Global Economic Management and the G20: A Conversation with Jacob J. Lew

Global Economic Management and the G20: A Conversation with Jacob J. Lew

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United States Secretary of the Treasury Jacob J. Lew joins CFR President Richard N. Haass to discuss global economic management and the G-20 summit. Lew discusses macroeconomic policies around the globe with a special focus on the EU and China, and shares his view on the ratification of the TPP.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

HAASS: Well, good morning to this beautiful fall morning here in the greatest city in the world. Welcome to the Council on Foreign Relations. And the subject of today’s meeting, if I put my glasses on, is “Global Economic Management,” including the G-20. And I want to thank not just those of you in the room for getting up so early and even remembering on a Monday morning to be here, but also those who are joining us by teleconference and the wonders of technology. We will try to reward them with a question or two when we get to that part. This meeting is part of the C. Peter McColough Series on International Economics.

The gentleman on my left, on your right, is the 76th secretary of the treasury. Not yet the subject of a Broadway play—(laughter)—but you never know. You never know. He is seven-eighths of the way through what I expect is his tenure, as the term—Jack Lew began as treasury secretary in the opening days of the second term of Barack Obama’s presidency. He has been there every day since, in which case he’s got just over, what, 100, 125 days to go. He probably has—you know, in government you have the equivalent of advent calendars in your office, and I’m sure he’s peeling it away one day at a time.

LEW: Haven’t moved from months and weeks to days yet. (Laughter.)

HAASS: You’ll get there. And he before this was the chief of staff at the White House, and before that was in the Cabinet as well as the director of the Office of Management and Budget, has had a long, distinguished career in and out of our nation’s capital. And it’s great to have you back with us today.

LEW: Great to be with you today, Richard.

HAASS: I expect you’re suffering a little bit from jetlag, having just come back from China, the G-20. I will be characteristically honest from afar. If I may borrow from that great strategist Shakespeare, it looked like much ado if not about nothing, then about little. How might I be wrong? I get the sense that you think people such as me, as if often the case, are wrong, and we are missing some of the significance of what happened in China. So why don’t we—why don’t we begin there?

LEW: As sharp as your analysis is, I think this is a case where I think you’re wrong. (Laughter.) I think the G-20 has to be judged against the times that you’re in. This was not a G-20 at the height of a financial crisis. This was a G-20 at a time of soft global growth and global anxiety. And if you look at what the G-20 has done over the last eight years, during a time of crisis it brought together concerted action, which had the effect of turning around an economy—a global economy—by seeing trillions of dollars of fiscal policy and monetary policy kick in to get the global economy moving.

During the intervening years, a lot of people have said, what is the relevance of the G-20? Well, let me give you a few examples. The G-20 has been a forum for working through issues like exchange-rate policy, where even four years ago there was a lot of anxiety about competitive devaluation. We’ve just come through a period of tremendous volatility in markets after the vote in the United Kingdom on Brexit, and you saw concerted action. You saw monetary authorities and treasuries around the world talking to each other. Well, how does that happen? It happens because you build up over time. We pushed this issue year after year, quarter after quarter at the meetings, and you saw restraint and concerted action to calm down markets at a time when, after the vote in the U.K., it could have been a lot worse.

If you look at the general macroeconomic policy tools, there’s been an ongoing debate between austerity and growth. That debate is over. You’re now seeing a concerted focus on growth. I think we in the United States can take some credit for having driven that debate in the direction of growth.

I think if you look at the commitment that the G-20 countries have made to use all policy tools—fiscal, monetary, and structural—there has been a decided change in the last six months. Whether it’s China, Canada, South Korea, countries in Europe, you have seen a move towards using fiscal tools. I think that’s significant.

In a moment of crisis, everyone knows each other. There is a group of people who get on the phone, who get on airplanes and go to meetings, and can talk with real trust. I think that makes a difference. I think it’s actually been an important stabilizing and growth-driving engagement.

The last issue, climate change. I think if you look at the conversations between at least the United States and China on climate change, it has pulled G-20 countries along with it. And I think you’re going to see the Paris agreement go into effect, in part because of the discussions that take place in a group like the G-20.

So I actually think that to judge the G-20 by crisis standards is to miss its real value during the majority of time when the world is not in economic crisis.

HAASS: So let me—let me follow up on a few areas, because as persuasive as you were, I still am unpersuaded.

LEW: You remain a skeptic. (Laughs.)

HAASS: I am. So let’s—because you had an interesting phrase. And I’m not quoting directly—if I get it wrong, I apologize—but the debate between austerity and growth is over, in favor of the latter. Well, the Germans are going to take the chairmanship, the presidency of the G-20, and they have a reputation, shall we say, for favoring more austerity. Have they been—are you persuaded that they have been persuaded that, whether they were right or wrong then, that now is the time for growth, and they are actually prepared to back growth?

LEW: Well, I’ll let the Germans speak for themselves. We’ve obviously had our own disagreements over macroeconomic policy over the last few years. But if you look over the last 18 months at the policies in Europe, you’ve seen a number of things change. You’ve seen a relaxation of fiscal targets on countries that have fiscal challenges, but are hard hit by refugee costs. Germany has gone along with that. You’ve seen Germany itself do all of the spending to meet refugee needs above fiscal targets, which by our calculation uses a significant fraction of the fiscal space that we believe they have. And just these last few days you’ve seen Germany issue a budget which raises the specter of more fiscal relief over the next two years. I don’t think you will see a change of philosophy in Germany, but I think you’ve seen some change of practice.

HAASS: OK. What about here? And by that I mean, in order to have growth rather than austerity, and in order basically to turn to people other than central bankers to bring it about, to have an important fiscal component, that might be an idea that’s gained some traction, but there’s a big difference, as you know better than anybody, between the rhetoric, if you will, and the reality. And the reality depends on politics. And let me just—you mentioned Europe, so let me just suggest two other places where the reality might not be quite there.

Let’s start with Japan. What signs do we see that the fiscal component of growth is gaining traction in Mr. Abe’s Japan?

LEW: Well, I’ll give you a couple of examples. Over the last three years, Japan has had two decisions to make about putting in place tax increases at a time when their economy was still quite soft. I would say that our bilateral discussions and the multilateral discussions in the context of the G-20 created a space where the Abe government was able to chart a path towards more fiscal room, even though it might have been a little bit controversial given the fact that they have a large debt as a percent of GDP.

HAASS: By not raising the sales tax.

LEW: By not raising the sales tax. I’ve had conversations with the prime minister, with the finance minister. I’m pretty confident that our engagement, both bilaterally and multilaterally, helped make that a policy that they were able to pursue.

I think that if you look at their current budget, they have proposed more spending that goes to helping individuals have both the ability to pay for childcare and more disposable income, shifting a bit from some of their practices which were much more oriented towards investment as opposed to consumption.

I think Japan has a deep, deep challenge. I mean, they have over almost two decades used policy tools intermittently. Had they used fiscal, monetary, and structural tools all at the same time in a forceful way, much the way we did in 2008 and 2009, I think the Japanese economy would be doing better. They’ve used their monetary, you know, ammunition without their fiscal, their fiscal ammunition without their monetary, and they’ve been very slow on the structural. TPP is a big part of their structural reform. We have gotten Japan into a place where they have agreed to liberalize a lot of their policies, which will help their economy to grow in the long run and create a more level playing field to be more—for us to be more competitive. It’s a win-win proposition. I think that the package of policies that Japan has pursued, if you take them individually, has been less effective than it would have been if you had done them in a more concerted way.

HAASS: Sure. And I’ll turn to TPP in a minute, but in many ways politics have been the great restraint there—and, rumor has it, also here. So what, if any, evidence is there, either now or forming, that the politics here will move from, shall we say, dysfunction to function; that we’ll move beyond the sequester to allow more fiscal stimulus here, whether in infrastructure or other areas? What gives you confidence rather than pause when you look either at the remaining time you’ve got in office or what might happen subsequently?

LEW: Again, I think if you look at recent history, it perhaps is a helpful guide. Putting in place automatic spending cuts was always a bad idea. It was meant to be such a bad idea that it would drive Congress to put something more sensible in place to replace across-the-board spending cuts. It took a couple years to get that done, but two budget agreements in a row have done that. They have substituted much more sensible policies in place of the dramatic reductions in spending in the short term, and I think we’ve already seen some of the economic benefit. You’re seeing the government sector helping to drive growth, as opposed to being a headwind for growth for the last couple of years. That’s very much a reaction to the fact that we’ve had small but meaningful budget agreements.

At the end of last year, you saw Congress come together with the administration to make permanent things like the earned income tax credit, to make permanent things like the research and experimentation tax credit, and to do it in a way that it actually provided some fiscal boost to the economy as well. So I think you’ve seen small steps, but meaningful steps over the last few years towards doing more business as usual. Hard to sit here in the political environment that we live in and be a Pollyanna about the future, but the recent steps certainly show a movement in the right direction.

When I think about what the big challenge facing the country today is, infrastructure is right at the top of the list. Anyone who comes through an airport or a seaport or a highway in the United States knows we have serious challenges that will make us uncompetitive economically if we don’t deal with them in a meaningful time frame. I think there’s actually bipartisan consensus that we need to deal with that challenge. What there isn’t yet is bipartisan consensus on how to pay for it.

HAASS: Yeah, this consensus may be in principle, not quite in practice yet.

LEW: So I’ve been pressing for several years, President Obama has been pressing for several years, an idea that I think the time will come, possibly right after our tenure, but nonetheless soon, where two things can be put together: doing business tax reform, fixing a broken corporate tax system, and paying for infrastructure. Why does that come together? It comes together because one of the problems we have is overseas income by U.S. companies, multinational companies based in the United States, that should come back to the United States. Almost all the bipartisan discussions of tax reform have included putting, at least on the already-existing income that’s sitting overseas, a one-time tax, whether it comes home or not, on that money. That will be a windfall, and that windfall can be used to pay for infrastructure.

HAASS: Do you think the—

LEW: I believe that will happen at some point in the next, you know, year, I would hope.

HAASS: It’s really a two-part question. Do you think the EU announcement about Apple will spur that? And have you taken a positon—you, as Treasury—on the EU position about Apple?

LEW: You know, the EU action, something that they call a “state aid action,” which has put a very significant retroactive tax in place, is something that I believe will actually stimulate the debate on tax reform. I am not going to defend companies that seek either a zero or a very low tax rate by taking advantage of tax havens and tax loopholes. We would very much like to close that. We think that tax reform is a way to close it. The actions we’ve taken on inversions are a way to close it. We are very much of the view that companies should pay their fair share of taxes. We have to change the laws, both here and around the world, for that to be fully effective.

I would hope that the idea that a European Commission action will reach into our tax base and take U.S. tax revenues and make them European tax revenues will help trigger this debate over tax reform, and bring together the conversation that I just described between tax reform and infrastructure. If losing billions of dollars of our tax base to another authority isn’t going to get people’s attention, I don’t know what will.

HAASS: Otherwise, it risks becoming the greatest stimulus—U.S. stimulus of Europe since the Marshall Plan.

LEW: And it’s a change in concept. Retroactively reaching into our tax base is something we find deeply troubling, which does not justify the behavior of seeking to avoid taxation. So we have been trying to thread a needle, and we have made our views clear, both in Europe and here.

HAASS: Fair enough. Let me just put a few other things on the table and then we’ll open it up.

One is China. You’ve just come from there. I’d be curious, your take on their economy—a lot of talk about excessive savings, bubbles building up there, potential to export the bubbles elsewhere. How concerned or sanguine did you leave China about where they are and their own sense of what needs doing there, not just for their own good, but because of now China’s significance globally for everybody else’s good?

LEW: You know, Richard, I have for some time had the view that China’s economic authorities understand very clearly what they need to do. They’ve been laying out, you know, a program, both in their Third Plenum, in their National People’s Congress, that has all of the elements that we tell them they need to implement to get their economy moving in the right direction, to deal with excess capacity, to make sure that they don’t manage their exchange rate in a way that causes global problems, and that to let market forces be a more dominant force in the economy. So we can sit down and have a theoretical conversation, and you know, I don’t see enormous differences of conceptual approach.

The political will to implement those is another question. And I think what the test will be for China is, do they use the space that they have? And they still have time, and they still have fiscal room to manage what is one of the hardest economic transitions any country has ever gone through, from a largely production/industrial-oriented economy to a more consumer-driven market-oriented economy at a scale large than we’ve ever seen. It’s a big, hard problem. It will involve disruptions. And that’s going to mean providing assistance, transitional assistance in regions and to individuals. But if they don’t do it, the future is not very good for China. They cannot tolerate excess capacity and kind of wasted economic resources forever.

In terms of China’s interconnectedness to the global economy, it’s at a—at a point now where in some ways is neither fish nor fowl. It is not financially interconnected the way, say, the U.S. banking system is to the global banking system. So you could have large failures of Chinese financial institutions without necessarily seeing the global repercussions that you saw in the United States in 2008. On the other hand, as one of the two largest economies of the world, China’s absolute growth—their GDP growth, their demand for commodities, and their role in markets—has a pretty substantial effect on kind of global macroeconomics.

I think that when you look at how the transmission of risk from China flows, rather than thinking about the U.S. model, one ought to think about the kind of macroeconomic model. Which is why I’ve said for some time, and I think it’s a fairly widely held view, that it is the best thing for the United States and the global economy for China to be doing well. So we have a real stake in China’s economic reform.

And, you know in terms of just bilateral trade, there has to be a level playing field. We cannot tolerate markets in China being closed to U.S. products and markets in the United States being open to China. We can’t tolerate an investment climate that doesn’t let U.S. investors go to China but does have Chinese investment in the United States. We’ve made progress on all those issues, but it will be a work in progress. It’s not something where, you know, on January 20th, you know, 2017, one will be able to say the work is done. What I think we will be able to say is the U.S.-China economic relationship is now one where we can have frank conversations and resolve difficult issues and work through things. And we’ve made a lot of progress on a lot of issues. That’s going to require sustained attention by the next administration.

HAASS: Let me just put two other issues out there and then we can open it.

One you’ve alluded to, which is trade. So TPP has been signed, sealed, delivered, and is parked. So the question is, what, if any—what, if any, evidence you’re seeing—particularly given the fact that the two principal candidates for the presidency are both against it, what reason is there for optimism whatsoever? And even more broadly, putting—even beyond TPP in the specific sense, what we’re seeing in this country and other places is a real pushback against various manifestations of globalization, one of them being trade. It’s being scapegoated—I’ll give my own editorial opinion here—for a lot of other things, and trade is being blamed for a lot of the job loss that I think is technology and innovation and productivity induced rather than trade-related. But be that as it may, what we’ve seen across party lines is a real falling off of support. So what does this mean for TPP? And more broadly, what is your sense—because this will go way beyond your tenure—can we, and if so how can we, rebuild support for what used to be something that Democrats and Republicans both supported?

LEW: You know, Richard, let me start with the kind of bigger question, then come to TPP. I think that there is a lot of anxiety and anger, not just in the United States but around the world. And there is a sense that even if trade does help grow the economy, the benefits of a growing economy aren’t being spread in a way that reaches working families. I think if we don’t have a better ability to convince working families, middle-class families that they have a stake in better macroeconomic growth, whether trade is good or bad almost is irrelevant. People lose faith in the system being on the level, serving all people. It’s why, even in this G-20, you saw almost every leader talk about inclusive growth, something that we used to be relatively lonely talking about. Now everyone is talking about inclusive growth.

Now, what do you do about that? In a country like the United States, we talked about infrastructure. That’s a big part of what you do about it because it creates good jobs in the short term and it builds a stronger economy in the future. We also have to worry about education and training, from the earliest education—preschool—all the way through to mid-career training with, you know, our proposal to make community college education free for those who complete it. What’s that about? It’s about giving people the skills they need to compete in an environment where, between technology and globalization, those with more skills do better than those with less skills. So there are things we can do to help make the benefits of a growing economy more widely shared.

You know, I think if you look at the substance of TPP, it actually pushes directly against a lot of the arguments being made against it. For example, on labor practices, if you look at one of the things that makes doing business in the United States less competitive, it’s when other countries have weak labor standards. Well, TPP puts in place higher labor standards. You’ve seen a number of the TPP countries—you know, Vietnam, Mexico—raise their labor standards because they’ve entered into TPP. I don’t think that’s widely known. I don’t think it’s widely appreciated. But if you want the U.S. to be more competitive, one thing you have to do is level the playing field. We can’t let the rules of the road be such that others get to have lower costs because they ignore environmental concerns, they ignore labor concerns, and they ignore business practices that we consider to be minimal standards, and then undercut us in price. TPP raises the bar on all the participating countries.

Have we done a good job communicating that and making it clear that the benefits of a growing economy that’s fueled by trade get to working people? I think we have more work to do. I think the fact that the wages in trade-related sectors are higher than the wages in other sectors is something most people don’t understand. We have to make that argument. I tried in an article in Foreign Affairs to do it to a relatively—you know, an audience that’s relatively familiar with these issues. We have to take it out of the pages of Foreign Affairs and get it into kind of kitchen-table conversations.

HAASS: Either that or we have to—it’s our fault; we have to build the circulation, maybe. (Laughter.)

LEW: And, you know I think you asked why am I optimistic that TPP can pass. Again, I understand the political environment is a rough one. I also understand we got a majority to vote for TPA. TPA was an abstract proposition. TPP is a specific product where I can sit and make the argument on issue after issue how it addresses the concerns that people had when they voted for TPA. If there weren’t a larger political debate, I’d be very confident that we could pass TPP because I know it meets the test that we set out. Even with the political environment we’re in, I know that when you have a president and an administration pushing as hard as we will be for TPP, we’re going to have an opportunity, albeit a small one, to get this done in the remaining months that we have.

HAASS: So there will be a push in the lame duck?

LEW: Absolutely. Absolutely.

HAASS: OK. One last question and then we’ll open it, which is Brexit. You mentioned Europe before. So far, at least, the financial and economic consequences of Brexit have been modest, worse than some of the doomsayers have said. Is it your sense, though, that this is the calm before the storm? That this is—or, to put it—use another historical analogy, I guess, it’s something of the Phony War; the real war hasn’t begun yet, and that happens once Article 50 is triggered, once negotiations begin? You then enter a two-year period of prolonged uncertainty. Is that—and how much of a drag might that be, not just on the British but on the—on the European economy?

LEW: You know, Richard, earlier in the conversation you asked about the value of the G-20. I can tell you, in the week leading up to and following the vote in the United Kingdom, the relationships that were—have been formed through these regular meetings that we have came into full force. You had ministers—finance ministers, central bank governors coordinating. And in a sense, I think some of the reaction of markets to the Brexit vote was very much muted because you saw such concerted action by central banks and by finance ministers to restore confidence that there was not going to be a liquidity crisis and there was going to be coordinated, not independent action—which, you know, could have happened. You could have seen devaluations in some countries. You didn’t. So I think part of it is, you know, you avoid something being worse. And, you know, you can be pleased that there—the reaction was muted, but it does have a little bit of moral hazard risk that people might say, well it wasn’t so bad.

Now, I think if you look at the forecast for the economy in the U.K., I’ve seen no forecasts that don’t show substantial decline in GDP. If you gave me a policy choice—choice A is 1 (percent) to 2 ½ percent more GDP growth, choice B is 1 (percent) to 2 ½ percent less GDP growth—no one in a position like mine would choose the lower GDP growth path, and that’s what the Brexit vote means for the U.K. So over time I think this is going to be hard on the U.K. All of their planning is assuming that it will have that effect.

The spillover to Europe and the United States will very much depend on what the environment of the negotiations are. If there is a sense that this is heading towards a resolution that will have a high degree of integration, I think you could have a moderate spillover into the other economies. If it starts to be a very contested discussion where it looks like the seams are opening up, I think you could have a much more dramatic kind of economic reaction.

In the United States, you know, the direct impact should only be relatively small, unless it starts to spill over into real anxiety about financial markets in the future and global economic growth in the future. But the story of that hasn’t been written yet. That’s to be developed, and I think it will develop over time. I think managing through the month after the vote to calm things down was very important.

I went to Europe two weeks after the vote to urge all the parties to kind of tone down the rhetoric, and make it clear this was going to be a long process, and that the goal is maximum integration. Now, I think, you’ve seen that be the flavor or the engagement since then. What happens when they actually start to get down to the details? You know, we’ll have to see. I hope that they continue to approach it in a way that keeps things calm because one thing we know for sure, it will take a while. And uncertainty can’t be avoided, because it’s going to take a while. You can characterize that period with great anxiety or lower anxiety. It’s better for the global economy if it’s a reasonable, amicable discussion aimed at reaching a resolution that is a stable one, and as integrated as possible, for the U.K., the EU. And that, I think, affects us in the global economy.

HAASS: OK. I’ve done my best to stimulate you all. I’ve raised every issue except the $20 bill. So have at the secretary. We’ll just do it normal Council style. Raise your hand. I’ll call on you. Wait for the microphone. Introduce yourself. And be succinct. I see a gentleman in the back.

Q: Thank you. Secretary Lew, my name is Rafael Matos (sp). I’m a journalist from Argentina.

I want to follow up on your comment about the debate between austerity and growth to be over. Argentina is implementing a gradual approach to fiscal adjustment, and the government seems to be paying both the political costs of that decision, without still getting the benefits of the actual growth—economic growth, I mean. So what’s your view on this gradual path to fiscal adjustment and this tension it creates? Thank you.

LEW: Look, I think that the reform program in Argentina, in a very short period of time, has had a quite dramatic impact both on Argentina’s domestic economy and Argentina’s place in the world economy. You know, just six months ago—you know, or nine months ago, Argentina was kind of on the fringe of the global economy. It’s now very much participating in the conversation about the global economy with the reforms that it’s putting into place being an example of progress that we’re making.

I don’t think you undo a long period of economic policy challenges and economic performance challenges in six months or a year. What you do is you show a direction that starts to restore confidence and opens markets, as they have, to traditional borrowing, and that eliminates, in the case of Argentina, the kind of outlier reputation because of the crisis over the Argentinian bonds. I think settling the dispute with bondholders put Argentina in a place where it could once again enter the financial markets in a normal way.

With all that said, there are many challenges that Argentina will have to deal with over time. The speed with which they do that is obviously going to have to be informed by the absorptive capacity of Argentina’s economy for reforms, but it’s going to take a determination to stay on a reform path in order to maintain confidence. I’ve had conversations with our counterparts there, where I think they want to move as quickly as they can, but they understand that they can’t do everything at once. And we’ve certainly urged them to stay very much committed to the reform agenda.

HAASS: Second row.

Q: Good morning. Earl Carr representing Momentum Advisors. Thank you, Mr. Secretary, first and foremost, for your service.

I had a question regarding China. Most scholars and economists have really written off President Xi Jinping as being committed to market-oriented reforms. Do you believe that’s an accurate assessment?

LEW: Well, I’m not sure that’s true about most scholars. I think that the kind of dichotomy that I outlined earlier very much is one that he’s going to have to resolve. I am confident from direct conversations with him that he understands what he needs to do for China’s economy. I’ve also heard him say that it’s going to be a test of the success or failure whether he implements those policies. What I’ve continued to raise publicly is the need for them to stick to the reforms and actually implement them in a timely way in order not to miss the opportunity that China has with substantial economic resources right now that they might not have in five years or 10 years.

I think it’s a mistake to write off the commitment. I think it’s correct to ask the kind of question I’m asking, which is do they have—does he have the political will to press head, even if some of the reforms are disruptive? You know, we talk a lot about excess capacity. What does dealing with excess capacity mean? It fundamentally means shutting down manufacturing facilities whose time has passed, and having a workforce have to be either relocated, retrained, or given transition assistance. That’s hard in any country. It was hard in the United States when we went through a restructuring our steel industry.

In China, the industry, and the state, and the social structure are all interconnected. It is a very big challenge. With that said, there’s no alternative. Some firms will just have to close. Some firms will have to go through a bankruptcy kind of process. Workers are going to need assistance. They’ve put aside a fair amount of money—probably not as much as they need to—to provide transition assistance. But it’s going to require pushing forward in the face of things that are somewhat disruptive socially. The alternative is having an economy that is no going to be as strong five years or 10 years from now. That would be bad for China, and it would be bad for the global economy. So I hope the answer to that question is that he sticks to the reforms that have been outlined. But obviously that’s going to be something we’ll all look back in five years or 10 years and know the answer to.

HAASS: You said there’s no alternative, but in some ways we’re seeing the alternative. It means not winding down state-owned enterprises. It means continuing to build supply when there’s not necessarily demand.

LEW: Yeah, but, you know, you look at the kind of confluence of major policies, the commitment China’s made on climate change will require shutting down some dirty facilities.

HAASS: Why do you say that? Because China has not specified a target that they have to reach by 2030. They’ve simply said they’re going to peak in 2030. They’ve never set a specific quantitative limit.

LEW: But they need to keep adding new capacity to provide new necessary industrial capacity, new necessary electric generating capacity. In order to level off when they say they’re going to level off, they’re going to have to create headroom by taking dirty old factories offline. I think that there’s a coming together of the excess capacity and the climate objectives. I actually think the climate issue is a domestic issue in China now. And you’ve been to China. It’s not hard to understand—

HAASS: The pollution certainly is, more than climate, in some ways.

LEW: Well, that’s what I mean. The way it’s experienced by people on the street is the face mask, not letting their children go out into the street, the eyes burning when you walk down the street. It’s very real.

HAASS: Yeah. No, we agree.

Sir, in the second row here.

Q: Thank you. Dan Rosen of Rhodium Group.

Another China-related question. You, in discussing direct investment flows, said that we need to insist upon a level playing field. The United States has traditionally said we’re open to other people’s capital, regardless of whether they’ve got their policies toward inward investment right at home. And on top of that, China already hosts about three times as much American direct investment as we’re hosting here. Are you serious that this is a priority issue to kind of clamp down a bit on the inflow of Chinese investment unless we have a more kind of reciprocal arrangement?

LEW: Look, I think from the inception, the United States has been open to foreign direct investment. It’s now we’ve had the economic performance we’ve had over the last 240 years. I’m not going to re-characterize the future as being dramatically different from the past. It’s a good thing that the United States is an attractive place for capital from around the world to invest. I think the idea of bilateral parity in terms of how we deal with China is important, though. You know, we have pursued, on behalf of the interests of U.S. businesses having access to Chinese markets for goods and services in a wide variety of areas.

And I think if you look at something like a binational investment treaty, that’s going to require—in order for there to be a BIT it’s going to require China to open its markets as well as getting access to American markets. We’ve made it clear that the only pathway towards a successful BIT negotiation is if it’s a high quality agreement. They want to have an agreement. We think an agreement would be in our mutual interest if it’s high quality. We’re going to push that very hard. Even without a BIT, you know, we have pushed for access both in financial services, health care services, in other fields, technology, for U.S. firms to have access to China’s market.

One of the issues I’ve raised with China in the last year, increasingly, is that as they make progress on removing some of the barriers for U.S. investments that are direct barriers, indirect barriers are increasingly a source of concern, whether it’s supposed national security reviews or technology reviews, things that tend to keep foreign businesses out are another form of an indirect barrier to foreign investment. Frankly, it’s not in China’s interest to have that happen. They need the innovation that comes from having foreign companies come to China. They need the capital that comes from foreign companies coming to China.

If it becomes an inhospitable environment, it’s bad for China. It’s also unfair for it to be a one-way street. So we’ve pushed this quite hard, and we will continue to. And I think that there is—we’ve made progress, but frankly there’s more progress to be made.

LEW: Jack, I want to put one other issue on the table, I should have mentioned before, which is you’re very—as much as any of your predecessors, if not more, you’re associated with Treasury’s role in the strategic refinement of sanctions. And you’ve played a critical role in the backdrop to the Iran agreement. Well, just the other day North Korea did its fifth nuclear test. Not surprising, lots of people said let’s review sanctions, maybe ramp them up. And the question with North Korea is not only have sanctions not worked to date—if by worked, you mean getting them to stop their nuclear missile programs—but by the time you’ve taken so much away from a country, and this is the most closed country in the world, there’s not a lot left to do. So is it your sense that sanctions have essentially run their course with North Korea? Or would you still think there’s room for potential impact?

LEW: I think sanctions have effectively cut North Korea off from the global economy. And you know, ironically that does reduce your leverage. I mean, North Korea can say what else do we have to lose, if they already don’t have access except for humanitarian goods and services. On the other hand, we came through the U.N. sanctions review earlier this year, and we saw an unprecedented international focus, including China, on putting tougher sanctions in place. A lot of the flows between China and North Korea are for humanitarian goods. But there’s also some leakage there in terms of other support for North Korea’s economy. Having China participate with us is very important. Having them follow through and implement those sanctions is something we press very hard on.

We are not taking any option off the table. We continue to review constantly what our options are to put more effective pressure on North Korea. But one of the things in sanctions generally that I’ve given a lot of thought to, and I think is going to be incumbent on whoever is the steward of our sanctions program, is getting the balance right between multilateral and unilateral action. If you go it alone and don’t have the cooperation of the world, it could look tougher but perhaps have less impact. You need to have the cooperation of the global community to have maximum impact.

That doesn’t mean you take any of your unilateral options off the table, but getting the mix right—we saw in Iran—there were on occasions some issues as to whether we should do more on our own. And I was of the view that we needed to keep others engaged. I think we provide that that was the way to be most effective with Iran, to have the cooperation with, in the case of Iran, our oil sanctions. That was a hard policy for a lot of countries that depended on Iran for a lot of their oil. We had that cooperation. We pressed forward. We keep an international effort together.

North Korea is an enormous challenge. We are going to do everything we can to try and keep the pressure on North Korea. It’s unacceptable for North Korea to have a nuclear weapon. They have done more testing both of nuclear weapons and of missiles in recent months, in a way that has, I think, the world’s attention clearly focused. And we will continue to sharpen financial tools as we can. The goal is to change the policy. Always with sanctions, the goal is to change the policy. And I think with North Korea, you have a particularly unique challenge, where the question is: What will change their policy? I have no heard very many people with a clear confidence that there’s one button you can push that will have that effect. We’re going to everything we can to be effective.

HAASS: Yeah. David.

Q: Thank you, Mr. Secretary. You—

HAASS: You should introduce yourself.

Q: I’m David Braunschvig.

You mentioned that you have a concern about inversions. What role do you think in the context of your fiscal policy recommendations should be aligning the U.S. corporate tax to levels that are consistent with our international partners—i.e., lower them.

LEW: We have been proposing for three and a half years to reduce the corporate tax rate by eliminating loopholes so that we go from being one of the highest statutory tax rates in the developed world, to roughly being at the average. I think that would be good for U.S. competitiveness. I think it would be good to closing down a tax environment that has businesses driven to maximize tax efficiency as opposed to output efficiency. I think it’s a very important economic objective. Earlier I was describing how we marry that to infrastructure investment, where I think we can actually do something that’s profoundly positive for the U.S. economy.

I’ll tell you the reason we’ve had trouble getting there. First of all, it’s always hard to close loopholes because while it’s good for the common wheel to lower the statutory rate, there are going to be individual interests that don’t want to see the loopholes closed because it’s their individual benefit. We’re going to need to overcome that. That’s always hard. We’re also going to need to kind of confront honestly the fact that it is not going to happen in an environment where we do necessarily individual tax reform at the same time. There has been an argument made that we shouldn’t do business tax reform unless we also do individual tax reform.

I think there’s a consensus to be had on business tax reform. And the voices that argue to bring them together, ostensibly in the name of small businesses, are actually representing rather large interests, whether they’re interstate pipeline companies or large financial firms. I think we have to break them apart. We have to be willing to talk about business tax reform, be willing to do it on a revenue-neutral basis, where you close loopholes and lower rates, where you take the one-time revenue that comes from bring a foreign income home and you use that pay for infrastructure. You cannot use that to pay for lower tax rates because it’s not going to be there permanently and you can’t do it in a revenue-neutral way if you take the one-time money and lower rates.

I think we can get to a rate that puts us roughly at the average if we do that. I’ve been encouraged over the years by bipartisan conversations where I think there is an emerging consensus around the idea that I just described. The political environment has not been one that was conductive to getting it across the finish line these last couple of years. I hope that the combination of heightened understanding of the problem that we have, given the European state aid action, given urgent need for infrastructure, create a moment in time where the two things come together and we can actually get this done.

LEW: Now that we’re 15 minutes the way into the meeting I think now is as good a time as ever to remind people this is on the record. (Laughter.) Anything you said can and will be used against you.

Yes, ma’am, in the front row.

Q: Bhakti Mirchandani. I work for a hedge fund. Thank you, Mr. Secretary, for your time today, and also for your service.

I’m sure you’ve read Piketty’s book. It was the CFR book of the year. What are your thoughts on a global tax authority? Is that something you would recommend that your successors work towards? You’ve talked about adding tax elements to most of the treaties that would tax U.S. profits abroad, but what are your thoughts on kind of broader multilateral cooperation?

LEW: I think if you look at the progress we’ve made in the last two years in the G-20 on something that’s called base erosion and profit shifting, we’ve made more progress in the last two years than we did in the previous two decades. It doesn’t entirely solve the problem. It doesn’t put us in a place where we don’t have to change our laws and other regions and countries don’t have to change their laws. I don’t think we’re going to end up with a global tax system. What we each need to do is attend to the things that make our environments either ones that drive businesses to look for tax havens, or make our economies the tax haven themselves.

You know, we’ve had an argument with other countries where we think a race to the bottom with low tax rates is generally a problem. There ought to be a norm that doesn’t have countries in a beggar-thy-neighbor position. It’s a little hard when we have such a high tax rate to prevail in that argument. If we reformed our business tax code and we were closer to the average, we would have more leverage to make that case. I think that the base erosion and profit shifting involves sharing of information, it makes it much harder for a firm to hide its earnings.

You know, there’s two kinds of tax avoidance—legal and illegal. (Laughter.) Our job is to shut down the policies that provide for legal tax avoidance, and to enforce policies that are getting through the cracks illegally. Information helps you a lot with the latter. Having beneficial ownership of information available to firms—to tax authorities and law enforcement authorities helps to get at that. We’ve taken some important strides domestically on that.

At Treasury we’ve put in place rules that require financial institutions to get more information about beneficial ownership. It actually would require legislation to have that apply to companies formed generally in the United States. I hope that the current focus on the inequity in a tax system that people can easily avoid through legal and illegal means helps us to accomplish more policy to close that. It’s kind a kind of directional way towards what you’ve described, but obviously it has very different characteristics.

 HAASS: Mr. Huber.

Q: Dick Huber, InVina Wine Group.

Thank you for your comments. Very articulate. And we’ve talked about several large countries going through transitions, but we haven’t mentioned one of the biggest that’s going through one of the greatest transitions, which of course if Brazil. And you have the advantage of having a counterpart there that also is an ex-banker. I’d just like to have your comments about what’s happening there.

LEW: Well, I’ve had a number of counterparts in Brazil over the last three and a half years. (Laughter.)

HAASS: One is living here in New York City now. (Laughter.)

LEW: I met my newest counterpart just two weeks—a week before, at the G-20. And we met before when he was in the private sector. Look, I think that Brazil has a combination of economic and political challenges. You know, Brazil’s financial system has actually been pretty stable, notwithstanding a lot of political and economic turbulence. If the political situation calms down and solid economic reforms are put in place, Brazil’s economy actually has a lot of positive potential. They’ve had a bad combination of destabilizing things going on. And you know, I think that the reform agenda that’s been laid out is a serious one. And hopefully things will stabilize on both the political and economic front so that Brazil, which is a very large economy, can get back to healthier growth.

HAASS: All right.

Q: Mr. Secretary, my name is Joseph Cari.

Please comment on the use of big boxes of cash to pay Iran and your sensitivity of the public relations part of that, how the American public viewed that these payments were made in such large cash—in such a large amount of cash. I think it something that the American public just does not understand.

LEW: Yeah, I think if—you have to break what has been going on with Iran into its component parts, because they’re really separate. Obviously at the beginning of the year we had an agreement on the Joint Comprehensive Plan of Action. You saw Iran implement the plan, which then meant we relieved sanctions that were nuclear-related sanctions on Iran. That’s a good thing. That has actually done more to stop Iran from getting a nuclear weapon than any other action, you know, that we could have taken. It’s set back to the clock where they have a longer lead time.

Now, when we lifted the economic sanctions that were tied to their nuclear program, we left in place sanctions that were tied to their support for terrorism and regional destabilization. Separately from the nuclear agreement, we had a number of other things that we were able to work through with Iran, in part because the door was open to discussions where it had never been open before, because we had this negotiation going on. One issue had to do with a long-standing lawsuit where under the old regime, the shah’s regime, Iran had paid the United States for military equipment that was never delivered. There was a lawsuit pending The Hague, where we believed we were going to lose and we were going to have damages that were many billions of dollars more than we settled for.

We settled. And when you settle, you have to make a payment. How you make the payment is a technical matter. But in a world where you’ve cut Iran off from much of the global financial system, they wanted to be paid quickly, which is not unusual when there’s a settlement. And cash was the method that was chosen. I think that the issue is the same, whether it was a wire transfer or cash. It was a settlement that saved the American people billions of dollars. And it resolved a longstanding legal dispute.

Separately, there was a negotiation to have Americans brought home. The fact that these things all happened at the same time, you know, is in part because the doorway to discussions was opened at the same time. And I think that Americans should be glad that we have a nuclear agreement with Iran. They should be relieved that a lawsuit that could have meant billions of dollars more exposure is settled. And they should be happy that separately Americans who wanted to come home have been able to come home.

HAASS: OK, we got lots of hands. So I want to alienate at least half the people in the room. The gentleman here has been very patient for a long time.

Q: Thank you. Peter Lehner with Earthjustice.

You’ve mentioned both the interest in climate change and also the growing consensus for growth or austerity. Is there any thought about trying to direct that growth in some ways that are more consistent with the climate change strategies?

LEW: You know, one of the things that the G-20 has focused on in the last year is green finance. It was one of China’s priorities in its year of presidency. In the period of time leading up the Paris agreement there was a conference of—including finance minister in Addis Ababa, Ethiopia, to try and change the way that countries think about financing, you know, green technology.

I would say the approach for decades of developing countries was to look externally for, you know, official development assistance to finance those activities. Coming out of Addis Ababa was an agreement that it needed to be three-legged stool. It needed to be combination of official development assistance, domestic budgetary commitment, and public-private partnership. Coming out of that I think is a much more aggressive approach with how to finance what will be the technology of the future and the alternative to fossil fuel use. And it’s an important shift in orientation which I think is going to have a long-lasting impact.

HAASS: This will probably be the last question, unless it’s a particularly short question and a particular short answer.

Q: I’ll try to make it short.

LEW: My forte, short answers.

Q: You’ve spoken eloquently about easing sanctions on Iran, and how that worked. What about applying that to North Korea? And secondly, in that context, you talked about the technical issue of having to send pallets of cash as opposed to allowing a bank transfer by indemnifying a bank. You’re running into problems with extraterritoriality on Iran. You’re going to run into the same thing with the Chinese on North Korea. How do you plan to deal with that problem?

LEW: Look, I don’t think you can compare where we are in terms of the nuclear sanctions with Iran to anything having to do with North Korea. We used sanctions in the case of Iran to do what sanctions can do. Sanctions can bring a country to the table, can make them want relief from the sanctions, but they have to choose to change their policy. Iran changed its policy on its nuclear program, there was relief from the nuclear sanctions. We’ve seen no sign from North Korea of a change of policy. So I don’t think that—I don’t think we’re in a time frame where relaxing sanctions on North Korea is the question. The question is how can they be more effective.

In terms of extraterritoriality, you know, we do have the ability to put unilateral sanctions in place. The United States is the center of the global economy. The dollar is the world’s reserve currency. That gives us the ability to have very substantial reach. But we’ve also learned over time that the most effective sanctions are sanctions that are global sanctions, international cooperation to implement them. And we have to always balance which tools we use and how to balance them to be most effective. I think we got it right with Iran. And we’re going to keep working at it with North Korea.

HAASS: Any update on the $20 bill, before you leave us?

LEW: You know, I think I made the news that I can make on the $20 bill. I’ve very pleased with where we ended up. We ended up in a place where we will for the first time in a hundred years have a woman on the front of our currency. It will be Harriet Tubman on the $20 bill. It’s going to take some time for that design to be completed. But I’m proud of the decision and I’m very pleased with the reaction. I’m also pleased with the kind of scope of changes that we’ve outlined, which are going to—even on the $5 bill and the $10 bill, bring to our currency more of our history, bringing images of iconic events that happened at the Lincoln Memorial to the back of the $5 bill, and bringing the story of women’s suffrage to the back of the $10 bill. So I think it was an exciting project to work—has been an exciting project to work on. And we’re going to leave it in the place where it can be implemented as the technology features and the design features can be put in place.

HAASS: Do you feel inclined to distribute any samples? (Laughter.)

LEW: No free samples in my business. (Laughs.)

HAASS: I want to thank the secretary, both for this morning and for all these years. (Applause.) Thank you.

(END)

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