Home The Washington Diplomat July 2011

Top Economic Official at State Presses China to Play Fair

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Robert Hormats has come full circle with China. As a young man working under legendary former Secretary of State Henry Kissinger, Hormats — a Baltimore native — attended the first game of the historic ping-pong diplomacy series between the United States and China in College Park, Maryland.

Inspired by that exciting event, the bright young bureaucrat went on to a distinguished career in international diplomacy and economics, first as an economic staffer on the National Security Council in the early 1970s, then as deputy U.S. trade representative in the late 1970s, and finally as assistant secretary of state for economic and business affairs in the early 1980s.

In 1982, armed with a wealth of government experience and a doctorate degree in international economics from Tufts University, Hormats traded in his government ID for a fancier business card and a job with Wall Street financial powerhouse Goldman Sachs. Ever ambitious, Hormats worked his way up to become vice president of Goldman Sachs International, a position he held until 2009, when his old friend Hillary Clinton came calling.

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Photo: U.S. Department of State
                               Robert Hormats

As it turned out, Clinton — the new U.S. secretary of state — needed help with China, a much different, and more powerful, nation than Hormats had encountered 40 years earlier. Because of his experience working under four different U.S. presidents, as well as his intricate knowledge of international financial systems, Clinton saw Hormats as an appealing prospect.

Hormats had gotten to know Clinton and her husband when Bill Clinton was governor of Arkansas and heavily involved in international trade. When Hillary called Hormats to offer him a job, the 68-year-old Goldman Sachs executive said he jumped at the chance, despite his powerful and lucrative career on Wall Street.

"I'm a Democrat, so I wanted to work for a Democratic administration and President Obama," Hormats explained during a wide-ranging interview in his spacious State Department office overlooking the Potomac River. "I have known and been a friend of Hillary Clinton for a very long time and I have enormous respect for her."

Hiring Hormats was also important to Clinton, who's received widespread praise for elevating the State Department's prestige during her tenure. As part of her campaign to improve U.S. diplomacy, Clinton has enlisted the help of the private sector, such as the recent public-private partnership with MAC Cosmetics to combat sexual violence and HIV/AIDS in South Africa.

Hormats embodies that blend of private savvy and public expertise. Today, he serves as the senior economic official at the State Department, advising Clinton on international economic policy and working to improve America's bilateral relations with its various economic partners.

Hormats, whose official title is undersecretary of state for economic, energy and agricultural affairs, has a diverse portfolio in policy areas ranging from trade and investment, energy cooperation, aviation and more.

He's just as comfortable talking about the role of innovation in global health as the importance of private companies competing with state-capitalist markets, or the profitable but deadly trade in conflict minerals, or the flaws in the Chinese economic model.

"As someone whose background is international economics and international finance, and has worked in various aspects of government before, these are issues I enjoy working on," Hormats told The Washington Diplomat. "I also think they are important to the country and the world."

A sampling of his schedule over the last two months reveals a diplomat who spends a lot of time on airplanes. Hormats has jetted to Cairo in recent weeks, as well as to Amman for the U.S.-Jordan Business Summit, Texas for an Asia-Pacific Economic Cooperation (APEC) road show, and Paris for the G-8 and Organization for Economic Cooperation and Development (OECD) summits. In fact, Hormats joked that the only thing he lacks in his current job is sleep.

Closer to home, Hormats played a key role in the recent third annual U.S.-China Strategic and Economic Dialogue in Washington, delivered remarks to the U.S.-Korea Business Council Coalition at the National Association of Manufacturers, and met with ambassadors from the Czech Republic, India and Qatar, the Lithuanian energy minister, and officials from Chevron, among many others.

Although he works across a broad spectrum of issues, China naturally consumes a lot of the undersecretary's time. It just so happened that 2009 — the year Hormats returned to the State Department — marked not only the 60th anniversary of the founding of the People's Republic of China, but also the 30th anniversary of the establishment of diplomatic relations between the United States and China.

"Despite the incredible challenges of the past 30 years, what has remained constant over these past three decades — under eight successive presidents of both parties — has been a recognition that our two countries have fundamental common interests and our relationship has enormous consequences for the world," Hormats said at a conference in Washington last spring.

The economic expert reiterated that view in his interview with us. Diplomatically, Hormats declined to critique the Bush administration, which was widely perceived as alienating foreign governments with varyingly heavy-handed or indifferent diplomatic approaches.

"I do think there were a lot of areas where more proactive engagement on international economic issues was needed," Hormats said. "One of them was East Asia. This is the fastest growing area of the world where I think we needed to be more proactive and are already deeply engaged.

"I've spent a lot of my time on a wide range of issues — trade, intellectual property protection, protecting the interests of American investors in the region," he noted.

Not surprisingly, much of his focus over the past two years has been aimed at convincing China to compete fairly in the global economy. As part of that strategy, Hormats has been working to convince Chinese leaders of the benefits of something he calls "competitive neutrality."

As Hormats sees it, a new challenge to the global consensus on open markets and private investment has emerged — and China is leading the pack, with India and other nations not far behind. He recently wrote that National Intelligence Estimates reveal that "wealth is moving not just from West to East but is concentrating more under state control."

This means that in many countries, the state's role in the economy is gaining influence as governments reject "the Western liberal model for self-development but are using a different model — state capitalism," Hormats wrote.

In essence, governments, such as China's, create state-owned or state-supported enterprises — or "national champions" as Hormats calls them — that are heavily subsidized or given wildly unfair competitive advantages within those countries. Then these companies become serious global competitors, which can corrupt the naturally occurring competition and relatively even playing field for normal private sector firms.

"If they give companies preferential financing, or preferential regulatory treatment, or exemption from monopoly rules, or other advantages that private sector companies don't have, it affords them a competitive advantage, not just doing business vis-à-vis foreign companies in China but it gives them an enormous competitive advantage in our market and in third-country markets," Hormats explained. "Our goal here is to say to countries, 'look, this is a very substantial threat to the competitiveness of our companies because it gives them — the Chinese and other countries' companies — an artificial competitive advantage that private sector companies don't get.'"

Hormats added that the advantages these favored companies enjoy are not necessarily based on better performance or innovation, but on government policies and practices that distort competition in the market.

"There is a need for a level playing field and the need to work with China as a rising power to ensure that as they become a more important player in the global economy, they also assume more risk for the global economic system," Hormats said.

And how does the United States convince them to play by the established rules of the so-called "Western liberal model for self-development," as he describes it?

"Lecturing doesn't move them — very few countries respond to lectures by us or anyone else," Hormats concedes. "But they have a very clear view of their self-interest. If you can make the point in a compelling way that their self-interest should compel them to respect intellectual property and to avoid discrimination against foreign firms operating in China and to eliminate these artificial advantages they give to their companies, they will listen.

"What's in their interest is that their companies are now operating internationally and they want those countries to be treated on a level playing field, too," he added. "They are producing more intellectual property, and they want their intellectual property protected — and they heavily rely on the global economic system."

Hormats was quick to give due credit to the Chinese for their stunning growth. "They have done some very impressive reforms; they have raised hundreds of millions of people out of poverty; they are investing a lot in science, engineering, technology," he said. "The fact is that they are a much more competitive country now and they shouldn't have to resort to these arbitrary measures to enhance their competitiveness. They would be competitive without those."

At the same time, he points out that China's transformation took place within a liberal international economic framework.

"Much of what China has accomplished, as noted, is due to its own ingenuity, its own reforms, and the hard work of hundreds of millions of Chinese citizens.... But China's dramatic growth is also due to a stable global financial system, market access benefits of WTO membership and enormous capital inflows," he said in a recent speech titled "The United States and China: The Next Five Years," in which he openly wondered, "Will China work within the rules-based, market-driven, international economic system created at the end of World War II, or instead strive to dramatically change it?"

Hormats told The Diplomat that there are signals the Chinese are beginning to come around to the Western way of thinking on this issue, but they (among other countries) are not completely sold on the idea.

"Have they made some progress? Yes," Hormats said. "Have they made enough progress to create a level playing field or a nondiscriminatory environment? No. They need to do a lot more.

"If they push back against an open trading and investment system then that's going to [work to] the disadvantage of the Chinese," he continued. "They have an interest in making the system work because they have a big interest in the system. They have an interest in foreign markets, in a stable international financial system, and they have an interest in the protection of their intellectual property.

"And because they have those interests, they should be doing a lot more to make sure the global economy is and is seen by people in the U.S. and elsewhere as operating fairly."

Hormats also says that if more countries take China's lead in propping up private companies with all kinds of economic and regulatory advantages, it could undermine the entire global system.

"If Americans perceive it's not operating fairly — that one country or a group of countries is taking undue benefit of this system and it's harming our interests — they are going to push back against the system itself," he said, quickly adding that he doesn't believe this is China's goal.

"I don't think they want to destroy the system or radically change it at all. They want to take the maximum benefits they can from the system," he explained. "But if they want to continue to do that, they have to make greater contributions to the system by ensuring that it's perceived and is a level playing field, and that intellectual property is protected, and that they don't give their companies artificial advantages over other companies and they don't discriminate against foreign companies in their procurement."

And if they do?

"Then the system that has been very important in their rise will be more vulnerable and work to their ultimate disadvantage, if not now then down the road," Hormats predicted.

Yet he also rejected the view — commonly held by some Americans — that China and the United States are on an inevitable collision course, economically or possibly even militarily in a doomsday scenario.

"Clearly there are going to be differences between the U.S. and China, but the fact is that it is in the national interest of both countries to work together," Hormats said. "There is bound to be suspicion on a given issue or two, but we need to approach China and they need to approach us from the point of view of one common reality.

"If we don't work together and we have constant disruptions in our relationship, it will affect both sides and the global economy," he added. "We need to develop a constructive relationship with them and they need to do what they need to do to have a constructive relationship with us. I don't think a confrontational relationship will serve either side's interest."

Beyond China, the Middle East and the volatile "Arab spring" have been very much on Hormats's agenda. The State Department official said he's traveled to the region four times in the past two months and envisions more trips in the near future. In the process, he's defended the Obama administration's decision to forgive a $1 billion loan to Egypt, even as the United States struggles to rein in its own debt at home. At the other end of the spectrum, some critics have argued that debt relief is not enough to address Egypt's economic woes.

Hormats said the debt relief, even in the face of some protest here at home, is smart policy.

"The reality is we need to help Egypt to stabilize itself because the instability of the country, if the democratic reform process goes off track, the consequences for the region will be very serious," Hormats warned. "If we do the right things, like the plan the president announced, we have a chance at supporting a process which will enable greater political and economic participation of larger numbers of Egyptians and strengthen the democratic process and the economic reform process.

"But it's up to the Egyptians to implement this," Hormats cautioned. "This is a huge turning point in the Middle East and the Middle East is critical to our national interests. If we miss the opportunity, then the consequences for American interests will be enormous."

He also suggested that assistance to other Arab countries could be warranted as well, especially as their economies suffer from a drop in tourism, remittances and other revenues due to ongoing upheaval.

"It is critical that we take advantage of this moment and be as helpful as we can, but also not forget some other places where the reform process is under way, like Jordan," he said. "We need to help them stabilize their financial and economic situations. A lot of industries are just not functioning, so their revenue is way down and their reserves are depleting, and we need to strengthen them financially and economically."

And that's always been America's virtue — the ability to pull itself up by the bootstraps and help others do the same, Hormats said, arguing that strong economies will foster democracy and help usher in a new era of stability in the region.

"Our real strength is our ability to connect to younger people in these countries who are really the dynamic source of change, supporting entrepreneurialism, efforts to create small- and medium-size enterprises, and giving their kids opportunities to participate in the economy and opportunities to advance in society," Hormats said. "Throughout the whole history of the United States we've been an upward mobility society. We're an opportunity society. We give people an opportunity for upward mobility.

"They'll create their own destiny and we can work with them and have venture capitalists there to help them."


About the Author

Michael Coleman is a contributing writer for The Washington Diplomat.

Last Edited on June 19, 2014