The View from the Obama Administration

Monday, March 12, 2012

Undersecretary of Economic Growth, Energy, and the Environment Robert D. Hormats addresses the CFR's Council of Councils inaugural conference.

The Council of Councils is an international initiative designed to connect leading foreign policy institutes from around the worked in a common conversation on issues of global governance and multilateral cooperation. The initiative is funded by a generous grant from the Robina Foundation.

RICHARD HAASS (president, Council on Foreign Relations): OK, it is yet again time to go to work, for which I apologize. Good evening. I want to welcome Ambassador, Secretary, everything else, Negroponte, as well as Odeh Aburdene, to our -- to our midst.

We've had a really good day, I thought, in this, our first day as a -- the Council of Councils looking at subjects this morning from humanitarian intervention to nonproliferation to the state of global governance. Tomorrow we'll tackle the easy question, among other things, of the future role of the dollar. We also had the good fortune to hear from Bob Zoellick. I think this is probably the beginning of the end for Bob at the World Bank. (Laughter.) And we were lucky enough to hear some of his reflections on the bank as a -- one of the pre-eminent international institutions.

So tonight we are lucky enough to have with us Bob Hormats. Bob was sworn in as undersecretary of state for all things economic in September 2009. Prior to that Bob was a vice chairman of a fledgling financial startup called Goldman Sachs. (Laughter.) Before that he had served in government any number of times, usually with the letter "E" somewhere after or before his name for the economics.

He actually has straddled, I think as well as anybody, the political-economic space, which is something important to us at the -- here at the Council on Foreign Relations because that's exactly what we try to straddle, because I always tell people that in universities, you have departments of economics and departments of politics or political science, departments of history. In the rest -- in the world, you don't. The world doesn't have isolated stovepipe departments; it's all integrated. And I think Bob's career has dealt with economics in its integrated sense as well as anybody. And most important, when you look at Bob's career and you look at his resume, the one thing that stands out is his decade on the board of the Council on Foreign Relations.

Bob is, as you can see, joined by Thierry de Montbrial, who's the founder and president of IFRI, the French Institute for International Relations, what some of us consider to be the "Council on Foreign Relations East" or, depending upon your perspective, west. The wine and the food is better there, so if you're lucky, you'll get invited to their next meeting. But in the meantime you're here with us. And Thierry, in addition to his work at IFRI, is also the founder of the World Policy Conference, which, like this meeting, deals with questions of global -- of global governance.

These two gentlemen are going to have a conversation, I believe, a tete-a-tete, so to speak. We Americans are allowed to use French phrases again now that the United States and France have -- their relationship has improved. (Laughter.) And then afterwards we will open up the conversation to you all, and I hope that you will take advantage of it and get the microphone and challenge both of the gentlemen on the stage.

So Monsieur de Montbrial, the floor is yours.

And Bob, thanks very much for joining us tonight. (Applause.)

THIERRY DE MONTBRIAL: Well, thank you very much, Richard.

Thank you, Bob.

The first thing -- the first thing to observe is that we had Bob and Bob. And you said this morning that we have forgotten the first name of Mr. Zoellick, so we have also forgotten the first name of Mr. Hormats. But this is Bob. (Laughter.) Bob, we have known each other for almost 40 years. The -- we met for the first time in the fall of 1973. At the time you were working at the National Security Council. I was myself yet -- the head of the policy planning staff -- the newly created policy planning staff at the foreign -- the French Foreign Ministry. And I remember very well that our first discussions were essentially about global governance. The only difference, of course, is that in those years we did not use the phrase "global governance." But fundamentally, this is what it was.

And I think it is interesting, to start this conversation, to ask you almost 40 years later: What has changed?

ROBERT HORMATS: Well, it's a great question. And I think about it myself, particularly coming back to government after spending such a long period of time outside of the government in the private sector, as Richard has indicated.

What's changed, I think, is dramatic. There is a wonderful quote from the late Vaclav Havel. And he said, things have changed so dramatically and so quickly, we haven't had time to be astonished yet. And I think that when you think about it, there is a lot of wisdom in that statement.

If you go back 40 years, there was one central issue, and that was the Cold War. The Cold War dominated virtually every aspect of foreign policy or statecraft at the time in various ways and in various parts of the world.

Second, during the Cold War, power was based on essentially the accumulation and projection of military power. Now increasingly, power and influence is measured in terms of national economic strength and the ability to project national economic strength.

The third element that's so interesting is that at the time the BRICS, as they're now called, were really minor players in the global system. It's not that they weren't -- except for Russia, which was then the Soviet Union, but the others were really minor players in the -- in the global political system. And now, largely as a result not of their accumulation of military power but their accumulation and projection of economic power, they are major players in the global system.

At that point we didn't have the G-8. We didn't have the G-20. There were far fewer international institutions. The world was divided up between East and West in the Cold War, but also, as time went by, North/South. There were lots of frictions between the North and South, and various fora were established, particularly under French leadership -- Avenue Kleber, where there was an attempt to try to bridge the differences between North and South.

The whole notion of NGOs and the role that civil society played in the formation of foreign policy was minor -- minuscule. There were very few NGOs. There was very little involvement by the average citizen in foreign policy in general. Foreign policy in those days was conducted between the foreign office and the State Department or other foreign offices around the world. Nowadays you have -- virtually every agency of every government has its own foreign policy and has its own foreign policy structure. So you have interaction between the Department of Energy here and the department of energy in other countries. Virtually every agency is involved to some degree -- in many cases to a substantial degree -- in international economicaffairs, so they don't really have to go through the foreign offices or the State Department.

And now you have instant communication, whereas in those days, you had the device of using cables from the State Department to colleagues around the world; now you can communicate with your counterpart, when you drive home at night, using your BlackBerry or your iPad. So the whole notion of foreign policy communication, foreign policymaking, has become much more diffused.

So statecraft has to address these dramatic changes. And how does it do that?

One, as Secretary Clinton has pointed out in several speeches, you really have to have a much stronger economic component in your overall tool -- box of tools in your foreign policy -- on your foreign policy agenda. In other words, you got to have a very strong economic component in your overall foreign policy. So that's particularly important, particularly when you're dealing with emerging economies, but in general that's a very important part of foreign policy today, whereas it really wasn't so much during the Cold War.

Second, you cannot simply deal with foreign offices around the world. You have to appeal to popular opinion. You have to utilize other techniques for addressing issues. You have to deal with the views of people in the streets of Cairo or Tunis or many other parts of the world. So you have to have a foreign policy which reaches well beyond the capitals to -- and well beyond the major institutions to large numbers of other people.

You also need to deal with other agencies.

You have to have, in the State Department and other foreign offices, the ability to pull together and coordinate and prioritize various aspects of foreign policy and bring them all together.

So these are ways in which statecraft and international economic and political governance have changed very dramatically.

And lastly, you need to bring in a lot more countries. And I think that probably is the biggest difference. That is to say, it can no longer be the U.S. and Europe working together on issues. You need to have the active engagement and the constructive engagement of the BRICs, but not only the BRICs. Many other emerging economies as well have to play a major role if you're going to make any progress on financial issues or trade issues or environmental issues or nonproliferation issues or virtually any other major issue in the global economy.

It can't be the traditional economies and the traditional countries that were the dominant forces in the period right after World War II, the -- U.S., Europe, Japan and a few others, it has to be a wider range of countries, and in particular, China, the rise of China. I'm not a believer in the G-2, but I do think that almost every major policy issue is going to be more easy -- is going to be easier to resolve and will be resolved more rapidly if the United States and China work together as opposed to their working at odds with one another.

And therefore, I think particularly relations in the United States and China are extremely important. But it can't be just China. And that's one of the key points, it seems to me, is that China itself, while important, and the U.S. relationship with China is certainly very important, if we confine it only to U.S. and China trying to deal with one another and resolve problems, first of all it probably won't resolve the problems, because you need other countries; and second, because other countries will resent the fact that the U.S. and China are trying to impose their views on other countries; and third, because one of our objectives, particularly in the economic area, is to develop a consensus on new global rules and norms or the reinforcement of old global rules and norms, and China and a number of other countries in many cases are less enthusiastic about doing that.

So to make progress on many of these issues, you need to have a much broader range of countries engaged in the process, including some of the more rapidly growing emerging economies in South Africa,Indonesia, Turkey and many other countries that are playing a much greater role in the world system -- need to have a voice in the global system. It can't be just the United States and China or the United States, China and India. It has to involve a wide range of other countries in the process of developing the rules and the norms and the consensus that will enable the world economy to work effectively in the 21st century.

So the economic statecraft and statecraft in general or governance in general is very different, for all these reasons.

DE MONTBRIAL: Well, so listening to him and to all these changes he has been describing, he should be exhausted, but in fact you are not.

Let me -- by the way, I have forgotten to say that this meeting is on the record. And you're invited to switch off your telephones and all that, but apparently everything is going well.

So let me -- let me -- you mentioned the NGOs, the role of the NGOs, and then you spoke of certain ministries, such as energy ministries, speaking together, bypassing the ministries of foreign affairs, but in fact you say nothing about the NGOs per se. So in your -- in your actual experience, how would you describe the role of NGOs? I think this is particularly important for our meeting here, because the initiative of Richard Haass is to create a council of councils, and with the intention of playing some role. So how would you describe the increasing role or supposedly increasing role of NGOs, and particularly think tanks, I would say?

HORMATS: Well, I think the role of NGOs is clearly much greater than it was 40 years ago, when there were very few, if any, NGOs at the time. So why are they important? They're important for a variety of reasons.

One, they obviously are playing a greater global role. Two, they focus a lot of attention on very specific issues, some of which governments themselves don't pay enough attention to. Third, in many cases they are very good watchdogs for issues that governments should be paying attention to but can't, in many ways because their scope is very limited and their agility is very limited.

And let me give you an example of what I mean. And that is, we have coming up this Rio plus 20 meeting that's going to take place in a couple of months. We had a meeting in Palo Alto where be brought scientists, entrepreneurs, innovators from around the world to come and address development issues: How do you use technology to address development challenges? And then we also had government officials.

What was very interesting about this was that there was a division between the government people and the -- and the NGOs and the innovators and the people who really were actively engaged in solving problems. And what was quite obvious at the time was that you had groups like the World Wildlife Foundation or the Environmental Defense Fund or many other groups that were looking at environmental issues; innovators in the area of energy, particularly green energy, from all over the world; people who were dealing with global health issues from all over the world. These were scientists, innovators and NGOs that had global scope.

And what's very interesting is the meetings that they had were really designed to solve problems. You had them focusing what was the problem, how do we mobilize expertise from around the world -- both to monitor what governments are doing; to identify problems that governments are not dealing with adequately; to, in some cases, address them themselves.

One example was an NGO which is monitoring air quality in various cities in China -- in 119 cities in China. What are they doing? They're putting up a little air quality measurement in all these cities so that the Chinese cities are now -- they know -- the citizens of these cities know what the air quality is. And they compete one another -- they -- with one another. They put pressure on their governments to improve environmental quality. This is something that the government of China was not going to do and certainly the government of the United States was not able to do.

So what's -- what was increasingly clear is that you had all these groups, this sort of collective expertise of these groups coming together utilizing the new technology of the Internet, which certainly didn't exist 40 years ago, to address global problems. And they would also not just address them using new technology but address them in collective meetings that they had with governments to encourage governments to take more robust positions.

One of them is an NGO which identifies viruses that are emerging throughout the world and reports them. These are done virally with people with their cellphones. If there's an instance of an outbreak of a given virus, they report it to a particular group. The particular group sends it around the world so people understand that there is a risk that's developing in Vietnam or China or some other place, and then scientists around the world work together to find a cure. This was in fact the case with avian flu. Avian flu was identified not so much by scientists but by people who saw this bird flu beginning to develop, sent the information in, and then scientists around the world began to understand what it was. This is something governments couldn't do.

So at this meeting in Stanford it was very interesting. When the government people got together, they were talking about communiques and U.N. language and this and that -- really sort of sclerotic kinds of conversations, whereas the entrepreneurs, the NGOs, the scientists, the innovators, through this sort of collective effort to deal with problems, were way out in front in addressing these.

So I think the modern notion of governance is not just about government; it's about mobilizing the talents of people around the world. And NGOs are a wonderful way of pulling that talent together and getting it to focus on specific sets of issues. So I'm increasingly of the view that government in the 21st century involves effective government, but it also involves engaging citizens, experts, using collaborative methods.

DE MONTBRIAL: Bob, you seem to say that this is a wonderful evolution. OK, but explain us how this does not lead necessarily to chaos?

HORMATS: It's possible it leads to chaos, but it's also possible that governments can produce chaos by not addressing some of these issues as well. So I do not think that government can simply cede authority to NGOs. I'm not a Pollyanna about the role of NGOs. They need also to exercise responsibility. And in many cases, NGOs are not always the best vehicles for addressing issues.

But increasingly, they -- the ones that are accountable, that have some measure of accountability, can play a very important role.

It doesn't mean governments concede the role of governance to nonelected authorities. It means that governments can utilize the information provided by NGOs or other groups to help them governing, and it also means that these groups can monitor government.

This doesn't mean -- (you're right ?) -- in many cases you find NGOs that may not have the right answer or may not have the any legitimacy. They may be sort of self-appointed, without having a sense of responsibility, and they may simply focus on their own little issue at the cost of other issues, which may be more important.

So it's not an either/or -- government or NGOs; it's governments and NGOs and private sector experts working together to resolve these problems. But government -- governments themselves, in this very rapidly moving world, need to utilize, to mobilize a lot of the collective talent that's out there to help address these problems.

DE MONTBRIAL: So let us apply that to the case of international monetary relations and the trade system, you know. How do all these extremely complex chemistry lead to a more stable international monetary framework and a more stable trade system?

HORMATS: Well, I'd -- I'm not sure, in those areas, that NGOs are necessarily the vehicle for doing it. And I think the monetary system still has to be largely managed by finance ministries and central banks. Trade -- there are clearly trade ministers, trade ministries that address a number of these issues.

But I do think that from time to time, one of the things that we need to address more -- and it's not really a question that NGOs primarily can deal with; it's more a change in the system that has emerged as a result of evolution in the way governance is conducted by countries, and that is increasingly, if you look -- many of the problems of the world today are global, but politicians have to respond to national electorates. And that presents a very substantial dichotomy and a major dilemma for the world. Increasingly, almost every issue that affects the American economy or the Japanese economy or the British economy or the South African economy, you name it -- almost any one of those issues that affects those economies is global. The financial system is global, but it has a profound effect on everything you and do, and certainly on the financial environment in the United States. The trading system has an enormous impact on all of us. The environment clearly does. The issue of pandemics -- you name it; almost every issue is global, with an enormous national impact -- virtually everything: food prices, oil prices. On the other hand, most of the politics of individual countries or the politicians of individual countries have to respond to domestic pressures within a domestic political context. So you have to figure out ways of addressing this dichotomy, this imbalance.

And in the area of trade, what's particularly interesting is this: that we have rules like the WTO, but increasingly what governments are doing is finding ways of imposing nationalistic measures that are not strictly WTO-illegal but are what one might call behind the borders. These are measures that were never intended to be included or in some cases were never intended to be included under WTO rules, but governments increasingly are utilizing them to restrict trade or restrict investment or to force the transfer of intellectual property.

China has used these to a very substantial degree. China doesn't want to destroy the global trading system, but it wants to utilize the global trading system to its advantage. So it finds gray areas that are not strictly WTO-illegal which are counter to the principles of openness and fairness that are built into the WTO.

And China's not the only one. A lot of countries look for these gray areas where they can identify measures that will protect their economy or provide benefits for certain sectors that are beneficial internally but are not strictly illegal in -- with the WTO and that they won't make that country vulnerable to suits in the WTO. So we're experiencing a much more complicated global trading system with a lot more barriers and a lot more measures that countries take, like, for instance, certain kinds of financial subsidies and protection from antitrust measures and restrictions on investment in particular sectors in their economy that the WTO does not address but which gives their companies -- they give their companies certain advantages.

These are the kind of things -- they're more subject to -- or should be subject to international rules, but the international rules don't apply as well as they ought to because they're techniques that weren't used when the WTO was created or the GATT was created and now we have to address them.

DE MONTBRIAL: So, one last question before we open the discussion to the floor: In a meeting -- in a small meeting in Washington last fall, we discussed the issue of the Arab Spring, and we discussed the issue of -- from the viewpoint of governance, and we discussed the issue of the economic tools to try and stabilize the situation in the -- in the Middle East and particularly in the case of Egypt, which rightly you identified as a key target for your -- American policy. So a few month(s) later, where do we stand?

HORMATS: Well, we've obviously had some very unfortunate issues with Egypt over the last couple of months and, without getting into those because they're still at a very sensitive stage and there's no point in discussing them at this moment, I would make the broad point that this area is equivalent in terms of its historical importance to the demise and the disintegration of the Soviet Union a couple of decades ago. And the difference is that -- or at least one difference is that, at that period of time, the United States and Western Europe had a large amount of resources that it could bring to bear to support the transitions in Eastern Europe and Central Europe. Today, given budgetary considerations here and elsewhere, particularly in most of Western Europe, the amount of resources available to provide support for these countries in transition is simply much smaller, much lower. So we have -- the tools available to us are simply more constrained.

The second is that, because of this, we need to use more of our techniques that relate to the private sector. That is to say, find ways of facilitating exports from these countries to the rest of the world; find ways of encouraging more foreign investment in North Africa, in the transition economies, than we -- than we -- than we might have in the past; identifying other methods of mobilizing international resources through the IMF or the World Bank or the African Development Bank or the European Bank for Reconstruction and Development, which we're trying to find ways to enable to play a greater role in the -- in the -- in the North Africa-Middle Eastern transition economies. So the stability of these countries economically is very important to the stability of these countries from a political perspective, and vice versa, I would add.So the historical challenge is that we just don't have the resources we had or had 20 years ago to address the change in Eastern Europe and Central Europe. But we nonetheless need to look at this as an historic opportunity and mobilize, in as creative a way as we can, the resources that we have and the capacity that we have to support these countries because if the economic transition does not go well, it'll make it much more difficult for them to have a smooth political transition. And likewise, as I say, if the political transition does not go well, it'll make it much more difficult to have a smooth economic transition, in particular because it will discourage foreign investment, which is critical to job creation in this region.

So we're trying to work together in what, as you know, is called the Deauville Partnership that was established under the leadership of France at the Deauville G-8 summit next -- last year. We're the chairman of it this year; I'm the chairman of the -- what they call, the foreign affairs sous-sherpas. We're focusing on a number of issues that are designed to address this historic change, but it would be, I think, a terrible historical mistake if we did not collectively find a way of working, not only with the transition economies, but with the other economies of the region -- Turkey and the Gulf states -- to find a way of supporting this transition and particularly helping to stabilize these countries economically, but beyond that, helping them to undertake structural reforms that will enable them to create more jobs; support small- and medium-sized enterprises; address problems of corruption, which was one of the major concerns a lot of people had about the previous governments in these regions.

So that there are enormous numbers of challenges to be faced in addressing -- in addressing these difficulties, but it has to be a top priority.

I would say, of all the issues that I have to do deal with, that the two most significant priorities -- the two highest priorities are, one, the economic challenges of the Middle East and North Africa and, two, the effort to bring China into the global system in a way in which they take greater responsibility for it, that's commensurate with their economic strength.

DE MONTBRIAL: One of us, this afternoon, described Qatar as a major NGO because they have three -- the three ideal ingredients of NGOs: namely, money, access to media, and momentum. Would you agree?

HORMATS: I'm not sure I'd call them an NGO, but I think they have access to all those three, yes. I mean, they do --

DE MONTBRIAL: (Laughs.) Especially the first one. (Laughs.)

HORMATS: Well, they have money, but they also have access to media, which is certainly true -- Al-Jazeera -- and they have a lot of momentum. And I also think -- and let me just -- this is a good way of addressing an issue that was discussed at our table -- Odeh and I go back a very long way; we always discuss these kinds of issues, and we talk and -- and that is that I think -- I had the opportunity in Davos to spend time with the prime ministers of the countries of the region and the candidates -- or at least some of the candidates for president of Egypt, and -- and a lot of the Gulf countries were there -- and I do think that while there's been criticism of the Gulf countries for not providing very much money to Egypt or Tunisia at this point, I do think, in the end, they will recognize that a stable, prosperous Egypt, one that has a -- an orderly transition to democracy and to a stable market-oriented economy, is in the interests not just of Egypt but of the whole region.

And I would say very much the same of Tunisia. Tunisia's role is different. Tunisia's certainly a smaller, less central country then Egypt, but since it was the beginning -- this is where it all started -- there's a certain significance about Tunisia succeeding. And my view is that if Tunisia succeeds -- and we're very committed to this, and we're doing a great deal to support them -- if they succeed, that really demonstrates that this transitional process can work elsewhere.I think it will be a beacon for other countries in the region and will be very helpful. So even though it's smaller and less central and less strategic than Egypt, it is still a very important part of the process.

And obviously we can't forget Jordan and Morocco, that are undertaking transitions of their own; and Libya, which is in a different stage in the process and obviously more complicated in some ways, is also a country where we are trying to provide support for a smooth transition in a very -- a very complicated environment.

So this is our historical moment in our generation. We have to figure out ways of addressing it, and it's complicated, but it is essential.

DE MONTBRIAL: Mr. Negroponte, since we have the honor and pleasure of having you with us.

HORMATS: Excellency.

QUESTIONER: Yeah. Robert, good evening. We worked together 40 years ago in the National Security Council.

HORMATS: Yes, we did. I do recall. I do recall. Old EOB.

QUESTIONER: I'm not entirely certain that things have changed quite as much as all of that. But in any case --

HORMATS: Well, there was no Internet. You have to admit that, John.

QUESTIONER: Maybe I'm just an old fuddy-duddy.

HORMATS: No cellphones.

QUESTIONER: But my question relates to --

HORMATS: No Xerox machines either.

QUESTIONER: -- to China. My sense was that, even though the transition from the last administration to this one was quite smooth in the sense that we had no major incident that called into question the relationship, I remember hearing from you and others a certain degree of frustration with the country of China early in the administration. And I just was wondering if you could comment a little bit on the U.S.-China economic relationship today and how you see it going forward.

HORMATS: Yes, I think what's interesting about China -- it's a great question, John, and it's also very timely because roughly 40 years ago to the week, really, Nixon made his historic trip to Beijing to meet Mao Zedong. And prior to that, Kissinger went to China a couple of times -- several times to meet with Zhou Enlai and Mao, butZhou -- but he only met with Mao really after Nixon met with Mao, and most of his conversations were with Zhou Enlai beforehand.

And what -- what's very interesting about it is that -- and this is sort of an historical reflection, but I think it's true and it says something about where China is and how we need to deal with it -- in those days, the relationship with China was the result of geopolitics, of two elements: one, our attempt to isolate or weaken the negotiating position of North Vietnam by having relations with its biggest supporter and its biggest neighbor, China; and the second, because -- and people forget this now -- there was a very real view, on the part of both China and the U.S., that the Soviet Union was about to invade China, and the Chinese wanted to counter this by having a relationship with the Americans, and we were not particularly anxious to see the Soviets invade China either.

So this was a relationship that was pulled together or pushed together by these strategic considerations. Economics played virtually no role at all. They were a signal -- or meant as a signal, or to the extent we normalized or tried to normalize economic relations, it was a signal to the Chinese that we wanted to improve political and security relations. But no one at the time believed that economics would matter very much in this relationship. And in fact, what happened in China had virtually no impact on the global economy, no impact on the American economy, and what happened in the United States had virtually no impact on the Chinese economy, because there was virtually no trade for a number of years after the sanctions of -- that were imposed during the Korean War. And even after the Shanghai Communique, economic relations didn't take place to any great degree until Deng Xiaoping came along and opened up China.

So what -- what's interesting about China today is that if you look at -- if you look back at the history of China, China -- the really clever, smart, visionary leaders of China have utilized the global economy to leverage reforms internally in China. Deng Xiaoping utilized the opening to the rest of the world to push for reforms inside China because he figured, look, if the United -- if China's to compete in the world economy, it has to change internally. So we used this opening to go into China, to utilize, in fact, the pressures from global competition to force changes in China that would probably not have occurred as rapidly without that. And certainly Zhu Rongji joined the WTO or had China join the WTO in part to increase exports, but in part because he leveraged the rules of the WTO internally in China to push for reforms in China.

Where are we today? I think that China today has benefited enormously from being part of the global system. But I think thatthey have, at this point, concluded that they need to make changes internally in China, and the World Bank report called "China 2030" illustrates the kind of changes that need to be made. The 12th five- year plan indicates some of these changes as well.

China cannot utilize the same model that it's utilized for the last x number of years. In the future, in order to maintain stable growth and particularly to create more inclusive growth, it has to bring more people into the system, not just people in eastern China, but central and western China. It realizes this.

Also, wages are going up. So the kind of things that it exports to the rest of the world will be different, and it can't continue to consume CO2-emitting fuels the same way it did before. So it needs to make some major changes.

And I think what we need to do with China today is not lecture them, although we need to take very tough positions on intellectual property, on indigenous innovation, on an unlevel playing field, on a lot of advantages that they take by gaming the system, which they do. They carve out, as I mentioned before, certain parts of the global trading system and limit foreign competition in certain areas so that they can build up their competitive advantage vis-a-vis others and therefore export more effectively to the rest of the world. But lecturing them does not help.

What does help, I think, and what can help is to identify those areas of change that the Chinese are setting out for themselves in their economy, through their five-year plans, through the work plan which Wen Jiabao just announced to the National Party Congress, through the kinds of things that are in the World Bank report, and identify those areas in which China itself recognizes it has to move and ally ourselves with people in China, both government reformers and provinces and others, who are supporting these kinds of reforms in China.

I think China itself understands that it has to change.

So we really need a sort of two-stage strategy. One is to be very firm on those central issues like intellectual property protection or forced transfer of technology, things like that that are big problems, but also to find more and more ways of supporting those who want to have better environmental standards, those who want to have better income distribution, those who want to increase consumption in central and western China, those who want to rebalance the Chinese economy, those who want intellectual property protection in China because they're developing their own intellectual property, those companies that want to invest abroad and will find it very hard to do so if China does not treat investment at home in a more equitable way.

So we need a smart strategy with China that combines toughness on certain -- in certain areas with a general desire to work with the reformist people in China, as we did with Deng and as we did with Zhu Rongji.

DE MONTBRIAL: So -- please -- (inaudible).

QUESTIONER: It seems like the president and the prime minister of Israel have discussed Iran last week. And it looks like the president have asked the prime minister to give more time to strategies that not involved military intervention. What is your assessment of the chances that sanctions will be effective to bring back Iran to the negotiating table with a reasonable position that will make the world more comfortable with its nuclear program?

HORMATS: Very good question. I -- the nuclear part of it is really not in my area, but not -- but the sanctions part is. So let me talk about that. That's -- because it's a very thoughtful question.

I am, from all the information we receive, convinced that these sanctions are having a very substantial effect on Iran. And there will be, as you know, as a result of what the United States is doing and the European Union is doing, even a tighter set of sanctions that will be implemented, that are in fact being implemented as we speak, which will have an even greater effect than those that have already been implemented.

Now, what the impact is going to be on Iran in terms of its policy decisions, I can't predict. It's really not in my area. And I don't think even people who have more expertise can say for certain what the reaction of the Iranian government will be. But I do think that they have now come to the stark conclusion that the West, even though -- and not just the West; other countries as well -- even though -- but I'll speak about the West for a predictable reason -- even though we have economic challenges at home -- and the Europeans certainly do -- even with that, the U.S. and the EU are willing to take very tough action against Iran on -- in terms of tightening sanctions.

And I think that can be and has been quite impactful in the minds of a lot of Iranians, not just that we're doing it and not just that it's -- it's certainly squeezing them by -- because these sanctions relate to oil; they relate to dealings with the central bank; they relate to dealings with other designated financial institutions. They will certainly -- they are certainly going to cause a continued deterioration in the living standards of the people of Iran and convince them that they cannot engage in business as usual and continue to -- and continue their nuclear program, just that there are penalties, and those penalties are going to affect the people of Iran.

What they will choose to do in the end, I just don't know. But I can certainly vouch for the fact that from all the indications we have received, from the people who've been there and from other ways of getting information, that the -- that these have had a very substantial impact and that the -- and that the government of Iran did not anticipate particularly Europe and its -- with all the difficulties it's having taken -- taking such tough positions. So I think that they clearly are feeling a lot of pressure. What they will do and what the final policy outcome will be -- hard to know.

DE MONTBRIAL: Other question -- please, Stewart. (Inaudible.)

QUESTIONER: Stewart Patrick, Council on Foreign Relations.

You were present, I believe, at Rambouillet, and probably were sherpa for the first five or six of the G-X meetings. I'm wondering whether or not you could enlighten us on whether or not -- what the division of labor that you expect between the G-8 and the G-20 going forward is. We're obviously the host of the G-8. A lot of people thought that this vestigial organization was going to go by the wayside after the G-20 was declared the premier forum for global economic coordination. The recent announcement that there's a G-8 -- G-20 foreign ministers track would also suggest that some of the foreign policy and security issues might actually move into that arena as well. On the other hand, at Deauville, the G-8 seemed to have sort of a renaissance. So I'd just be interested in your -- in your thoughts about the two organizations.

HORMATS: Yeah, it's a very interesting question. I mean, the -- we had this -- just to touch briefly on the foreign ministers' meeting in Los Cabos, this was really the first. Whether there'll be another one remains to be seen. The Russians are the chairs next year. They've made it clear they do not want to have one of this sort, and they only sent their ambassador there. They were not particularly thrilled because they thought that it was going to push the G-20 into a range of foreign policy and national security-related issues.

In fact, of all the interventions -- and I was there throughout -- there was only one intervention that even mentioned a security- related issue, and that was really only one sentence, and it related to the need for tougher action, collective action on Syria. But other than that, it was all about energy issues, development issues, a wide range of things that foreign offices are engaged in.

So the point that you make, though, is an interesting one: What is the -- what is the division of labor between the two? And I would -- I would look at it this way. The G-20 really started out as a finance ministers' meeting, and then during the financial crisis, the last financial crisis -- I have to identify them -- President Bush decided he would have it at the heads of state level. And it has up until recently dealt only with financial issues, first dealing with the financial crisis and now dealing with regulatory changes to avoid a future financial crisis.

But it's also begun to move into areas that are now somewhat different from -- although in some ways tangentially related to financial issues -- like environmental issues, development issues,anti-corruption issues. These are more and more in the area not of finance ministry authority, but State Department, USAID, Department of Energy and other agencies as well. So as the agenda shifts, then I think you will see more and more involvement in the planning for the G-20 shift to the other agencies that have more focused expertise in those areas. So almost by definition it will become more of a -- of a grouping that will discuss financial issues, but a broader range of issues, but not national security or foreign policy issues because they become very divisive.

To cite one example, a couple of years ago, the U.S. -- two years ago the United States suggested -- just suggested that there be a discussion of a national security issue -- I won't mention which one it was, but fairly obvious one at the time. And there was this enormous negative reaction, particularly from the large emerging economies. They didn't want this, so we decided we won't push it. So I think it's going to evolve in the direction of having other topics of interest to the G-20 countries.

The G-8 really started out as the G-6, and then Canada was added, and then somewhat later Russia was added to the -- to the heads of state part but not to the financial part. So the G-8 now deals with a number of issues that are nonfinancial. It would make a very strong -- a very strong point of not encroaching on what the G-20 is doing, although there is some overlap.

So what are we going to discuss this year, just to give you an idea? One, the Deauville partnership. What can we do to support economic change and political change in Middle East, North Africa? Two, we're going to focus on food security in Africa.

There's almost always an African component. There has been a food security component for the last several years.

Third, there's always -- (coughs) -- excuse me -- there's always a discussion of foreign policy issues at the beginning, whatever the issue is -- the issue du jour, whatever the issue is is discussed. You know, it'll be almost certainly this time Iran, Syria and probably a number of other things that are -- that are contemporary.

And fourth, there's a discussion of the first session normally of global economic issues just because when the G-8 leaders get together, they want to talk about these issues. So it's -- it focuses more on a relatively few issues. And then there are all these subgroups that deal with terrorism, that deal with counterinsurgency, that deal with drug issues, deal with a wide range of other issues. So it is less financial and more sort of foreign policy or foreign policy-related issues.

And my view is that it still plays a very important role because you still want this smaller group of countries that is more like- minded on some of these issues to exist because there's an opportunity to discuss things that you couldn't discuss or couldn't discuss very effectively in the G-20.

DE MONTBRIAL: Well, time is almost up, so will take -- now there are plenty of questions. So -- OK, so I suggest -- I see three hands, and I stop here, OK? And I suggest to take the three questions together, and you will answer globally because we are supposed to resume in exactly 20 -- 12 hours from now. So you are the first.

QUESTIONER: Thank you very much. My name is Kusile Lamini (ph) from the South African Institute of International Affairs. My question, Bob, is regarding Africa. You have experience in working for different administrations in Washington. I just want to find out from you, if you compared the Obama administration to the others that you have worked for, how prominent is the African agenda for the Obama administration? I'm asking that because President Obama has just visited one African country since coming to office, contrary to the huge expectation when he took over from Africa that it was going to be time for Africa in Washington.

DE MONTBRIAL: So that's one question. Second question. No, no, second question, and then the third. No, no, no, I see a second question here. Yeah.

QUESTIONER: Hi. Marco Incerti from the Center for European Policy Studies in Brussels. I just wanted to go back to one of the key points that you have made, that is, the trade-off between the global issues and the national preoccupations. We've learned today that Obama is having problems due to the gasoline prices. In Europe, you have two governments which are led by so-called technocrats because the politicians couldn't deliver. The president of France yesterday made some waves with a speech that called into question one of the cornerstones of European integration. So the question is how do you think the two can be reconciled, or alternatively, for how long do you think the current situation is sustainable?

DE MONTBRIAL: Thank you.

HORMATS: In Europe or globally?


DE MONTBRIAL: By the way, I'm not sure that Schengen Agreement are a cornerstone of the European integration, but this can be discussed.

So last question in Japanese.

QUESTIONER: (Through interpreter.) Well, first of all, yesterday was the one-year anniversary of our earthquake and tsunami. And indeed, I would like to take this opportunity to thank U.S. -- friends in the United States and the government one more time because Japanese citizens really felt on their skin level that those 20,000 U.S. soldiers worked on the front line of the rescue operation. They really felt that's the alliance, and they really were very thankful for that.

Indeed, I was quite moved by your very succinct and articulate way of explaining what NGOs or a civil society could do. I wish you would come to Japan and talk about it again in front of the Japanese. That would really help understand --

HORMATS: Happy to do that.

QUESTIONER: -- help people understand what the NGO could do.

Now, I have two questions. First of all, I feel there is such a lack of dialogue between U.S. and Japan. And for instance, Japanese media is almost every day reporting the issue of the base moving from Okinawa, and all they are concerned about is who's going to bear the burden of the -- I mean, the cost. Who's going to pay for it and how much? And they don't really go any farther than that.

Secondly, I hear from my friend in the Japanese government and the politicians that the U.S. government are not really that much interested in TPP. Is that really true? I really would like to hear from you so that I can take it back and share it with my so-called opinion leaders in Japanese society. Thank you.

HORMATS: Thank you very much. Three good questions.

First --

DE MONTBRIAL: It was slightly shorter in English than Japanese. (Laughter.)


All right, first, Africa: I think the -- this administration has spent a great deal of time on Africa, particularly utilizing the USAID and the Millennium Challenge Corporation, other institutions of that sort. It's -- I -- it's hard to judge the commitment to Africa in terms of presidential visits, but I do think that if you look at the secretary of state, she's been to Africa numerous times and had very long, extensive conversations in -- I would -- I'm guessing; I'm sort of adding it up -- I'd say 15 or so countries in Africa, probably more. But she's been to a lot of them, and she's spent a great deal of time there.

Now, again, you can't judge the relationship in terms of time spent or visits made, but I would -- I would make the point thatAfrica is important for several reasons: One, not just because of the development needs of Africa, which, in many cases, are extensive, but Africa's now playing a much greater role in the global economy than it has in the past. It's not very well-known to Americans. Americans really don't think of Africa in terms of the some of the newer innovations that are going on there and some of the -- of the great economic success stories that are occurring in Africa.

And they're a number of them in -- and one example, obviously, South Africa, even though it has a high rate of unemployment, has also done quite well in many, many respects. Botswana is an example of a country that has done extremely well. Tanzania has turned itself around dramatically. Ghana has been very successful. Burkina Faso -- a number of these countries have actually done some very constructive, innovative reforms.

Third, Africa is a big source of energy for the United States. In fact, it's a bigger source of energy for oil, in particular for the United States, than the Middle East. So Americans don't necessarily understand this. So there are a wide range of areas that -- where Africa is important.

But the fourth one essentially is that Africa is playing a role on the world stage that it is -- that it has not played before. Africa's very involved in the U.N. Africa's very involved in a wide rage of multilateral institutions. It's really asserting itself in ways that it didn't a decade or two ago.

So I would say that, while it's not the most significant strategic priority, it is, in terms of foreign assistance, in terms of energy and in terms of a lot of the innovations that are going on, Africa's playing a very substantial role. And I think that, you know, it's -- it may -- it doesn't capture the headlines so much, but it's certainly an area where there is a lot of progress.

I lived in Africa -- in East Africa for a year. So I have a sort of a personal commitment to it. But I know Secretary Clinton feels very strongly about it, and she's -- we've had a lot of programs with African entrepreneurs. And this is one of the things that I think is particularly interesting, an interesting dimension in our relationship with Africa, that we've had a lot of meetings between American and African entrepreneurs because a lot of new ideas are being developed in Africa.

One example is Usha Heating, which is -- you probably know, which is a -- and this is an interesting example. It's a company developed by a Kenyan woman who now lives in Johannesburg. The technology was developed to monitor the violence after the Kenyan elections. It was used using cellphones to identify where homes had collapsed in Haiti because the technology was used in Haiti, and cellphones could call various things. It was transmitted to Boston, where there was a call center, automatically, and the call center in turn called the American forces in Haiti, and they rescued people utilizing this technology that was developed in Africa. So there are a lot of new technologies that are being developed in Africa.

So we're trying to identify with Africa not in the more traditional way, but in a much more modern way. And I think actually, it's working quite well.

The global versus national issue is a really intriguing problem. And as I say, increasingly it's not just governments that have to deal with this, but you need a broader range of people to address these global problems. And I think that one answer to this -- and it's not necessarily the only answer, but one answer is to identify ways in which we can work with individual countries to find ways, in their own interest of strengthening global norms and the global system -- increasingly, as I say, what happens in the world economy has an impact on virtually every country. The question now is whether you can get those countries that are affected by the global system to play a greater role in the management -- in the successful management of the global system.

And this involves a big transition. The global system was essentially created by the U.S. and Western Europe and, if you really narrow it down, the U.S. and Britain after World War II, you know, in effect Keynes and Harry Dexter White. But more -- but then other European countries played a greater role over a period of time. And then you had Western Europe was -- you know, which was really created by the Marshall Plan, but also leaders like Schuman and Monnet. But the global system essentially started -- while it started out being created by Europeans and Americans, now it needs to engage and involve a lot of other emerging economies that don't have the sort of pattern of global economic responsibility that the West developed right after World War II because they knew they had to make the system work in the interest of recovery and the alliance that occurred that was so important after the Cold War. In many emerging economies, they didn't have that same sense of history or that same tradition. So one has to find ways of encouraging them to play a greater role in the system. And I think that over a period of time it's not about telling them they have to do it; it's about identifying ways in which their own domestic interests are best served by engaging in the process of developing rules -- common rules in the global system or adhering to rules that serve collective interests.

The intellectual property point is one I had mentioned before. More and more emerging economies are developing their own intellectual property: copyrights, patents, new innovations. They want them protected just like Americans and Europeans want them protected. So they have an interest in supporting rules that protect intellectual property.

They have an interest in a -- in freedom of navigation because more and more of their products that they buy and that they sell move across international sea lanes. So they have an interest in working together for the protection of the freedom of navigation around the world.

The environment, where many countries -- emerging economies said, well, wait a minute, you know, you polluted the environment while you had your industrial revolution; now it's our chance, so we don't feel that same sense of responsibility. Well, now when the health and the well-being of their people are affected, they do begin -- they are beginning over a period of time to develop that sense of responsibility about global environmental cooperation.

So I think as these countries evolve and as we work with them to identify common interests or collective interests, I think we'll be able to work together more and more. You can't be a Pollyanna about it. There are obviously areas where our norms and theirs or our concept of norms and theirs will differ, where we prioritize certain values to a greater degree than other countries do, where other countries want to carve out parts of the system and protect portions of their economy, particularly if they're emerging or developing from global competition. That's going to -- that's going to continue. So I'm not talking about a perfect world here, but I am talking about areas in which there's a growing number of opportunities for convergence.

And let me talk about the last one, for instance, Japan. Two points. One, I do think -- and I make the same point about Europe -- that there is such a substantial focus now on the BRICs and some of the challenges in the emerging world, that some of the dialogue -- the intensity or the depth of the dialogue between the United States and Japan and the United States and Western Europe has weakened substantially. In other words, we're not as engaged in these conversations as we were.

Now, in a way this is the product of success rather than of failure, because it used to be we had these big Cabinet-level meetings between the United States and Japan. In fact, when Kennedy was assassinated, the Cabinet -- almost all the Cabinet was in an airplane heading to Tokyo for a bilateral summit, essentially, or Cabinet-level meeting, high-level, Cabinet-level sort of meeting. So, basically we had these.

But that was a period of time when we were trying to develop a more normal relationship with Japan after World War II, in the he '60s and '70s. Now there are so many informal business contacts, contacts among academicians, contacts among think tanks, that we really don't need that government-to-government kind of conversation to the same degree, because there are so many other conversations and so rich -- such a rich dialogue in many other areas. But it doesn't mean neglect of Japan, it just means that there are so many sinews, so many connections that what is done at the government level is not nearly as important.

Now, there obviously are -- you talked about the Okinawa issue, which has, you know, gotten a lot of publicity on both sides of the Pacific. There are many other issues where we do have strategic dialogues. But I think that in general, the fact that there's such a rich dialogue among so many aspects of our society, that we probably don't need that high-level government interaction as much, although the Japanese prime minister is going to come here soon and there will be conversations, and w do have these things from time to time.

Last point, TPP. The U.S. government does want TPP. And why? It's because if you look at Europe, as I mentioned, we have a lot of interaction between the United States and Europe institutionally. We have NATO. We have the OECD, which is now broader, but really started out as a U.S.-European -- primarily U.S.-European entity. We have a whole range -- we have what's known as the TEC, which deals with a whole series of economic issues. We have lots of contacts, institutional contacts across the Atlantic. We didn't -- we don't have as many across the Pacific, and there were real doubts when this administration came in about how committed the United States was to the Pacific, to Asia. There were a lot of questions, particularly given the rise of China: Was the United States going to sort of step back and become disengaged or less engaged in Asia?

We have tried to counter that perception by having, first of all, a strong commitment to APEC; second, summits between the United States and ASEAN; third, the president went to the East Asian Summit. And we have the U.S.-Korean Free Trade Agreement. And one of the areas that we think is very important in demonstrating our commitment to our staying power in East Asia is the TPP, where we bring a number of countries -- the Trans-Atlantic Partnership -- I'm sure most of you are familiar with it -- but it includes nine countries now, including the U.S., some countries in Latin America, Brunei, Vietnam, New Zealand and Australia. And there's a possibility of extending it to others, but that process is still -- that consideration is still under way. It hasn't been decided on yet.

But we definitely want to have TPP as a demonstration, one, of our commitment to East Asia in an economic point of view, which has certain strong political significance as well, and second because it can develop what we call 21st century rules on state-owned enterprises, on protection of intellectual property, on workers rights, on a whole range of things.

And our view is, if we can get agreement among those nine countries, and perhaps others if they join -- and other countries, as you know, are interested in joining -- then we can help to establish stronger norms in the Asian region and counter pressures in some countries for more nationalistic standards, for more nationalistic regulations, for more nationalistic practices which are designed to impose restrictions on access to their markets, whereas if we can reach an international set of norms and of practices, as we hope to in the TPP and utilizing APEC and other vehicles, then we can -- instead of acquiescing in these more nationalistic practices, we can develop more international practices and encourage other countries, such as China, to adopt those rather than these more restrictive nationalistic practices that they tend to utilize from time to time.

So our goal -- it's part of a goal of not isolating China but, to the extent we can work together, we would like to engage China in a way that encourages them to adopt international norms, not -- and discourages them from adopting nationalistic restrictions which tend to segment off parts of their economy from global competition.

DE MONTBRIAL: Well, thank you very much, Bob. Now, I have one bad -- we have bad news, two good news, and news. (Laughter.) The bad news is that we are about 20 minutes behind schedule, but nevertheless I hoe that we all -- that you will all agree with me that we enjoyed very much this extremely deep and interesting discussion. The two good news is, one, a totally different nature. Our Chinese friend took a lot of notes on what you said. (Laughter.) I think she was the only one. I watched the audience very, very closely. I think she was -- well, he's Japanese, but not so many notes. So, you know, what you said certainly will be reported.

The other good news is that Bob Hormats looks very much like as he was in 1973.

HORMATS: Thank you.

DE MONTBRIAL: He's physically almost unchanged, almost --

HORMATS: (Chuckles.) (Inaudible.)

DE MONTBRIAL: -- and as energetic and enthusiastic as he was. That's the second good news.

And as for the news, I am asked to tell you that you should collect your belongings from the first floor conference because there might be some thieves tonight. Well, anyway, I don't know, because we -- but anyway, you are asked to remove everything from the building, you know, --

MR. HORMATS (?): Thieves at the Council on Foreign Relations?

DE MONTBRIAL: -- until tomorrow morning. That's what I am -- no, no --

MR. HORMATS (?): Thieves?

DE MONTBRIAL: We ask that all participants collect their belongings from the first floor conference room before departing this evening. And we will reconvene here tomorrow at 8:30 a.m. "puenktlich." (Laughter.)

OK. So thank you very much, Robert. (Applause.)







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