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Diplomacy in Action

Economic Statecraft


Remarks
Deborah A. McCarthy
Principal Deputy Assistant Secretary, Bureau of Economic, Energy and Business Affairs
European and Eurasian Affairs Deputy Chief of Mission Conference
Washington, DC
October 26, 2011

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As prepared for delivery

Secretary Clinton has articulated a doctrine of "economic statecraft" for U.S. foreign policy, recognizing that the nature of America's challenges, at home and abroad, demands a serious and sustained commitment to put economics at the center of our foreign policy agenda. The Economic Bureau is committed to fulfilling this vision, and your efforts at post will be critical to our success.

Welcome

Thank you for the opportunity to speak with you today. As many of you know, I previously served in Athens as Deputy Chief of Mission (DCM), so I understand firsthand the challenges and opportunities awaiting Europe and the important role DCMs play in empowering their teams to accomplish our economic agenda.

Over the past few months – and most recently in New York October 14 –Secretary Clinton has delivered several speeches describing the intersection of economics and foreign policy, and recognizing that America's global leadership and economic strength are a package deal.

Following the New York speech, the Secretary issued a cable on "Economic Statecraft." It is a call to action for posts around the world to harness the tools and forces of global economics to advance our diplomatic agenda; and furthermore, to use our diplomacy to meet our economic goals.

Last year's Quadrennial Diplomatic and Development Review (QDDR) enshrined economic issues as a defining pillar of our power abroad and strength at home. Our success in responding to the crisis unfolding in the eurozone, to the dramatic changes sweeping through the Middle East, to our own critical priority of restoring jobs back home, demand a sustained commitment to put economic issues at the forefront of our foreign policy agenda.

I would like to speak to you today about how you, as DCMs, can lead efforts at post to advance these objectives.

Economic Statecraft: Updating Our Foreign Policy Priorities

During much of the past decade, American foreign policy was intensely focused on places where our threats were the greatest. Today, we must focus equally on the places with the greatest growth potential.

Much attention has been given to the rise of Asia and the importance of emerging markets globally. Indeed, we must do more to develop the world's economic operating system in the Asia-Pacific region, and we should seek opportunities to work with our allies in Europe on issues of shared concern.

And yet, the U.S. economic relationship with the EU is the largest and most complex in the world, generating trade flows of about $3.6 billion a day. Transatlantic investment is directly responsible for roughly 7.1 million jobs.

From 2000 to 2009, over half of U.S. foreign direct investment (FDI) was in Europe. In 2008, combined stock of U.S. FDI in the EU was 10 times greater than in the BRIC economies.

Twenty percent of all goods exported from the U.S. and 35 percent of all exports services are destined for Europe. U.S. commercial relations with Europe are three times that of China – a fact sometimes overlooked in the media.

Therefore, we must capitalize on these economic relationships and prioritize those sectors – such as services, technology, and high-value added manufacturing – where our comparable strength can help set global standards.

With the EU, we should accelerate and intensify efforts to move toward a more systematic approach to regulatory cooperation to unlock additional opportunities for trade and investment between the U.S. and Europe.

We must also do more to enlist all of our allies in anchoring a system of fair and open competition. We will seek to expand our cooperation with the EU in combating state-led market distortions and unfair trade practices in third countries.

Increased engagement in forums such as the G20 and OECD, and in bilateral arrangements such as the Strategic and Economic Dialogue with China, will be important instruments in establishing a more solid framework for our relationships, and will serve to strengthen the global economy.

Going on Offense: Advancing our Economic Agenda

In the past, our domestic markets powered much of our own (and the world's) economic growth, but moving forward, U.S. economic growth will increasingly rely on our ability to compete and win overseas. It is imperative, therefore, that all our posts overseas promote an affirmative and robust trade and investment agenda that aggressively responds to the barriers and market distortions that too often produce an uneven playing field tilted against U.S. firms.

This means elevating and updating our commercial diplomacy to attract investment in America and ensure U.S. companies can invest on fair terms in overseas markets.

National Export Initiative (NEI)

By now, I am sure you are all aware of the President's goal of doubling American exports by the end of 2014 through the National Export Initiative (NEI). We are on track to meet that goal.

As Deputy Chiefs of Mission, you play a vital role in exercising front office leadership on coordination of the trade promotion agenda. Your continued support in partnering with businesses to promote American-made goods and services worldwide is essential to meeting this goal.

Unfortunately, however, budget realities are forcing the Commercial Service to reduce its overseas presence. Against that backdrop, in many missions, more of overseas support for U.S. businesses and export promotion will shift to State Department economic officers and front offices.

While we are currently developing additional commercial diplomacy training, it is incumbent on you to find "force multipliers" to advance our agenda. For example, we should consider ways to more effectively collaborate with AmChams, and how the AmChams themselves can educate and influence host nation regulators and lawmakers.

Very importantly, we will also need to work with AmChams and state and municipal trade promotion offices overseas to provide services to new-to-market U.S. companies to facilitate their success, attract investment to the United States, and promote exports.

SelectUSA

New FDI in the United States plays an important role in creating more, and generally well-paying, jobs. Companies engaged in FDI are also responsible for about 20 percent of U.S. exports.

In June, the President launched the SelectUSA Initiative, a whole-of-government approach to attracting more investment to the United States, whether new investments by U.S. companies at home, “re-shoring” of U.S. overseas investments back to the United States, or new foreign direct investment in the United States.

In pursuing foreign investment, the State Department is engaging in creative ways both with business communities—at home and abroad—and with government at all levels. For example, we have brought together the National Governors Association and its Chinese counterparts to build greater trade and investment ties. Governors and Mayors know the best ways to create jobs through investment from overseas. They understand firsthand the local impact these investments can have.

Our overseas posts must continue to encourage international businesses to invest in the U.S., while also working to ensure that U.S. companies can invest on fair terms in overseas markets.

Eurozone Financial Crisis

Any discussion of economic issues would be incomplete without mention of Europe's financial crisis and its impact on the U.S. and global economy. The importance of the EU as a trading partner and strategic ally on many economic issues makes the eurozone crisis our problem as well. In terms of the U.S. financial system, direct exposure to the most vulnerable eurozone countries is moderate but we are concerned about broader risks, including to Europe’s banks and to global growth. Treasury recently termed the eurozone crisis “the most serious risk today to global recovery.”

Later today, European leaders will make an announcement on additional measures to addressing the financial crisis plaguing the region. Although details of the agreement are still emerging, we believe they must include steps to increase capital cushions at key European banks, to help Greece achieve debt sustainability in the long-term, and to establish a convincing firewall limiting contagion effects.

Sending a credible message to the market is essential, and timing matters. We see today as a first step in re-establishing the momentum of economic recovery to be followed by next week’s G20 Summit in Cannes. If Europe provides a comprehensive roadmap to address the region’s financial turmoil, then G20 leaders will be able to voice support for these measures and reiterate a global commitment to growth-enhancing economic policies, helping to further renew investor and market confidence.

Our best source of candid information on crisis developments has been the detailed reporting from your posts. The steady flow of cables providing insights on the effects of the crisis – not only within the eurozone but also on the broader European region – has been essential to Washington policymakers in formulating our thoughts on the crisis and linking together common themes emerging from the crisis.

We are working closely with Treasury to improve communication flow, with results such as conference calls with Treasury DAS Christopher Smart.

MENA: Using Economic Tools to Solve Foreign Policy Challenges

As we embrace economic statecraft, it's not just our priorities that are changing. The way we pursue them is evolving as well. Specifically, we are finding that solutions to our strategic challenges increasingly hinge on important economic dimensions.

Our response to the ongoing transition to democracy in countries across the Middle East and North Africa (MENA) is just one example. The demonstrations are stark reminders of the desire of young people – there and around the world – for greater opportunity. If we want to see democracies take hold in these countries, we must help them reform their economic systems to better create opportunities for their citizens.

Good governance, transparency and inclusiveness are directly related to economic prosperity. The Arab Spring has taught us that governments cannot ignore these principles. In that regard, the State Department’s Domestic Finance for Development (DF4D) initiative aims to empower developing countries, including Tunisia, with tools to improve tax administration, transparency and anti-corruption efforts. The idea is to help developing countries mobilize their own domestic resources and reduce aid dependence. Our European partners – particularly those countries in Central Europe that have undergone successful economic transitions over the last two decades, are in a good position to serve as mentors and help us in this endeavor.

Europeans are among our staunchest allies in the MENA region as demonstrated by recent commitments of the G-8 on the Deauville Partnership, which focuses on how best to aid successful transitions toward democratic societies and create more inclusive, job-creating economies in light of the Arab Spring movement.

We will continue to rely on these relationships as we promote a comprehensive U.S. –Middle East Trade and Investment Partnership and encourage other countries to also use economic diplomacy to promote growth and regional stability in the MENA region.

Our recent efforts to unfreeze assets in Libya as a source of funding for the TNC would not have succeeded without the quick actions of our European counterparts (and facilitated by many of our Embassies in Europe).

New austerity measures in European countries may shift Europe’s focus more inwardly, which is why we will continue to rely heavily on your assistance to promote U.S. priorities in defense and development aid.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) principles can also be powerful tools to advance a range of human rights, environmental, and other objectives. The Bureau of Economic and Business Affairs (EB) launched a CSR Team in June. It has been building a framework that posts and U.S. businesses can use to access comprehensive information on best practices for good corporate citizenship. The team is developing a training module for FSI and other training materials to expand engagement with Economic Officers, Political Officers, DCMs and COMs. I encourage you to visit our internet website for more information: http://www.state.gov/e/eb/eppd/csr/index.htm.

Other EB Priorities

Our agenda at EB is full, and we thank all of you for your hard work on our ongoing priorities.

Transatlantic Economic Council

Through the Cabinet-level Transatlantic Economic Council (TEC), we are working to align our regulatory processes in high-growth sectors including nanotechnology, e-vehicles, e-health, and raw materials.

Work on the objectives of the TEC has been continuous throughout the year. For example, I recently met with trade investment experts in Brussels to discuss investment issues and specific work on third countries, which may result in potential deliverables to the TEC.

But as the Secretary stated in her October 14 speech on economic statecraft, too often we re-litigate regulatory differences when we ought to be resolving them and avoiding new ones. This frustrates companies on both sides of the Atlantic. The Trans-Atlantic Economic Council is the forum where we try to resolve these differences, and harmonizing regulatory schemes between the United States and the EU is one of the best ways we can enhance growth, enhance exports, and avoid duplicative costs.

We hope the date for this year’s TEC, proposed as November 29, will soon be publicly announced.

Fair Competition and Russia WTO accession

Russia’s accession to the World Trade Organization is a priority for this Administration as part of the reset policy. Having Russia integrated into a rules-based organization will bring greater predictability and transparency to Russia’s trade regime.

The Working Party aims to complete work on Russia’s accession package by the last week of October and send the package to the WTO Ministerial Conference for final approval in its December 15-17 meeting.

Russia has resolved its bilateral accession issues with the notable exception of Georgia. We and other members of the WTO have encouraged Russia and Georgia to resolve their differences with the help of Swiss mediation.

When Russia joins WTO, the United States will need to give the same unconditional most-favored nation (MFN)/normal trade relations treatment to Russia’s goods that we provide to those of all other WTO Members. That commitment requires us to terminate Jackson-Vanik, which places conditions on MFN treatment. If we do not terminate Jackson-Vanik, U.S. farmers, workers and businesses will be at a disadvantage compared to those of other WTO member countries.

The Administration is committed to working with Congress to terminate Jackson-Vanik this year. It will be a difficult fight, and members of Congress will link human rights, Georgia, and other concerns to Russian graduation.

EU Emissions Trading Scheme (ETS)

EB's Office of Transportation Affairs is leading the Department's efforts to prevent U.S. airlines from being included in the EU'S Emissions Trading Scheme (ETS). As you know, this scheme will require all international air carriers flying into or out of Europe to surrender – and pay for – emission allowances for the entirety of a flight, not just the portion occurring within EU territory.

While the U.S. government supports the goal of reducing aviation emissions, we believe that the International Civil Aviation Organization (ICAO) should provide the framework for a global approach to address international GHG emissions.

In September, more than 20 countries, including the U.S., issued a declaration opposing the inclusion of international aviation in the EU ETS and urging the EU to work on a global solution at ICAO.

Energy

Another economic issue central to our engagement with Europe is energy. The Secretary’s Special Envoy for Eurasian Energy Ambassador Richard Morningstar regularly consults with our Ambassadors and foreign interlocutors and has already been to over half of your posts coordinating on these issues.

As I speak, we are planning the U.S.-EU Energy Council Ministerial to take place on the margins of the U.S.-EU Summit in late November. At the heart of our policy is the belief that energy security is best achieved through diversity of suppliers and of transportation routes to market, together with a focus on alternative technologies, renewable and other clean energy, and increased energy efficiency.

We aim to achieve this through focusing on Caspian gas transit through the Southern Corridor, improved dialogue with Ukraine and Russia, engagement with external suppliers such as Libya and Nigeria, and joint renewable projects, amongst many other key issues. U.S.-EU energy cooperation is crucial.

The issues could not be more pressing: Europe is currently in the throes of a major re-evaluation of its energy markets and resources, following the German decision on nuclear power, the French stance on shale gas, and the Commission’s increasingly robust implementation of the 3rd Energy Package. Many of your countries have expressed interest, or have participated in, the Global Shale Gas Initiative, which shares our own national experience at the level of the states, DOE, EPA, and the U.S. Geological Survey on the development of important resource.

Telecommunications and Information Policy

Through Ambassador Phil Verveer, our U.S. Coordinator for International Communications and Information Policy, the Department engages in bilateral dialogues to address the front burner issues affecting information and communications technologies (ICTs). Phil and his team have been heavily involved in discussions with the EU on various aspects of cloud computing affecting our governments, industry, and consumers; including network security, data privacy, and intellectual property protection while ensuring the free flow of information across electronic networks.

For the past 15 years, the EU has dominated the global dialogue on commercial privacy, and has taken an approach to personal data protection that in many ways hinders innovation and free trade by restricting the movement of data across national borders. The Administration will soon issue a White Paper that will include a powerful articulation of the benefits of the U.S. approach to privacy, which emphasizes sector-specific regulation, and includes both a proposal for a basic Consumer Privacy Bill of Rights and a plan to convene a series of multi-stakeholder meetings to develop industry-specific codes of conduct.

It will be important to socialize these concepts with our European counterparts, and convey to them that we respect different national approaches to privacy.

Misplaced concerns about the USA Patriot Act continue to hurt U.S.-based cloud providers doing business in Europe. We will continue to provide posts guidance on this issue, and encourage you to correct these misconceptions when you encounter them.

Building the Capacity of the State Department

Last year's Quadrennial Diplomacy and Development Review (QDDR) recognized that we live in a new, fast-changing, and interconnected world. The QDDR made several recommendations that seek to elevate economic statecraft as an essential strand of our foreign policy.

The QDDR established a new Under Secretary for Economic Growth, Energy and the Environment. Through this reorganization, the Bureau of Oceans, Environment, and Science (OES), the Science and Technology Advisor, and the newly-established Office of the Chief Economist, will join the E family. U/S Hormats will continue to serve in this new role.

The QDDR also called for the establishment of a new Bureau for Energy Resources (ENR) to unite our diplomatic and programmatic efforts to better manage the geopolitics of today's energy economy, expand good governance, deepen transparency and increase access to energy.

We are now in the process of setting up this new Bureau, and are identifying the resources available to staff it.

Conclusion

The Economic Bureau is committed to fulfilling the Secretary’s vision of a deeper nexus between foreign and economic relations. This new economic statecraft requires us to update our foreign policy priorities, play better offense, use economic tools to solve strategic challenges, and build our internal capacity.

The State Department has an important role to play in the “whole of government” approach to economic affairs. With more than 1,000 economic officers at Embassies and Consulates around the world, we are the eyes and ears of international economic affairs for the U.S. Government.

The 250 foreign and civil service employees of the Economic and Business Affairs Bureau look forward to working with you to put the tools of our diplomacy to work to meet economic goals.

I challenge each of you to lead your missions in creatively promoting investment in the United States. EUR countries are by far the largest source of FDI for the United States. You might consider creating a new award to be given to a company that invests in the U.S., or having your ambassador lead a delegation of investors to the U.S. These are just a few ideas, and we are eager to work with you to come up with more.



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