congress. But as we 
seek to improve and reform the MDBs, we also invite Congress' attention 
to streamlining the number of legislative directives. Mandates require 
considerable time and resources to implement, and can detract from 
other important tasks related to loan quality. They can occasionally 
inadvertently undermine
    U.S. leadership in the MDBs, as other member countries pay less 
attention to the U.S. position because our votes and positions on a 
given loan are pre-determined. Many mandates and reporting requirements 
are simply outdated. As we seek to reform the MDBs, we look forward to 
having a dialogue with members about how we can ensure voting mandates 
and reporting requirements have the impact that Congress intends but do 
not impede U.S. efforts to advance our broader strategic objectives in 
the MDBs. We appreciate the dialogue that we have had with the 
committee, not only on legislative mandates, but also on U.S. 
engagement at the MDBs as a whole. We look forward to continuing this 
dialogue today and into next year.
Debt Transparency Initiative
    Treasury has encouraged an initiative at the IMF and World Bank to 
develop, and disseminate to the public, information on international 
borrowing. One of the principal thrusts of the initiative is to 
modernize official debt data in line with market developments over the 
last 20 years. Government debt obligations are no longer limited to 
traditional loans and bonds. New liabilities ranging from derivative 
operations to pre-paid forward sales of commodities impose the same 
calls on government budgets. If the burden on taxpayers is the same, 
the disclosure, accounting and fiscal treatment must be the same. 
Investors will then have more and better data to make decisions, 
allowing markets to function more smoothly and crises to be less 
frequent and less severe.
    Over the next two years, this new standard of debt disclosure 
should be defined and endorsed by the official sector. In the case of 
the IMF, this practice is consistent with Section 42 of the Bretton 
Woods Act, which specifically directs the Secretary of the Treasury to 
support procedures to collect, and disseminate publicly, information on 
international borrowing.
    The IFIs--including the IMF and World Bank--have a key role to play 
in enhancing debt transparency in, and supporting sustainable borrowing 
and lending practices by, their member countries. Developing countries 
need investment to grow, including in infrastructure. But lending to 
low-income countries (LICs) that is non-concessional, non-transparent, 
and funneled into poor quality projects will raise debt burdens without 
boosting productivity and growth. This, in turn, results in countries 
diverting scarce budget resources to service high levels of debt and 
poses a threat to countries' growth prospects and overall economic 
stability and development.
    On the borrower side, the IMF and World Bank are making efforts to 
obtain a comprehensive picture of members' debt positions in both IMF 
bilateral surveillance and as part of their lending programs, with the 
goal of improving debt sustainability. In particular, we are working 
with both institutions to improve the public disclosure of a broad 
range of sovereign debt statistics, including publicly guaranteed 
contingent liabilities and forward sales of commodities, by member 
countries to reduce debt surprises. This will improve policy making and 
reduce the frequency and severity of financial crises. We also strongly 
support the IMF and World Bank's efforts to build borrower countries' 
capacity in public debt management and disclosure.
    On the creditor side, the IMF and World Bank also have roles to 
play, in particular with emerging, non-traditional creditors such as 
China. The IMF and World Bank are engaging in more structured outreach 
to non-Paris Club and multilateral creditors, including preparing and 
providing workshops on debt sustainability analyses, lending 
frameworks, and external coordination in debt resolution. At the same 
time, they are planning reviews of their respective debt limit policies 
to strengthen data provisions and simplify conditionality. All of these 
steps reflect our shared priorities with the IFIs in promoting debt 
transparency, debt sustainability, and responsible burden sharing in 
debt resolution, which in turn will help reduce opportunities for 
corruption.

    In conclusion, while U.S. growth has accelerated, growth in many 
other countries has slowed. This gives rise to new challenges in 
international economic policy that we are working to meet through new 
initiatives. I appreciate the opportunity to present this Committee 
with a description of our major activities in 2018 and policy direction 
for 2019 and beyond, and I invite your views and questions.





     Responses to Additional Questions for the Record Submitted to 
             Hon. David Malpass by Senator Robert Menendez

Debt Transparency
        In your testimony you state ``Secretary Mnuchin pushed forward 
        an initiative on debt transparency that will, in the near term, 
        significantly increase public disclosure and broaden the 
        existing definition of international debt beyond traditional 
        bonds and loans.''

    Question 1.  Can you provide a preliminary overview of the 
initiative?

    Answer. The purpose of the initiative is to improve the quality, 
consistency, and transparency of sovereign debt data, including the 
reporting of debt equivalent instruments (e.g., forward sales of 
commodities, asset repurchase agreements) and contingent liabilities 
(e.g., obligations of state-owned enterprises, guarantees). To do so, 
the Treasury Department is working closely with our international 
counterparts as well as the International Monetary Fund (IMF) and the 
World Bank to promote the development and adoption of stronger 
international standards of data collection and disclosure. The 
Department anticipates that enhanced transparency of sovereign debt 
statistics will promote better policy decisions and reduce the 
frequency and severity of financial crises.

    Question 2.  Will you commit to consulting with Congress on issues 
that would entail any new authorities or oversight obligations?

    Answer. Yes. The Treasury Department looks forward to working with 
Congress on this initiative.

    Question 3.  Will you commit to scheduling staff-level briefings on 
your ongoing efforts to combat Chinese debt-trap diplomacy?

    Answer. Yes. The Office of Legislative Affairs will contact 
committee staff to schedule these briefings.
Multilateral Development Banks
        Regarding your testimony on Multilateral Development Banks 
        (MDBs),

    Question 4.  Will you commit to engagement with this committee on 
the ``sweeping reforms'' envisioned by the administration to make MDBs 
more effective?

    Answer. Yes. The Treasury Department looks forward to working with 
Congress to make MDBs more effective.

    Question 5.  Do you anticipate any new authorities will be required 
to achieve those reforms? If so, can you commit to timely consultations 
with the Committee?

    Answer. Yes. For example, continued congressional support for 
contributions to the MDBs' concessional window replenishments advances 
our ability to promote additional reforms for the benefit of the 
world's poorest countries and ensure effective use of U.S. 
contributions. Treasury is committed to timely consultations, and we 
look forward to working with you.
International Monetary Fund Quota Review
        In your testimony you state ``the IMF has ample resources to 
        achieve its mission, countries have considerable alternative 
        resources to draw upon in the event of a crisis, and the post-
        crisis financial reforms have helped strengthen the overall 
        resiliency of the international monetary system.''

    Question 6.  Please provide the data and calculations that you have 
used to conclude that the IMF has sufficient resources to meet expected 
contingencies.

    Answer. There are many ways to estimate future demand for IMF 
resources, including by looking at the size of members' economies and 
their trade and capital flows, estimates of demand based on historical 
IMF programs, and data from past global crises. In addition, demand for 
IMF resources also relates to the availability of other sources of 
support, such as regional financial arrangements. Moreover, it is not 
feasible to assume that the IMF resources will cover every tail risk 
scenario. Therefore, Treasury constructed several crisis scenarios. 
These include a mild crisis scenario in which a set of emerging markets 
face financial difficulties and request assistance of about 3.5 percent 
of their Gross Domestic Product (GDP), with resulting demand for IMF 
resources of about $300 billion; a moderate crisis scenario in which 
the same set of emerging markets requests assistance at 6 percent of 
GDP, with resulting demand of about $500 billion; and a severe shock 
scenario in which the set of emerging markets require assistance at 
amounts of 9 percent of GDP, with demand of about $700 billion.
    Given underlying IMF financial commitments of almost $200 billion, 
under these scenarios, the IMF's medium-term overall lending needs 
range from about $500 to about $900 billion. Current IMF resources are 
sufficient to cover most crisis scenarios. In addition, the IMF can 
mobilize additional resources in the event of a severe global crisis.



                               __________


                 Prepared Statement of Jennifer Hillman

                            a. introduction
    Virtually every major international gathering of world leaders 
recently has ended in failure--or at least failure to reach enough 
agreement to issue a concluding statement or communique.\1\ These 
failures come at a time when many have been looking for signs that 
world leaders would come together to address the most pressing problems 
facing the world--including climate change, the breakdown in the rules 
of the international trading system, the need everywhere for good jobs 
that pay a living wage, and rapidly growing income inequality.
---------------------------------------------------------------------------
    \1\ 1 See, for example, Summit of Asia-Pacific Economic Cooperation 
in Papua New Guinea, November 18, 2018 (failure of an agreed-upon 
communique among the 21 nations of APEC blamed on US-China trade 
tensions and the growing competition for influence among the South 
Pacific countries); G-20 Finance Ministers, Buenos Aires, March 20, 
2018 (no agreement on usual communique of shared principles on major 
economic policies due to trade issues); G-7 meeting, Quebec, Canada, 
June 8-9, 2018 (President Trump rejected a previously agreed-upon 
communique and disparaged Canadian Prime Minister Trudeau); G-20 
leaders meetings in Hamburg, July 2017 (final text was held up by 
objections to the U.S. decision to withdraw from the Paris Agreement on 
climate change, despite agreement on most aspects of the final 
statement); WTO 11th Ministerial Meeting, Buenos Aires, Argentina, 
November 2017 (ended with no concluding statement and no new 
agreements). The NATO Summit (Brussels, July 11-12, 2018) did produce a 
communique, but also disputes over President Trump's demand that 
spending increases occur faster than previously agreed timeframes.
---------------------------------------------------------------------------
    The failure of these meetings to produce formal agreements--or even 
specific paths to reaching agreements in the future--despite the high 
stakes has left many questioning the ability of the world's leaders to 
meet global challenges, shining a spotlight on the institutions and 
fora that were established for the purpose of achieving multilateral 
solutions-particularly the World Trade Organization (WTO), the World 
Bank, the International Monetary Fund (IMF), and the United Nations. 
The failure to reach agreements can best be seen as part of a long-term 
trend toward increased complexity in the world that makes it nearly 
impossible to reach traditional multilateral binding accords, combined 
with a waning of faith on the part of many countries in multilateralism 
and multilateral institutions.\2\
---------------------------------------------------------------------------
    \2\ 2 Concerns over the functioning of the international economic 
institutions and analyses about how to improve them have existed for 
decades. A number of these ideas were summarized, along with the 
suggestion that the G-20 be used as a fora in which renovation of the 
WTO, IMF and World Bank could be coordinated, in Saving 
Multilateralism: Renovating the House of Global Economic Govemance for 
the 21st Century. Jennifer Hillman, ``German Marshall Fund of the US,'' 
attached as Appendix A.
---------------------------------------------------------------------------
    A number of clear trends emerge from the failures to reach accords 
at virtually all recent international gatherings:

    1.) Government policies and international arrangements for 
collective decision-making have not kept pace with changes in the 
world, especially the high degree of international economic integration 
and interdependence.
    Much of the increasing complexity in the international economic 
order stems from the explosive growth in the number and size of 
multinational corporations and financial institutions, many of which 
now dwarf the economic size of most of the nations in the world.\3\ 
Added to the complexity is the increase in the speed at which goods, 
money and technology move around the globe in our digital age.
---------------------------------------------------------------------------
    \3\ For example, Apple Inc. recently crossed the $1 trillion market 
capitalization figure, which makes it larger than the GDP of 183 out of 
the 199 countries for which the World Bank has GDP data.
---------------------------------------------------------------------------
    2.) Learning to operate in this vastly more complex world will 
require more multilateralism, not less.
    As countries emerged from the era of colonialization and began 
opening their markets, the number of players on the global stage 
increased, making reaching consensus among a much larger group of 
disparate interests more difficult. But because the most significant 
problems facing the world cross many international boundaries, solving 
them will require that countries come together to find regional, 
plurilateral, or global solutions.
    3.) It is essential that the international economic institutions be 
updated and improved, not destroyed or left to wither.
    Because it is clear that reaching major new binding accords or 
creating new international institutions is quite difficult, the best 
and most achievable solution is to renovate our existing institutions. 
Each needs to modernize and improve their governance structures to 
ensure that work can get done despite the increases in complexities and 
to update their mandates to ensure their ability to address the 
problems of the 21st century, many of which are quite different from 
those that existed in the 1940s when these institutions were created.
    Given that the crisis is most acute at the WTO, this testimony will 
focus on what must be done to renovate the World Trade Organization and 
why doing so is critical, both for the trading system and for the 
continued existence of a rules-based international economic order. The 
need for the WTO and its dispute settlement system to remain viable is 
particularly critical if we are to address the challenges presented by 
the explosive growth of China and its transformation into the largest 
exporter of goods in the world.\4\
---------------------------------------------------------------------------
    \4\ In 2017, China's merchandise exports exceeded $2.3 trillion, 
far outstripping all other countries in the world, as the United States 
merchandise exports were close to $1.6 trillion, followed by Germany at 
just over $1.4 trillion, with all other countries' merchandise exports 
far below $1 trillion. WTO Trade Statistical Review 2018.
---------------------------------------------------------------------------

                        B. The Crisis at the WTO

    The WTO was created in 1995 as a successor to the General Agreement 
on Tariffs and Trade (GATT) at the height of support for 
multilateralism and multilateral institutions. In recent years, many 
have expressed frustration with the WTO. The concerns include:
    1.) A lack of balance--the negotiating arm of the WTO is weak and 
WTO members have reached only one new agreement-on trade facilitation-
since 1995, while the dispute settlement arm has been (at least until 
the blockage at the Appellate Body in 2017) considered very strong-some 
say too strong, while the executive arm is viewed as highly competent 
but lacking in authority to drive change.\5\
---------------------------------------------------------------------------
    \5\ USTR Robert Lighthizer commented on the relative strength of 
dispute settlement compared to negotiation in his remarks at the WTO's 
most recent Ministerial Conference (MC-11) in Buenos Aires: ``[M]any 
are concerned that the WTO is losing its essential focus on negotiation 
and becoming a litigation-centered organization. Too often members seem 
to believe they can gain concessions through lawsuits that they could 
never get at the negotiating table.''
---------------------------------------------------------------------------
    2.) A limited mandate that does not readily allow the WTO to take 
on the ``trade and . . . '' issues connected to trade's impact on the 
environment, labor, the uneven distribution of the benefits of trade, 
currency manipulation, competition policy, or corruption around trade, 
or to ensure that the trading system rules contribute to the 
Sustainable Development Goals agreed to by the world's leaders in 2015. 
The WTO negotiating agenda has not been focused on the 21st century 
trade issues of digital trade, investment policy, food security, global 
health services, technology, on environmental goods and services.
    3.) A bifurcation of members into ``developed'' versus 
``developing'' country camps, with no in between for the emerging 
economies such as India, Russia, Brazil, or South Africa and no easy 
way to address the rise of China-now the largest merchandise exporter 
and second largest merchandise importer in the world.
    4.) A recent willingness, led by the United States, to impose 
tariffs that violate the WTO's basic rules, leading many to question 
the point of having a rules-based organization if its major members 
openly flout those rules.
    5.) A lack of enforcement of the transparency and notification 
requirements of the WTO, with most countries hopelessly behind on 
making required disclosures of their policies and practices, 
particularly with respect to the granting of subsidies.
    6.) A limited ability to respond to the explosive growth of 
regional, bilateral and preferential trade agreements, with over 400 
agreements establishing trade relationships and rules outside of the 
fonnal ambit of the WTO.
    7.) concerns over the functioning of the dispute settlement system, 
particularly its Appellate Body, which have grown so extreme in the 
United States that the U.S. has blocked any process for the appointment 
of new Appellate Body members to fill the vacancies created by the 
expiration of members' terms, potentially leaving the Appellate Body 
with too few members to hear appeals.
Possible Fixes?
    Given the failure to reach many new agreements or even to agree on 
a ministerial declaration at its latest Ministerial Conference--the 
WTO's MC-11, held in Buenos Aires, Argentina in December 2017--it is 
clear that the creation of a new and different international trade 
organization is a virtual impossibility.\6\ Therefore, it is imperative 
that the WTO be renovated to make it a more efficient and effective 
organization-one that is capable of reaching new agreements and 
establishing new rules on the pressing trade issues of today and one 
that finds ways to respond to the concerns noted above.\7\
---------------------------------------------------------------------------
    \6\ EU Trade Commissioner Cecilia Malmstrom noted at the close of 
the meeting: ``All WTO Members have to face a simple fact: we failed to 
achieve all our objectives, and did not achieve any multilateral 
outcome. The sad reality is that we did not even agree to stop 
subsidizing illegal fishing.'' As the Reuters report on the Ministerial 
Conference (MC-11) noted: ``The World Trade Organization failed to 
reach any new agreements on Wednesday, ending a three-day ministerial 
conference in discord in the face of stinging U.S. criticism of the 
group and vetoes from other countries.''
    \7\ A number of major studies have been done suggesting ways to 
improve the functioning of the WTO, including ``The Future of the WTO: 
Addressing Institutional Challenges in the New Millennium: Report of 
the Consultation Board to the Director-General Supachia Pantichpakdi'' 
(2004) (``the Sutherland Report''); ``The Multilateral Trade Regime: 
Which Way Forward?'' (2007), The Warwick Commission Report, and most 
recently, the report of the high-level board of experts convened by the 
Berertelsmann Stiftung foundation, ``Revitailzing Multilateral 
Governance at the World Trade Organization,'' 2018.
---------------------------------------------------------------------------
    The specifics of how to do so are beyond the scope of this 
testimony, but should retlect the work that has been done over many 
years and with increasing intensity in the past year. Most recently, 
Canada hosted twelve WTO members at the Ottawa Ministerial on WTO 
Reform, focusing on changes that would: I) improve the efficiency and 
effectiveness of the WTO monitoring function, 2) safeguard the WTO 
dispute settlement system, and 3) modernize the trade negotiating 
agenda.\8\ Neither the United States nor China were included in the 
Ottawa meeting, but both were informed of the outcome and much further 
discussion has flowed from the meeting.
---------------------------------------------------------------------------
    \8\ Included in the Ottawa gathering were trade ministers from 
Australia, Brazil, Chile, the European Union, Japan, Kenya, Korea, 
Mexico, New Zealand, Norway, Singapore and Switzerland. In advance of 
the gathering, Canada circulated a paper outlining the discussion 
proposals to all members of the WTO. JOB/GC/201.
---------------------------------------------------------------------------
    For its part, the European Union put forward a series of proposals 
to reform the WTO and to break the logjam regarding the appointment of 
new members to the WTO's Appellate Body.\9\ These proposals come at the 
behest of the European Council, which mandated a pursuit of WTO 
modernization that would: 1) make the WTO more relevant and adaptive to 
a changing world, and 2) strengthen the WTO's effectiveness. They 
involve reform ideas around broadening the negotiating agenda of the 
WTO to permit it to rebalance the system and level the playing field; 
establishing new rules to address barriers to services and investment, 
including with respect to forced technology transfers; increasing 
compliance with the transparency and notification requirements of the 
WTO; and shoring up the WTO's dispute settlement system, including by 
resolving the current blockage in appointments to the Appellate Body.
---------------------------------------------------------------------------
    \9\ Even more recently, the EU revised its specific proposals for 
changes at the Appellate Body (AB) into two formal submissions to the 
WTO, one that was introduced along with China, Canada, India, Norway, 
New Zealand, Switzerland, Australia, Korea, Iceland, Singapore and 
Mexico (WT/CG/W/72) that addresses five specific concerns relating to 
the Appellate Body (1. AB members remaining on after their term expires 
to finish appeals, 2. Reports taking longer than 90 days, 3. Municipal 
law as a matter of fact rather than law, 4. Unnecessary findings, and 
5. The role of precedent) and a second document introduced along with 
China and India (WT/GC/W/753) that proposes that AB members serve one 
longer term, that the AB be expanded from 7 to 9 members serving on a 
full-time basis, with members remaining in place until their 
replacement has been appointed. Both proposals were submitted on 
November 26, 2018 for discussion at the meeting of the WTO's General 
Council scheduled for December 12-13, 2018.
---------------------------------------------------------------------------
    The United States, in its 2018 President's Trade Policy Agenda,\10\ 
expressed concerns that the WTO dispute settlement system had 
appropriated to itself powers that the WTO Members never intended to 
give it; and lamented its inability to reach new agreements, its 
allowance for members to ``self-declare'' themselves to be 
``developing'' countries and thereby take advantage of certain 
additional flexibilities (special and differential treatment) granted 
to developing countries, and its lack of management of the rise of 
China. Recently, the United States, along with Argentina, Costa Rica, 
the EU and Japan recently submitted a proposal to the WTO to address 
``the chronic low level of compliance with existing notification 
requirements'' by introducing administrative sanctions for countries 
that fall behind with their reporting obligations.\11\
---------------------------------------------------------------------------
    \10\ https://ustr.gov/about-usfpolicy-offices/press-office/reports-
and-publications!2018/20l8-trade-policy-agenda-and-2017
    \11\ WTO JOB/GC/204 and JOB/CTG/14, November 1, 2018.
---------------------------------------------------------------------------
    The Government of France, on the heels of hosting the 100th 
anniversary of Armistice Day and its follow-on Paris Peace Forum,\12\ 
hosted a conference, A WTO Fit for the 21st Century, on November 16, 
2018 to gather representatives from government, the WTO, academia and 
more to discuss and debate specific ideas on modernizing and improving 
the WTO.
---------------------------------------------------------------------------
    \12\ The Paris Peace Forum, led by France's President Emmanuel 
Macron, is designed to be an annual gathering ``based on a simple idea: 
international cooperation is key to tackling global challenges and 
ensuring durable peace. To support collective action, it gathers all 
actors of global governance under one roof for three days-states, 
international organizations, local governments, NGOs and foundations, 
companies, experts, journalists, trade unions, religious groups and 
citizens. Through original formats of debates and the presentation of 
solutions, it demonstrates there is still a momentum for 
multilateralism and a better organization of the planet, both among 
states from North and South and civil society actors.'' https://
parispeaceforum.org/
---------------------------------------------------------------------------
    Numerous non-governmental players-from think tanks to academics to 
trade practitioners--have also put forward ideas and proposals-
increasingly under the banner of ``the trading system is in crisis.'' 
Prominent among them is the Bertelsmann Stiftung report of its high-
level board of experts, Revitalizing Multilateral Governance at the 
World Trade Organization.'' \13\ That board recommended: 1) new policy 
dialogues to address trade policies and on the functioning of WTO 
bodies, 2) use of plurilateral negotiations among the ``coalitions of 
the willing'' rather than all members of the WTO; 3) an enhanced role 
for the WTO Secretariat to provide input and support to the policy 
debates at the WTO; and 4) an ongoing review of the institutional 
performance of the WTO.
---------------------------------------------------------------------------
    \13\ https://www.wto.org/english/news_e/news18_e/
bertelsmann_rpt_e.pdf.
---------------------------------------------------------------------------
    Among the cross-cutting ideas in many of these proposals are the 
following:

 1. The need for better enforcement of the transparency and 
        notification requirements of the WTO;
 2. Support for new negotiation dynamics through increased used of 
        negotiations in groups smaller than all of the WTO membership 
        to allow agreements to be reached more quickly;
 3. A reconsideration of the role of the WTO Secretariat to permit it 
        to recommend solutions and drive toward negotiated outcomes;
 4. An urgent need to resolve the blockage of appointments to the WTO 
        Appellate Body;
 5. A need to expand the negotiating mandate of the WTO to include the 
        21st century trade issues, the many issues that fall into the 
        ``trade and . . .'' set of issues, and the Sustainable 
        Development Goals.

C. The United States Needs the WTO to Effectively Address Its Concerns 
                               with China

    For the United States, the need for a well-functioning WTO is 
critical, as the United States needs the WTO if it is to effectively 
address its difficulties with China.
    Concerns in the United States and around the world with China's 
practices and policies have been growing with each passing year. These 
concerns were recently succinctly summarized in the statement made by 
U.S. Ambassador to the WTO Dennis Shea in a May 8, 2018 statement to 
the WTO General Council:

        China ... is consistently acting in ways that undermine the 
        global system of open and fair trade. Market access barriers 
        too numerous to mention; forced technology transfers; 
        intellectual property theft on an unprecedented scale; 
        indigenous innovation policies and the Made in China 2025 
        program; discriminatory use of technical standards; massive 
        government subsidies that have led to chronic overcapacity in 
        key industrial sectors; and a highly restrictive foreign 
        investment regime.\14\
---------------------------------------------------------------------------
    \14\ Statement as delivered by Ambassador Dennis Shea, Deputy U.S. 
Trade Representative and U.S. Permanent Representative to the WTO, WTO 
General Council, Geneva, May 8, 2018.

---------------------------------------------------------------------------
    The concerns are further laid out in two recent documents:

    (1) the Section 301 Report, issued by USTR on March 2, 2018,\15\ 
which raises four core concerns:
---------------------------------------------------------------------------
    \15\ Findings of the Investigation Into China's Acts, Policies, And 
Practices Related lo Technology Transfer, Intellectual Property, And 
Innovation Under Section 301 of the Trade Act Of 1974, Office of the 
United States Trade Representative, March 22, 2018,

    First, China uses foreign ownership restrictions, such as joint 
venture requirements and foreign equity limitations, and various 
administrative review and licensing processes, to require or pressure 
technology transfer from foreign companies.
    Second, China's regime of technology regulations forces U.S. 
companies seeking to license technologies to Chinese entities to do so 
on non-market-based terms that favor Chinese recipients and that 
violates China's national treatment requirements to treat foreign 
investors no less favorably than it treats domestic investors.
    Third, China directs and unfairly facilitates the systematic 
investment in, and acquisition of, foreign companies and assets by 
Chinese companies to obtain cutting-edge technologies and intellectual 
property and generate the transfer of technology to Chinese companies. 
The role of the state in directing and supporting this outbound 
investment strategy is pervasive, and evident at multiple levels of 
government--central, regional, and local.
    Fourth, China conducts and supports unauthorized intrusions into, 
and theft from, the computer networks of foreign companies to access 
their sensitive commercial information and trade secrets.
    This initial Section 301 report was recently (November 20, 2018) 
updated with additional evidence and new data, with the conclusion that 
``China fundamentally has not altered its acts, policies, and practices 
related to technology transfer, intellectual property, and innovation, 
and indeed appears to have taken further unreasonable actions in recent 
months.'' \16\
---------------------------------------------------------------------------
    \16\ USTR Update Concerning China's Acts, Policies and Practices 
Relating to Technology Transfer, Intellectual Property and Innovation, 
November 20, 2018,

    (2) the 2017 Report to Congress on China's WTO compliance, issued 
by USTR January 2018, which is the sixteenth such report and examines 
nine categories of WTO commitments undertaken by China (trading rights, 
import regulation, export regulation, internal policies affecting 
trade, investment, agriculture, intellectual property right, services 
and legal framework), with this year's report concluding that ``the 
United States erred in supporting China's entry into the WTO on terms 
that have proven to be ineffective in securing China's embrace of an 
open, market-oriented trade regime.'' \17\
---------------------------------------------------------------------------
    \17\ 2017 Report to Congress on China's WTO Compliance, Office of 
the United States Trade Representative, January 2018,

    Both Reports raise the obvious question of what is the most 
effective way to address this myriad of interwoven and overlapping 
concerns. For me, the best approach would be a big, bold, comprehensive 
case at the WTO tiled by a broad coalition of countries that share the 
United States' substantive concerns about China-even if they strongly 
oppose the Trump Administration's unilateral tactics or the sequencing 
of actions that began with putting tariffs on steel and aluminum 
imports from those same countries that the United States needs to be 
working with on such an action at the WTO.

              D. A Big, Bold WTO Case is the Best Way To 
            Address the Deep, Systemic China Problems. Why?

    First, a broad and deep WTO case represents the best opportunity to 
bring together enough of the trading interests in the world to put 
sufficient pressure on China to make it clear that fundamental reform 
is required if China is to remain a member in good standing in the WTO. 
The U.S. needs to use the power of collective action to impress upon 
both China and the WTO how significant the concerns really are. The 
United States simply cannot bring about the kind of change that is 
needed using a go-it-alone strategy. A coalition case also has the 
potential to shield its members from direct and immediate retaliation 
by China.
    Second, a comprehensive WTO case would restore confidence in the 
WTO and its ability to address fundamental flaws in the rules of the 
trading system. As U.S. Ambassador Dennis Shea put it, ``If the WTO 
wishes to remain relevant, it must--with urgency--confront the havoc 
created by China's state capitalism.'' \18\ If the WTO can be seen to 
be able to apply or, where necessary, amend its rules to take on the 
challenges presented by China's ``socialist market economy'' framework, 
then faith in the institution and its rules-based system can be 
enhanced, for the good of the United States and the world.
---------------------------------------------------------------------------
    \18\ Statement as delivered by Ambassador Dennis Shea, Deputy U.S. 
Trade Representative and U.S. pennanent Representative to the WTO, WTO 
General Council, Geneva, May 8, 2018.
---------------------------------------------------------------------------
    Third, the work to put together a coalition, to research and agree 
upon the Chinese measures to be challenged and the claims to be made, 
and to litigate in a coordinated way at the WTO would make it less 
likely that the United States would accept a limited agreement 
connected to the U.S.-China bilateral trade deficit. Certainly the 
United States' partners in such a coalition would raise strong 
objection to the U.S. accepting an agreement under which China simply 
agreed to shift its purchases of soybeans from Brazil to the U.S. or 
its sourcing of energy products from Russia and Central Asia to the 
United States. Given that the American people are already paying a high 
price as a result of the imposition of Section 301 tariffs on China and 
the corresponding retaliatory tariffs imposed by China on U.S. exports, 
it is essential that the United States emerge from the process with 
measures to address the many real problems with China rather than 
simply addressing the bilateral goods trade deficit.\19\ A coalition 
may be the best way to avoid a narrow, deficit-focused bilateral deal.
---------------------------------------------------------------------------
    \19\ In Beijing on May 3-4, at its first high-level meeting with 
China following the release of the Section 301 Report, the United 
States presented it draft framework (attached herewith as Appendix B) 
for balancing the trade relationship with China, noting that ``there is 
an immediate need for the United States and China to reduce the U.S. 
trade deficit with China,'' and listing as the first of eight issues 
the request for a commitment by China to reduce the US-China trade 
deficit by $200 billion.
---------------------------------------------------------------------------
    The idea of bringing a broad, coalition-based case against China--
both for specific violations and for its nullification and impairment 
of legitimate expectations that the United States and the other members 
of the WTO had at the time China joined the WTO--was recently endorsed 
in a recommendation to the Congress contained in the U.S.-China 
Economic and Security Review Commission's November 2018 Report to 
Congress.\20\ The Commission specifically recommended that Congress 
examine whether USTR ``should bring, in coordination with U.S. allies 
and partners, a ``non-violation nullification or impairment'' case--
alongside violations of specific commitments--against China at the 
World Trade Organization under Article 23(b) of the General Agreement 
on Tariffs and Trade.\21\
---------------------------------------------------------------------------
    \20\ https://www.uscc.gov/sites/default/files/annual--reports/
2018%20Annual%20Report%20to%20Congress.pdf.
    \21\ Commission Recommendation 2, page 21, Executive Summary and 
Recommendations, 2018 Report to Congress of the U.S.-China Economic and 
Security Review Commission.
---------------------------------------------------------------------------

                 E. The Time is Ripe for a WTO Case Now

    The suggestion to bring a bold WTO case against China now certainly 
begs the question: if such a case is so clearly warranted and the 
problems have persisted for so long, why hasn't it been brought before 
now?
    Among the reasons may be the following:

    First, many countries (and the companies within those countries) 
have been reluctant to take on China for fear of retaliation by China, 
in ways both obvious and hidden.\22\ Countries fear that China will 
impose trade remedies or other measures on their exports or deny needed 
permits to their companies or file WTO challenges, all in direct 
response to claims of unfair trade practices, forced technology 
transfers or intellectual property theft. While not a perfect shield, 
bringing a broad, coalition-based case would lessen the likelihood that 
China would or could effectively retaliate against all of the coalition 
partners, much less the many industries and companies that would be 
standing behind the case.
---------------------------------------------------------------------------
    \22\ As stated in the Section 301 Report (at pg. 9): U.S. companies 
``fear that they will face retaliation or the loss of business 
opportunities if they come forward to complain about China's unfair 
trade practices . . .  ``Multiple submissions noted the great 
reluctance of U.S. companies to share information on China's technology 
transfer regime, given the importance of the China market to their 
businesses and the fact that Chinese Government officials are `not shy 
about retaliating against critics.' For example, a representative of 
the Commission on the Theft of American Intellectual Property testified 
at the hearing: `American companies are intimidated and reticent over 
the issue, especially in China. There they risk punishment by a 
powerful and opaque Chinese regulatory system.' In addition, according 
to the U.S. China Business Council, their member companies do not 
presently have `reliable channel[s] to report abuses and to appeal 
adverse decisions . . .  without fear of retaliation.' ''
---------------------------------------------------------------------------
    Second, bringing a collective case, with multiple complainants, is 
never easy, as it requires tremendous coordination of both the legal 
tasks of drafting and pleading and of the substantive arguments to be 
made, which may favor one country more than others or raise concerns 
for some but not all of the coalition. Only a handful of the 547 WTO 
complaints brought to date have been brought by a coalition of 
countries, but for this case to be most effective, a coalition is 
needed. And many of the potential coalition partners have been working 
with the U.S. in other fora, including the OECD, the G-7, and the 
Global Forum on Steel Excess Capacity. The need to pool together both 
the evidence and the political power of as large a coalition as can be 
mustered will be important to achieving sustained pressure at the 
highest levels on China.
    Third, many countries in the past have been reluctant to bring WTO 
disputes unless they were virtually assured of a victory. No one wanted 
to lose, given the diplomatic and political fallout that can occur from 
one country accusing another foreign sovereign of being a rules 
scofflaw. But in light of the depth and breadth of the concerns about 
China, now is the time to throw caution to the wind and bring a big 
case that challenges a number of both specific measures and systemic 
matters, assuming there is sound evidence to ensure that each claim has 
been brought in the good faith required by the WTO's Dispute Settlement 
Understanding (DSU). \23\ Moreover, a number of the most likely 
applicable provisions have not yet been tested, against China or any 
other country. In the past when tried for the first time, WTO rules 
have usually been found to work.
---------------------------------------------------------------------------
    \23\ Article 10 of the DSU provides: ``It is understood that 
requests for conciliation and the use of the dispute settlement 
procedures should not be intended or considered as contentious acts and 
that, if a dispute arises, all Members will engage in these procedures 
in good faith in an effort to resolve the dispute.''
---------------------------------------------------------------------------
    Fourth, bringing cases against China has often presented very 
difficult evidentiary hurdles, as much of the information and evidence 
needed to support a claim, particularly a claim based on unwritten 
rules or practices, can be quite difficult to obtain. As noted above, 
one of the ongoing complaints of the United States and others is the 
lack of transparency in China, particularly around the issue of 
granting licenses or permits. As stated in the Section 301 Report: 
``The fact that China systematically implements its technology transfer 
regime in informal and indirect ways makes it `just as effective [as 
written requirements], but almost impossible to prosecute.' . . .  
Nevertheless . . .  confidential industry surveys, where companies may 
report their experiences anonymously, make clear that they are 
receiving such pressure. The lack of transparency in the regulatory 
environment, the complex relationship between the State and the private 
sector, and concerns about retaliation have enabled China's technology 
transfer regime to persist for more than a decade.'' 1A\24\
---------------------------------------------------------------------------
    \24\ Findings of the Investigation Into China's Acts, Policies, And 
Practices Related to Technology Transfer. Intellectual Property, And 
Innovation Under Section 301 of the Trade Act Of 1974, Office of the 
United States Trade Representative, March 22, 2018, at pg. 22.
---------------------------------------------------------------------------
    However, it is clear that over the course of the last decade or 
more, through the work of the U.S.-China Economic and Review Security 
Commission, USTR and other U.S. Government agencies, along with 
numerous business and industry groups, a substantial amount of evidence 
has been collected here in the United States. The combination of the 
comprehensive and well-documented Section 301 Report, the annual USTR 
report to Congress on China's WTO compliance and the annual reports to 
the Congress from the U.S.-China Economic and Review Security 
Commission already contain substantial evidence to support the 
potential claims noted above. Add to that the work done in the EU, 
Japan, Canada and others, and at the OECD along with other multilateral 
institutions, and it becomes clear that there should be more than 
sufficient evidence to demonstrate that China's economy is operating in 
ways that undermine the WTO's rules-based, market-based system. Indeed, 
one of the many benefits of bringing a case as a coalition is that each 
member of the coalition can contribute the evidence that they have 
collected and the experience of their companies.
    Fifth, some would argue that WTO cases have already been tried, 
with some success and some failure. It is true that China has been 
challenged in 40 disputes brought to the WTO's dispute settlement 
system, with 22 of those cases arising from complaints filed by the 
United States, eight coming from the EU, four from Mexico, three from 
Canada, with Japan and Guatemala also bringing claims against 
China.\25\ And a number of them (at least 15) have found against China. 
While the actual extent of Chinese compliance with WTO rulings can be 
questioned, in a number of cases, China has removed or amended its 
offending measures and in five others, China has reached a settlement 
agreement with the complaining party. The problem with many of these 
cases is that the challenges were relatively narrow, limited to a few 
Chinese measures, or to a particular industry or set of producers. 
While some of the more recent cases, including in particular the case 
on subsidies for aluminum and the Section 301-related case on IPR 
violations, have attempted to bring a specific case to showcase the 
underlying and more systemic problems, no panel has yet been requested 
in those cases and it remains to be seen whether a single case can 
provoke a more systemic response from China.
---------------------------------------------------------------------------
    \25\ See the attached Appendix C for a list of the cases brought 
against China and their outcomes. Note that for eight of the cases, no 
panel has been requested, for two of the cases the panel is working on 
the case, and for two others, the DSB has agreed to establish the panel 
but the actual panelists to hear the case have not yet been appointed.
---------------------------------------------------------------------------
    As a result, some have come to believe that the WTO, as the 20 17 
USTR report to Congress states, ``is not effective in addressing a 
trade regime that broadly conflicts with the fundamental underpinning 
of the WTO system.'' \26\ I disagree. I do not believe that the kind of 
broad case, with claims across sectors and across legal regimes, has 
been tried. No one, for example, has challenged the Chinese system of 
intellectual property rights or technology transfers as a whole. The 
WTO, therefore, has not been given the opportunity to show what can be 
done to save its core provisions. Yet it is just such a systemic case 
that could provide the basis and the incentive to craft a legal remedy 
that could be beneficial to all sides.
---------------------------------------------------------------------------
    \26\ 2017 USTR Report to Congress on China's WTO Compliance at 5.F. 
The WTO Case Against China
---------------------------------------------------------------------------
    The essential thrust of any WTO case should be to hold China to the 
specific commitments it made when it joined the WTO in 200 I and to the 
overarching understanding embodied in the Marrakesh Declaration that 
WTO members participate ``based upon open, market-oriented policies.'' 
\27\ The specific commitments China made are found in the texts of the 
WTO Agreements, China's Protocol of Accession to the WTO, certain 
designated paragraphs of the accompanying Working Party Report, and 
China's schedules of commitments.\28\ The schedules cover tariffs and 
non-tariff measures applicable to agricultural trade and industrial 
goods (commitments under the General Agreement on Tariffs and Trade, or 
GATT) and services (commitments under the General Agreement on Trade in 
Services, or GATS). The Accession Protocol and Working Party Report 
thereto also set out promises on how China intends to fulfill its WTO 
obligations.
---------------------------------------------------------------------------
    \27\ Marrakesh Declaration of 15 April 1994, Preamble.
    \28\ See Report of the Working Party to the Accession of China to 
the WTO, WT/ACC/CHN/49, 1 October 2001. Para 342 sets forth the 
specific paragraphs of the Working Party Report that are considered to 
be incorporated into the Protocol of Accession itself. These paragraphs 
are therefore considered to be equally legally binding on China as the 
provisions in its Protocol or the text of the WTO Agreements.
---------------------------------------------------------------------------
    Every WTO case must be based on government measures (i.e., Jaws, 
regulations, rulings or practices), whether written or not, that 
violate one or more specific commitments or that ``nullify or impair'' 
a benefit provided to members of the WT0.\29\ It is this combination of 
both actual violations and the non-violation impairment of benefits 
that should be the focus of the case at the WTO.
---------------------------------------------------------------------------
    \29\ The WTO Appellate Body, in EC-Asbestos described nullification 
and impairment: ``Article XXIII: l(a) sets forth a cause of action for 
a claim that a Member has failed to carry out one or more of its 
obligations under the GATT 1994. A claim under Article XXIII: I (a), 
therefore, ties when a Member is alleged to have acted inconsistently 
with a provision of the GATT 1994. Article XXIII:l(b) sets forth a 
separate cause of action for a claim that, through the application of a 
measure, a Member has `nullified or impaired' `benefits' accruing to 
another Member, `whether or not that measure conflicts with the 
provisions' of the GATT 1994. Thus, it is not necessary, under Article 
XXIII:l(b), to establish that the measure involved is inconsistent 
with, or violates, a provision of the GA TT 1994. Cases under Article 
XXIII: l(b) are, for this reason, sometimes described as `non-
violation' cases.'' Appellate Body Report, EC -Asbestos, para. 185.
---------------------------------------------------------------------------
    Among the things that could be included in such a big, bold case 
are the following, understanding that this is not an exhaustive list:
1. Technology Transfer
    One of the key findings of the Section 301 Report is that the 
Chinese government uses both foreign ownership restrictions and 
administrative licensing and approvals processes to force technology 
transfer in exchange for either the investment approval itself or for 
the numerous administrative approvals needed to establish or operate a 
business in China.
    However, China clearly committed (in one of the legally binding 
paragraphs of its Working Party report) that it would not condition 
investments on the transfer of technology:

        The allocation, permission or rights for importation and 
        investment would not be conditional upon performance 
        requirements set by national or sub-national authorities, or 
        subject to secondary conditions covering, for example, the 
        conduct of research, the provision of offsets or other forms of 
        industrial compensation including specified types or volumes of 
        business opportunities, the use of local inputs or the transfer 
        of technology. (Emphasis added).\30\

    \30\ Paragraph 203, Working Party Report. See also Section 7.3 of 
China's Protocol of Accession.
---------------------------------------------------------------------------
    While the Section 301 Report clearly notes the difficulty in 
proving the technology transfer mandates, given that many of them are 
unwritten, and that others are done in the course of a negotiation 
between two ostensibly private parties (even though the Chinese entity 
may be either state-owned or have Communist Party members on its 
board), recent decisions of the WTO Appellate Body have made it clear 
that unwritten measures can be challenged.\31\ Given the clear 
commitment made by China and the WTO's Agreement on Trade Related 
Investments' (TRIMs) prohibition on treating foreign investment less 
favorably than Chinese investment, China's practices resulting in the 
forced or coerced transfer of technology should be challenged.
---------------------------------------------------------------------------
    \31\ See, for example, Appellate Body Reports, Argentina--Measures 
Affecting the Importation of Goods, WT/DS438/AB/R / WT/DS444/AB/R / WT/
DS445/AB/R, adopted 26 January 2015.
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2. Discriminatorv Licensing Restrictions
    The second key finding of the Section 301 Report is that China's 
regime of technology regulations does not allow U.S. (or other foreign) 
firms to license their technology (or choose not to license it) under 
the conditions and terms that they would like or that would prevail in 
a market economy. The Chinese regulations, among other things, 
discriminate against foreign technology, putting foreign technology 
importers at a disadvantage relative to Chinese companies and imposing 
additional restrictions on the use and enjoyment of technology and 
intellectual property rights simply because the technology is of 
foreign origin. This violates China's commitment to provide national 
treatment.
    Unlike the concerns for the unwritten and under-the-table nature of 
the forced technology transfer practices, these measures are formal 
laws and regulations that are well-known to the United States and 
others. Indeed, Japan, the U.S. and the EU have been raising concerns 
about these rules in the TRIPS Council and other WTO forums. Some of 
these same laws and regulations are the source of the United States' 
and the EU's May 2018 requests for consultations with China.
    China's commitments here are clear: China ensured national and MFN 
treatment to foreign right-holders regarding all intellectual property 
rights across the board in compliance with the TRIPS Agreement\32\ In 
enacting laws and imposing regulations which discriminate against 
foreign holders of intellectual property rights and which restrict 
foreign right holders' ability to protect certain intellectual property 
rights, China has broken those commitments and violated its WTO 
obligations.
---------------------------------------------------------------------------
    \32\ Paragraph 256, Working Party Report, one of the legally 
binding paragraphs of China's Working Party Report.
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3. Outbound Investment and Made in China 2025
    The third major finding of the Section 301 Report is that China has 
engaged in a wide-ranging, well-funded effort to direct and support the 
systematic investment in, and acquisition of, U.S. companies and assets 
to obtain cutting-edge technology, in service of China's industrial 
policy. The report also notes that the role of the state in directing 
and supporting this outbound investment strategy is pervasive, and 
evident at multiple levels of government--central, regional, and local. 
The government has devoted massive amounts of financing to encourage 
and facilitate outbound investment in areas it deems strategic. In 
support of this goal, China has enlisted a broad range of actors to 
support this effort, including SOEs, state-backed funds, government 
policy banks, and private companies.
    Concerns about these policies were heightened by the release by 
China's State Council in 2015 of its Made in China 2025 initiative, a 
.. comprehensive blueprint aimed at transforming China into an advanced 
manufacturing leader [through] preferential access to capital to 
domestic companies in order to promote their indigenous research and 
development capabilities, support their ability to acquire technology 
from abroad, and enhance their overall competitiveness.'' \33\
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    \33\ U.S. Chamber of Commerce, ``Made in China 2025: Global 
Ambitions Built on Local Protections.''
---------------------------------------------------------------------------
    Because much of the outward investment regimes and the Made in 
China 2025 plan are formal laws, regulations or programs of the Chinese 
government, basic documentation for a WTO claim is relatively 
straightforward. However, the WTO rules have much less say over outward 
investment, making the nature of a WTO claim in this area more 
complicated. Nonetheless, there are some commitments that could form 
the basis for a violation claim, including a lack of reciprocity. For 
example, China stated that its IPR Jaws will provide that ``any 
foreigner would be treated . . .  on the basis of the principle of 
reciprocity.'' \34\ Yet as the Section 3 0 I Report amply documents, 
the Chinese adm in istrati ve approval regime imposes substantially 
more restrictive requirements than that of the United States. U.S. 
firms face numerous barriers, such as sectoral restrictions, joint 
venture requirements, equity caps, and technology transfer requirements 
when they seek access to the Chinese market. Chinese firms do not face 
anything remotely approaching these types of restrictions when 
investing in the United States.
---------------------------------------------------------------------------
    \34\ Paragraph 256 of China's Working Party Report (one of the 
paragraphs that is legally binding).
---------------------------------------------------------------------------
    In addition, China's outward investment regime and programs like 
Made in China 2025 could be challenged under the WTO's GA TT Article 
XXlll ``non-violation'' given the non-market nature of China's outward 
investment scheme. As the Section 301 Report notes: ``Market-based 
considerations . . . do not appear to be the primary driver of much of 
China's outbound investment and acquisition activity in areas targeted 
by its industrial policies. Instead, China directs and supports its 
firms to seek technologies that enhance China's development goals in 
each strategic sector.'' \35\ Yet China, in joining the WTO, was 
becoming part of an organization calling for the ``participation of . . 
. economies in the world trading system, based upon open, market-
oriented policies and the commitments set out in the Uruguay Round 
Agreements and Decisions.'' \36\
---------------------------------------------------------------------------
    \35\ Findings of the Investigation Into China's Acts, Policies, And 
Practices Related to Technology Transfer, Intellectual Property, And 
Innovation Under Section 301 of the Trade Act Of 1974, Office of the 
United States Trade Representative, March 22, 2018, pg. 148.
    \36\ Marrakesh Declaration of 15 April 1994.
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4. Theft of Trade Secrets and Other Intelelectual Property
    The fourth area identified by the Section 301 Report are cyber 
intrusions into U.S. commercial networks targeting confidential 
business information held by U.S. firms, conducted and supported by the 
government of China. These cyber intrusions have allowed the Chinese 
government to gain unauthorized access to a wide range of commercially-
valuable business information, including trade secrets, technical data, 
negotiating positions, and sensitive and proprietary internal 
communications.
    The Section 301 Report and the numerous documents and studies it 
references, along with the Department of Justice indictment of Chinese 
government hackers for cyber intrusions and economic espionage,\37\ 
leave little doubt that China has engaged in serial theft of U.S. 
intelelectual property rights, trade secrets in particular.
---------------------------------------------------------------------------
    \37\ U.S. v. Wang Dong et al., (W. D. Pa., May I, 2014).
---------------------------------------------------------------------------
    The clear claim under the WTO is a violation of the WTO's Agreement 
on Trade-Related Aspects of Intellectual Property Rights (TRIPS). TRIPS 
covers the broad array of intellectual property rights (i.e., patents, 
copyrights, trademarks, trade secrets, industrial designs, geographical 
indications, integrated circuits) and provides both minimum standards 
of protection and a broad-based requirement for enforcement. For 
example, Article 39 of the TRIPS Agreement provides that people and 
companies ``shall have the possibility of preventing infonnation 
lawfully within their control from being disclosed to, acquired by, or 
used by others without their consent . . .  '' while TRIPs Article 41 
imposes an affinnative obligation on all WTO Members: ``Members shall 
ensure that enforcement procedures . . .  are available under their law 
so as to pennit effective action against any act of infringement of 
intellectual property rights covered by this Agreement, including 
expeditious remedies to prevent infringements and remedies which 
constitute a deterrent to further infringements.'' Engaging in and 
permitting the theft, whether through cyber intrusions or not, is a 
violation of the basic requirement that China's laws and its efforts to 
enforce intellectual property rights ``must have real force in the real 
world of commerce.''\38\
---------------------------------------------------------------------------
    \38\ James Bacchus, ``How the World Trade Organization Can Curb 
China's Intellectual Property Transgressions,'' CATO, March 22, 2018.
---------------------------------------------------------------------------
5. Investment Restrictions
    As noted above, Chinese government officials at times use China's 
current foreign investment approval process to restrict or unreasonably 
delay market entry for foreign companies, to require foreign companies 
to take on a Chinese partner, or to extract valuable, deal-specific 
commercial concessions as a price for market entry.\39\ Foreign 
companies are often told that they will have to transfer technology, 
conduct research and development in China or satisfy performance 
requirements relating to exportation or the use of local content if 
they want their investments approved.\40\
---------------------------------------------------------------------------
    \39\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018, pp. 83-95.
    \40\ For example, in October 2012, MOF, MIIT and MOST issued two 
new measures establishing a fiscal support fund for manufacturers of 
New Energy Vehicles (NEVs) and NEV batteries. As foreign automobile 
manufacturers are required to form 50-percent joint ventures with 
Chinese partners, these requirements could effectively require them to 
transfer core NEV technology to their Chinese joint-venture partners in 
order to receive the available government funding.
---------------------------------------------------------------------------
    In addition, in the name of security, a number of additional 
restrictions have been placed on foreign investment. The National 
Security law includes a more restrictive national security review 
process and other significant restrictions on foreign investment, such 
as restrictions on the purchase, sale and use of foreign ICT products 
and services, cross-border data flow restrictions and data localization 
requirements.'' \41\
---------------------------------------------------------------------------
    \41\ The recently enacted Cybersecurity Law adds additional 
restrictions to those in the National Security law.
---------------------------------------------------------------------------
    The Catalogue Guiding Foreign Investmellf in Industry (Foreign 
Investment Catalogue), imposes significant restrictions in key services 
sectors, extractive industries, agriculture and certain manuefacturing 
industries.
    A number of the provisions in these laws and catalogues violate the 
commitment China made in its Protocol of Accession: ``China shall 
ensure that . . . the right of importation or investment by national 
and sub-national authorities, is not conditioned on: whether competing 
domestic suppliers of such products exist; or performance requirements 
of any kind, such as local content, offsets, the transfer of 
technology, export performance or the conduct of research and 
development in China.'' \42\ These also violate China's basic 
commitment to national treatment, requiring that China treat foreign 
companies no less favorably than it treats Chinese companies.\43\
---------------------------------------------------------------------------
    \42\ China's Protocol of Accession to the WTO, Section 7.3
    \43\ China's basic national treatment commitment is underscored in 
Paragraph 18 of the Working Party Report (one of the legally binding 
paragraphs): ``The representative of China further confirmed that China 
would provide the same treatment to Chinese enterprises, including 
foreign-funded enterprises, and foreign enterprises and individuals in 
China.''
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6. Lack of An Independent Judiciary
    The WTO rules require all members to ensure the conformity of its 
laws, regulations and administrative procedures with the requiren1ents 
of the WTO Agreement. Among those requirements is the maintenance of 
judicial, arbitral or administrative tribunals or procedures for the 
review and correction of administrative actions relating to trade 
matters, where the tribunals responsible for such reviews are: a) 
impartial, b) independent of administrative agencies subject to such 
review, and c) have no substantial interest in the outcome of the 
matter under review.'' \44\
---------------------------------------------------------------------------
    \44\ Article X.3(b) of the GATT.
---------------------------------------------------------------------------
    When China joined the WTO, it expressly committed to .. establish 
or designate, and maintain tribunals, contact points and procedures for 
the prompt review of all administrative actions relating to the 
implementation of laws, regulations, judicial decisions and 
administrative rulings of general application referred to in Article X: 
1 of the GATT 1994, Article VI of the GATS and the relevant provisions 
of the TRIPS Agreement. Such tribunals shall be impartial and 
independent of the agency entrusted with administrative enforcement and 
shall not haye any substantial interest in the outcome of the matter.'' 
\45\
---------------------------------------------------------------------------
    \45\ China's Protocol of Accession to the WTO, 2(D) Judicial 
Review.
---------------------------------------------------------------------------
    Yet China's National People's Congress and local peoples' 
congresses, as controlled by the Chinese Communist Party, maintain the 
power to dictate the outcomes of proceedings of all agencies entrusted 
with administrative enforcement of WTO-related rules, of the tribunals 
that review the decisions of administrative agencies, and all other 
judicial organs engaged in further reviews of actions and decisions by 
trade-related agencies and reviewing tribunals, such as China's Supreme 
People's Court.\46\ Because this means that China's legal system allows 
the Chinese Communist Party to secure discrete administrative, legal 
and economic outcomes related to China's WTO obligations, China has 
violated its commitment to establish and maintain an independent 
judiciary and to provide for uniform, independent judicial review of 
administrative actions relating to WTO obligations and commitments.
---------------------------------------------------------------------------
    \46\ ``China's top judge has fired a warning shot at judicial 
refonners by formally acknowledging that China's court system is not 
independent of the Communist Party and rejecting attempts to make it 
so.'' Financial Times, July 20, 2018.
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7. Subsidies
    Many regard the WTO's difficulty in regulating subsidies as among 
its greatest weaknesses, particularly when it comes to the size and the 
nature of the subsidies being provided in China. For example, 
subsidization and the resultant overcapacity have been problems in 
China, particularly with State-Owned-Enterprises (SOEs) which are 
provided with a variety of free or below-cost resources (such as land 
and raw materials), raising questions as to whether inputs provided by 
such SOEs to downstream manufacturers should be treated as government 
subsidies. The provisions of the WTO's Agreement on Subsidies and 
Countervailing Measures (ASCM) makes proving the existence of such 
subsidies difficult. Specifically, the agreement defines a subsidy as a 
``financial contribution by a government or any public body.'' \47\ The 
WTO Appellate Body has interpreted ``public body'' to mean government 
or governmental entities that exercise governmental functions\48\ --
i.e., that the entity must possess, exercise, or be vested with 
``governmental authority'' and be performing a ``governmental 
function.'' This interpretation effectively takes Chinese SOEs out of 
the definition of subsidy and renders the WTO framework ineffective in 
addressing these cases.
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    \47\ See Article I of the SCM Agreement. Assuming that a measure is 
a subsidy within the meaning of the SCM Agreement, it nevertheless is 
not subject to the SCM Agreement unless it has been specifically 
provided to an enterprise or industry or group of enterprises or 
industries.
    \48\ See United States--Definitive Anti-Dumping and Countervailing 
Duties on Certain Products From China, WT/DS379/AB/R.
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    Second, demonstrating the existence of a subsidy also requires 
showing that a benefit was provided to the subsidy recipient, with 
``benefit'' being defined as making the recipient better off than they 
would have been absent the subsidy. Such a demonstration requires a 
comparison to a market benchmark to determine whether the terms of a 
loan or the price of a government purchase were more favorable than 
market-based terms. Because of the nature of China's economy, 
benchmarks are often hard to prove.
    Moreover, remedies available under the WTO subsidy rules are 
perceived to be inadequate in addressing concerns about China. The ASCM 
does not provide an outright ban on subsidies but rather allows 
countries to take one of two actions when faced with subsidized goods: 
1) countervailing duty actions if the subsidized goods are coming into 
their markets and causing injury to their domestic producers, with the 
amount of the duty equal to the portion of the cost of production that 
has been covered by the subsidy, or 2) adverse effects cases at the 
WTO, if the damage from trade in the subsidized product is causing hann 
in third-country markets.\49\ The problem with countervailing duties is 
that they may simply push the subsidized goods into other markets, thus 
suppressing prices. The problem with adverse effects cases is that 
remedies in the WTO are prospective only so the requirement to ``remove 
the adverse effects of the subsidy'' often does little to dismantle the 
capacity that China has built to produce those goods in the first 
place.
---------------------------------------------------------------------------
    \49\ Part V, Agreement on Subsidies and Countervailing Measures.
---------------------------------------------------------------------------
    In recent years, it appears that China has begun to tie subsidies 
to lists of qualified manufacturers located in China. For example, the 
central government and certain local governments provide subsidies in 
connection with the purchase ofNEYs, but they only make these subsidies 
available when certain Chinese-made NEVs, not imported NEVs, are 
purchased. China appears to pursue similar policies involving NEV 
batteries, leading to lost sales by U.S.-based manufacturers.\50\
---------------------------------------------------------------------------
    \50\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018; pg.90.
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    China made two basic commitments with respect to subsidies when it 
joined the WTO: I) to notify the WTO of all the subsidies it granted or 
maintained, and 2) to eliminate all export contingent and import 
substitution subsidies. It also made general national treatment 
commitments not to discriminate against foreigners. It appears that 
China is violating all three commitments. The hope in bringing a broad 
challenge would be to force a long-overdue discussion about what the 
WTO can do to change its approach to disciplining subsidies, along with 
achieving a fonnal finding that China is in breach and must bring its 
measures into compliance.
8. Export Restraints
    In some situations, China has used its border taxes to encourage 
the export of certain finished products over other finished products 
within a particular sector. For example, in the past, China has 
targeted value-added steel products, particularly wire products and 
steel pipe and tube products, causing a surge in exports of these 
products, many of which ended up in the U.S. market. Furthermore, 
despite its commitments to the contrary, China has taken no steps to 
abandon its use of trade-distortive VAT export rebates. Export taxes on 
any products other than those specified in Annex 6 to China's Protocol 
of Accession are prohibited and ripe for challenge.\51\
---------------------------------------------------------------------------
    \51\ ``China shall eliminate all taxes and charges applied to 
exports unless specifically provided for in Annex 6 of this Protocol or 
applied in conformity with the provisions of Article VIII of the GATT 
1994.'' Section 11.3, China's Protocol of Accession to the WTO.
---------------------------------------------------------------------------
9. Standards
    China seems to be actively pursuing the development of unique 
requirements, despite the existence of well-established international 
standards, as a means for protecting domestic companies from competing 
foreign standards and technologies. Indeed, China has already adopted 
unique standards for digital televisions, and it is trying to develop 
unique standards and technical regulations in a number of other 
sectors, including, for example, autos, telecommunications equipment, 
Internet protocols, wireless local area networks, radio frequency 
identification tag technology, audio and video coding and fertilizer as 
well as software encryption `and mobile phone batteries. This strategy 
has the potential to create significant barriers to entry into China's 
market, as the cost of compliance will be high for foreign companies, 
while China will also be placing its own companies at a disadvantage in 
its export markets, where international standards prevail. There are 
also concerns that integrating its domestic standards requirements into 
its certification or accreditation schemes would make them de facto 
mandatory.\52\
---------------------------------------------------------------------------
    \52\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018, pp. 60-61.
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    China's standards are subject to the WTO requirements on standards, 
both those contained in the Agreement on Sanitary and Phytosanitary 
Standards (SPS Agreement) (relating to food, animal and plant 
standards) and the Agreement on Technical Barriers to Trade (TBT). Both 
Agreements contain basic national treatment requirements, preferences 
for the harmonization of standards with those set by recognized 
international standards organizations and a basic requirement that 
standards not be more trade restrictive than necessary to fulfill a 
legitimate objective. To the extent that China's standards can be shown 
to have effectively created unnecessary obstacles to trade or to have 
unreasonably departed from international standards, they can be 
challenged at the WTO.
10. Services
    China's commitments with respect to services are those found in its 
GATS (General Agreement on Trade in Services) schedules and in more 
recent commitments China has made to improve on those initial 
commitments. The problem is that in a number of sectors, China has not 
followed through previously agreed upon changes. For example:
    Insurance: \53\ While China allows wholly foreign-owned 
subsidiaries in the non-life (i.e., property and casualty) insurance 
sector, the market share of foreign-invested companies in this sector 
is only about two percent. Some U.S. insurance companies established in 
China sometimes encounter difficulties in getting the Chinese 
regulatory authorities to issue timely approvals of their requests to 
open up new internal branches to expand their operations. In November 
2017, China announced that it would be easing certain of its foreign 
equity restrictions in the insurance services sector, but to date it 
has not done so.
---------------------------------------------------------------------------
    \53\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018, p. 125
---------------------------------------------------------------------------
    Securities and management services: \54\ China only permits foreign 
companies to establish as Chinese-foreign joint ventures, with foreign 
equity capped at 49 percent. In November 2017, China announced that it 
would be easing certain of its foreign equity restrictions in the 
securities and asset management services sectors, but to date it has 
not done so.
---------------------------------------------------------------------------
    \54\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018, p. 20.
---------------------------------------------------------------------------
    Legal services:\55\ China has issued measures intended to implement 
the legal services commitments that it made upon joining the WTO. 
However, these measures restrict the types of legal services that can 
be provided by foreign law finns, including through a prohibition on 
foreign law finns hiring lawyers qualified to practice Chinese law, and 
impose lengthy delays for the establishment of new offices.
---------------------------------------------------------------------------
    \55\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018, p. 129.
---------------------------------------------------------------------------
    The WTO case should work to hold China to all of the commitments it 
has made to open up its services sector.
11. Agriculture
    U.S. exporters continued to be confronted with non-transparent 
application of sanitary and phytosanitary (SPS) measures, many of which 
have appeared to lack scientific bases and have impeded market access 
for many U.S. agricultural products. China's seemingly unnecessary and 
arbitrary inspection-related import requirements also continued to 
impose burdens and regulatory uncertainty on U.S. agricultural 
producers exporting to China, as did the registration and certification 
requirements that China imposes, or proposes to impose, on U.S. food 
manufacturers.\56\
---------------------------------------------------------------------------
    \56\ 2017 Report to Congress on China's WTO Compliance, USTR, 
January 2018, p. 96.
---------------------------------------------------------------------------
    Any SPS measures adopted without a sound scientific basis or 
without a risk assessment or without being based on certain 
international standards are clearly subject to challenge at the WTO, 
with past cases indicating a high likelihood that any such measures 
would be struck down. The inspection-related requirements may also 
violate the WTO's Agreement on Pre-shipment Inspection, which contains 
both non-discrimination and transparency requirements.
Transparency\57\
---------------------------------------------------------------------------
    \57\ 2017 Report 10 Congress on China's WTO Compliance, USTR, 
January 2018, p. 137 to 141.
---------------------------------------------------------------------------
    The issue of transparency and access to China's laws, regulations 
and rules was of key concern to WTO members when China joined in 2001. 
China's Protocol of Accession and five paragraphs of its Working Party 
clearly commit China to making all laws, regulations and other measures 
pertaining to trade readily available and, upon request, available 
prior to their implementation or enforcement, along with making them 
available in one or more of the official languages of the WTO (English, 
French and Spanish). As the following examples show, China has not 
lived up to these commitments and can be challenged on these (and 
other) transparency failures at the WTO:

    Publication of laws: While trade-related administrative regulations 
and departmental rules are more commonly (but still not regularly) 
published in the journal, it is less common for other measures such as 
opinions, circulars, orders, directives and notices to be published, 
even though they are in fact all binding legal measures. In addition, 
China does not normally publish in the journal certain types of trade-
related measures, such as subsidy measures, nor does it nonnally 
publish sub-central government trade-related measures in the journal.
    Notice and comment procedures: At the May 2011 S&ED meeting, China 
committed to issue a measure implementing the requirement to publish 
all proposed trade and economic related administrative regulations and 
departmental rules on the website of the State Council's Legislative 
Affairs Office (SCLAO) for a public comment period of not less than 30 
days. In April 2012, the SCLAO issued two measures that appear to 
address this requirement. Since then, despite continuing U.S. 
engagement, little noticeable improvement in the publication of 
departmental rules for public comment appears to have taken place, even 
though China confirmed that those two SCLAO measures are binding on 
central government ministries.
13. Non-violation
    Last, but certainly not least, a broad and deep case at the WTO 
should include a non-violation claim under Article XXIII of the GATT, 
focused on the myriad ways in which China's economy fails to meet the 
Marrakesh Declaration that the WTO was designed as a world trading 
system ``based upon open, market-oriented policies.'' The non-violation 
clause of Article XXIII represents a real-world attempt to solve the 
broader problem of contractual incompleteness. It provides a legal 
cause of action against measures that do not violate the treaty but 
that nevertheless upset the reasonable expectations of the parties and 
can be aimed at policies that might otherwise be beyond the reach of 
the GATT/WTO agreements.\58\ Non-violation claims have been rare.\59\ 
WTO members generally agree that ``the non-violation nullification or 
impairment remedy should be approached with caution and treated as an 
exceptional concept. The reason for this caution is straightforward. 
Members negotiate the rules that they agree to follow and only 
exceptionally would expect to be challenged for actions not in 
contravention of those rules.'' \60\
---------------------------------------------------------------------------
    \58\ Article XXIII provides:

    Nullification or Impairment
      1. If any contracting party should consider that any benefit 
accruing to it directly or indirectly under this Agreement is being 
nullified or impaired or that the attainment of any objective of the 
Agreement is being impeded as the result of:
      (a) the failure of another contracting party to carry out its 
obligations under this Agreement, or
      (b) the application by another contracting party of any measure, 
whether or not it conflicts with the provisions of this Agreement, or
      (c) the existence of any other situation, the contracting party 
may, with a view to the satisfactory adjustment of the matter, make 
written representations or proposals to the other contracting party or 
parties which it considers to be concerned. Any contracting party thus 
approached shall give sympathetic consideration to the representations 
or proposals made to it.
    \59\ ``Although the non-violation remedy is an important and 
accepted tool of WTO/GATT dispute settlement and has been 'on the 
books' for almost 50 years, we note that there have only been eight 
cases in which panels or working parties have substantively considered 
Article XX111: l(b) claims.'' Panel Report, Japan-Film, para. 10.36.
    \60\ Panel Report, Japan-Film, para. 10.36.
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    However, the wide-spread concerns with China's economy and the 
difficulties it has raised for WTO members suggests that this is indeed 
the time for an exceptional approach. As made clear in Harvard Law 
Professor Mark Wu's ``China Inc.'' analysis, China's economy is 
structured differently from any other major economy and is different in 
ways that were not anticipated by WTO negotiators.\61\ It is the 
complex web of overlapping networks and relationships, both formal and 
informal, between the state, the Communist Party, SOEs, private 
enterprises, financial institutions, investors and others with Chinese 
government oversight over state assets (SASAC), financial sector 
organization (Central Huijin Investment Ltd.), heavy state planning, 
placement of Communist party officials in key positions, specific forms 
of corporate networks and state-private sector linkages that make 
China's economy so unique and so hard for the trading rules to deal 
with.\62\
---------------------------------------------------------------------------
    \61\ Mark Wu, ``The `China, Inc.' Challenge to Global Trade 
Governance,'' Harvard International Law Journal, Vol. 57, Spring 2016, 
pp. 261-324.
    \62\ Mark Wu at 284.
---------------------------------------------------------------------------
    It is exactly for this type of situation that the non-violation 
nullification and impairment clause was drafted. The United States and 
all other WTO members had legitimate expectations that China would 
increasingly behave as a market economy--that it would achieve a 
discernable separation between its government and its private sector, 
that private property rights and an understanding of who controls and 
makes decisions in major enterprises would be clear, that subsidies 
would be curtailed, that theft of IP rights would be punished and 
diminished in amount, that S0Es would make purchases based on 
commercial considerations, that the Communist Party would not, by fiat, 
occupy critical seats within major ``private'' enterprises, and that 
standards and reguelations would be published for all to see. It is 
this collective failure by China, in addition to the specific 
violations of individual provisions noted above, that should form the 
core of a big, bold WTO case.

                    G. Objectives of Such a WTO Case

    Most WTO disputes have as their goal a ruling by the Dispute 
Settlement Body that the measures complained about violate one or more 
provisions of the WTO Agreements, after which the responding party 
brings its measures into compliance, often by removing or amending the 
offending measures. Here, while one of the goals would indeed be to 
seek certain specific rulings of that type, the goals would be much 
broader--

 1. to seek a common understanding of where the current set of rules 
        are failing and need to be changed (with disciplines on 
        subsidies at the top of that list);
 2. to begin the process of scoping out exactly what those rule changes 
        would look like to accommodate the views of the broader WTO 
        membership;
 3. to seek recognition from China of where and to what degree its 
        economic structure can or cannot fit within a fair, transparent 
        and market-based trading system; and
 4. to give China the opportunity to make a choice that is its 
        sovereign right to make-whether it wants to change its system 
        to one that does fit within the parameters of the WTO or not.

    As former USTR official Harry Broadman put it, ``There's no right 
or wrong here. If China's choice results in conduct that does not 
square with the rules of the WTO . . .  so be it. Beijing should then 
exit the WTO gracefully or be shown the door.'' \63\ The hope would be 
that both China and the coalition of parties to the dispute would 
appreciate that the trading system is better off with China as part of 
it, that the WTO rules are in some places and in some ways part of the 
problem and need to be changed, but that tinkering at the margins will 
not suffice.
---------------------------------------------------------------------------
    \63\ Harry G. Broadman, ``The Coalition-Based Trade Strategy Trump 
Should Pursue Toward China,'' Forbes, April 9, 2018.
---------------------------------------------------------------------------
H. Conclusion
    The concerns with China are global concerns. The tools used to 
address the concerns and the solution sought should be global as well. 
And that means using the WTO. And it means fixing the WTO, particularly 
its dispute settlement system, to ensure that the WTO is ready and able 
to take on the challenge that China presents to the world trading 
system.


        Saving Multilateralism--Renovating the House of Global 
                Economic Governance for the 21st Century


               by Jennifer Hillman--The German Marshall 
                      Fund of the United States\1\
---------------------------------------------------------------------------

    \1\ Jennifer Hillman is a Professor from Practice at the Georgetown 
University Law Center. She is a former member of the WTO Appellate Body 
and also served as a Commissioner at the U.S. International Trade 
Commission and as an Ambassador and General Counsel in the Office of 
the United States Trade Representative.
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     [included as a supplement to ms. hillman's prepared statement]


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Examining the Debt Implications of the Belt and Road Initiative from a 
                           Policy Perspective


            John Hurley, Scott Morris, and Gailyn Portelance

            [entered into the record by senator para.young]


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     Responses to Additional Questions for the Record Submitted to 
                Scott Morris by Senator Robert Menendez

Multilateral Development Banks
        In your testimony you state ``the MDBs have been rated as the 
        most effective development institutions by multiple systematic 
        reviews of aid and development finance.''


    Question 1.  Please provide support for that statement.

    Answer. See the information provided below.

   Nancy Birdsall and Homi Kharas (2010 and 2014). The Quality of 
        Official Development Assistance (QuODA), 1st and 3rd Eds. 
        Washington, DC: Center for Global Development; Global Economy 
        and Development at Brookings.
   William Easterly and Tobias Pfutze (2008). ``Where Does the Money 
        Go? Best and Worst Practices in Foreign Aid,'' Journal of 
        Economic Perspectives 22(2): 29-52.
   Stephen Knack, F. Halsey Rogers, and Nicholas Eubank (2010). ``Aid 
        Quality and Donor Rankings,'' World Development 39(11): 1907-
        17.
   Samantha Custer, Zachary Rice, Takaaki Masaki, Rebecca Latourell, 
        and Bradly Parks (2015). Listening to Leaders: Which 
        Development Partners Do They Prefer and Why? Williamsburg, VA: 
        AidData at William and Mary
   UK Department of International Development (2011). Multilateral Aid 
        Review: Ensuing maximum value for money for UK aid through 
        multilateral organisations.
   UK Department of International Development (2016). Raising the 
        Standard: the Multilateral Development Review 2016.

        In your testimony you state ``by my estimates, one-third to 
        nearly half of the bank's lending in China is not appropriately 
        focused.''


    Question 2.  Please explain.

    Answer. See the attached report, ``Examining World Bank Lending to 
China: Graduation or Modulation?'' Expected publication date January 
2019.


    [The report referred to above follows:]

                Examining World Bank Lending to China: 
                        Graduation or Modulation


                   Scott Morris and Gailyn Portelance
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