U.S. GOVERNMENT PUBLISHING OFFICE

36–503 PDF WASHINGTON : 2019

S. HRG. 115–621 

MULTILATERAL ECONOMIC INSTITUTIONS 

AND U.S. FOREIGN POLICY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MULTILATERAL 

INTERNATIONAL DEVELOPMENT, 

MULTILATERAL INSTITUTIONS AND 

INTERNATIONAL ECONOMIC, ENERGY, 

AND ENVIRONMENTAL POLICY 

OF THE

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

NOVEMBER 27, 2018 

Printed for the use of the Committee on Foreign Relations 

( 

Available via the World Wide Web: 

http://www.govinfo.gov 

FOREI-42327 with DISTILLER

COMMITTEE ON FOREIGN RELATIONS

BOB CORKER, Tennessee, Chairman

JAMES E. RISCH, Idaho 

MARCO RUBIO, Florida 

RON JOHNSON, Wisconsin 

JEFF FLAKE, Arizona 

CORY GARDNER, Colorado 

TODD, YOUNG, Indiana 

JOHN BARRASSO, Wyoming 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

ROBERT MENENDEZ, New Jersey 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

CHRISTOPHER A. COONS, Delaware 

TOM UDALL, New Mexico 

CHRISTOPHER MURPHY, Connecticut 

TIM KAINE, Virginia 

EDWARD J. MARKEY, Massachusetts 

JEFF MERKLEY, Oregon 

CORY A. BOOKER, New Jersey 

TODD WOMACK, Staff Director

JESSICA LEWIS, Democratic Staff Director

JOHN DUTTON, Chief Clerk

SUBCOMMITTEE ON MULTILATERAL INTERNATIONAL

DEVELOPMENT, MULTILATERAL INSTITUTIONS

AND INTERNATIONAL ECONOMIC, ENERGY,

AND ENVIRONMENTAL POLICY

TODD, YOUNG, Indiana, Chairman

JEFF FLAKE, Arizona 

CORY GARDNER, Colorado 

JOHN BARRASSO, Wyoming 

ROB PORTMAN, Ohio 

JEFF MERKLEY, Oregon 

TOM UDALL, New Mexico 

CHRISTOPHER A. COONS, Delaware 

EDWARD J. MARKEY, Massachusetts 

(II)

FOREI-42327 with DISTILLER

C O N T E N T S 

Page 

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

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

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

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

Responses to additional questions submitted for the record by Senator 

Menendez ....................................................................................................... 64 

De Marcellus, Hon. Roland, acting deputy assistant secretary, International 

Finance and Development, Bureau of Economic and Business Affairs, U.S. 

Department of State, Washington, DC ............................................................... 6 

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

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

VA .......................................................................................................................... 21

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

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

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

SAVING MULTILATERALISM—RENOVATING THE HOUSE OF GLOBAL ECONOMIC GOVERNANCE FOR THE 21ST CENTURY—by Jennifer Hillman— 

The German Marshall Fund of the United States—[included as a supplement to Ms. Hillman’s prepared statement] .......................................... 80 

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

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

Morris, Scott, senior fellow and director, United States Development Policy 

Initiative, Center for Global Development, Bethesda, MD ............................... 32 

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

EXAMINING THE DEBT IMPLICATIONS OF THE BELT AND ROAD INITIATIVE

FROM A POLICY PERSPECTIVE—by John Hurley, Scott Morris, and 

Gailyn Portelance—[entered into the hearing record by Senator Young] 143 

Responses to additional questions submitted for the record by Senator 

Robert Menendez .......................................................................................... 182 

EXAMINING WORLD BANK LENDING TO CHINA: GRADUATION OR MODULATION—Scott Morris and Gailyn Portelance—[included in the hearing 

record as part of Scott Morris’s response to a question from Senator 

Menendez]] .................................................................................................... 183 

Segal, Stephanie, senior fellow and deputy director, Simon Chair in Political 

Economy, Center for Strategic and International Studies, Washington, DC .. 37 

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

(III)

FOREI-42327 with DISTILLER

FOREI-42327 with DISTILLER

(1) 

MULTILATERAL ECONOMIC INSTITUTIONS 

AND U.S. FOREIGN POLICY 

TUESDAY, NOVEMBER 27, 2018 

U.S. SENATE, SUBCOMMITTEE ON MULTILATERAL INTERNATIONAL

DEVELOPMENT, MULTILATERAL INSTITUTIONS, AND

INTERNATIONAL ECONOMIC, ENERGY, AND

ENVIRONMENTAL POLICY

COMMITTEE ON FOREIGN RELATIONS, Washington, DC. 

The subcommittee met, pursuant to notice, at 2:39 p.m. in Room 

SD–419, Dirksen Senate Office Building, Hon. Todd Young, chairman of the subcommittee, presiding. 

Present: Senators Young [presiding] and Merkley. 

OPENING STATEMENT OF HON. TODD YOUNG, 

U.S. SENATOR FROM INDIANA 

Senator YOUNG. Good afternoon. This hearing of the Senate Foreign Relations Subcommittee on Multilateral International Development, Multilateral Institutions, and International Economic, Energy, and Environmental Policy will come to order. 

Once again, I want to thank the ranking member, Senator 

Merkley. Today’s hearing represents our subcommittee’s eighth 

hearing during the 115th Congress. I am grateful for our continued 

partnership on this and many other issues. 

The title for today’s hearing is ‘‘Multilateral Economic Institutions and U.S. Foreign Policy.’’ 

We will divide today’s hearing into two separate panels. Our first 

panel will consist of two administration witnesses: the Honorable 

David Malpass, Under Secretary for International Affairs at the 

U.S. Department of Treasury and the Honorable Roland de 

Marcellus, Acting Deputy Assistant Secretary for International Finance and Development at the U.S. Department of State. I want 

to welcome both of you. 

Our second panel today will consist of five distinguished experts 

and former officials from previous administrations. I will introduce 

each of them following this panel. 

Now, given this important topic and our excellent witnesses here 

today, I am, of course, eager to hear from each of you, but before 

we do, allow me to frame this conversation somewhat. 

In July of 1944, delegates from 44 nations met in Bretton Woods, 

New Hampshire to establish new rules and institutions for the 

post-World War II international economic system. These nations, 

led by the United States and informed by lessons regarding the 

FOREI-42327 with DISTILLER

2 

causes of World War II, sought to create institutions that would 

catalyze economic growth, reduce poverty, expand trade, and promote financial stability. The primary result of these negotiations 

were the International Monetary Fund and the International Bank 

for Reconstruction and Development, which is now part of the 

World Bank group. 

At risk of ruining the surprise, allow me to say the following up 

front. The U.S. is not and should not be neutral when it comes to 

the continued success of these institutions. The U.S. helped create 

these multilateral institutions for good reasons, and Americans 

have been among the leading beneficiaries. 

While the IMF, World Bank, and regional development banks are 

not perfect and they require reform, on balance, they have promoted and sustained the open rules-based international economic 

order that has facilitated decades of extraordinary economic growth 

for both Americans and people around the world. They have helped 

lift millions out of poverty, doing good, creating international customers for American companies, and promoting peace, stability and 

prosperity. That is why I believe the U.S. should continue to support these institutions, pushing them to fulfill their important purposes and implement reforms where necessary. 

If we fail to lead and remain engaged in these multinational fora, 

others nations will step forward and replace us, namely China. In 

a vacuum created by the absence of U.S. leadership, Beijing would 

twist these organizations to their purposes and state capitalist 

model. Absent U.S. leadership and engagement, China would expedite the creation of alternatives to the institutions that have done 

so much good and serve the interests of Americans and millions 

around the world. Less powerful and prosperous nations would 

have little choice but to reluctantly bandwagon with Beijing. That 

would represent a negative outcome for Americans and for pretty 

much everyone other than the Chinese Communist Party. A coercive international economic order dominated by China would look 

very different. 

Now, to be clear, most developing countries, and particularly 

those in Asia, do not want to be forced to choose between the 

United States and China. Many countries have genuine development needs, and they will find one way or another to address those 

needs. However, developing countries do want choices. The U.S. 

should ensure developing countries have an alternative to the Chinese model, which often involves poor transparency, unsustainable 

debt, and the creation of dependence, which is frequently exploited 

later for China’s strategic advantage. 

We should use our voice and our votes in these international financial institutions to demand greater transparency from China 

and to ensure Beijing is not saddling developing countries with 

unsustainable debt burdens. 

Simultaneously, we should lead with our strength, the private 

sector. We should ensure U.S. federal policies, laws, and institutions, as well as U.S. official development assistance, focus on catalyzing private investment, making clear that the United States 

want prosperous and independent trading partners, not dependent 

debtors to extort in order to gain access to a port. 

FOREI-42327 with DISTILLER

3 

I look forward to discussing with our witnesses how these international financial institutions have benefited Americans, how they 

are performing and what reforms may be necessary. I am interested in discussing how the U.S. is or should be using our voice 

and our vote in these international financial institutions to address 

the lack of transparency from China we have seen in the developing world and some of the resulting debt burdens inflicted on developing countries. 

I would also like to hear from our witnesses on the upcoming 

G20 summit and what key U.S. objectives the administration is or 

should be pursuing there. 

So with those thoughts in mind, I would now like to call on 

Ranking Member Merkley for his opening remarks. Senator 

Merkley? 

STATEMENT OF HON. JEFF MERKLEY, 

U.S. SENATOR FROM OREGON 

Senator MERKLEY. Thank you very much, Senator Young, in organizing this hearing and for your partnership over the last 2 

years. I think this subcommittee has examined a number of important issues and done so with a real policy framework, intentional 

effort to get to the bottom of the story. And well done. 

I expect we will hear from our State and Treasury Department 

witnesses about the value of U.S. contributions to the IMF and the 

World Bank, the value that they have in supporting a transparent 

development agenda that seeks to assist countries expand their 

economies. These efforts are particularly relevant in a world where 

so many countries seek financing from China, whose loans come 

with lax to nonexistent labor and environmental standards and 

whose repayment terms are clouded in mystery. These are important issues, and I look forward to hearing from our government 

witnesses the administration’s current efforts in this area. 

But China’s opaque financing does not just affect the developing 

world. I hope to hear from our second panel about how Beijing’s 

anticompetitive behavior has violated the commitments it made to 

us and to the world community when we supported its membership 

in the World Trade Organization, an other multilateral economic 

institution that affects U.S. foreign policy and workers here at 

home. Those violations include the theft of intellectual property, 

weak labor and environmental standards, and forcing U.S. and foreign companies to transfer technology. 

The Chinese Government provides subsidized loans, export credits, loan forgiveness and more for state-owned enterprises. These 

firms use these unfair advantages to shrink market share for U.S. 

firms who do not receive the same benefits from Washington and 

are forced to lay off workers. 

I want to note that when I was reading the materials for this 

hearing, it really emphasized the debt trap that China is using as 

an instrument of foreign policy. And it reminded me of a book I 

read in college called ‘‘The Debt Trap.’’ But this book was about the 

IMF’s policy 45 years ago and about how we had many loans that 

went to the elite in developing countries, how the elite banked 

those funds overseas, and how subsequent governments were left 

in these poor countries to repay the debt, leaving them in an exFOREI-42327 with DISTILLER

4 

traordinarily vulnerable situation in terms of policies that would 

benefit their citizens versus benefit foreign investors. 

It has been many, many decades in which the IMF’s practices are 

very different. But now we have China adopting a debt trap model, 

adopting a model in which they are setting up a system where they 

can exercise leverage in a fashion that is not beneficial to the development of the welfare of the citizens of many countries. And I 

think it merits this full investigation, and I certainly appreciate 

you scheduling this hearing. 

Senator YOUNG. Well, again, I want to welcome our witnesses. 

Know that your full written statements will be included in the 

record. I thank you for the thoughtfulness of those statements. 

I would ask each of you to summarize your written statement, 

however, within 5 minutes so that we can engage in a more extended question and answer period. So let us go in the order that 

I announced you. Under Secretary Malpass? 

STATEMENT OF HON. DAVID MALPASS, UNDER SECRETARY, 

INTERNATIONAL AFFAIRS, UNITED STATES DEPARTMENT 

OF THE TREASURY, WASHINGTON, D.C. 

Mr. MALPASS. Thank you very much, Senator Young, and thank 

you, Senator Merkley. Thanks for holding the hearing. 

While there has been substantial economic progress in the 

United States, growth abroad has softened materially, causing 

challenges for international economic policy. Our goal is to achieve 

faster U.S. and global growth in ways that improve after-tax wages 

for American workers. 

I would like to describe some of our major 2018 international 

policies in order to create the context for our work in the international financial institutions, the IFIs. 

We have engaged repeatedly with China on our trade and investment concerns and the problems caused by their One Belt, One 

Road initiative. It often leaves countries with excessive debt and 

poor quality projects. If countries default on these debts, China 

often gains influence over the host governments and may take ownership of the underlying assets. We have built a common awareness of these concerns in the G7 and the G20. In lending, China 

often fails to adhere to international standards in areas such as 

anti-corruption, export credits, and finding coordinated and sustainable solutions to payment difficulties, such as those sought in 

the Paris Club. 

In addition to that work on China, we built a common awareness, as I mentioned in the concerns, in the G7 and G20 that is 

important. Secretary Mnuchin has pushed forward an initiative on 

debt transparency that will increase public disclosure and broaden 

the existing definition of international debt beyond traditional 

bonds and loans. We will be working with the IMF and the World 

Bank in this initiative. It should reduce the frequency and severity 

of developing country crises and help push back on China’s overlending. 

With Congress’ support, we have also enhanced America’s national security through FIRRMA, which has strengthened and modernized the Committee on Foreign Investment in the United States, 

CFIUS. CFIUS launched an innovative pilot program on November 

FOREI-42327 with DISTILLER

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10th, which includes requiring declarations for certain foreign investments in U.S. businesses involved in critical technologies in 27 

specific industries. 

We have worked multilaterally to forge a new currency consensus in the G20 to recognize the growth and investment benefits 

of currency stability. The U.S.-Mexico-Canada agreement, to be 

signed later this week, includes the first currency chapter in a 

trade agreement. We also reached an understanding with South 

Korea on currency stability and transparency at the time of the update of KORUS. 

Argentina’s new IMF program includes a nominal monetary anchor and an important commitment to leaving currency intervention unsterilized. Those policies quickly stopped Argentina’s mid2018 currency crisis, and they are dramatically reducing the rate 

of inflation. By expressly limiting the growth of the monetary base, 

a policy that the United States strongly supported, the central 

bank was able to arrest the precipitous decline in the exchange 

rate. 

Treasury also this year launched the America Crece initiative to 

promote growth in the western hemisphere. In 2018, we signed energy framework agreements with Panama and Chile. We expect to 

sign one with Jamaica tomorrow and hope to conclude one with Argentina in the near future. 

We have refocused the Financial Stability Board on its systemic 

risk mandate, including the adoption of an activities-based approach on insurance activities and wind-down of work streams unrelated to stability issues and the evaluation of the effectiveness of 

existing policies before developing new policies. I served on the 

nominations committee for FSB leadership and was pleased with 

yesterday’s announcement of Fed Vice Chairman Randy Quarles as 

the FSB’s next chairman, the first American to serve in that role. 

Looking into 2019, we will continue our work on debt transparency, the implementation of FIRRMA, the energy initiatives, 

and China’s unfair trade practices and lack of reciprocity and market access. We maintain active economic dialogues with other countries to assess systemic vulnerabilities and to support democratic 

principles and institutions. 

In Latin America notably in the western hemisphere, we have 

emphasized the risks and challenges posed by ‘‘The Troika of Tyranny,’’ namely Venezuela, Cuba, and Nicaragua. 

As Brexit approaches, Treasury is analyzing risks to the international financial system. We are working toward improved trade 

arrangements with the EU. The administration has notified Congress on October 16th of its intent to start trade negotiations with 

the UK, once it leaves the EU in March of 2019. And we continue 

to work to streamline the G20. 

I am going to stop at this point and leave discussion of the IFIs 

to my State Department colleague, Secretary de Marcellus. Thank 

you. 

[Mr. Malpass’s prepared statement is located at the end of this 

transcript.] 

Senator YOUNG. Thank you, Secretary Malpass. 

Secretary de Marcellus? 

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STATEMENT OF HON. ROLAND DE MARCELLUS, ACTING DEPUTY ASSISTANT SECRETARY, INTERNATIONAL FINANCE AND 

DEVELOPMENT, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, UNITED STATES DEPARTMENT OF STATE, WASHINGTON, D.C. 

Mr. DE MARCELLUS. Thank you very much. Chairman Young, 

Ranking Member Merkley, thank you so much for holding these 

hearings. It is certainly an honor to be here today and a particular 

honor to testify with Under Secretary Malpass. 

Senator, as you noted in your opening statement, the United 

States was the leading force in establishing the World Bank and 

IMF. And though Treasury has the lead for the oversight of the 

IFIs, international financial institutions, the State Department has 

been working closely with Treasury from the very beginning to be 

sure that these institutions advance our interests. We created them 

and we remain in the IFIs to advance our national security interests, our foreign policy interests, and our economic interests, as 

well as promoting the wellbeing of people globally. 

The question is sometimes asked, which is better? Multilateral 

assistance or bilateral assistance? To me it is like asking, when you 

build a house, which tool is better, the nail gun or the power drill? 

It really depends on the task at hand at that very moment. Now, 

we might use the nail gun or bilateral assistance more often, but 

we do not want be at the job site without the power drill. 

Now, that said, the tools can always be improved and reformed. 

And Under Secretary Malpass’ written statement goes into excellent detail on the reforms that we are looking for across the IFIs, 

and we are very supportive of those. 

One advantage that the IFIs offer is the leveraging of resources 

since their resources so exceed our own because of the other donors, as well as the access to capital markets. 

In addition, we can leverage the skills of the very talented staff 

at IFIs, provide advice to developing countries around the world on 

issues like procurement, fiscal policy, anti-corruption, or debt sustainability and many other issues. 

I would like to just focus on three areas where the IFIs advance 

our interests. One, by providing stability in strategically important 

areas such as the Middle East. Two, by advancing our economic interests. And three, by offering a best practice alternative to the 

Chinese lending model. 

In terms of the Middle East, when our vital ally, Jordan, was 

threatened with massive refugee flows from Syria, it threatened to 

destabilize the country. So we turned to the World Bank to help. 

The World Bank set up the Global Concessional Financing Facility, 

or GCFF, to help pool funds to assist countries facing refugee flows, 

initially Jordan. The United States put in, so far, $35 million to 

this fund. We were a founding donor. Other countries then followed 

our lead and put in, so far, another $244 million as of the middle 

of this year. 

Now, what happened is the World Bank and the European Bank 

for Reconstruction and Development then extended loans—they 

were low interest, thanks to these contributions—to help the Syrian refugees and their Jordanian host communities with clean 

water, education, health, job opportunities. 

FOREI-42327 with DISTILLER

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So in sum, $35 million from us went to about $1.5 billion in low 

interest support for a key regional ally, Jordan. 

Now, going to our economic interests, as you noted and the 

Under Secretary noted, the IMF and the banks have been working 

to advance prosperity around the world. So this creates better conditions for expanding the U.S. and global economy, thus giving us 

larger markets for export and support for American jobs. America’s 

fastest growing export markets, now representing 40 percent of our 

exports, are in developing countries. 

The IFIs also help by promoting in these countries a transparent 

business climate and helping to raise global procurement standards, fight corruption, and unleash private investment. This helps 

our companies compete better. 

Third and lastly, the IFIs promote and provide transparent financing terms, offering, as you noted, borrowers a better alternative for their people to the opaque terms and financing offered 

by China in their lending practices. This has already led to 

unsustainable debt levels in several cases. The IMF is working 

alongside the World Bank, as the Under Secretary has noted, to 

bring transparency to countries external debts, helping to shed 

light on these and to counter these predatory lending practices. 

But in addition, as Senator Merkley noted, development banks 

employ policies aligned with American laws and American values 

to safeguard the environment and people. Unlike lenders with little 

to no regard for these standards, the banks require borrowing governments to address environmental and social impacts associated 

with the projects. These requirements support sustainable development and lasting results. 

So in closing, I would like to reemphasize the State Department’s 

commitment to working with Treasury to ensure that the IFIs advance our national security, our foreign policy, and our economic 

interests globally. Over 7 decades, this has benefited exporters and 

taxpayers, promoting American prosperity and security. 

We also appreciate Congress’ interest, your engagement, and continued support on these issues. 

So thank you again for holding this hearing, and I look forward 

to your questions. Thank you. 

[Mr. de Marcellus’s prepared statement follows:] 

PREPARED STATEMENT OF HON. ROLAND DE MARCELLUS

Chairman Young, Ranking Member Merkley, and Members of the Subcommittee, 

it is my honor to appear before you today to discuss the important role that the 

International Financial Institutions (IFIs) play in advancing our national security, 

foreign policy, and economic interests globally. IFIs include the International Monetary Fund (IMF) and the Multilateral Development Banks (MDBs), which include 

the World Bank, Inter-American Development Bank, the European Bank for Reconstruction and Development, the African Development Bank, and the Asian Development Bank. 

Enhancing U.S. Leadership 

The United States was the leading force in establishing the World Bank and 

International Monetary Fund (IMF) in 1944. The Department of the Treasury has 

the lead for oversight of the IFIs, but the Department of State has been working 

closely with Treasury from the very beginning to advance our interests. Our objective was then and is now to strengthen the international economy for the benefit 

of the American people and U.S. interests globally. 

FOREI-42327 with DISTILLER

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I would like to describe briefly how these institutions work at the most general 

level. First, they pool contributions from countries around the world. The staff of 

the institution then works with recipient countries to develop projects and programs 

for the benefit of the recipients’ economic development in the case of the Multilateral Development Banks, or financial stability in the case of the IMF. Those projects 

and programs then come to the board of the institution for a vote of approval. The 

United States has the largest vote at nearly all of the IFIs and considerable influence. The Treasury Department gives directions to our representatives at the institutions on how to vote in each case. They do so, however, in close coordination with 

other agencies, particularly the State Department. 

Getting Bang for the Buck 

We created the IFIs, and remain engaged in them, to advance our national security, foreign policy, and economic objectives as well as to promote the wellbeing of 

people throughout the world. The question is sometimes asked, which is better—bilateral assistance or multilateral assistance? It is like asking which tool is better 

for building a house—a nail gun or a power drill? It depends on the particular task 

at hand. In building the house, we might use the nail gun (or bilateral assistance) 

more often, but we certainly want the power drill at the job site as well. 

As I alluded to earlier, the resources of the IFIs far exceed our own contributions 

because these institutions draw heavily from other donors and leverage resources 

from the international capital markets. For example, in the World Bank’s nonconcessional lending arm, the International Bank for Reconstruction and Development (IBRD), every dollar invested from the United States is combined with about 

five additional dollars from other countries. These combined six dollars allow World 

Bank/IBRD to raise additional financing on international capital markets, amounting to up to 30 dollars it can then lend for development assistance. These loans are 

repaid to the IBRD—with interest—by the borrowing governments, which finances 

future IBRD loans. Our contributions, multiplied by the others, contribute to global 

economic growth and stability that directly benefit American workers and exporters. 

In addition, we are able to leverage the highly skilled staff at the IFIs, who provide 

expert advice to developing countries on issues ranging from anti-corruption and 

proper procurement practices to fiscal policy and debt sustainability, and countless 

other issues. 

Enhancing American National Security 

The IFIs can also advance our national security. Outward migration and destabilizing threats have frequently come from the world’s fragile and conflict-affected 

countries. Support to these vulnerable countries is a key priority of the IFIs. For 

example, the World Bank administers multi-donor trust funds and convenes top financial and policy experts to develop strategies to promote growth and development 

in countries such as Afghanistan, Liberia, and South Sudan. These engagements decrease the cost of U.S. support and help to meet our policy objectives. 

Another excellent example is Jordan, which has been deeply affected by the crisis 

in neighboring Syria. President Trump stated in his remarks on September 25 to 

the U.N. General Assembly: ‘‘As we see in Jordan, the most compassionate policy 

is to place refugees as close to their homes as possible to ease their eventual return 

to be part of the rebuilding process. This approach also stretches finite resources 

to help far more people, increasing the impact of every dollar spent.’’ 

It is in that spirit that we had worked with the World Bank to create the Global 

Concessional Financing Facility (GCFF), an innovative financing mechanism created 

to help countries—initially Jordan—cope with refugee crises. This is a perfect example of the leveraging that stretches our contributions further. The United States was 

a founding donor to the GCFF and has contributed a total of $35 million. Other 

countries quickly followed our lead and by mid-2018 had provided a total of approximately $244 million more. Those contributions combined with loans from the World 

Bank and the European Bank for Reconstruction and Development resulted in $1.45 

billion of low-interest loans to Jordan explicitly to support the refugees and assist 

the Jordanian host communities. In sum, our $35 million contribution resulted in 

almost $1.5 billion provided to help Jordan support hundreds of thousands of Syrian 

refugees. 

The IMF is another key partner in U.S. efforts to support macroeconomic stability 

and advance economic reforms in strategically important countries such as Ukraine, 

Iraq, and Egypt. The IMF’s work has complemented and supported many of our foreign policy objectives. With its powerful voice on economic and financial governance 

issues globally, the IMF has provided impetus for governments to undertake necessary economic reforms aimed at boosting growth of real median incomes. A good 

current example is Argentina, where, with IMF support, the Macri Government is 

FOREI-42327 with DISTILLER

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making important economic reforms to put itself on sustainable financial footing. 

This will help the Argentine Government continue on a path towards sound economic management and restore growth, important for global economic stability. 

Expanding Markets for U.S. Exports 

Promoting prosperity around the world helps create better conditions for expanding the U.S. and global economy, creating and increasing markets for U.S. exporters 

and supporting American jobs. America’s fastest growing export markets—now representing roughly 40 percent of U.S. exports—are developing countries. The IFIs 

help these countries to unleash their economic potential, which has helped to lift 

tens of millions of their citizens out of poverty. As their prosperity has increased, 

so has their purchasing power, expanding the number of reliable consumers around 

the world for U.S. products and services. 

Improving Business Climate and Standards 

The IFIs also help U.S. exporters by promoting a transparent business climate 

and helping to raise global procurement standards, combat corruption, and unleash 

private investment. For example, the World Bank’s annual Doing Business report 

incentivizes countries to undertake reforms to make it easier to open and operate 

a business. This enables U.S. companies to better compete in the developing world. 

Thanks in part to U.S. leadership, the IFIs engage with developing countries to 

strengthen governance and legal frameworks, including respect for the rule of law 

and property rights. As another example, the World Bank has helped countries 

around the world establish functional and accountable customs procedures, providing U.S. exporters with faster, more predictable clearance of goods. 

Specifically, the Multilateral Development Banks champion transparent and fair 

global standards for financing and procurement, with open, transparent bidding and 

terms. Public procurement accounts for 10 to 15 percent of the world economy. By 

improving procurement standards in developing economies, the MDBs help level the 

playing field for U.S. business to compete for public contracts globally. The Department of State has worked to expand opportunities for U.S. companies to participate 

in MDB projects. One initiative to increase such opportunities is the BIDS platform 

(which stands for Business Information Database System). BIDS (bids.state.gov) aggregates MDB project opportunities and helps link U.S. companies to relevant U.S. 

Government economic officers at overseas posts who can help them navigate the 

local market. 

The transparent financing terms practiced by the MDBs offer governments a better alternative for their people than the opaque terms and financing proffered by 

some countries in bilateral lending that have helped lead to unsustainable sovereign 

debt in several cases. At the same time, our engagement at the IMF gives us the 

ability to press for stringent policy requirements for countries to qualify for IMF 

programs. For example, the IMF works alongside the World Bank to bring transparency to countries’ external debts, helping to shed light on and counter predatory 

lending practices by other countries. 

Protecting People and the Environment 

The MDBs employ policies aligned with American laws and values to safeguard 

people and the environment. Unlike those willing to provide financing to governments with little to no regard for these standards, the MDBs require the borrowing 

governments to address environmental and social risks in order to receive support 

for investment projects. Examples of these requirements include conducting environmental and social impact assessments, consulting with affected communities about 

potential project impacts, and restoring the livelihoods of displaced people. These requirements not only support sustainable development, they provide additional opportunities for U.S. companies, which lead the world in practices that account for 

environmental and social impact. 

Confronting Global Health Threats 

The IFIs support U.S. global health security interests by helping address pandemic risks and diseases before they migrate to or affect the United States. For example, in response to the 20142015 Ebola outbreak in West Africa, the World Bank 

provided quick-disbursing funding for a rapid response to the disease outbreak. 

Helping control Ebola saves us money at home. The National Institutes of Health 

has estimated the cost of caring for Ebola at as much as $50,000 per patient per 

day. Treating just two Ebola cases in Nebraska in 2014 cost $1.16 million. MDBs 

also help to prevent disease outbreaks from becoming a pandemic by helping countries to strengthen their health systems, which also boosts the impact of our bilateral health assistance. 

FOREI-42327 with DISTILLER

10 

In closing, I would like to reiterate that the Department of State is committed 

to working with the Department of Treasury to ensure that the International Financial Institutions advance our national security, foreign policy, and economic interests globally. Our contributions to the IFIs leverage other countries’ resources to deliver global economic growth and development. Over seven decades, this has directly 

benefitted U.S. exporters, workers, and taxpayers, promoting American prosperity 

and strength. 

Senator YOUNG. Well, thank you both for that helpful summary. 

In fact, you have preempted some of my sort of foundational questions. 

But I would like to begin with a bit of history here, as you did, 

Secretary de Marcellus, indicating in your prepared testimony that 

the World Bank and IMF were created through U.S. leadership in 

large measure back in 1944. And the United States was compelled 

because of that unique moment in history in which it found itself 

as we were nearing the end of a World War. We had suffered 

through a Great Depression. 

Do the lessons or dangers that were felt in 1944 still have some 

relevance to today as we think about the appropriate role that the 

IMF and World Bank are playing? Are they serving different needs 

than were felt back in—you know, 60 years ago, 70 years ago? 

Mr. DE MARCELLUS. Thank you very much. I would invite Secretary Malpass to amplify on this because he certainly has very 

good insights on this question. 

I would say many of the issues remain the same at the macro 

level of building economic prosperity, to advance the global economy, and American interests. 

However, the world has changed. And the focus at the time of 

creation was really on reconstructing Europe and our allies in 

Western Europe. Now it is really more on poor developing countries 

who need more work on governance and more foundational help, 

for instance, on health systems, the work that the World Bank does 

to prevent pandemic health threats from hitting U.S. shores in the 

country. It would not have applied so much in 1944 but is now part 

of their work. 

And then, of course, we have something new in that China is an 

emerging donor but a large one, which is a new development we 

have not seen, at the same time and as has been noted, it is a significant factor in the international system. Therefore, the IMF, 

World Bank, and other development banks have a new role, as has 

been noted, to provide an alternative but also in helping countries, 

borrowers, understand what is really an offer from China, helping 

them understand and analyze the terms. 

So there are many new ways and countless other ways that the 

development banks and IMF have adjusted to time over the 7 decades. 

Senator YOUNG. Secretary Malpass, so in addition to stability 

with the example of the Middle East, more specifically the Jordan 

example, very powerful, global prosperity—40 percent of our export 

markets, as Secretary de Marcellus indicated, are located in developing countries. And then lastly, an alternative to the opaque Chinese model. 

Are there other rationales for these institutions that we should 

be thinking about? 

FOREI-42327 with DISTILLER

11 

Mr. MALPASS. In the World Bank, we have advocated a shift, a 

graduation of countries from being borrowers to not borrowing, and 

that way leaving more resources for poorer countries. 

So one of the things going on now is the conflict state problem 

or the fragile state problem where both the IMF and the multilateral development banks have some expertise in helping those situations. So one of the goals is to get the focus of the organizations 

toward those needier countries or weaker governments. 

Senator YOUNG. Very good. 

Secretary Malpass, how do you believe the IMF and World Bank 

are doing in fulfilling their missions? You have itemized a whole 

lot of reforms that the administration is already well on its way, 

fairly deeply involved in at the executive level. Maybe you could 

identify the leading couple of reforms that you believe need to 

occur, how the United States should be using its voice and its vote 

to advance those reforms, and then if you have an opportunity to 

reflect on how Congress might provide additional authorities or assistance on any of these fronts, please volunteer that to us. 

Mr. MALPASS. Thank you, Senator. I will make three areas of 

comment. 

One is how different the world financial environment is today 

from when the institutions were founded. So there’s much more 

availability of private capital often, and countries have been able 

to build local currency financing structures, which simply did not 

exist really prior to 1990. And so that is a sea change, a seismic 

shift in the way the institutions operate. 

So the reforms that we have encouraged in them are this graduation concept, so to stop lending to countries that do not really need 

the money, to have differential pricing in the loans so that betteroff countries pay more in interest for the loans that they are doing, 

to have an increased focus on the quality of the loans and the 

transparency of those loans. 

And then I would also say in the World Bank, a capital increase 

that has recently been agreed on by the member countries. There 

was a substantial focus on creating a sustainable lending concept. 

So that means that the World Bank would not suddenly lend a lot 

at the beginning of a capital cycle and then need more money as 

it goes along. So the hope is that this will create a sustainable platform where they will not have to keep having capital increases. 

So from the standpoint then of the IMF, I will mention three reforms that we have been working on there. 

One is with regard to fiscal policy, making it more growth oriented. In some decades, the tendency was to think of it as a repayment mechanism from countries that had gotten over-indebted. 

And so one of the shifts we are looking for is to have it be more 

integrally involved in creating a higher median income for the 

country that it is working in. 

A second is the type of privatizations being done. Sometimes in 

the past there would be a tendency and emphasis on selling assets 

from the government for the highest price rather than thinking of 

it as the greatest benefit to the nation’s growth. And you can often 

get more benefit by stopping a monopoly rather than selling a monopoly for the highest price to the high bidder. 

FOREI-42327 with DISTILLER

12 

And the third that I will mention is we are no longer on the gold 

standard. That was one of the formative purposes of the IMF. And 

so in that regard, IMF is still, under article 1, seeking stability of 

exchange rates rather than competitive devaluation. So I mentioned in my opening remarks that thrust of administration policy. 

So as far as what Congress can do in this, I think holding this 

hearing is very good, and then being engaged in thinking about 

these policies. This is truly a seismic shift in global finance toward 

a global situation where capital is available where countries are 

implementing good policies. And so in that regard, Congress can 

both be aware, be knowledgeable, and be engaged in encouraging 

that effort. My goal—one of my goals—is to see quite a few more 

countries—let us say five or 10 more countries—growing really fast 

as we go into 2019 and 2020. 

Senator YOUNG. Well, thank you, that is helpful. 

This Senator, I know Senator Merkley, intends to stay engaged 

on these issues. And if there are some concrete things we can do 

to be of assistance to help you as you walk your way through these 

reforms, please let us know. 

Mr. MALPASS. Senator, I am sorry. If I may interrupt. One thing 

I forgot to mention. You know, we are bound by a great number 

of mandates from Congress, legislative mandates. There are nearly 

100. And while we share many of the goals of many of the mandates, the cost of managing those is actually substantial. We bear 

a lot at Treasury. The State Department bears a substantial cost 

to managing those mandates, which tend not to expire. So these 

may be things that made sense 20 years ago that do not need to 

be on the books now. So taking a look at that would help us a lot. 

Senator YOUNG. Well, we will require your expertise and assistance and that of your team. But I would request that you identify 

those 100, 100-plus mandates, indicate how precisely they impede 

your ability to advance reforms and open markets, enhance stability, and present an alternative to China in the case of the World 

Bank. And let us know how we can be helpful. 

Mr. MALPASS. Thank you. 

Senator YOUNG. We would like to take a look at that and work 

together on a bipartisan basis. 

But before I turn it over to Senator Merkley—and I will give you 

due time to ask all that is on your mind, Jeff—I just would like 

for my own benefit and for all of those who are watching—Secretary de Marcellus, you mentioned leveraging $35 million in the 

case of Jordan, 35 million U.S. dollars, as I understood it, into $1.5 

billion through use of IFIs. Can you walk me through exactly how 

that works? 

Mr. DE MARCELLUS. Thank you, Senator. I would be very happy 

to. 

So Jordan, since it is a higher income country, does not qualify 

for low interest loans from the World Bank. Therefore, when they 

took on all of these refugees, we and they did not think it was fair 

for them to take market-based loans for people from another country. And it would be hard for them to sell to the Jordanian people 

that they were going to take market-based loans. They really needed lower interest loans. 

FOREI-42327 with DISTILLER

13 

So what we did was set up this fund where donors—so our $35 million plus the $244 million from others. We go and basically buy 

down the interest rate on these loans, turning what would be a 

normal loan for the World Bank into a discount, very low interest 

loan, which is more appropriate to the need and in recognition of 

Jordan’s contributions to managing this horrible humanitarian situation. 

So what it does is basically by paying off the interest, you are 

able to leverage much larger amounts. That is how you get from 

$35 million up to almost $300 million in total donors. Then you 

take the entire loan amount down to this rate. That is how you get 

to $1.5 billion. 

Senator YOUNG. Thank you much. 

Senator Merkley? 

Senator MERKLEY. Thank you both very much. 

So I wanted to start with a letter that a group of Senators sent 

on August 16th that asked this question about whether IMF funds 

are essentially being used to repay Chinese debt. And to give you 

an example of this, Pakistan is a good example of a country that 

has a significant amount of Chinese investment. I think the number I have is $62 billion. They owe a lot of money back to China, 

Chinese banks, and they are seeking an IMF bailout. I think it is 

a $12 billion bailout. And they have asked the U.S. to make sure 

that we do not block this. 

Is that IMF money essentially going to help Pakistan repay Chinese banks? Why is that a good economic development strategy? 

Mr. MALPASS. Senator, I do not think that would be a good development strategy. And so the IMF team just came back from Pakistan. I had people in Pakistan 2 weeks ago. One of the things we 

are pushing hard for is full transparency of the debt. You mentioned Chinese debt. But one of the challenges is they have not disclosed the terms of—in many cases, they have not disclosed the 

terms of that debt. That means the interest rate, the maturity, and 

when it would have to be repaid. 

In general terms, we think that the maturity of the Chinese debt 

comes after the IMF would have been repaid. So from the standpoint of IMF money being used to pay Chinese money, I would say 

a challenge is to find a program that will cause substantial economic reform in Pakistan and that will allow it to be funded, that 

Pakistan be funded and have an ability to survive in financial 

terms going forward. 

And I will take this moment to say with China in general, this 

problem is not unique to Pakistan. China is lending in many countries where the terms of the loans are simply not given, and that 

gives China a lot of leverage within its program. And it is something that we are pushing back on very hard in the Paris Club, in 

the OECD, in the IMF, the World Bank, at the G20 and in the G7. 

Senator MERKLEY. So when you say that terms are not given, do 

you mean not given to the borrower or not given to the international community? 

Mr. MALPASS. In some cases, both. So they are not made public. 

They are not available to the international community, but sometimes they are not even available to certain parts inside the government itself. And that is an issue because China may make a 

FOREI-42327 with DISTILLER

14 

loan, but not really want the terms of the loan to be disclosed even 

within the government that it is lending to. 

Senator MERKLEY. So Senator Young and I both referred to this 

Chinese debt trap strategy, and I am just going to restate it simply 

and see if you all concur that this is their strategy or if we are perhaps mischaracterizing the situation. 

But China often lends to developing countries that may have an 

interest in a particular—building a port, building a highway, building a prestige project of some sort that involves a significant 

amount of debt. They often use their own workers, that is, Chinese 

workers, to build the project. It is often very opaque in terms of the 

terms. It often involves a—these are not gifts, but these are Chinese loans. So, therefore, repayment is necessary. The government 

is often reluctant to disclose the terms without transparency. So 

perhaps the country is getting a very poor deal. And the result is 

now China has significant leverage to apply for other national interests that China has. 

Is that a fair characterization of the Chinese debt trap model? 

Mr. MALPASS. I share many of those concerns. Yes, sir. 

So I will give you an example where China then does not work 

with the international community on some of these. There is a 

group called the International Working Group on Export Credits 

where there is an effort to have disclosure of the export credits that 

are going to countries, such as countries in Africa or to Pakistan. 

China simply has stood aside from that group. They attend meetings but then do not engage to describe which of their institutions 

are making those loans. 

And a second is the Paris Club itself where China is now—for 

many countries in the world, China is the biggest creditor. And yet, 

it does not participate in the Paris Club, which is an organization 

of creditor countries that tries to have rationality within the restructuring process when a country basically cannot repay. 

So I am describing constructive ways that China could be better 

involved and yet simply it has chosen not to be. 

Senator MERKLEY. Please go ahead, yes. 

Mr. DE MARCELLUS. If I could add to that. One of the most 

prominent examples of what you have described is in Sri Lanka, 

the Hambantota Port, where, after Sri Lanka could not pay the 

debts, China converted the port to their own ownership for a 99- 

year lease, as well as 15,000 acres of land. 

But when that happened, that was noticed around the world. We 

hear about it all over the world. As you have seen, that became a 

campaign issue in many elections around the world where opposition groups are criticizing the volume of Chinese lending and the 

terms and all of the other drawbacks that you already elaborated. 

So Malaysia, we saw Prime Minister Mahathir canceling billions 

of dollars of Chinese projects. 

The Maldives, a new government ran against basically Chinese 

lending, and won. And they are now opening up the Chinese books. 

In fact, it was in the press this morning that they discovered that 

some of the Chinese projects ran massively up in cost overruns, 

like tripled the market price for a hospital. 

FOREI-42327 with DISTILLER

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In Africa, Sierra Leone, a new government criticized Chinese lending and then canceled an airport project—it was $300 million— 

on the rational basis that the existing airport was not fully utilized. And Burma scaled back a port from $7.3 billion to $1.3 billion. 

So we see this happening more and more. I think countries are 

beginning to notice the down side and they are getting more savvy. 

I do not want to overstate it that these governments will not go 

back to China for more loans, but we think they are getting more 

sophisticated when they do it. 

But then going to your earlier statement where you held up the 

book, ‘‘The Debt Trap,’’ when the IMF and the West over-lent in 

many cases and built up debt burdens in the developing world, we 

dealt with it. We owned up to it. We did debt forgiveness. So by 

the same token, if China makes the same types of mistakes we 

might have made 45 years ago, we would look to them to do some 

sort of forgiveness for these countries so they are not saddled with 

debt forever crippling them. So I think that is something that the 

entire world would like to see. 

But thank you for raising that issue. It is certainly one of intense 

interest. 

Senator MERKLEY. One of the reasons it was such a problem was 

corruption. So there would be an IMF loan to a government where 

the elite would essentially funnel off massive amounts of the loan, 

and the remaining amount of the money and its development 

project could not possibly generate enough economic development 

to pay the loan back. So it was a bad investment. 

And then the terms of the IMF agreement were essentially that 

to pay back the loan, you had to engage in austerity. So you had 

an elite that now had been super enriched by this deal because of 

the corruption, and you had a population that was now suffering 

the austerity necessary to try to find some path to pay it back, 

which was not a good deal for the people of a country. And as you 

say, we wrestled with it. We have transparency around it. We had 

an academic debate. We had an institutional debate. 

I am not sure that those mechanisms—in fact, I am quite sure 

those mechanisms are not present in the Chinese consideration of 

the impact of their debt trap. It seems to me this is a case where 

it is a deliberate strategy to create leverage rather than a strategy 

gone awry, if you will, which if it is a deliberate strategy, you do 

not necessarily have any plan or desire to remedy it. 

As you point out, in Sri Lanka, for 99 years they have a massive 

port owned. I know I have heard from the national security side. 

Our concern is it might also become a military base outpost for 

China. 

So I am wondering, as we push to kind of draw attention to this 

strategy, are there other things that we should consider doing? For 

example, should we push for a policy in the IMF and World Bank 

that no loan, no grant project will go to any country that does not 

have complete transparency for its international borrowing? 

Mr. MALPASS. Senator, those are very good points. 

So within the transparency initiative that I mentioned in my remarks, we are working in the IMF and the World Bank to encourage them to include terms in loans, so when they do make a loan 

to a country, say that the country is expected to make transparent 

FOREI-42327 with DISTILLER

16 

all of the lending that it gets. Otherwise, you would be the lender 

into a situation where someone else has better terms than you do. 

And then within that framework, we are also trying to make 

sure that we are talking about debt in a broadly construed context 

because one of the things that happens, financial markets are very 

innovative. So as soon as you find one loophole that you are closing, then there is an ability to find another. And one of the things 

going on is the promise of collateral or of payments in kind in future years. So China will make a loan to a country in dollars or 

in real currency today and then commit that country, get someone 

in the country to commit to ship them oil for the next 15 years. 

Well, that takes money from the people of the country and puts it 

in the pockets of the elite in the near term. 

So Secretary Mnuchin’s initiative on that, which we discuss in 

the G20, the G7, and have made substantial progress on, is exactly 

in line with that. And I think Congress can be insistent—as countries kind of look for alternatives, they often come to Congress and 

say, can you not finance this, we are in trouble—saying, look, at 

a minimum there has got to be full transparency of whatever debt 

you are taking on. 

Senator MERKLEY. Thank you. 

Senator YOUNG. Mr. de Marcellus, in your prepared statement, 

you wrote about the transparent financing terms practiced by multilateral development banks. And you contrasted that with the 

opaque terms that some of the bilateral lending, particularly with 

China, we see around the world. And you indicated that has, in 

turn, led to sovereign debt, which creates global financial fragility 

and instability. 

You have also referred to predatory lending practices by some 

countries, particularly China. You discussed actions in Sri Lanka 

in particular. Malaysia is another country. 

The Vice President of the United States just recently said infrastructure loans to governments across the Indo-Pacific too often 

come with strings attached and lead to staggering debt. 

IMF Managing Director Lagarde, with whom I met this morning, 

has also expressed concern regarding a problematic increase in 

debt, potentially limiting other spending as debt service rises and 

creating balance of payment challenges. 

Mr. Under Secretary, how is the U.S. specifically using its voice, 

its votes, and leverage in international financial institutions to encourage more transparency from China in its projects in the developing world, as well as an end to the imposition of unsustainable 

debt arrangements on developing countries? And, Mr. Malpass, if 

you prefer to chime in, please feel at liberty. 

Mr. DE MARCELLUS. I will start and he can amplify. 

Senator YOUNG. If you would like to privately confer for a moment and then respond collectively, that is also okay. [Laughter.] 

Mr. DE MARCELLUS. As the Vice President said, there are problems there. Some Chinese loans are linked to resource extraction. 

Some appear to jeopardize countries’ sovereignty. Some burden 

countries with unsustainable debt. Some have adverse environmental impacts. Many are implemented by Chinese SOEs and Chinese labor. Most appear not to be commercially viable, and then almost none are transparent. So we have to address all of those. 

FOREI-42327 with DISTILLER

17 

On the transparency, as Under Secretary Malpass described, 

working through the G20 and within the IMF and World Bank, we 

are working on debt sustainability frameworks for low income 

countries. So when they go into a low income country, they have 

to have a full picture. And Managing Director Lagarde has recognized this, and it has been very clear on the need for transparency 

when the IFIs go in. When we Western donors or the IFIs lend, 

that is not linked to resource extraction. They are weighed against 

debt sustainability frameworks. The information is shared with 

IMF. 

And getting to the point earlier about these non-commercially 

viable projects—and as Under Secretary Malpass stressed earlier, 

what is new in the world is the private sector. So the best option 

is the private sector building these projects, and when they do it, 

they are darned sure it is commercially viable so you do not get 

that problem. 

Senator YOUNG. Just following up on that briefly, how can the 

U.S. better, more effectively catalyze private investment in the developing world? 

Mr. DE MARCELLUS. I think Congress has helped us in a great 

degree with the BUILD Act and the new Development Finance 

Corporation. Thank you for action on that. It is going to be able 

to give us new tools to try to fill the gap. They cannot replace, it 

should not replace the private sector, but if there are gaps to get 

the private sector off the sidelines—and there are also—now I will 

defer to Under Secretary Malpass as well—framework details. But 

at the G20, we are working on trying to develop infrastructure as 

an asset class for institutional investors to again to get the very 

large institutional money off the sidelines to build this infrastructure. 

And then within the Indo-Pacific strategy, within that region, 

Secretary Pompeo announced a series of initiatives in power and 

digital and just general infrastructure to try to work with our private sector and again have our whole government work with them 

to try to fill the gaps. If there is a regulation that has to be fixed, 

if there is some other element that needs to be addressed to help 

the private sector get engaged, just be there on the ground, 

through our embassies, the Commerce Department, Treasury, 

USAID. 

Senator YOUNG. Sort of wraparound services, as it were. 

Mr. DE MARCELLUS. Correct. 

Senator YOUNG. Mr. Malpass? 

Mr. MALPASS. I will add to those points. I wanted to give a concrete example. 

So as a country gets over-indebted, it typically has gone to the 

Paris Club. As I mentioned earlier, China has not accepted the invitation to be in the Paris Club. So it is the biggest creditor. 

And I will mention one specific country. Congo-Brazzaville has in 

recent years borrowed way too much money. Much of it was borrowed from China. The problem is that other countries cannot then 

lend or even make—the private sector certainly does not want to 

invest into Congo-Brazzaville while there is this overhang of Chinese debt. But China will not say how much it thinks it is owed 

FOREI-42327 with DISTILLER

18 

and the country itself also does not know the terms and is not able 

to say how much it is owed. 

And further, China does not have a process to reschedule or to 

forgive that debt, as Secretary de Marcellus was saying. The developed countries have a technique for when a country really has 

failed, to forgive that debt and let the country start to rebuild. 

China has rejected that as a process. 

Yes, sir, Senator? 

Senator YOUNG. Well, so this is instructive. 

In the second panel, Ms. Segal in her prepared testimony noted 

China’s reluctance to participate in certain international arrangements, the Paris Club in particular. And on the Paris Club website, 

China is listed as an ad hoc participant, not a permanent member. 

So for those who may not be familiar with it, what is the Paris 

Club? Why does it matter? And what explains Chinese reluctance 

to become an official member of the Paris Club? 

Mr. MALPASS. Yes, sir. 

I myself have not been to the Paris Club, though I know some 

about it from my previous stint at Treasury and now my current 

stint. It is under my purview. It is a group of creditors that meets 

in Paris—of official creditors. So that would be, for example, the export-import kinds of banks around the world, the military lending 

that goes on, and other forms of official credit. 

So they sit down when a country has failed. It is almost like, in 

my very lay terms, a bankruptcy process where a country is unable 

to pay. Then the creditors get together and think about what to do. 

And oftentimes that means extending the terms of loans or actually 

organizing the forgiveness of debt. 

So as an ad hoc member, China was invited, and this has been 

going on for several years. It predates the current administration. 

They sit in the same room with other creditors. They listen to the 

disclosure of data. It would almost be like you could go and sit in 

a bankruptcy proceeding and hear everybody else’s debt but you do 

not tell the group what you are owed by that company. And so the 

country then works with the creditors. China hears the information. 

So what has been done in recent meetings—they meet monthly. 

So in recent meetings, the rest of the world has asked China to 

step out of the room when certain debts are discussed because 

China, by not participating, needs to be excluded from the group. 

And we are now at the point where we, the U.S., have suggested 

to the other participants in the Paris Club that China not be invited to future meetings if it is not going to participate in a given 

discussion. So it is a disclosure issue where they could be playing 

a constructive role in the world. They are the biggest creditor in 

many countries, and they should be doing this but have declined. 

Senator YOUNG. Just very briefly. This subcommittee hearing is 

on multilateral economic institutions and U.S. foreign policy once 

again. So many of the challenges and concerns that many of us vocalize with respect to China and its predatory economic practices 

are shared by our G7 partners, by G20 member countries. And I 

just would like your thoughts. You can give us a letter grade or 

your qualitative assessment of how the United States is doing on 

FOREI-42327 with DISTILLER

19 

a multilateral basis in working with other countries to address 

these concerns and these predatory practices. 

Mr. MALPASS. You know, will give us a B-plus or an A-minus. 

And the reason for that, while there is a lot of criticism of the U.S. 

for trying to stop international activity, the reality is the Trump 

administration but the U.S. Government as a whole is a leader in 

almost all of the international organizations that are going on, 

leading in a direction of more freedom of higher per capita incomes, 

better economic growth. 

And the way to do that does not mean that we want the organizations to spend more money. In fact, one of the things that I have 

tried to get us to do is have these multilateral bodies have a lot 

fewer meetings and less talk and more action within them. And we 

have been somewhat successful in the G20, in the OECD framework, and in other frameworks in scaling back their work streams. 

I mentioned the Financial Stability Board, FSB, early in my remarks. 

Senator YOUNG. Thank you. I am going to give Senator 

Merkley—allow him to close out this panel. And thank you, gentlemen. 

Senator MERKLEY. So I was reading that the World Bank has some $60 billion of projects in China. And I was thinking about 

that, as I have seen China evolve from my first trip there, an economy based on bicycles to another trip with a few more ring roads 

around Beijing and a system choked with cars to yet another trip 

where I witnessed massive new metro systems and a 200-mile per 

hour train system. 

Should we still be sending development loans to China? 

Mr. MALPASS. In my view, no. In the World Bank reforms that 

have been put on the table and the World Bank management has 

committed to this year, they will be winding down, graduating 

China from IBRD lending. That is the part of the World Bank that 

is currently still lending to China. 

However, the Asian Development Bank still lends and plans to 

continue lending and could, I think, substantially scale back and 

discontinue that lending. 

So I agree with the thrust of your point, Senator Merkley. 

And not to defend, but I would say to Senator Young’s very good 

question, how is the U.S. engaged in these, we can state reforms 

and really push hard for them, but in a lot of cases, we do not have 

control of the organizations and they do not want to go in the direction that we are indicating. 

With regard to China, final point, the world community is pretty 

much in line now recognizing that China has been taking advantage of the system. So there is actually good support within the G7 

and even in the G20 and bigger bodies that China has got to 

change and got to stop taking these loans—wind down its borrowing from the institutions. 

Senator MERKLEY. And finally, last Friday, the Trump administration released its National Climate Assessment that got a lot of 

attention, despite being released the day after Thanksgiving, because it laid out the already massive damage that is happening in 

the U.S. due to climate chaos and how those impacts will accelerate 

over the years to come. 

FOREI-42327 with DISTILLER

20 

Should our international institutions of lending adopt a strategy 

of only financing or primarily financing renewable strategies, noncarbon-burning strategies, given the grave consequences we are 

facing from carbon pollution? 

Mr. MALPASS. In most cases, the organizations try to have high 

quality projects that are transparent where there are environmental assessments as appropriate for the projects. The projects 

are aimed at helping the people of the country get forward in terms 

of the availability of energy, the availability of even heating in certain countries. 

So I would say the policy structure—as I mentioned before, we 

have nearly 100 congressional mandates, many of which—maybe 

the majority—are aimed at environmental practices within the 

multilateral development banks. So I do not know that additional— 

so I do not think additional legislation is needed in this regard. I 

would say that projects are monitored, and there is a substantial 

amount of evaluation done of environmental impacts now. Thank 

you. 

Senator MERKLEY. A lengthy answer avoiding the core point of 

the question, but thank you. 

Mr. MALPASS. Thank you, sir. 

Senator YOUNG. Well, I thank you gentlemen for your time, your 

testimony, and your service. Note that I plan to keep the hearing 

record open for 48 hours, and I would appreciate you both submitting timely responses to any questions that may have been submitted for the record in my absence when I had to step out for a 

couple minutes. Thanks again for being here today. 

If your schedules permit you to stay for the second panel, I of 

course would welcome you to do so. However, I understand if your 

schedules require you to depart. 

This concludes the first panel. We will now take a few moments 

to transition and permit panel number 2 witnesses to take their positions. [Pause.] 

Senator YOUNG. Our second panel today consists of five former 

members of previous administrations and expert witnesses. And I 

thank all of you for being here today. 

The Honorable Clay Lowery, a Visiting Fellow at the Center for 

Global Development, who has also served as Assistant Secretary 

for International Affairs at the Treasury Department from 2005 to 

2009. 

Mr. Scott Morris, Senior Fellow and Director of the U.S. Development Policy Program at the Center for Global Development. He 

also previously served as Deputy Assistant Secretary for Development Finance and Debt at the U.S. Treasury from 2009 through 

2012. 

Ms. Jennifer Hillman, Professor in Practice, Georgetown Law 

Center. 

Ms. Thea Lee, President of the Economic Policy Institute. 

And Ms. Stephanie Segal, Senior Fellow and Deputy Director of 

the Simon Chair in Political Economy at the Center for Strategic 

and International Studies. 

I welcome each of you. Thank you again for being here. Your full 

written statements will be included in the record. I would ask each 

of you to summarize your written statement within 5 minutes so 

FOREI-42327 with DISTILLER

21 

we can engage in an extended Q&A and conclude the hearing 

around 4:30. So that is roughly 45 minutes from now. 

Why do we not go in the order that I announced you. Once again, 

Mr. Lowery. 

STATEMENT OF HON. CLAY LOWERY, VISITING FELLOW, 

CENTER FOR GLOBAL DEVELOPMENT, ARLINGTON, VIRGINIA 

Mr. LOWERY. Chairman Young, Ranking Member Merkley, thank 

you for the opportunity to testify on multilateral economic institutions and U.S. foreign policy. 

I am going to skip the portion that I had about the multilateral 

economic institutions. I think the government witnesses covered it 

very well about the reforms that are needed, as well as the importance to our national interests. 

So when thinking about these institutions in terms of our foreign 

policy, the committee asked, in particular, about the U.S. relationship with China, as we heard in some of the debate earlier. So I 

begin with the Trump administration’s national security strategy 

that refers to China as a strategic competitor. 

Through its section 301 investigations and other actions, the administration has gone even further and accused China of being an 

unfair competitor. And this analysis to me seems fair and accurate. 

But to compete, the U.S. should not just criticize. It needs to 

have an affirmative strategy. And this starts with emphasizing 

U.S. strengths and seizing opportunities to demonstrate better U.S. 

alternatives. And our strengths in my opinion start with, one, our 

model of the private sector, not government support leading the 

way; and two, our deep and longstanding relationships with allies 

around the world who share our values and our ideals, not just 

having transactional arrangements. 

So while China may have spent a trillion dollars in its Belt and 

Road Initiative over the last 5 years, I think it is far more important that just in the Indo-Pacific region alone, the U.S. has over 

$1.4 trillion in trade annually and invested over $900 billion in the 

region as of 2017. These are U.S. strengths, and we should use official tools, whether bilateral or multilateral, to highlight and leverage such strengths. 

This is why I think the Trump administration and Congress, particularly this committee, deserve praise for rethinking OPIC and 

strengthening it through the BUILD Act. 

The closest multilateral model to this approach is the International Finance Corporation, which is the window at the World 

Bank that finances productive private enterprises in the least developed countries. 

To work in riskier countries, the IFC is probably going to need 

to issue more capital. And so recently IFC shareholders, including 

the United States, reached agreement that will allow the IFC to increase significantly its investments in the poorest countries and the 

most fragile countries, while the U.S. will not have to provide any 

new money to this and still retain its veto power. This deal strikes 

me as a solid accomplishment by the Trump administration. 

On the other hand, the Trump administration has taken a number of steps that undermine the strengths of the United States, and 

I will just name two. 

FOREI-42327 with DISTILLER

22 

First was walking away from the Trans-Pacific Partnership. 

There is no other way to put it. This was reckless and a gift to 

China. Instead of helping to establish higher standards and better 

market access for our private sector, we are stuck trying to cobble 

together bilateral deals that appear to rely on a model of managed 

trade. 

Second, the administration has not taken advantage of building 

a coalition to confront China, but has instead threatened to impose 

tariffs on our closest allies on the laughable justification that importing automobiles threatens our national security. In other 

words, rather than making China the outlier because of its behavior, the administration’s unpredictability and unreliability on trade 

could cost us allies that we need to address the real challenges 

posed by China. 

So this leads me to my last point, which is what can Congress 

do. 

To supplement the strong bipartisan work that Congress did on 

establishing the International Development Finance Corporation, 

Congress should also work with the administration on the multilateral economic institutions. Let us just take the World Bank as an 

example. I see three areas of action for Congress. 

First, approve and fund the capital increase for the IBRD. 

Second, authorize the capital increase for the IFC, which is not 

going to cost any money in our appropriations. 

And third, work with the administration on the upcoming 2019 

IDA replenishment. 

And finally, while this hearing is not about international trade, 

this committee may want to consider asserting its role on U.S. 

trade policy, particularly as it concerns China. I would encourage 

the committee to press the administration to develop and share its 

end goal for the current trade war or at least a framework agreement that would address the legitimate concerns with China’s 

trade practices. 

Thank you. I am happy to field any questions. 

[Mr. Lowery’s prepared statement follows:] 

PREPARED STATEMENT OF HON. CLAY LOWERY

Chairman Young, Ranking Member Merkley, and members of the subcommittee, 

thank you for the opportunity to testify on the Multilateral Economic Institutions 

and U.S. Foreign Policy. 

My name is Clay Lowery and I am Managing Director of Rock Creek Global Advisors, a consulting firm that advises companies on international economic and financial policy matters. I also serve as a visiting fellow at the Center for Global Development and as a senior advisor to the Center for Strategic and International Studies. 

From 2005 to 2009, I was the Assistant Secretary of International Affairs for the 

Treasury Department, which exercises U.S. executive oversight of our involvement 

in the International Monetary Fund and the Multilateral Development Banks 

(MDBs), and is a key player in making U.S. foreign policy. 

My testimony today, however, reflects my own views. 

In my testimony, I will discuss (i) U.S. interests in the multilateral economic institutions, (ii) how to think about this in terms of our ‘‘competition’’ with China, and 

(iii) some recommendations on the role Congress should play. 

The U.S. Role in the Multilateral Economic Institutions 

The United States and its allies established the IMF, the World Bank, and the 

GATT—the predecessor of the World Trade Organization—at the Bretton Woods 

conference of 1944. The idea at the time—one that is still true today—was that 

international cooperation on key economic, financial and trade issues and maintainFOREI-42327 with DISTILLER

23 

ing an open, rules-based economic order are important for global stability and prosperity. Since then, the U.S. has also been a founding member, a substantial contributor, and a leader of the key regional development banks: the Asian, African, InterAmerican, and European development banks. 

While each of these institutions has different mandates, tools, financing mechanisms and/or member countries, they broadly have similar objectives: to promote 

economic and financial stability, increase economic growth in a sustainable manner, 

and strive to maintain an open, competitive and well-coordinated international economic order. 

As a large shareholder in these multilateral institutions, the U.S. Government 

should constantly be looking for ways to improve them. However, it is worth noting 

that these institutions have wellserved U.S. national interests over the decades, including by: 

• Promoting global financial stability, which is a core objective of the IMF for example, and is critical to U.S. economic growth, exports, and job creation. 

• Financing infrastructure and human capital development to foster prosperity 

overall and to support the construction of the actual roads and ports that allow 

U.S. exporters to get their products and services to market. 

• Assisting with the ‘‘soft infrastructure’’ of property rights, the rule of law, bureaucratic efficiency, and stronger environmental and social standards, which 

improve the business environment and levels the playing field for U.S. businesses and workers. 

• Leveraging resources through other countries’ contributions and through capital 

markets. President Trump often expresses his concern that other countries are 

not sharing the burden fairly in international institutions. In the case of the 

IMF and the MDBs, this criticism has no merit. For instance, every dollar that 

the U.S. puts into the International Development Association (IDA), which is 

the concessional loan- and grant-making ‘‘window’’ of the World Bank, leads to 

16 dollars in contributions by others. 

Maybe just as importantly, these institutions support U.S. foreign policy goals, 

and the U.S. calls upon them time and time again—whether it is to (i) finance infrastructure in frontline states such as Afghanistan, (ii) provide non-humanitarian financial support to rebuild countries that have been devastated by natural disasters, 

or (iii) boost economies that are the source of refugee flows to mitigate the problems 

of mass migrations. 

These institutions have received continuous support from the Treasury and State 

Departments in both Republican and Democratic administrations. Perhaps as importantly, previous Secretaries of Defense and military leaders also have strongly 

supported them. They have recognized that the IMF and the MDBs are important 

tools to conduct strong foreign policy and to provide the conditions necessary to keep 

our troops out of harm’s way. They have recognized that U.S. leadership of these 

institutions is vital not only to their effectiveness, but to U.S. national security interests. 

How does this all relate to China? 

The committee asked about these multilateral economic institutions and U.S. foreign policy, particularly as we think about U.S. relations with China. It should come 

as no surprise that, as China has risen to the near-top of the global economic and 

financial ladder, it has sought to shape the international economic order in ways 

that advance its own national interests. To do so, China is trying to alter the global 

rules and norms that it did not play a role in setting, change the governance structures in existing institutions to reflect its increasing strength, create alternative institutions that are more aligned with its economic model, and set standards in areas 

where standards are not yet defined. 

The Trump administration’s National Security Strategy referred to China as a 

strategic competitor. Through its Section 301 investigation and other actions, the 

administration has gone further and accused China of being an unfair competitor. 

This analysis seems fairly accurate to me, and the administration should be commended for being willing to take on China on a number of fronts. 

I do not believe that the administration’s approach on these issues has been flawless and I have a number of criticisms. For today’s hearing, however, I will focus 

on the multilateral economic institutions, and how best to use them to promote the 

interests I discussed earlier. 

First, the United States should have an affirmative strategy. Rather than simply 

complaining about China’s attempts to alter the system, pointing out its flaws, or 

trying to mirror China’s approach, the U.S. should highlight its own strengths and 

seize opportunities to demonstrate the better U.S. alternatives. 

FOREI-42327 with DISTILLER

24 

The U.S. strengths are abundant and well-recognized. Broadly speaking, we have 

a system that relies on strong rule of law, protection of property rights, and a very 

robust private sector. Our companies, farmers, and workers are internationally competitive, particularly in technology and high-value manufacturing, which are areas 

that leverage American ingenuity, innovation, and highly-developed capital markets. 

Just as importantly, we have deep and longstanding relationships with allies around 

the world who share our values and ideals. 

In fact, I’d argue that often the people and governments of these countries want 

the U.S. to succeed, not because it will help President Trump or the U.S. gain more 

power, but because it also helps them. This is a significant difference from the 

model China seems to be promoting. While China may have spent $1 trillion in its Belt and Road Initiative (BRI) over 

the last five years, I think it far more important that—just in the Indo-Pacific region—the U.S. has over $1.4 trillion in trade annually and invested over $900 billion in the region as of 2017. These are U.S. strengths and we should use official 

tools—whether bilateral or multilateral—to highlight and leverage such strengths. 

This is why I think the Trump administration deserves praise for rethinking the 

Overseas Private Investment Corporation (OPIC) and working with Congress to 

strengthen it through the BUILD Act. If it works well, the new International Development Finance Corporation (IDFC) should catalyze U.S. private capital in ways 

that challenge China’s development model and leverage U.S. strengths. I also applaud the administration for going further by working with Japan and Australia to 

leverage this model. 

The closest multilateral model to this approach is the International Finance Corporation (IFC), which is the ‘‘window’’ at the World Bank that finances the establishment, improvement, and expansion of productive private enterprises in less developed countries. In order for the IFC to be more effective going forward, it needs 

to be in countries where private sector investors won’t go—unless incentivized. That 

way, instead of countries having to turn to a state-led model with countries such 

as China providing the financing and expertise, the IFC can work with an emerging 

private sector to advance similar objectives and in ways that are more in line with 

U.S. values and interests. 

To work in riskier countries, the IFC will need to issue more capital. Recently, 

IFC shareholders, including the U.S., reached agreement to increase the IFC’s capital. As part of the agreement, (i) the IFC will increase significantly its investments 

in the poorest and most fragile countries, (ii) the U.S. will not have to provide any 

new money, and (iii) the U.S. will still retain enough voting shares to maintain its 

veto power over major decisions at the IFC. This strikes me as a solid accomplishment by the Trump administration. 

On the other hand, the administration has taken a number of steps that undermine the strengths of the United States—particularly as concerns a ‘‘strategic competition’’ with China. First and foremost was walking away from the Trans-Pacific 

Partnership (TPP). There is no other way to put it: this was reckless and a gift to 

China. Instead of helping to establish higher standards and better market access, 

and working with allies and partners in the region to advance our commercial and 

strategic interests, the U.S. is stuck on the outside trying to cobble together bilateral deals that appear to rely on the model of managed trade. Perhaps just as importantly, by withdrawing from this significant initiative, we have undercut another 

one of our strengths, which is our allies’ confidence in U.S. leadership. 

Secondly, the administration has exacerbated this loss of confidence through its 

approach to addressing legitimate concerns with China’s trade practices. Instead of 

working with our allies to build a coalition to confront China, the administration 

has been trying to justify imposing more and more tariffs, including on our closest 

allies, based on the laughable proposition that importing autos and auto parts 

threatens national security. Rather than making China the outlier because of its behavior, the administration’s unpredictability and unreliability on trade could cost us 

allies that we need to address the real challenges posed by China. 

Third, the administration seems overly focused on U.S. trade in goods, despite the 

fact that trade in services is a major American strength. While this approach may 

play well politically among some in the U.S., it fails to accurately assess U.S. competitive strengths and how best to leverage them to compete with China over the 

long term. 

What Can Congress Do? 

This leads me to my last point, which is: what can Congress do? 

Congress, particularly this committee, deserves a lot of credit for its bipartisan 

leadership in modernizing and expanding our own development finance institution 

through the BUILD act. The new IDFC could demonstrate that there are preferable 

FOREI-42327 with DISTILLER

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alternatives to China’s international economic development model, while also helping meet U.S. foreign policy goals and promoting development around the world. 

To supplement these efforts, Congress should work with the administration on its 

multilateral economic institution strategy. Just in the World Bank, I see three areas 

of action for Congress: 

1. Funding the capital increase for the IBRD. The administration has done a solid 

job of promoting reforms during the negotiation for the capital increase, including re-allocating resources away from China and other middle-income countries 

and to lesser-developed countries. Congress should authorize and appropriate 

the funds to continue to allow the U.S. to be the leading player in the World 

Bank. 

2. Authorize the capital increase for the IFC. As noted above, this multilateral 

model aligns with U.S. strengths and requires only authorization, not appropriation. While some have questioned whether the agreement reached can be 

implemented in full, it is worth taking some risk when there are no more U.S. 

taxpayer resources at stake. 

3. Work with the administration on the 2019 IDA replenishment. Next year, the 

administration will be negotiating the replenishment of IDA. This is an area 

where the U.S. can work with China as another donor. If there are IDA reforms 

that Congress believes should be introduced or expanded upon, then it should 

voice those to the administration as early in 2019 as possible. 

These are just a few examples and do not include the regional development banks, 

which may also require oversight and reform. Just over the Thanksgiving weekend, 

for instance, former Secretary of State and Treasury George Schultz authored an 

op-ed suggesting changes at the IDB to allocate more resources to addressing economic challenges in Central American countries as a way to better approach the refugee problem. Serious ideas such as these should be examined and explored. 

Finally, while this hearing is not about international trade, this committee may 

want to consider asserting its role on U.S. trade policy, particularly as it concerns 

China. The administration’s approach of conflating national security with international economic policy, attacking our allies whose help we need to confront and 

negotiate with China, and imposing successive rounds of tariffs instead of negotiating new commitments, does not appear consistent with the principle of strong 

Congressional oversight on trade. I would encourage this committee to press the administration to develop and share its end-goal for the current trade war or a framework agreement that would address the legitimate concerns with China’s trade 

practices. 

Thank you and I’m happy to field any questions. 

Senator YOUNG. Plenty to follow up on there. Thank you, Mr. 

Lowery. 

I am going to go down the line with your indulgence. I had indicated I would go in the order in which I introduced you, but you 

are not seated in that order. So Ms. Hillman. 

STATEMENT OF JENNIFER HILLMAN, PROFESSOR, 

GEORGETOWN LAW CENTER, WASHINGTON, D.C. 

Ms. HILLMAN. Well, thank you very much. That makes it a lot 

easier on all of us. 

Thank you, Chairman Young and Senator Merkley. I very much 

appreciate the opportunity to appear before you, particularly at 

this time when the international economic order that, as Chairman 

Young mentioned, the United States worked so hard to create and 

nurture is at such a critical inflection point I think with the United 

States in particular headed down a potentially dangerous, unilateral, and isolationist road. 

The major problem I think with the approach that we are taking 

is that the problems that we are confronting, whether that is the 

struggle around the world for good jobs that pay a living wage, 

whether that is climate change, whether that is the widening of the 

wealth gap or the rise of extremism and threats to national security. These are not problems that can be isolated or solved by the 

FOREI-42327 with DISTILLER

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United States alone. These are increasingly complex problems that 

overlap with one another and that will require global solutions. 

And yet, these problems are arising at a time when our international economic institutions are under siege. They are responding to a backlash from globalization. They are being attacked from 

outdated mandates that do not address the 21st century problems 

that they need to deal with. And they are being questioned in 

terms of their effectiveness, their relevance and their legitimacy. 

I would say the crisis is the most acute at the World Trade Organization. And yet, the United States needs the United States more 

than ever if we are to take on China. 

Why the crisis at the WTO? Well, there are a number of sources 

of frustration outlined in my written testimony. I will mention just 

two. 

First, there is a lack of balance at the WTO between the weak 

negotiating arm of the WTO with members having reached only 

one agreement on trade facilitation since 1995 compared to the 

very strong—some would say even too strong—dispute settlement 

arm of the WTO, while the executive part of it is viewed as highly 

competent but lacking in the authority to drive any meaningful 

change. 

And it is this lack of balance that appears to be the primary driver for the United States’ decision to block any process to reappoint 

members of the WTO’s appellate body. So we are now down to just 

the bare minimum of three members sitting on that appellate body, 

and any even discussion about how to put new members on the appellate body has been blocked by the United States. 

Secondly I will mention a recently willingness, led by the United 

States, to impose tariffs that violate the WTO’s basic rules, which 

leads many to question what is the point of having a rules-based 

organization if its major members regularly flout those rules. 

So I believe it is critical that the WTO and its WTO dispute settlement system be fixed immediately as the United States needs to 

take the WTO path if it is going to fix the problems that we have 

with China. And in my view that is what ought to happen, is that 

we ought to be bringing a big and bold case based on a coalition 

of countries working together to take on China. Why? 

First, it represents the best opportunity to bring enough leverage 

together by the trading interests of the coalition to put sufficient 

pressure on China to make it clear that fundamental reform is 

needed. 

Second, a comprehensive WTO case would restore confidence in 

the WTO and the rules of the trading system. 

Third, in the past, countries have been reluctant to take on 

China for fear of retaliation. But a broad coalition-based case would 

lessen the likelihood that China would or could effectively retaliate 

against all of the trading partners that would be in this coalition. 

Fourth, the evidentiary burdens of bringing a case against China 

because of its lack of transparency are formidable, but a coalition 

case would allow you to pool all of the evidence that has been being 

collected against China from the United States, the European 

Union, Japan, Canada, and others. 

And finally, WTO cases have already been tried but with limited 

success. The problem is that the challenges were narrow, limited 

FOREI-42327 with DISTILLER

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to a few Chinese measures or to a particular industry or set of producers. No panel has yet been requested to rule on the Chinese system as a whole, and that is what I would recommend, that there 

be a WTO case to hold China to the specific commitments that it 

made when it joined the WTO as well as a broad, overarching what 

is referred to as a non-violation case that would basically say, 

China, you promised when you became a member of the WTO that 

you would become a market-oriented economy and you have not 

done so. If anything, you have gone the other way. And you would 

bring a case at the WTO that says, A, you are violating that basic 

overarching notion of being a market economy, and B, you are violating—and I have laid out in my written testimony—12 very specific commitments that you made that you are now violating. 

And my own view would be if you bring this kind of big, bold coalition case against China, that will be the best way to result in the 

big structural reforms that we really need to see within China and 

that we ought to use the multilateral institution of the WTO and 

use the leverage and the power that it creates with its binding dispute settlement mechanism to be the best tool that we can engage 

in to take on China. 

[Ms. Hillman’s prepared statement is located at the end of this 

transcript.] 

Senator YOUNG. Thank you, Ms. Hillman. 

Ms. Lee? 

STATEMENT OF THEA LEE, PRESIDENT, ECONOMIC 

POLICY INSTITUTE, WASHINGTON, D.C. 

Ms. LEE. Thank you, Chairman Young, Ranking Member 

Merkley, for the invitation to participate in today’s important hearing. 

Today’s hearing provides an opportunity to review U.S. engagement with multilateral economic institutions and the importance of 

both using our influence in those institutions strategically and balancing international engagement with the use of appropriate unilateral tools and domestic policies. 

I would argue that past U.S. trade policy has failed American 

workers, as well as many domestic producers, and has undermined 

democratic decision-making authority with respect to environmental and consumer protections. 

Going forward, Congress and the executive branch should articulate and implement a new approach to global economic integration, 

one that prioritizes good jobs and strong communities and that supports domestic democratic decision-making, where possible. This 

strategy is most likely to succeed if implemented with the cooperation and support of key allies and the multilateral economic institutions, as I think both Mr. Lowery and Ms. Hillman discussed. 

Enforceable multilateral rules are essential to a well functioning 

global system. But the WTO, the organization tasked with defining 

those rules has struggled in recent years to achieve consensus on 

new rules and to enforce existing rules. 

For American workers, the WTO has often appeared to be an obstacle to a reformed trade policy. 

FOREI-42327 with DISTILLER

28 

First, WTO rules are lopsided towards corporate investors over 

those of workers—to its corporate interests over those of workers, 

consumers and the environment. Investors’ rights are prominently 

protected by provisions on investment, financial flows, intellectual 

property rights, among others, while protections for workers’ rights 

are almost completely absent. The WTO has failed to address systematic currency manipulation or misalignment, as well as the use 

of permissive tax laws to attract investment. I would argue that 

both of these are key areas where multilateral trade rules ought 

to be available and enforceable. 

The U.S. Government has not used its considerable clout at the 

WTO to press for deep reforms along these lines. Even if it were 

to do so, it would only succeed if it were able to build a coalition 

with other industrialized countries and key developing and emerging nations. But perhaps the current moment of stalemate and rising tension could be an opportunity to build such a coalition. 

Second, with respect to enforcement, the United States has not 

been able to manage its trade relationship with China effectively 

since China’s accession to the WTO. The U.S. goods trade deficit 

with China hit $375 billion in 2017, up from $83 billion in 2001. 

The growth of the trade deficit with China during this period was 

responsible for the loss of 3.4 million U.S. jobs in all 50 States and 

in every congressional district. Nearly three-fourths of the jobs lost 

were in manufacturing. 

And that is one of the reasons why getting trade policy right is 

so important. The jobs displaced by flawed trade policy are, for the 

most part, manufacturing jobs which provide excellent wages and 

benefits, especially compared with jobs in the service sector. 

EPI research has shown that the wage-suppressing effects of our 

poor approach to globalization and trade have hit all workers without college degrees across the country, not just those in manufacturing who have lost jobs directly to import competition. 

These widespread wage impacts are more in the aggregate than 

the more concentrated losses in directly trade-impacted sectors. 

The key elements of needed trade policy reform include the following. 

First of all, address currency misalignment. The U.S. must abandon our strong dollar dogma and target a currency that allows for 

a manageable and stable trade deficit. 

We should also ensure that our tax and spending policies are in 

line with a sustainable value for the dollar. Last year’s tax bill and 

spending policies contributed to a higher value dollar, which is one 

reason why our trade deficit is growing. 

The WTO and the IMF have not provided any support or guidance for addressing currency misalignment despite the fact that 

each of those organizations in principle have some jurisdiction in 

that area. In the medium and long term, the U.S. Government 

should seek to strengthen and clarify currency tools at both the 

WTO and the IMF. Ultimately, the goal should be to bring countries to the table to negotiate a new Plaza Accord, as was last done 

in 1985. This is the single most effective way to rebalance global 

trade flows, and supportive action from the multilateral economic 

institutions could be crucial in incentivizing such a deal. 

FOREI-42327 with DISTILLER

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We should make access to the U.S. market contingent on respect 

and enforcement of internationally recognized core labor rights. 

The WTO, in particular, must recognize that violation of core workers’ rights is as much an unfair trade policy as the violation of patents or copyrights. 

And finally, we need to develop and commit to a concrete economic plan to help workers in America, focusing on skills, workforce development, job quality, infrastructure, clean energy transition, and expanding a strong social safety net. We need a tax system that supports this plan, but our current system rewards capital over labor and outsourcing over domestic production. It remains riddled with unproductive loopholes and especially after last 

year’s changes, it failed to raise adequate revenue to fund needed 

investments. We must ensure that American workers and businesses have the tools and skills they need to compete successfully 

in a dynamic global economy. 

Thank you for your attention. I look forward to your questions. 

[The prepared statement of Ms. Lee follows:] 

PREPARED STATEMENT OF THEA MEI LEE

Thank you, Chairman Young, Ranking Member Merkley, and members of the subcommittee, for the invitation to participate in today’s important hearing. I am the 

president of the Economic Policy Institute—a nonprofit, nonpartisan think tank, 

which has analyzed the effects of economic policy on the lives of America’s working 

families for over three decades. 

Our country is at a critical moment with respect to international trade and investment policy. We need clarity regarding our strategic goals and priorities in the global economy. At the same time, we urgently need to align our trade policy with our 

domestic choices on tax policy, infrastructure, workforce development, regulation, 

and labor markets. 

Today’s hearing provides an opportunity to review U.S. engagement with multilateral economic institutions, and the importance of both using our influence in those 

institutions strategically and balancing international engagement with the use of 

appropriate unilateral tools and domestic policies. 

Over the last several decades, the U.S. Government has consciously chosen to accelerate our integration into the global economy, with a particular set of priorities 

focused on accommodating the concerns of multinational corporations that invest 

and operate both in the United States and abroad. The vehicles for this accelerated 

integration include the negotiation of more than a dozen bilateral and regional trade 

agreements, a corporate-centered agenda at the World Trade Organization and the 

international financial institutions, and inconsistent and lackluster enforcement of 

U.S. trade laws. 

At the same time, the U.S. Government has dramatically under-invested in crucial infrastructure, education, and skills training, while workplace protections and 

the social safety net have eroded, and the tax code has become more regressive. Our 

macroeconomic policy has tended to weight concerns about inflation more heavily 

than the goal of achieving and maintaining full employment. On net, these global 

and domestic choices have exacerbated growing inequality and wage stagnation, and 

contributed to the erosion of the middle class and the manufacturing sector. This 

has deepened geographical, as well as class and race, divisions in the United States. 

Critique of current trade policy 

Past U.S. trade policy has failed American workers—as well as many domestic 

producers—and has undermined democratic decision-making authority with respect 

to environmental and consumer protections. Going forward, Congress and the executive branch should articulate and implement a new approach to global economic integration—one that prioritizes good jobs and strong communities, and that supports 

domestic democratic decision-making where possible. This strategy is most likely to 

succeed if implemented with the cooperation and support of key allies and the multilateral economic institutions. Transparency and predictability are essential elements. 

FOREI-42327 with DISTILLER

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1 Robert E. Scott and Zane Mokhiber, ‘‘The China Toll Deepens,’’ October 23, 2018. 

2 Robert E. Scott, ‘‘We Still Haven’t Recovered Well-paying Construction and Manufacturing 

Jobs,’’ Economic Policy Institute, August 16, 2017. 

The World Trade Organization (WTO) is the global organization tasked with defining multilateral trade rules. The 168 members of the WTO constitute about 98 

percent of the global economy. While enforceable multilateral rules are essential to 

a well-functioning global system, the WTO has struggled on several fronts in recent 

years. First, it has become increasingly difficult to achieve consensus on new rules, 

and key areas like currency misalignment, climate change abatement, and coordination of tax regimes are not even on the agenda. Second, enforcement of existing 

rules has been contentious, and the member states are currently locked in a disagreement over dispute settlement. 

For American workers, the WTO has often appeared to be an obstacle to a reformed trade policy—both in terms of the inadequacy of the current rules and problems with enforcement. 

First, WTO rules are lopsided towards corporate interests over those of workers, 

consumers, and the environment. Investors’ rights are prominently protected by provisions on investment, financial flows, and intellectual property rights, among others, while protections for workers’ rights are almost completely absent (with the exception of a minor clause on prison labor). The WTO’s regulatory rules also tend to 

favor corporate interests in weaker regulation over stronger domestic protections for 

consumers or the environment. In addition, the WTO has failed to address systematic currency manipulation or misalignment, as well as the use of permissive tax 

laws to attract investment. I would argue both of these are key areas where multilateral trade rules ought to be available and enforceable. 

The U.S. Government has not used its considerable clout at the WTO to press for 

deep reforms along these lines. Even if it were to do so, it would only succeed if 

it were able to build a coalition with other industrialized countries and key developing and emerging nations. Perhaps the current moment of stalemate and rising 

tension could be an opportunity to build such a coalition. 

And second, with respect to enforcement, the United States has not been able to 

manage its trade relationship with China effectively since China’s accession to the 

WTO in 2001. This is, in our view, the most pressing U.S. trade concern, along with 

other countries that run persistent current account surpluses. The United States 

ran a goods trade deficit with China of $375 billion in 2017—up from $83 billion 

in 2001. This is the largest single bilateral trade deficit between any two countries 

in the history of the world—and it continues to trend upwards, despite twenty U.S. 

challenges to China at the WTO, despite earnest annual bilateral talks and commitments, and despite all the ‘‘reform’’ commitments China made upon accession. Currency misalignment is at the center of our trade imbalance with China. 

The growth of the U.S. trade deficit with China between 2001 and 2017 was responsible for the loss of 3.4 million U.S. jobs—in all 50 states and in every congressional district. Nearly three-fourths (74.4 percent) of the jobs lost were in manufacturing.1

And our trade problems with China are getting worse, not better. The U.S. trade 

deficit with China is up almost 10 percent through September of 2018 (year to date, 

over the same period last year). 

The composition of imports from China is changing in fundamental ways, with 

significant, negative implications for certain kinds of high-skill, high-wage jobs once 

thought to be the hallmark of the U.S. economy. Since it entered the WTO in 2001, 

China has moved rapidly ‘‘upscale,’’ from low-tech, low-skilled, labor-intensive industries such as apparel, footwear, and basic electronics to more capital- and skills-intensive industries such as computers, electrical machinery, and motor vehicle parts. 

China has developed a rapidly growing trade surplus in these specific industries, 

and in high-tech products in general. 

The jobs displaced by flawed trade policies are often manufacturing jobs, which 

provide excellent wages and benefits, especially compared with jobs in the service 

sector, where employment has been growing. These manufacturing jobs are often 

unionized, and have generally provided higher than average wages, on-the-job training, and benefits like health care and retirement security.2

And EPI research has shown that the wage-suppressing effects of our poor approach to globalization and trade have hit all workers without college degrees across 

the country—of all races and ethnicities—not just those in manufacturing who have 

lost jobs directly to import competition. While trade-displaced workers face the largFOREI-42327 with DISTILLER

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3 Josh Bivens, Adding Insult to Injury: How Bad Policy Decisions Have Amplified 

Globalization’s Costs for American Workers, Economic Policy Institute, July 11, 2017. 4 Robert E. Scott, Growth in U.S.-China Trade Deficit between 2001 and 2015 Cost 3.4 Million 

Jobs: Here’s How to Rebalance Trade and Rebuild American Manufacturing, Economic Policy 

Institute, January 31, 2017. 5 Robert E. Scott, Re-Balancing U.S. Trade and Capital Accounts, Economic Policy Institute, 

Working Paper#286, 2009. 6 Josh Bivens, Adding Insult to Injury: How Bad Policy Decisions Have Amplified 

Globalization’s Costs for American Workers, Economic Policy Institute, July 11, 2017. 7Thomas I. Palley, ‘‘The Economic Case for Labor Standards: A Layman’s Guide,’’ Richmond 

Journal of Global Law & Business, vol. 2, issue 2, 2001. 

est individual losses, in the aggregate the wider effects of across-the-board downward pressure on wages are much more significant.3

What we should be doing on trade policy 

We urgently need to work together to develop and implement a strategic trade 

policy that aligns with our values and goals, and that complements our domestic 

policy to create good, skilled jobs in manufacturing, in agriculture, and in the service sector. 

The key elements of reform include the following: 

Address currency misalignment. The United States must abandon our strong dollar dogma and target a currency that allows for a manageable and stable trade deficit. We absolutely can manage the value of the U.S. dollar, and we need to set it 

at a level that essentially balances trade. This will give U.S. manufacturing the 

breathing room it needs to gain back some of the few million jobs it has lost in recent decades. (More information can be found in a 2017 EPI report on the pervasive 

negative impact currency misalignment has had on American jobs and wages.) 4 Our 

multilateral economic institutions tasked with addressing currency—the WTO and 

the International Monetary Fund—have not provided any support or guidance for 

addressing currency misalignment. In the immediate term, we should test the multilateral institutions by taking necessary steps to manage the dollar, but in the medium and long term, the U.S. Government should seek to strengthen and clarify currency tools at both the WTO and the IMF. This multilateral action can send a 

strong message to those countries that run large, persistent trade surpluses and 

have undervalued currencies. Ultimately, the goal should be to bring countries to 

the table to negotiate a new ‘‘Plaza Accord,’’ as was last done in 1985. This is the 

single most effective way to rebalance global trade flows,5 and supportive action 

from the multilateral economic institutions could be crucial in incentivizing such a 

deal. 

Moratorium on new trade agreements. There is no reason to devote policy resources to chasing a ‘‘better trade deal’’—certainly not by negotiating agreements 

that incentivize outsourcing and boost the profits of the multinational corporations 

that actively subvert the bargaining power of American workers. Policymakers who 

want to work across international borders could instead focus on eliminating tax havens or harmonizing climate policies to ensure that countries do not free ride on others’ efforts to mitigate greenhouse gas emissions. The most effective and appropriate 

way to address these concerns would be for the multilateral economic institutions 

to provide a forum, eventually moving toward consensus rules and enforcement capacity. (Recommendations in a 2017 report by EPI address how to reorient national 

policy toward measures that will benefit the United States and other countries.) 6

Make access to the U.S. market contingent on respect and enforcement of internationally recognized core labor rights. These core labor standards include the right 

of freedom of association and the right to bargain collectively, as well as freedom 

from discrimination, forced labor, and child labor (as outlined by the International 

Labour Organization in the Declaration on Fundamental Principles and Rights at 

Work). Enforcing these core labor rights is win-win for workers in all countries.7

While the U.S. has included labor rights provisions in our trade agreements for 

many years, these rights still suffer from unnecessary loopholes and ambiguity in 

definition, and they have not been effectively and consistently enforced. We need a 

new approach and commitment, and the WTO in particular must recognize that violation of internationally recognized workers’ rights is as much an unfair trade policy 

as the violation of patents or copyrights. 

And finally, but just as significantly, we need to develop and commit to a concrete 

economic plan to help workers in America—by focusing on skills and workforce development, job quality, infrastructure, the clean energy transition, and expanding 

a strong social safety net. The U.S. Government has its own responsibility to develop and implement a coherent long-term economic strategy with respect to both 

manufacturing and services, both trade-related and domestic. We have failed to inFOREI-42327 with DISTILLER

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vest adequately in infrastructure and skills for decades, and business has not filled 

the void. We have a tax system that rewards capital over labor, and outsourcing 

over domestic production. It remains riddled with unproductive loopholes, and—especially after last year’s changes—it fails to raise adequate revenue to fund needed 

investments. We must use domestic tax, infrastructure, and workforce development 

policies to ensure that American workers and businesses have the tools and skills 

they need to compete successfully in a dynamic global economy. 

Thank you for your attention, and I look forward to your questions. 

Senator YOUNG. Thank you, Ms. Lee. 

Mr. Morris? 

STATEMENT OF SCOTT MORRIS, SENIOR FELLOW AND DIRECTOR, UNITED STATES DEVELOPMENT POLICY INITIATIVE, 

CENTER FOR GLOBAL DEVELOPMENT, BETHESDA, MARYLAND 

Mr. MORRIS. Thank you, Mr. Chairman, Senator Merkley. 

Let me start by saying I very much agree with the case that has 

been made, in particular, for the multilateral development banks. 

So I am not going to repeat in any detail what we have already 

heard. 

I do want to say, though, on these institutions—I want to make 

the point that U.S. leadership depends on our willingness to provide financial support. So the administration’s support for the capital increase of the World Bank is a positive move in my view, and 

while a capital increase does not benefit the poorest countries, it 

will support many countries in Asia, Africa, and Latin America 

where the U.S. has important interests and ties. 

At the same time, the administration has scaled back support for 

the MDBs’ efforts in the poorest countries. These cuts diminish 

U.S. standing and limit the MDBs’ ability to engage where they are 

needed the most. 

So while I believe the capital increase merits your support, it 

should not happen on the backs of other critical MDB commitments. 

Senator Merkley, you raised the question of China’s borrowing 

from the MDBs, and I do want to address that point. I should say, 

as we already heard from the administration, that this has been 

something that this administration and, frankly, the Obama administration was critical of. 

That said, I think it is actually misguided to push too hard on 

this issue, particularly when there is a better alternative. Specifically the capital increase agreement itself requires China and other 

relatively wealthier borrowers to pay higher interest rates on their 

World Bank loans. Higher loan charges will increase bank revenues, easing the financing burden on shareholders and creating 

better incentives for the bank’s borrowers. 

But it is also important to recognize how World Bank lending to 

China can actually benefit us. In a forthcoming paper, I examine 

the bank’s projects in China, a significant share of which is aimed 

at the critical task of reducing the country’s massive carbon emissions. The damaging effects from climate change are not contained 

within our national borders, and positive action taken in one country ultimately benefits others, including our own. 

Finally, let me turn to China’s financing activities in other developing countries. 

FOREI-42327 with DISTILLER

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In some respects, China’s lending is like that of the MDBs in providing capital to invest in transport and energy infrastructure, 

which is sorely needed to spur economic growth. But it is also increasingly clear, as we have heard, that China’s lending is pushing 

some countries into over-indebtedness. 

Earlier this year, my colleagues and I detailed the debt problems 

facing China’s Belt and Road Initiative and pointed to failures in 

China’s approach that are harming some countries. Within the Belt 

and Road, this includes countries like Djibouti, which hosts U.S. 

and Chinese military bases, as well as Pakistan, Mongolia, and 

Laos. 

A key priority for U.S. policy should be to effect a change in behavior by bringing China into the norms and disciplines of other 

major creditor countries. 

We can also respond by offering developing countries more options. That should start with strong support for the MDBs, which 

are readymade to lend at scale and with high standards. The recently enacted BUILD Act will also usefully bring more U.S.-led development finance to bear globally. 

That said, the new Development Finance Corporation should be 

additional and not a substitute for traditional assistance. U.S. leadership through longstanding programs like PEPFAR is doing vital 

work measured in lives saved, and they deserve sustained support. 

It is also important to recognize the essential value of this Development Finance Corporation. Yes, it will deliver more financing, 

but it is in the standards attached to that financing that will distinguish the institution. 

The BUILD Act lays important markers on project effectiveness 

and social and environmental safeguards, things like ensuring that 

local communities are consulted and compensated if they are displaced by a road project. It will take diligence to make these things 

a reality and sustain them over time. 

Let me close by highlighting the risk of going too far when it 

comes to competing with China. There is a difference between offering choices to developing countries and forcing them to choose. 

It would be a costly mistake to seek to carve up the developing 

world in Cold War fashion between clients of the U.S. and clients 

of China. Chinese finance is a reality, and where it is delivering 

something of value to developing countries, we will not convince 

them otherwise. 

Chinese officials are sensitive to the backlash on the debt issue 

right now. And now is the time to exploit that by seeking a change 

in policy and practice, not by drawing battle lines in the developing 

world that are unlikely to hold, but by working with allies to pressure Chinese officials in settings that matter to them, settings like 

the World Bank, the IMF, and the G20. 

Thank you. 

[Mr. Morris’s prepared statement follows:] 

PREPARED STATEMENT OF SCOTT A. MORRIS

Chairman Young, Senator Merkley, thank you for the opportunity to testify today. 

My name is Scott Morris and I am a senior fellow and director of the U.S. development policy program at the Center for Global Development, a non-partisan think 

tank in Washington, DC. I previously served as the Deputy Assistant Secretary for 

Development Finance and Debt at the U.S. Treasury from 2009 through 2012. 

FOREI-42327 with DISTILLER

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1The World Bank, Inter-American Development Bank, Asian Development Bank, African Development Bank, and the European Bank for Reconstruction and Development. 

You have raised a critical set of issues and challenges in this hearing, and I will 

try to do justice to at least some of them. I will focus my remarks on the importance 

of the International Financial Institutions (IFIs) for U.S. interests, the role that 

China is playing today in development finance, and the U.S. response to China’s 

emergence as a leading development actor. 

The Value of the IFIs 

All the IFIs, which includes the IMF as well as the leading multilateral development banks (MDBs), 1 have been key partners for the United States since the creation of the World Bank and IMF over seven decades ago. This is not coincidental. 

The United States has been the leading architect and remains the largest shareholder or ‘‘owner’’ across the IFIs. 

But even if they were of our making, how do they continue to serve our interests? 

Let me try to answer that question by focusing on the multilateral development 

banks. 

• First, the MDBs amplify U.S. assistance, both by drawing in other countries’ 

money and by their own AAA-rated borrowing on capital markets. In 2017, the 

United States contributed $1.8 billion to MDB programs (just 5 percent of the 

U.S. foreign assistance budget). In doing so, we directly leveraged over $120 billion in MDB on-the-ground assistance that year. That’s three and half times as 

much as the U.S. spends directly on foreign assistance globally. 

• Second, by virtue of their lending model, the MDBs can operate at a scale and 

across a range of sectors (infrastructure in particular), that the United States 

alone cannot, given our reliance on grant financing in our bilateral programs. 

This includes a presence in a wide range of developing countries and settings, 

including places where we have U.S. troops on the ground. This is why U.S. 

military leadership past and present has been among the leading advocates for 

the MDBs. 

• Finally, the MDBs have been rated as the most effective development institutions by multiple systematic reviews of aid and development finance. More so 

than any other financing mechanism, this means that U.S. taxpayers stand a 

greater chance of getting the results that they pay for and not paying more than 

they should when it comes to MDB-financed projects. Surveys of developing 

country officials also reveal a strong preference for working with the MDBs 

compared to other sources of aid, suggesting that when we pursue our development objectives through these institutions, we stand a good chance of having 

committed partners on the other side of the transaction. 

Continued U.S. leadership in these institutions depends on our willingness to provide financial support, and on this point the Trump administration’s record is 

mixed. Last spring, Treasury Secretary Mnuchin announced U.S. support for a capital increase at the World Bank, a positive move that will enable the bank to continue to operate in a large group of developing countries, the so-called ‘‘middle income countries.’’ These World Bank borrowers are not among the poorest but include countries like India and the Philippines where the United States has important ties and interests. I hope this committee will give timely consideration to the 

capital increase when the administration brings it forward next year. 

At the same time, the administration’s support for the MDBs when it comes to 

the poorest countries has not been as strong. The administration has scaled back 

commitments for the World Bank’s low-income country financing arm, the International Development Association (IDA), as well as those of the other MDBs. This 

has been a mistake. It diminishes U.S. standing and limits the potential to fully engage in poorest countries where they are needed the most. 

Looking ahead, given the administration’s overall posture on the foreign assistance budget, there’s a risk that the U.S. contribution for the World Bank’s capital 

increase will come at the expense of our other multilateral contributions, and particularly IDA. But if there is to be a trade off in the budget to make room for the 

capital increase, this is not the right one. It will mean that the poorest countries 

will shoulder the burden of more financing for middle income countries at the World 

Bank. Surely there must be room in the remaining 95 percent of the foreign assistance budget to absorb this important and modest funding commitment. 

China’s Borrowing from the World Bank and ADB 

Let me turn now to the question of China’s relationship with the MDBs, particularly the World Bank and Asian Development Bank (ADB). In both cases, China reFOREI-42327 with DISTILLER

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mains one of the largest borrowers, something that has attracted criticism from the 

Trump administration and the Obama administration before it. Yet, neither administration has succeeded in halting MDB lending to China by fiat, and I want to encourage a different way of thinking about this issue. 

First, we should recognize that much of the value of the IFIs for the United States 

derives from their multilateral character. It greatly oversimplifies things to suggest 

they are strictly a U.S. tool, available to do our bidding no matter what the issue. 

The reality is that when we want to get something done in these multilateral institutions, we need to work with other countries. In turn, these institutions are most 

effective when they have the buy-in of the largest number of their member countries. And when the United States is seeking something from them that doesn’t 

have broad-based support, it can be a tough road. 

China’s borrowing from the World Bank and ADB is such a case. I think it’s misguided to push too hard on this issue, particularly when there is a better alternative 

with broader support, one that the Trump administration has already had some success in pursuing. Our objectives here ought to be twofold: to make the most of MDB 

engagement in China in terms of U.S. interests and to extract the most from China 

in return. 

Making the most of China’s borrowing means recognizing the value of some areas 

of this engagement and ensuring that the MDBs are appropriately focused on these 

areas. In some forthcoming research, I look in detail at World Bank projects in 

China. A significant share of the bank’s China portfolio is aimed at reducing the 

country’s massive carbon emissions, which is essential if we are to reduce the pace 

of climate change and its harmful effects, detailed just last week in the government’s report on climate change. We know well that the damaging effects from climate change are not contained within national borders, and positive action taken 

in one country ultimately benefits other countries. From an economist’s perspective, 

this aspect of the MDBs’ work in China is a classic global public good and something 

that ultimately benefits us, even as we sit here 7,000 miles away. 

There are other areas of World Bank lending that aren’t nearly as compelling, and 

by my estimates, one-third to nearly half of the bank’s lending in China is not appropriately focused. The capital increase agreement negotiated by the U.S. Treasury 

rightly seeks to reign in these areas of financing by laying out what sorts of activities are appropriate for the bank’s relatively wealthier borrowers. 

More importantly, the agreement also asks more of China and other relatively 

wealthier borrowers in the form of higher prices on their World Bank loans. 

Through higher loan charges, the bank will increase revenues, which eases the financing burden on shareholders, and will also create better incentives for the bank’s 

borrowers. I think there is more scope over time to further differentiate the lending 

terms for China and other borrowers to a degree that their borrowing can genuinely 

be viewed as financially profitable for the institution. 

Responding to China’s Global Financing 

Let me turn to what China is doing outside of the multilateral institutions and 

how the United States is responding. Over the course of a decade, China has become 

the leading bilateral source of development assistance globally, slightly surpassing 

the United States. Of course, the two countries look very different in the composition of their assistance. The United States mostly provides grant support in the 

health and humanitarian sectors, while China mostly provides loans to support infrastructure projects. 

In some respects, China’s lending is like that of the MDBs in that it is providing 

development country governments access to capital to invest in roads, bridges, and 

energy infrastructure, all of which are sorely needed to spur economic growth. But 

it’s also increasingly clear that China’s lending lacks important constraints, and the 

evidence suggests that Chinese development finance is pushing some countries into 

over-indebtedness with all the problems that come with unsustainable debt burdens. 

In research earlier this year at the Center for Global Development, my colleagues 

and I detailed the debt problems facing China’s Belt and Road initiative and pointed 

to the failures in China’s approach that are pushing some countries into debt crises. 

Within the Belt and Road, this includes countries like Djibouti, which is host to 

ports and military bases for multiple countries, as well as China’s neighbors Pakistan, Mongolia, and Laos. 

While I am skeptical about overuse of the term ‘‘debt trap diplomacy’’ to characterize China’s lending program, we don’t have to have a clear understanding of China’s motivations in every instance in order to recognize that policy failures on China’s part are contributing to debt problems when they arise. As a result, a key priority for U.S. policy should be to affect a change in behavior by bringing China into 

FOREI-42327 with DISTILLER

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the norms and disciplines of other major creditor countries, something we describe 

in detail in our research paper. 

But we can also respond to the problematic aspects of China’s lending by offering 

developing countries better alternatives. That should start with strong support for 

the MDBs, which are ready made to lend at scale and with high standards. 

But we can also do more bilaterally, and one response from the administration, 

spurred by leadership in this committee, holds promise. The expansion of OPIC’s 

lending authority and other reforms contained in the BUILD Act have the potential 

to bring more U.S.-led development finance to bear globally, expanding the mix of 

financing tools on offer in the U.S. assistance portfolio. The new U.S. Development 

Finance Corporation should better enable the United States to go beyond traditional 

assistance in the health and humanitarian sectors to provide larger scale financing 

in infrastructure and other growth-oriented sectors. 

As much as I think the BUILD Act is a positive step forward, my optimism comes 

with some caveats. First, the U.S. DFC should be additional and not a substitute 

for traditional assistance. U.S. leadership through long-standing programs like 

PEPFAR is highly valued in developing countries and is doing vital worked measured in lives saved. And as I noted earlier, strong U.S. contributions to multilateral 

funds like IDA are critical in maintaining our leadership in these institutions. It 

would be a fundamental mistake to allow the aid budget to be gutted on the heels 

of the BUILD Act. 

When it comes to the new DFC itself, it is important to recognize its essential 

value, particularly vis-a-vis Chinese finance. Yes, more financing overall is a good 

thing. But it is in the standards attached to that financing that will distinguish the 

DFC. The legislation lays important markers on project effectiveness and social and 

environmental safeguards. But it will take diligence and hard work to make these 

things a reality and to sustain them over time. 

Too often, the experience of other development finance institutions suggests, for 

example, that time and resource-intensive environmental impact assessments are 

viewed as red tape in the face of competitive pressures. Positioning the new DFC 

so prominently as a competitor to China only heightens my concern on this point. 

I encourage this committee in its oversight to adhere to a strong sense of what 

ought to distinguish U.S. finance from the worst characteristics of Chinese financethings like ensuring that local communities are consulted and fully compensated 

when they are negatively affected by a road project, or ensuring that a negative environmental impact assessment carries enough weight to alter or even halt a potential project. 

Finally, I’ll close by highlighting the risk of going too far when it comes to using 

development finance to compete with China. Yes, we should offer developing countries a ‘‘clear choice’’ by distinguishing our approach to assistance from the problematic features of Chinese finance. Here, we can and should do a better job with our 

developing country partners—both by clearly identifying problems such as non-competitive procurement and by supporting their efforts to be smarter borrowers when 

China is the creditor. 

But there’s a difference between offering choices and forcing countries to choose. 

It would be a costly mistake to seek to carve up the developing world in Cold War 

fashion between clients of the United States and clients of China. Chinese development finance is a reality, and even with its problematic features, it is undoubtedly 

delivering something of value to a wide range of developing countries. Where that 

is the case, we will not convince these countries otherwise. 

Where Chinese finance is causing problems, the U.S. objective should be to change 

Chinese behavior, working with key allies in the G7, India, and Australia, and 

through multilateral settings like the IMF and World Bank. Chinese officials are 

showing signs of feeling the pressure of a backlash on the debt issue. Now is the 

time to exploit that by seeking change: not by drawing battle lines in the developing 

world that are unlikely to hold, but by pressuring Chinese officials in settings that 

matter to them, settings like the G20, the IMF, and the World Bank. 

Thank you. 

Senator YOUNG. Thank you, Mr. Morris. 

Ms. Segal? 

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STATEMENT OF STEPHANIE SEGAL, SENIOR FELLOW AND 

DEPUTY DIRECTOR, SIMON CHAIR IN POLITICAL ECONOMY, 

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES, 

WASHINGTON, D.C. 

Ms. SEGAL. Mr. Chairman, Mr. Ranking Member, thank you for 

the opportunity to contribute to today’s discussion. I was asked to 

speak about the International Monetary Fund and also to address 

China’s strategic approach to projecting economic power and influence globally. 

The IMF was created to foster the stability of the international 

monetary system, and it does this by engaging in three principal 

activities. First, it monitors the economic developments of its members through IMF surveillance. Second, it provides loans to IMF 

members facing balance of payments needs. And third, it enhances 

the technical competence of IMF members through capacity development. 

The global economy has changed considerably since the IMF’s 

founding. Economic liberalization has extended beyond trade to 

now include financial and human capital flows. We are also witnessing the emergence of China as a global power and as a challenger to U.S. economic supremacy. This context makes the activities of the IMF, that is, surveillance, lending, and capacity building, more important than ever. 

In terms of surveillance, the IMF’s most recent evaluation of the 

Chinese economy took place in July, and thanks to efforts championed by the United States to promote transparency, the Fund’s 

report on China can be accessed by anyone with an unrestricted 

Internet connection. Because of IMF surveillance, Chinese authorities and the rest of the world receive a technical assessment of China’s economy from highly trained economists. Having a fact-based 

discussion on a common set of indicators, something that is required by the Fund’s articles of agreement for all Fund members, 

is valuable in and of itself. That is the good news. 

Where IMF lending is concerned, China and specifically its Belt 

and Road Initiative, or BRI, is playing a less constructive role. According to the U.S.-China Economic and Security Review Commission, the BRI is a well resourced, whole-of-government concept for 

regional and global connectivity. BRI financing comes from Chinese 

policy banks, state-owned commercial banks, the Silk Road Fund, 

as well as the Asian Infrastructure Investment Bank and the new 

Development Bank. 

Some projects will deliver the benefits that recipient countries 

hope for. But reports from BRI countries suggest that the return 

on other projects will not live up to expectations. A recent report 

noted that Chinese lending to Pakistan, Angola, and Zambia have 

complicated the countries’ prospects for an IMF program due largely to nonexistent information on the maturity, cost, and terms of 

Chinese loans. Missing terms or contingent liabilities left out of official statistics would compromise a key piece of IMF due diligence, 

that is, the debt sustainability analysis. 

The IMF’s Managing Director is correct to call for absolute transparency on the nature, size, and terms of debts in order to determine the debt sustainability of any country seeking IMF assistance. 

FOREI-42327 with DISTILLER

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1https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/31/IMF-World-Bank. Accessed 

November 23, 2018. 

Separate but related to comprehensive data reporting is China’s 

reluctance to join the Paris Club. Given China’s role as the largest 

single bilateral creditor to post-HIPC, low income countries, its failure to join with other creditor nations in seeking cooperative approaches to data collection and to debt relief undermines recipient 

countries, fellow creditors, and the integrity of the system. 

The issue of data is where the Fund’s work on capacity development is particularly relevant. The IMF should be ready to assist 

China in boosting its capacity to track credit and credit-like instruments and make this information public. Capacity development 

should also be prioritized for recipient countries so that they can 

assess financing terms and reduce any information asymmetries 

between borrowers and creditors. Expanding the envelope of data 

that member countries are obligated to provide in the context of 

IMF surveillance is also worth exploring. 

So to close, IMF activities advance our national interest by boosting transparency, by promoting global financial stability, and by 

enhancing the technical capacity around the world. Maintaining 

U.S. support for the IMF through our policy engagement and in the 

context of periodic IMF resource reviews represents a responsible 

use of our own scarce national resources. 

In addition to support for the IMF and the other IFIs, the United 

States can help countries that have limited options to finance needed investments. Passage of the BUILD Act, along with the recently 

announced Indo-Pacific Transparency Initiative, allows the United 

States to offer a positive agenda for infrastructure investment. 

Again, I thank the subcommittee for the chance to offer my 

thoughts, and I look forward to any questions. 

[Ms. Segal’s prepared statement follows:] 

PREPARED STATEMENT OF STEPHANIE SEGAL

Introduction 

Mr. Chairman, Mr. Ranking Member, Members of the Subcommittee, thank you 

for the opportunity to contribute to today’s discussion on Multilateral Economic Institutions and U.S. Foreign Policy. I appreciate the opportunity to discuss this topic, 

and I recognize the good work of the Subcommittee related to the strategic role of 

economics in foreign policy and national security. 

I was asked to focus my testimony on the International Monetary Fund (IMF or 

Fund) and U.S. engagement with the institution. I will also address briefly China’s 

economic rise, which has led to rapid changes in the international monetary system 

that the IMF oversees, as well as China’s strategic and increasingly assertive approach to projecting its economic power and influence globally. 

The International Monetary Fund 

As members of the Committee know, the IMF and its sister institution, the World 

Bank—together the Bretton Woods Institutions—were created following World War 

II as part of an effort ‘‘to establish a framework for economic cooperation and development that would lead to a more stable and prosperous global economy.’’ 1 To 

achieve this goal, the World Bank focuses on economic development and poverty reduction, while the IMF promotes international monetary cooperation to foster the 

stability of the international monetary system. The IMF engages in three principal 

activities to execute its mandate: First, it monitors the economies of its 189 members as well as the global economy under ‘‘Fund surveillance’’; second, it provides 

temporary financial resources to IMF members facing balance of payments needs; 

and third, it enhances the technical competence of IMF members through capacity 

development. While not without room for improvement, these activities have adFOREI-42327 with DISTILLER

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2 Articles of Agreement of the International Monetary Fund, Article I(v): https://www.imf.org/ 

external/pubs/ft/aa/index.htm. Accessed November 23, 2018. 3 U.S. Department of the Treasury, U.S. Treasury Report to Congress on Ways to Improve the 

Effectiveness of the IMF and Mitigate Risks to U.S. Participation, June 2016. 

vanced U.S. interests by fostering greater transparency and accountability in the 

international system, and smoothing inevitable periods of adjustment. 

Surveillance. The IMF’s bilateral surveillance activities are based on Article IV 

of the IMF’s Articles of Agreement which obliges the IMF to conduct ‘‘firm surveillance’’ over the exchange rate policies of its members in order to ensure the effective 

operation of the international monetary system. IMF members, in turn, are obligated to provide the IMF with the information necessary for such surveillance, as 

well as with any information deemed necessary for the effective discharge of the 

Fund’s duties, which is called for separately under Article VIII, Section 5. 

Bilateral surveillance takes the form of annual ‘‘Article IV’’ consultations, where 

an IMF country team spends time in-country, meeting with the monetary and fiscal 

authorities, political leadership, private sector participants, and civil society representatives among others to assess the country’s economic and financial conditions. 

This annual review culminates in a detailed ‘‘Article IV’’ report which is presented 

to the country’s authorities and IMF management, and then discussed by the IMF’s 

Executive Board representing all 189 IMF member countries. 

Thanks to the IMF’s transparency policy, championed by the United States, publication of Article IV reports is now ‘‘voluntary but presumed’’, making the vast majority of such reports available to the wider public. 

The IMF also conducts multilateral surveillance on regional and/or global economic and financial conditions. The IMF’s twice-yearly World Economic Outlook 

(WEO), Global Financial Stability Report (GFSR), Fiscal Monitor and Regional Economic Outlooks (REOs), as well as the annual External Sector Report (ESR), are 

examples of IMF multilateral surveillance products which evaluate regional or global financial and economic conditions. The ESR, the newest of the multilateral reports and first piloted in 2012 with strong support from the United States, analyzes 

economic conditions in individual economies to assess if and how they contribute to 

global imbalances, as well as the role of policy in contributing to such imbalances. 

Separate but related to IMF surveillance is the Fund’s work to further the provision of economic and financial data to the public through various data standards. 

While voluntary, adherence to the IMF’s enhanced General Data Dissemination 

Standard (e-GDDS); Special Data Dissemination Standard (SDDS); and SDDS Plus 

have filled data gaps, promoted greater data transparency, and provided market 

participants around the world with high quality data essential to capital market development. Taken together, nearly the entire IMF membership (185 of 189 member 

countries) subscribe to one of the three standards. 

Lending. IMF lending is intended to ‘‘give confidence to members by making the 

general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with (the) opportunity to correct maladjustments in 

their balance of payments without resorting to measures destructive of national or 

international prosperity.’’ 2 An IMF member therefore can smooth the adjustment to 

an economic shock by borrowing from the IMF in exchange for a set of conditions, 

generally ex ante commitments to policy reforms and quantified performance criteria for the duration of a lending program. Under a successful program, market 

confidence is restored, and the IMF is repaid as the economy adjusts and investors 

return to the country. In practice, few cases are so straight-forward, and yet the 

IMF has an excellent repayment history. During the Global Financial Crisis (GFC) 

in 2008-09, on through the ensuing euro area debt crisis, the IMF entered into programs and provided financial support to numerous countries, the vast majority of 

which have repaid their purchases to the Fund in full. A 2016 U.S. Treasury Report 

to Congress highlights that in the 24 cases of IMF exceptional access lending since 

2008 there was only a single instance of a country not repaying in full and on time, 

and in that case (Greece in June 2015) the country quickly remedied the delay in 

its repayment to the IMF. The same report offered Treasury’s assessment that IMF 

lending played an essential role in mitigating risks of spillover to the global economy.3

Of course, there are cases where Fund programs are unsuccessful, either because 

the program was not completed, or because even despite program completion, balance of payments vulnerabilities were not durably addressed, leading to follow-on 

programs. In these cases, while IMF program design should be examined, factors 

contributing to a program’s success or failure generally go well beyond program design and concern the member’s political will to implement sustainable macroeconomic policies as well as global conditions, among other factors. 

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4 International Monetary Fund, 2018 Review of the Fund’s Capacity Development Strategy— 

Overview Paper, November 2018. 

Currently, the IMF has $81.5 billion (SDR 58.8 billion) in credit outstanding, consisting of borrowing from the IMF’s General Resources Account (GRA) as well as 

its concessional borrowing window, the Poverty Reduction and Growth Trust. The 

largest outstanding exposures to members currently engaged in IMF programs are 

to Argentina, Ukraine and Egypt. All three programs received strong support from 

the United States when they were brought to the Board for approval. While the circumstances giving rise to financing needs differ dramatically in each case, the country’s importance to the United States was clearly a factor in garnering U.S. support 

for IMF program engagement. In each case, any bilateral assistance provided by the 

United States is dwarfed in comparison to the resources provided by the IMF. 

Capacity Development. Capacity development—covering technical assistance, 

training and other related activities in fiscal management, monetary policy, legal 

frameworks, and statistics—can be provided by the IMF at the request of a member, 

although there is no obligation for a member to accept such assistance. Like IMF 

surveillance and lending activities, capacity development is grounded in the IMF’s 

Articles of Agreement, which provide the Fund with the ability to ‘‘perform financial 

and technical services.consistent with the purposes of the Fund.’’ A review of the 

IMF’s capacity development activities completed this month underscores the importance of capacity development activities to meeting the Fund’s core mandate of fostering the stability of the international monetary system.4 In particular, the review 

highlights the importance of integrating the Fund’s capacity development and surveillance activities; as well as continuing to prioritize the provision of capacity development assistance to fragile states where needs are greatest. 

An Evolving International System 

The global economy and international monetary system have changed considerably since the IMF’s founding in 1945. The global economy is much more integrated 

now than in the wake of the Second World War, and economic liberalization has extended beyond trade to include financial and human capital flows. Liberalization 

has been good for living standards in the United States and around the world, yet 

we are experiencing a backlash, ironically coming from the center of the international system. In addition, in less than a generation we have witnessed the emergence of China as a global power and challenger to U.S. economic supremacy, which 

has likely exacerbated the backlash against economic liberalization, in part because 

China’s own impressive growth has exploited liberalization without offering the 

same opening to the rest of the world. Finally, the uncertainty around the impacts 

of technological change on productivity, economic growth and the distribution of economic gains means the global economy is headed into unchartered territory. Neither 

the backlash to globalization nor technological disruption are the focus of today’s 

hearing, so I won’t spend more time on these issues here except to offer that they 

underscore the Fund’s importance; the principal activities of the IMF—surveillance, 

lending and capacity development—are more important now than ever. 

China’s Rise. In 1980, the U.S. economy was nearly ten times the size of China’s, 

and per capita GDP in the United States was more than 40 times China’s. By 2000, 

the difference narrowed only marginally in U.S. dollar terms; however, under purchasing power parity—which assesses economic size by equalizing price levels between countries—the difference narrowed to slightly less than three times, reflecting 

both a weak renminbi and China’s low cost of living. By 2017, the U.S. economy, 

at just over $19 trillion, was little more than one-and-one-half times the size of China’s. But under purchasing power parity, the Chinese economy had already overtaken the United States as the world’s largest. One can debate the merits of U.S. 

dollar versus purchasing power parity measures, but the trend is clear. Given that 

China’s GDP per capita is still just a fraction of U.S. GDP per capita, we should 

expect the rate of Chinese economic growth to continue to outpace the United 

States, even as the U.S. economy grows in absolute terms. 

China’s economy (in U.S. dollars), can be expected to overtake the United States 

within a generation. The fact that China’s economy, fueled by 1.4 billion Chinese 

consumers, will overtake the United States, a country one-fourth its size by population, should not be seen as a threat so much as a high probability event. Furthermore, China’s economic size tells us little about how its leaders will manage its 

many challenges, ranging from population aging to environmental degradation to financial sector vulnerabilities. But the size of China’s economy, combined with the 

Government’s ability and willingness to corral its resources to achieve strategic objectives, does merit our close attention. 

FOREI-42327 with DISTILLER

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5 U.S.-China Economic and Security Review Commission, 2018 Report to Congress, November 

2018. 6 International Monetary Fund, People’s Republic of China: Staff Report for the 2018 Article 

IV Consultation, June 28, 2018. 7https://www.whitehouse.gov/briefings-statements/remarks-vice-president-pence-2018-apecceo-summit-port-moresby-papua-new-guinea/. Accessed November 20, 2018. 8https://www.thenews.com.pk/print/397725-imf-faces-china-debt-dilemma-as-low-income-nations-seek-help,November 25, 2018. Accessed November 25, 2018. 

IMF Surveillance and China. China’s economic rise and its relevance to the IMF 

can be framed around the three principle activities of the IMF: surveillance, lending 

and capacity development. In terms of surveillance, China meets the obligations of 

Fund membership. Its most recent Article IV discussion was held in July; and 

thanks to previously mentioned efforts championed by the United States to promote 

transparency, China’s Article IV report can be downloaded by anyone with an unrestricted internet connection. In the report and accompanying materials, we read 

staff’s assessment that Chinese data quality is ‘‘barely adequate’’ for Fund surveillance; that IMF Executive Directors support increased exchange rate flexibility and 

further capital account liberalization; and that they want China to allow market 

forces to play a more decisive role in the economy. With regard to China’s Belt and 

Road Initiative (BRI), Executive Directors encourage China to give due attention to 

debt sustainability in partner countries. At a minimum, Chinese authorities are 

hearing the technical assessment of IMF economists, including specific shortcomings 

(e.g., data quality) and areas of vulnerability (e.g., the financial sector). The IMF 

Executive Board—that is, the international community—is weighing-in with messages that will formally be transmitted back to Beijing. It is always a question 

whether a staff assessment or Board discussion will gain traction domestically, but 

the question is not unique to China. Having a fact-based discussion on a common 

set of indicators—something required by the Fund’s Articles of Agreement—is valuable in and of itself. 

China, BRI and IMF Lending. In contrast to IMF surveillance, China’s BRI is 

playing a far less constructive role where IMF lending is concerned. The problem 

comes from loans China is making to some would-be borrowers of the IMF, with 

much of the potentially problematic lending happening under the auspices of the 

BRI, which the U.S.-China Economic and Security Review Commission describes as 

a ‘‘well-resourced, whole-of-government concept for regional and global 

connectivity.’’ 5 This year’s Article IV report for China describes the BRI as an initiative which could ‘‘bring both opportunities for greater connectivity and growth, but 

also risks (e.g. debt sustainability)’’; and calls on China to develop ‘‘a clearer overarching framework governing BRI investment, better coordination and oversight, 

more focus on debt sustainability of the partner countries, and a transparent mechanism for dealing with project disputes, non- performance and debt service problems, 

as well as more open procurement and greater transparency over contracts.’’ 6 Chinese authorities, however, believe these concerns are overstated, and they see 

project selection and governance as ‘‘decisions of market entities.’’ 

It is possible that a number of BRI projects will deliver the economic benefits recipient countries hope for. It is also possible, based on reports coming from a number of BRI countries, that the economic return on some of these projects will be negative. In these cases, far from adding to macroeconomic stability, these projects potentially mire the recipient countries in higher levels of debt. The sheer scope of the 

BRI is daunting. Data provided in the U.S.-China Economic and Security Review 

Commission 2018 report suggests BRI equity and debt funding could already top 

half a trillion dollars through end-2017, coming from a mix of Chinese policy banks, 

Chinese state-owned commercial banks, the Silk Road Fund, as well as the multilateral Asian Infrastructure Investment Bank (AIIB) and New Development Bank 

(NDB). 

In a speech earlier this month at the APEC CEO Summit, Vice President Pence 

referred to ‘‘infrastructure loans to governments’’ with ‘‘opaque’’ terms, producing 

‘‘poor quality’’ projects ‘‘with strings attached and lead(-ing) to staggering debt.’’ 7 He 

cautioned countries against accepting foreign debt that could compromise their sovereignty, reflecting fears that at least some of the infrastructure projects built under 

the BRI are motivated by China’s political or military ambitions rather than to benefit the local or regional economies. A recent report initially published in the Financial Times and later re-printed in Pakistan reported that Chinese lending to Pakistan, Angola and Zambia has complicated the countries’ prospects for an IMF program due largely to ‘‘non-existent’’ information on the maturity, cost and terms of 

loans.8 The missing terms, combined with concerns that contingent liabilities (e.g., 

FOREI-42327 with DISTILLER

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9https://www.reuters.com/article/us-imf-worldbank-pakistan-talks/imf-to-seek-absolute-transparency-of-pakistans-debts-in-bailout-talks-idUSKCN1ML0W1, October 11, 2018. Accessed November 25, 2018. 10 International Monetary Fund, Macroeconomic Developments and Prospects in Low-Income 

Developing Countries-2018, March 2018, Table 4. Total Public and Publicly Guaranteed Debt 

by Creditor, 2007-16. 11 International Monetary Fund and World Bank Group, G20 Notes on Strengthening Public 

Debt Transparency, June 13, 2018. 12 Any amendment to the IMF’s Articles of Agreement requires the approval of three-fifths of 

the IMF’s members representing 85 percent of the total voting power. The next largest shareholder, Japan, holds a 6.15 percent of total votes; while China, the third largest shareholder, 

holds 6.09 percent. 

government guarantees) may not be captured in official government statistics means 

that a key component of IMF due diligence, the debt sustainability assessment or 

DSA, is compromised. 

The IMF has policies and conventions, starting with its preferred creditor status, 

that protect the Fund’s balance sheet, but comprehensive and reliable data must be 

the foundation for any assessment. IMF Managing Director Christine Lagarde is 

correct in demanding ‘‘absolute transparency’’ on the nature, size and terms of debts 

in order to determine the debt sustainability of any country seeking IMF financial 

assistance.9

Separate but related to the issue of comprehensive data reporting is China’s reluctance to participate in certain international arrangements, and the Paris Club in 

particular. Given China’s role as the largest single bilateral creditor to post-HIPC 

low income countries, its failure to join with other creditor nations in seeking cooperative approaches to data transparency and debt relief undermines recipient countries, fellow creditors, and the integrity of the system.10

Capacity Development: China and BRI Recipients. Data is where the last of the 

three principle functions of the IMF is particularly relevant. While the conventional 

wisdom suggests China is actively hiding the amount and terms of its financing, it 

is also possible that Chinese authorities, at least those in charge of managing the 

country’s exposures to overseas projects, have been blindsided by the volume of Chinese credit abroad. Given reports of Chinese exposure to numerous vulnerable countries, there is likely growing concern in China regarding the prospects for repayment. The IMF should be ready to assist China is boosting its capacity to track external credit and credit-like instruments, including contingent liabilities, with an 

eye to making this information public. China’s move earlier this year to create 

China International Development Cooperation Agency (CIDCA) to evaluate and administer China’s foreign assistance program can be a good first step, but with its 

limited focus on official development assistance, it is insufficient to capture all categories of relevant debt and contingent liabilities. In order to be effective and credible, CIDCA would also need to be independent from the Government. 

Expanding the envelope of data that member countries are obligated to provide 

to the IMF in the context of surveillance is also worth considering. 

The IMF and World Bank, in their reporting to the G-20, have underscored ‘‘that 

the primary responsibility for transparent debt recording, monitoring and reporting 

lies with the borrower.’’ 11 In this respect, IMF capacity development should be 

prioritized for recipient countries attempting to attract financing for infrastructure 

to provide these countries with the tools to assess financing terms. The increasing 

complexity of debt instruments makes this work even more critical to reduce information asymmetries between borrowing countries and their creditors. In addition to 

the IMF, the donor-supported Debt Management Facility housed at the World Bank 

works to strengthen low income countries’ debt management capacity and merits 

support. 

What Can the United States Do? 

U.S. influence at the IMF remains strong, reflecting America’s role in the IMF’s 

creation as well as the still-predominant contribution of the United States to the 

global economy. The United States currently holds 16.52 percent of the Fund’s total 

voting power, giving it an effective veto over any change to the Articles of Agreement.12 The United States also benefits from U.S representation among senior management, not only at the IMF but also at the multilateral development banks. In 

addition, while the IMF’s resident Board ensures that all members interact directly 

with IMF staff, management and other Board members, the IMF’s location in Washington also benefits the United States. But sustaining U.S. influence is far from 

guaranteed. The United States should recognize how IMF activities advance our national interests, by boosting transparency and ensuring a common reference point 

for economic discussions among global participants. IMF lending benefits U.S. straFOREI-42327 with DISTILLER

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13https://www.whitehouse.gov/briefings-statements/remarks-vice-president-pence-2018-apecceo-summit-port-moresby-papua-new-guinea/. Accessed November 20, 2018 

tegic priorities and promotes financial stability, even when individual IMF programs 

fall short of objectives. Maintaining U.S. support for the Fund, through serious political engagement and financial support in the context of periodic IMF quota reviews, 

constitute a responsible use of scarce national resources. 

In addition to supporting the IMF and the other international financial institutions, the United States can assist countries that are otherwise left with limited options to finance needed investments. In his speech earlier this month at the APEC 

CEO Summit, Vice President Pence underscored a renewed commitment to development financing, and infrastructure in particular.13 Recent actions, including passage 

of the BUILD Act to create a new foreign aid agency with authority to provide 

US$60 billion in funding for developing nations; along with a new Indo-Pacific 

Transparency Initiative, can equip the United States to offer a positive agenda for 

infrastructure investment, including private sector participation, while boosting 

transparency and combating corruption. Finally, allowing U.S. companies to compete overseas, including with the backing of a fully operational Export-Import Bank, 

can support a positive U.S. agenda overseas. 

Again, I thank the Subcommittee for the opportunity to offer these thoughts, and 

I look forward to answering members’ questions. 

Senator YOUNG. I thank each of you for your summary testimony. There is a lot for us to deal with in a fairly short amount 

of time. 

But why do I not begin with our first three panelists, Mr. Lowery, Ms. Hillman, Ms. Lee. Each of you spoke to, I believe, the need 

for a more coherent and comprehensive strategy with respect to 

some of these issues we are dealing with. 

Mr. Lowery, you indicated that Congress needs to assert our role 

with respect to trade policy and perhaps pressure—you did not say 

this, but pressure this and future administrations to clarify our 

economic security strategy. I will give you an opportunity to respond. 

Ms. Hillman, you focused quite a bit on the WTO in your summary comments, indicating that there is a need to fix the binding 

dispute settlement system, and you suggested this could best be 

done by assembling a coalition. I am not aware that that has been 

written into any particular strategy document, certainly not in any 

great detail by a previous administration or the current administration. 

Ms. Lee, you indicated that the Congress, working with our executive branch, should articulate and prioritize a strategy—your 

words. Most likely that would affect the sort of positive change I 

think that we all want with respect to jobs and incomes and economic stability if that change were pursued multilaterally, something you supported. 

So I think there is a means towards our getting there. In fact, 

I drafted legislation that I think would get us there. It is S. 2757, 

the National Economic Security Strategy Act of 2018. Senator 

Merkley was the original cosponsor lead on this. It would create a 

statutory requirement for the periodic production and submission 

to Congress of a national economic security strategy. 

What do you think about this idea, Mr. Lowery? We actually 

have a written document that can be critiqued by the academic 

community that will signal to our friends and adversaries and partners alike exactly what our strategy is. We could seek buy-in as we 

do with the National Defense Strategy or a National Security 

Strategy from the legislative branch. So we are all working toFOREI-42327 with DISTILLER

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gether for the betterment of the United States and all we represent. Is it a good idea to have a written strategy? 

Mr. LOWERY. So I had the honor of serving on the National Security Council staff back in 2001 and 2002. And part of the staff’s 

work was the National Security Strategy, which I do find to be a 

very helpful document. In fact, I used that in my testimony today 

from the Trump administration. 

So I have read your legislation. I think it would be a very helpful 

thing. I mean, having international economics should be part of 

any strategy, whether it is the National Security Strategy or creating a national economic strategy to go into more detail, just like, 

for instance, on the National Security Strategy, there is a National 

Defense Strategy that relies on it to create more—to be more specific on how the Defense Department envisions this document. 

So I think that this makes a lot of sense to me. It helps create 

priorities. It helps communicate what the administration is trying 

to do, whether it is this administration, the next administration, or 

following administrations. 

Senator YOUNG. And, of course, much of the strategy would be 

classified in nature. There would be a classified annex. As with our 

National Security Strategy, the rest of it would be open source. 

Ms. Hillman, thoughts. 

Ms. HILLMAN. I think it would be serving a great need, which I 

see very clearly right now, by helping to draw a line between what 

is economic security and what is national security because clearly 

one of the real threats to the WTO is the fact that the United 

States has imposed these tariffs on steel and aluminum in the 

name of national security. And right now, those tariffs are being 

challenged at the WTO by many of our trading partners. And the 

response of the United States has been that somehow we are allowed to violate all of our commitments because the challenge is 

coming to say you cannot put tariffs on steel of 25 percent because 

we agreed. We bound our tariffs on steel at 0 percent duties. So 

by charging this 25 percent tariff, we are breaking that commitment. We are violating the WTO rules. We said clearly we would 

not impose tariffs other than equally on all of the members of the 

WTO, and yet we are putting the tariffs on some but not on others. 

So what the United States is intending to say in that litigation is, 

oh, no, we are allowed to do this because we say it is in the name 

of national security. 

And the problem for the WTO is if they agree with the United 

States that you can do anything if you claim that it is in the name 

of national security, every other country can do this to every other 

product and say that they can put these restraints on if they simply say it is in the name of national security. 

And if, on the other hand, the WTO says no, United States, you 

cannot do this in the name of national security, the concern is that 

the Trump administration will withdraw from the WTO on the theory of, you know, sort of who are you, WTO, to tell us what is in 

our national security. 

So I think your legislation and your idea of helping to figure out 

where is that line between national security from a defense sort of 

security standpoint versus what is in our economic security would 

be immensely helpful. 

FOREI-42327 with DISTILLER

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I think also going forward, as we think about whether or not 

there is going to be future tariffs under this section 232, it would 

be very helpful if there could be some of that line-drawing. 

And the last thing. I will only comment quickly. You asked about 

whether or not there is some kind of a strategy document that 

would speak to these China issues that I was talking about in 

terms of a WTO case. The U.S.-China Economic and Review Security Commission just recently, very recently, released its annual report to the Congress, and included in their section on trade and 

China is this idea of sort of bringing a sort of bigger, bolder coalition case to challenge these trade issues with respect to China. 

Senator YOUNG. Excellent. 

Ms. Lee? 

Ms. LEE. Thank you. Thank you, Mr. Chairman. 

I look forward to reviewing your document because it sounds like 

a very useful direction to go. And I do believe there is a value in 

articulating and putting on paper and bringing together all the different agencies to have a coherent strategy. I think that is often 

missing in terms of U.S. economic policy. And I think one issue is 

that we should recognize that there are connections between our 

economic security and foreign policy, and sometimes those are legitimate concerns that are not taken into account. 

I think the other reason that it is useful is that, as we know— 

and I think we have had a lot of discussion today—other governments, particularly China, but others as well, have a very concerted economic strategy, a long-term economic strategy that they 

are playing off of. And if the United States is passive or not coordinated, I think that we will almost inevitably lose out. 

Senator YOUNG. Thank you. 

It is a bit ironic. I can go to the Internet and access China’s 

strategy. I can. In a sense, I have more coherence, more clarity, a 

broader view about what their strategy is on a going forward basis 

than I do as a member of the Senate Foreign Relations Committee 

where my job is, in the main, oversight. And I find that not just 

ironic but troubling, and I think a number of my colleagues find 

it troubling as well. 

I will ask one additional question and then kick it to Senator 

Merkley. It is a follow-up to you, Ms. Hillman, with respect to this 

idea of bringing one broad case at the WTO against China. 

The grounds of the case would be, A, that China has just broadly 

violated the expectations of a market economy. That seems sort of 

a violation of the spirit of the WTO agreement and the expectations 

you have when invited into the WTO. But then there are 12 specific commitments that you indicate the charges should include as 

well that one commits to when you enter the WTO. 

In your assessment, why has a case like this not been brought? 

Ms. HILLMAN. I think it’s an excellent question. I think there is 

a number of reasons why it has not been brought. 

Part of it is trying to bring a case as a coalition is difficult because you have to get everybody on the same page in terms of 

thinking about what kind of claims do we want to bring. 

As I mentioned, in the past, there has been really a reluctance 

because China retaliates and retaliates so quickly and immediately 

against countries that do take actions against China. And they reFOREI-42327 with DISTILLER

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taliate very clearly in this trade sphere and even for fairly innocuous actions. 

When the Nobel Peace Prize is given out to a Chinese dissident, 

what is the first thing China does? It bans the exports of salmon 

because they do not want to in any way reward countries where 

the Nobel Peace Prize is given. 

When the Philippines challenges the development of the islands 

in the South China Sea at the International Court of Justice and 

wins the case, what is the first thing China does? Ban Philippine 

mangos from going from the Philippines into China as a way of retaliating. 

So countries have been really reluctant to take on China in a 

major way for fear that they will be the subject of this retaliation. 

Again, hence the reason why my view is if you put together a large 

coalition of countries, it does create a bit of a shield against this 

ability for China to immediately retaliate. 

The other part of it, again as I mentioned, is evidence. It is hard 

to get enough of this evidence, particularly because China is so 

nontransparent. You simply cannot get your hands on the kind of 

documents that you would normally need in order to prove these 

cases. 

And I think the last thing that is really important is one of the 

major and I would say the most major claim against China relates 

to the issue of subsidies, that China creates massive over-capacity 

in steel, in aluminum, in chemicals, in all of these products on the 

backs of subsidies. And the concern there is whether or not the disciplines for how do we get at subsidies in the WTO are adequate. 

Right now, when the WTO tries to take on subsidies, you go kind 

of two roads. One is you can show that the imports of subsidized 

products are coming into the U.S. market, in which case you can 

try to put a countervailing duty onto those goods to offset the 

amount of the subsidy. So 50 percent of the cost of production was 

by a subsidy. You put a 50 percent duty on. That may work to protect the U.S. economy, but it pushes that subsidized steel out into 

all of the rest of the world. So it did not solve the problem. 

If, on the other hand, what you bring is an adverse effects case, 

the problem is that the remedy is prospective only and it only requires China to so-call remove the adverse effects of the subsidy. 

But if that steel plant is already up, built, and running, it does not 

do you very much good to say prospectively that you are supposed 

to get rid of the adverse effects of the subsidy. 

So the other reason why cases have not been brought is because 

some of the rules in the WTO are probably not sufficient to really 

take on board the substance of the problem that we have with 

China. 

Senator YOUNG. Okay. Thank you. 

I do not believe I will get to all of the questions I wanted to ask 

of all the witnesses because I do want to give Senator Merkley a 

lot of time to ask whatever might be on his mind. Thank you. 

Would you encourage us, Ms. Hillman, yes or no, to consider contacting the administration, encouraging them to assemble a coalition, gather evidence, and bring a case even in light of the infirmities with respect to some of the WTO provisions? Do you think 

it still merits—— 

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Ms. HILLMAN. Absolutely, yes. If the case wins, you have a lot 

of leverage over China to really push for it. If it loses, it will make 

it very clear where are the holes in the WTO rules that need to 

be fixed. So either way, the answer is yes. 

Senator YOUNG. Thank you. 

Senator Merkley? 

Senator MERKLEY. Thank you. 

Mr. Morris, you noted that some of our loans to China are helping China reduce carbon pollution and that that is a positive thing. 

Do you share the viewpoint from the administration’s report last 

Friday that carbon pollution is a significant world problem and we 

need to act quickly to address it, a point that was also made last 

month by the IPCC report that was described as a firm alarm 

going off saying, wake up, act fast on carbon? 

Mr. MORRIS. Absolutely I do. 

And I would make the additional point that in fact it is, if not 

the most important thing the MDBs themselves are doing today, 

among the most important. The capital increase at the World 

Bank—that agreement itself makes new commitments to climate finance that I think are part of what garner my support for that 

agreement. I think it is absolutely critical to their agendas going 

forward. 

Senator MERKLEY. Ms. Segal, do you share that view? 

Ms. SEGAL. I do, and I would also add the IMF focuses on macroeconomic issues as opposed to development issues. But the IMF has 

also thought about climate and climate change as a macro-economic issue. And we do see that there are real macro-economic impacts from climate change. So, yes, I do agree. 

Senator MERKLEY. Ms. Lee? 

Ms. LEE. Yes, absolutely. 

And I also think that the WTO could play a more constructive 

role with respect to climate change to allow countries that go first 

and go faster to implement carbon reducing strategies are not put 

at a competitive disadvantage through trade, so allowing border adjustable methods to adjust at the border for the difference in prices 

between countries that are moving quickly and countries that are 

moving more slowly. 

Senator MERKLEY. Ms. Hillman? 

Ms. HILLMAN. Yes, I totally agree. And I would only add that I 

do think I would agree with Ms. Lee that there is more that the 

WTO can do to both reduce all tariffs on anything that would contribute in terms of renewable energy types of goods. There has 

been a longstanding fight over exactly what products should be on 

that list, and my own view is that fight needs to be over with today 

so that you can go to zero duties and zero restraints of any kind 

on the trade in renewable energy materials in order to, again, 

make that contribution. 

I do think the WTO is also trying to work at disciplines on fossil 

fuel subsidies, which is the other way in which the trading system 

could contribute to helping. 

FOREI-42327 with DISTILLER

48 

But the answer is unequivocally yes. 

Senator MERKLEY. And Mr. Lowery, I do not want to leave you 

out. 

Mr. LOWERY. Thank you. I am not going to say yes or no only 

because I have not read the report, one. And secondly I clearly just 

do not have deep enough knowledge in this area. But I will say 

this. I usually would listen to a lot of scientists that seem to be 

coming to similar conclusions. 

Senator MERKLEY. Thank you. 

So, Mr. Morris, as you were noting about the loans to China and 

helping China reduce carbon pollution, I could not help but recall 

an article I had read about how China is the major financer of new 

coal plants around the world. So I asked my team to get me some 

facts here. 

So China is the largest investor in overseas coal projects, having 

invested $15 billion in the last few years. And they have another 

$13 billion in proposed projects. 

They are involved in planning 700 new coal plants at home and 

abroad. 

And from a different source, a New York Times article, at the 

end of 2016, China was immersed in 240 overseas coal power 

projects. And I have run into a number of these in different parts 

of the world. 

And the same articles note that just the building of these plants 

that are essentially on the drawing board completely overwhelms 

Paris. And Paris itself is not a significant ceiling in terms of—we 

will break the barriers that have been set by international scientists for 2 degrees under Paris. 

So some of you have already mentioned strategies that we could 

use in the international multilateral institutions to help take this 

on. But I hear this fire alarm ringing, saying wake up world. It is 

very hard. It is very hard because we have deeply invested ownership of fossil fuel assets around the world, and the owners clearly 

want to work hard to keep extracting them and burning them. And 

so that is an enormous challenge. 

But the international institutions that you all study or represent—share a little bit more about. And I think, Ms. Lee, you 

mentioned a specific idea that I did not completely capture, but 

maybe you would like to start by mentioning that idea. How can 

multilateral institutions really help us as a human civilization on 

this planet take on this enormous and immediate catastrophic challenge? 

Ms. LEE. The idea I was talking about had to do with the competitive differences, when countries move at different speeds to reduce carbon emissions. So, for example, if, let us say, the United 

States were to put on a carbon tax and raise the price of producing 

certain manufactured goods and other countries might move more 

slowly—developing countries. And that is certainly the idea of the 

Paris Accord. If production were to move from the United States 

to those places that have not yet reduced carbon emissions, then 

you are actually increasing emissions globally because you are 

moving relatively clean production to a relatively dirty place. 

FOREI-42327 with DISTILLER

49 

And one way of deterring that is to allow a border adjustable tax 

that would adjust for the difference in carbon strategies and that 

would prevent the competitive gaming of that. And it would not penalize the countries that do the right thing and move more quickly. 

And I believe it is correct that wealthier countries, wealthy industrialized countries, should move more quickly than poorer countries, but what you do not want to do is end up with this terrible 

outcome where—— 

Senator MERKLEY. No. I take your point on border adjustment. 

We recently had a report from Xcel Energy in Colorado that put 

out a request for proposals, and it came back at 2 cents per kilowatt hour for wind, 3 cents for solar, and both of those were below 

the cost of power from an already depreciated coal plant. 

Are we at the point where the dropping costs of solar and wind 

are going to dramatically change the calculations? Because even 

folks who may not share a concern about the health of our planet 

may want to be on the smart end of the cheapest energy. 

Ms. LEE. Yes, and I think that is a really positive development 

when renewable energy actually ends up being cheaper than the 

more expensive. That is a huge advantage. 

But also I think it is true—this goes, I think, back to the economic strategy and the long-term planning—is that some countries 

like China and Germany might have subsidized wind or solar panel 

productions at an earlier stage when it was not so obvious that 

there was an economic advantage. And that is the kind of thing I 

would like also see the United States be thinking ahead so that we 

are not brining up the rear in that kind of a decision. 

Senator MERKLEY. Yes, Scott? 

Mr. MORRIS. Yes. I would just say, Senator Merkley, you raise 

a good point. I do not think it has received enough attention. In 

fact, there seems to be an effect. As China goes greener and cleaner 

at home, they are pushing out dirtier abroad. 

I think the challenge here, which is consistent with the broader 

challenge we have talked about, is that we want to bring China 

into multilateral norms and disciplines. Well, in this area, we need 

to be sure that they exist. So that is things like standards for export credit agencies when it comes to energy finance, development 

finance abroad. 

You know, this institution that we are standing up under the 

BUILD Act—it is going to be really important that it has standards 

in this area that gives us some standing to try to enforce the massive volume of financing that is coming out of China and supporting these kinds of projects. 

Senator MERKLEY. Anyone else want to chip in on this? [No response.] 

Senator MERKLEY. So I want to turn back, Ms. Hillman, to your 

concept about this strategy for a multilateral challenge. I think of 

the whole WTO process as clunky—that is maybe on the complimentary side—and deeply dysfunctional, a maybe more accurate 

way to describe it. 

FOREI-42327 with DISTILLER

50 

And also fundamentally we struck a deal. It was a geostrategic 

maneuver aimed significantly at separating China from Russia, 

keeping the communist bloc separated. And we said, you know 

what? We will give you access to our market. We will let you 

produce goods at different labor standards, different environmental 

standards, and different enforcement standards, and very low 

wages, which means you will be able to undercut our products. Will 

this not be a sweet deal for you? 

And it was a sweet deal, and it remains a sweet deal. And essentially every manufacturer in America said, can we not make a lot 

more money going to the cheapest place in the world to make 

things and then sell it back into the American market? And we saw 

a massive loss of manufacturing. 

Is it time to rethink this sweet deal for China? They have taken 

the proceeds from that. They are doing massive infrastructure at 

home, which I described earlier, that I have seen just within a few 

trips. They are buying up strategic resources around the world. 

This is all part of a Chinese national economic security strategy, 

their Belt and Road strategy. And my colleague here has said, well, 

America needs a strategy. And our strategy is kind of mired going 

back to our Cold War battle keeping Russia and China separated. 

And we pay a massive economic price for it. Is it time to rethink 

the whole thing? 

Ms. HILLMAN. I think it very well may be time, and part of why 

I guess I am proposing this idea is as part of a rethink, if you will, 

or resetting the table vis-a-vis China. And the question is sort of 

under what auspices or under what table setting, if you will, do we 

have the best leverage with respect to China. Because I do think 

it is clear that many countries around the world share many of the 

United States’ substantive concerns about China, all of the concerns that you have just articulated, again that China has gotten 

away with because it is not just the United States that is feeling 

the brunt of a lot of the Chinese exports and, again, the products 

that are made with the low labor and the poor environmental conditions that you are describing. Those are affecting countries elsewhere in the world. So we have many allies with us that would 

agree with everything that you have just said in terms of what do 

we need to do about China. 

Where they disagree is over the United States’ unilateral tactic 

in approaching it. 

And I guess where I am disagreeing is I do not think we have 

enough leverage alone to create the kind of change that we are 

really talking about in China. So my own view is that the only way 

you are going to get at exactly the issues that you have described 

is to try to put together a coalition. And I do think it is a large 

coalition that agrees with you and agrees that China must be dealt 

with. 

The question is then what do get at the end of the day, whether 

it is enough change, enough resetting of that relationship because 

I do not disagree with you that when China joined the WTO, the 

expectations were really quite different from what the reality has 

been. And over the first couple of years, it appeared that China 

was moving in the right direction, it was opening up its economy, 

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51 

it was moving in a more market-oriented direction, it was starting 

to shut down some of the most environmentally damaging. 

But about—I do not know—2004, 2005, there is no question 

China took a major 180 degree turn in the wrong direction from 

every aspect. It became more state-owned. It became more Communist Party controlled. It became more abusive on a whole series 

of labor and environmental rights. 

So I do not disagree with you. I guess what I am trying to say 

is I think you are right that we need a very dramatic response to 

China. And my only point is I think it needs to be a multilateral 

response and not just a unilateral one. 

Senator MERKLEY. That is a very appropriate response for a multilateral conversation. 

And our time has expired. So I am going to turn this back to the 

chairman. Thank you all very much. 

Senator YOUNG. Well, thank you, Senator Merkley. 

And so many smart minds, so many topics we have covered and 

so many more questions I would like to ask, but we have run out 

of time. 

Chairman’s prerogative. A couple of administrative items. One, I 

would like to draw some attention to a report, of which Scott Morris was one of the co-authors, for those who have an interest in Examining the Debt Implications of the Belt and Road Initiative 

From a Policy Perspective, the title of the report, I would commend 

it to you. Among other things, the report indicates that the World 

Bank and other MDBs should work toward a more detailed agreement with the Chinese Government when it comes to lending 

standards that will apply to any BRI project no matter the lender. 

With unanimous consent, I would like to enter this report in the 

record. 

Senator MERKLEY. Absolutely. 

Senator YOUNG. And as the last order of business, Mr. Lowery, 

I will be submitting a question to you for the record because in 

your prepared testimony, you called walking away from the TPP, 

‘‘reckless and a gift to China.’’ I would be very interested in your 

thoughts about where we should go from here with respect to multilateral trade agreements. 

Thanks again all for appearing today as witnesses, for your research, for your expertise. 

For the information of this member and others, the record will 

remain open until the close of business on Thursday. 

Yes? 

Senator MERKLEY. Thank you. I would like to ask unanimous 

consent to submit to the record a table from the Information, Technology and Innovation Foundation. It is a summary of what was 

referred to as China’s broken WTO commitments, a dozen commitments where they have failed to live up to their promises. 

Senator YOUNG. Without objection, and just under the wire. 

[The information referred to above follows:] 

FOREI-42327 with DISTILLER

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Senator YOUNG. So the record will remain open until Thursday, 

including for members who may not have been present to, to submit questions for the record. 

Thank you again, and thank you, Senator Merkley, for our continued partnership. 

This hearing is now adjourned. 

[Whereupon, at 4:40 p.m., the hearing was adjourned.] 

Additional Material Submitted for the Record 

PREPARED STATEMENT OF HON. DAVID MALPASS

Thank you for holding this hearing and for inviting me to testify. 

My testimony a year ago to Congress addressed the topic of achieving faster U.S. 

and global growth in ways that improve after-tax wages for American workers. 

While there has been substantial progress in the United States, growth abroad has 

softened materially, causing challenges for international economic policy. In this 

context, I would like to provide an update on some of the major policies we implemented over the past year, and describe our policy direction for 2019. I will also 

present a detailed explanation of our policies on the International Financial Institutions (IFIs). 

Major Policy Developments in 2018 

In 2018, we worked to orient better the G20, G7, International Monetary Fund 

(IMF) and multilateral development banks (MDBs) toward growth and accountability. With engagement by the World Bank, IMF, and other partners, Secretary 

Mnuchin has pushed forward an initiative on debt transparency that will, in the 

near term, significantly increase public disclosure and broaden the existing definition of international debt beyond traditional bonds and loans. This will reduce the 

frequency and severity of developing country crises and help push back on China’s 

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over-lending to fragile developing nations, including those with weak governance. 

The World Bank and IMF have focused on more comprehensive and transparent reporting of public sector liabilities of borrowers to assist with our initiative. 

We engaged repeatedly with China on our trade and investment concerns and the 

problems caused by their One Belt, One Road (OBOR) initiative, which often leaves 

countries with excessive debt and poor-quality projects. If countries default on these 

debts, China often gains influence over the host government and may take ownership of the underlying assets. We have built a common awareness of these concerns 

in the G7 and G20. In lending, China often fails to adhere to international standards in areas such as anti-corruption, export credits, and finding coordinated and 

sustainable solutions to payment difficulties, such as those sought in the Paris Club. 

With evidence mounting in Asia and Africa that OBOR has undermined domestic 

institutions and economic strength in borrowing countries, countries such as Malaysia are re-examining the costs and benefits of OBOR-related projects. 

With Congress’s bipartisan support, we have enhanced America’s national security through the enactment and ongoing implementation of the Foreign Investment 

Risk Review Moderation Act of 2018 (FIRRMA), which has strengthened and modernized the Committee on Foreign Investment in the United States (CFIUS). 

We have worked multilaterally to forge a new currency consensus in the G20 and 

International Monetary and Financial Committee recognizing the growth and investment benefits of currency stability. The administration recently concluded the 

U.S.-Mexico-Canada Agreement (USMCA), which included the first currency chapter 

in a trade agreement, consistent with congressional directives promulgated under 

Trade Promotion Authority. We also reached an understanding with South Korea 

on currency stability and transparency at the time of the update to the U.S.-Korea 

Free Trade Agreement (KORUS). Argentina’s new IMF program includes a nominal 

monetary anchor and an important commitment to leaving currency intervention 

unsterilized, policies that quickly stopped Argentina’s mid-2018 currency crisis and 

are dramatically reducing the rate of inflation. 

Treasury also launched the America Crece (The Americas Grow) initiative to promote growth in the Western Hemisphere. One key element of this initiative is to 

deepen U.S. commercial ties with Latin America in energy and infrastructure. In 

2018, we signed energy framework arrangements with Panama and Chile, plan to 

sign one with Jamaica tomorrow, and hope to soon conclude one with Argentina. 

Looking forward, we are working with Colombia and have identified other attractive 

partners. These energy framework arrangements seek to achieve a high degree of 

energy development, integration, faster economic growth, and security with our 

partners through heightened and impactful trade, investment, and finance transactions that rely primarily on private capital. 

We have refocused the Financial Stability Board (FSB) on its systemic risk mandate, including the adoption of an activities-based approach for insurance activities, 

the wind-down of work streams unrelated to stability issues, and the evaluation of 

the effectiveness of existing policies before developing new policies. I served on the 

nominations committee for FSB leadership and was pleased with the recent announcement of Federal Reserve Vice Chair Randy Quarles as the FSB’s next Chair, 

the first American to serve in this role. 

We prepared and published a number of reports including: the MDB Evaluation 

Report, the Foreign Exchange Report, the report of the National Advisory Council 

on International Monetary and Financial Policies, the Export Credit Negotiations 

report, the Technical Assistance report, and the Exchange Stabilization Fund report. 

My testimony before Congress last year discussed the role of multilateral development finance in global growth and prosperity. Since then, we have been successful 

in getting the World Bank to commit to meaningful reforms to achieve sustainability 

in its lending, enforce its graduation policy, implement differential pricing, and 

agree to other reforms that would enhance accountability. As discussed further 

below, a 2018 package for a World Bank capital increase focuses on these areas and 

includes a new financial discipline mechanism that constrains annual lending levels 

to stop the pattern of recurrent capital increases. 

FOREI-42327 with DISTILLER

54 

Policy Direction for 2019 

Looking into 2019, we are again aiming our initiatives at improving the U.S. and 

global growth. We will follow through on the ongoing initiatives and push forward 

with new ones that will contribute to our economic and national security. As a key 

part of this effort, we maintain active economic and financial dialogues with likeminded countries around the world in order to exchange views on and assess systemic vulnerabilities and to support democratic principles and institutions. 

Here in the Western Hemisphere, we have emphasized the risks and challenges 

posed by ‘The Troika of Tyranny,’ namely Venezuela, Cuba, and Nicaragua. This 

‘Troika’ has actively subverted democratic institutions, looted its people’s assets and 

engaged in economic malfeasance, which has resulted in one of the world’s gravest 

migration crises, creating serious fiscal burdens and both security and public health 

risks for its neighbors in Colombia, Ecuador, Brazil, Peru, Panama, and Costa Rica. 

There are nearly 50,000 Venezuelans per day crossing into Colombia. Secretary 

Mnuchin has already held four meetings of finance ministers to review the crisis 

in Venezuela and the impact on its neighbors and support the broad coalition pressing for democratic change. In Nicaragua, we have built a strong consensus of donor 

countries to stop the multilateral development banks from lending to the Ortega regime, which perpetuates itself through the death, imprisonment, and exile of its 

many opponents. 

A high priority in 2019 will be the continued implementation of FIRRMA. Pursuant to that legislation, CFIUS launched an innovative pilot program on November 

10, which includes requiring declarations for certain foreign investments in U.S. 

businesses involved in critical technologies in 27 specific industries. 

There will be substantial work to deepen our major initiative on debt transparency. And we will continue to challenge China’s unfair trade practices and lack 

of reciprocity in trade, lending, and investment. We will continue our work in the 

G7, G20 and other forums to discuss the challenge to our market system from China’s non-market policies. There is already widespread acknowledgement of the problems in many key countries, but more work needs to be done on strengthening the 

debt transparency and financial resiliency of market-oriented countries. 

As Brexit approaches, Treasury is analyzing risks to the international financial 

system and working with the EU and the UK to ensure continued market access 

for U.S. firms, including financial services firms, and to avoid cliff-edge risks. We 

are working toward an improved trade arrangement with the EU and would like 

to pursue a bilateral trade agreement with the UK. The administration notified 

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55 

Congress on October 16, 2018 of its intent to start trade negotiations with the UK 

once it leaves the EU in March 2019. 

Supporting the administration’s trade agenda remains another high priority in 

2019. We will continue to increase reciprocity and market access, particularly for 

U.S. financial services firms. The financial services chapter of the USMCA will result in the elimination of a Canadian data localization rule that requires U.S. firms 

to store data in Canada. Other countries continue to erect similar barriers, and we 

are continuing to engage with finance ministries and central banks to achieve their 

regulatory objectives through other means while protecting U.S. firms from cumbersome foreign data localization requirements. 

Treasury’s Office of Technical Assistance (OTA) will continue its work to improve 

financial processes, including transparency, accountability, financial sector security 

and private sector-led growth. OTA works to improve budget and tax systems, while 

strengthening institutions charged with combating terrorist financing and financial 

crimes. For example, in Colombia, Indonesia and Uganda, Treasury’s OTA helped 

governments strengthen public-private partnerships to finance infrastructure development in ways that mobilize private capital. 

In Latin America, we will be building relationships with newly elected governments, including in Brazil and Mexico. We have engaged with Mexico on strengthening donor cooperation with the Northern Triangle, which is an area that the incoming Mexican Government has also stressed as a priority. 

We continue to work to streamline the G20 and make it more effective. In 2019, 

Japan will chair the G20 while France will chair the G7. We will also start preparing for the United States to host the G7 in 2020. 

Through Treasury’s seats on the boards of the Overseas Private Investment Corporation (OPIC), the Millennium Challenge Corporation (MCC), and the U.S. International Development Finance Corporation (DFC) (the new organization to be established under the Better Utilization of Investments Leading to Development Act of 

2018 that will encompass OPIC), Treasury seeks policies that provide strong financial coherence, further the national interest, and promote the effective use of taxpayer resources. Treasury is also leading U.S. efforts in the International Working 

Group on Export Credits, and working with the interagency on reforms in connection with the Export-Import Bank, to pursue relevant reforms. 

We have been in discussions on the World Bank’s request for a capital increase. 

We are seeking to improve the quality of IMF programs through existing cases and 

upcoming conditionality reviews. We will be notifying Congress of negotiations related to the IMF’s request for a quota increase under the 15th Quota Review (where 

we are in discussions to review the IMF’s funding needs and the makeup of their 

resources) and have notified Congress of negotiations related to the International 

Development Association (IDA) and the African Development Bank (AfDB). These 

IFI topics are discussed in more detail below. 

Seismic Shifts in Global Finance 

My testimony a year ago discussed the seismic shifts that have occurred in the 

global financial landscape and that are challenging the relevance of the international financial institutions (IFIs). The structure of global interest rates has 

moved substantially lower after the inflation peaks of the late 1970s and early 

1980s. Large inflows of private sector capital at increasingly affordable interest 

rates have materially added to growth and prosperity in many developing countries 

and dwarfed the resources of the IFIs. Similarly, emerging markets have gained far 

more access to external private capital, including directly from the capital markets 

as well as through global banks that borrow on the capital markets, resulting in 

private capital flows dwarfing official flows. 

But these inflows have presented challenges, including renewed debt sustainability risks in more vulnerable countries with weaker institutions and macroeconomic policies. Consequently, the availability of increased financing must be accompanied by a dramatically increased level of debt transparency, the capacity to 

manage liabilities prudently, and the capability to deploy resources toward their 

most productive use. 

Many emerging economies—particularly larger middle-income and upper middleincome economies—have gained access to longer maturity debt, increasingly in local 

currency. This has allowed these countries to build domestic yield curves, providing 

a solid foundation for ongoing market-sourced borrowing. 

FOREI-42327 with DISTILLER

56 

FOREI-42327 with DISTILLER


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"' c 

.Q 

$30 

~$20 0 

Vl 

:::> 

<= s10 ~ :> 

u 

$0 

Eurobond Issuances in Sub-Saharan Africa 

- I • • I 

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 

• Issued eJ Possible further issuance 

Note: Kenya ($2.5 billion), Ghana ($7.5 billion), and Tanzania ($0.7 billion) have discussed publicly 

plans for possible Eurobond issuances before the end of 2018. 

Total Official and Private Flows from Donor to Developing Countries 

1980-2016 {USD bn, constant 2014 dollars) 

600 ~-----------------------------------. 

200 

100 

0 

1980 1985 1990 1995 2000 2005 2010 2015 

Note: Chart depicts flows from OECD Development Assistance Committee countries 

to developing countries in constant 2014 U.S. dollars. 

Source: OECD 
57 

In addition to greater private capital flows, there is another important feature in 

the creditor landscape: developing economies are grappling with significant and 

growing inflows from non-traditional official creditors such as China. While Chinese 

financing may fill some gaps in financing for infrastructure investment in developing countries, there are often negative repercussions associated with Chinese 

lending. China’s use of non-market export credits, opaque financing, and exclusive 

procurement practices often benefits the donor more than the recipient and undermines debt sustainability, domestic institutions, and environmental and social 

standards. China, for example, does not adhere to legally binding international 

standards to criminalize bribery of foreign public officials in international business 

transactions. Its financing also often includes conditions that do not show up on the 

Government balance sheet but burden borrowing countries with future liabilities 

such as commodity deliveries. 

These major developments—the increase in developing country access to global 

capital markets and the surge in their official inflows from state-directed capital 

(mainly from China)—not only have profound consequences for developing countries, 

but also for the MDBs. 

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58 

To deliver on their policy goals—positively shaping the conditions for growth and 

higher median incomes in developing countries—the MDBs need to focus more on 

the quality of their project loans rather than the quantity and on helping developing 

countries get their policy environment right for using private capital inflows effectively. The MDBs must ensure that they themselves do not displace private capital 

or lower their lending standards to compete with China’s. 

Role of MDBs 

For the MDBs to effectively deliver on these goals, they must conduct sweeping 

reforms: Refocus assistance on poorer and more vulnerable countries. Strengthen institutions in those countries, and work with them to implement sound policies that 

attract private investment, deepen private markets, and accelerate economic growth. 

Potential reforms include limiting lending to defined needs and existing resources, 

introducing mechanisms to promote financial discipline including through budget 

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and salary constraints, differentiated loan pricing, graduation of borrowers, and sustainable lending practices. 

We are working in the G-20 and G-7 to improve coordination among the IFIs. The 

G-20 has agreed on a set of principles whereby the IFIs will coordinate with each 

other, particularly regarding budget support lending. This helps ensure that the 

MDBs are not competing with the IMF to lend into difficult situations where the 

macroeconomic framework is inadequate. The MDBs are also striving to coordinate 

better at a strategic and operational level. One approach, coordinated country strategies, would help the MDBs and other donors avoid duplicating their efforts in a 

particular country and respond more effectively to the challenges it faces. 

With regard to China’s excessive lending, the MDBs (alongside the IMF) can be 

an effective tool in helping vulnerable countries better understand the risks and implications of such lending. The MDBs present a better source of development finance 

with higher environmental, social, procurement, and debt sustainability standards. 

They can also help countries constructively channel bilateral loans toward growthpositive projects that serve the borrower, not just the lender. Finally, the MDBs and 

IMF can help countries build capacity to negotiate transparent, non-corrupt terms 

for infrastructure projects with foreign financiers, taking into account the macroeconomic consequences of new non-concessional debt. 

But it is worth noting that China has made substantial inroads into the MDBs 

despite its financing practices. In combination, China is absorbing decades of financial knowhow into its institutions in a few short years, a similar pattern to its absorption of manufacturing technology. We are working with allies and like-minded 

countries to guide the MDBs away from what could be viewed as endorsement of 

China’s geopolitical ambitions. 

World Bank Capital Increase 

Regarding the World Bank’s request for a capital increase, we secured commitments on most of the reforms discussed in my testimony before Congress a year ago. 

Though it will take time to implement, it is a solid reform package that better 

aligns the World Bank with U.S. national security, foreign policy, and economic priorities. 

Treasury pushed hard for the adoption of a new mechanism to limit World Bank 

lending and ensure the durability of this capital increase. Based on this push, the 

International Bank for Reconstruction and Development (IBRD) will adopt a new financial sustainability framework that restricts annual lending commitments to 

those that can be sustained in real terms over the next 10 years through organic 

capital accumulation alone. The framework also includes a buffer to allow for a crisis response without the World Bank having to approach the United States and 

other shareholders for a capital increase. This new framework is aimed at achieving 

financial discipline and avoiding future capital increase requests. IBRD Governors 

will review the framework every five years, providing them an opportunity to push 

for any needed enhancements to ensure the IBRD continues operating within its existing financial resources. 

As a direct result of the reform package, the IBRD committed to directing a bigger 

share of its lending to poorer countries, with the share of lending going to countries 

below the IBRD graduation income threshold increasing to 70 percent (from the current level of 60 percent); and to applying its graduation policy more rigorously, freeing up resources for countries that most need them. The reform package introduced 

differentiated loan pricing, making it the first MDB to adopt differentiated pricing 

for non-concessional sovereign lending. This will provide better-off, more creditworthy countries with an incentive to pursue market financing, rather than IBRD 

financing. 

The World Bank will also constrain the growth of staff salaries, which are the biggest driver of increases in its administrative budget. Beginning with the World 

Bank’s FY 2020 budget, the annual general salary adjustment for staff salaries will 

be capped. Management will also conduct a study of recruitment and retention, 

strengthen performance management, and undertake efforts to remove low performers. With these changes, staff compensation and World Bank administrative 

costs will grow at a slower rate than in past years. 

The IBRD capital increase is packaged with an increase in the capitalization of 

the International Finance Corporation (IFC), the part of the World Bank Group that 

focuses on lending to and investing in the private sector in developing countries. We 

declined to participate in the IFC capital increase based on our assessment that the 

IFC did not need more capital to be impactful. Other countries wanted to expand 

the IFC on their own, and packaged their support for the IBRD reforms to an IFC 

expansion. Our voting power will be diluted to 16.4 percent from 21.0 percent, but 

we maintained our veto through a reduction in the IFC’s veto threshold, which will 

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be adjusted from 20 percent to 15 percent. However, we succeeded in negotiating 

that shareholders will, in parallel, seek an amendment to the IFC Articles of Agreement to reduce the threshold that allows the United States to maintain our veto 

over any future IFC capital increases from 20 percent to 15 percent. We will also 

be seeking Congressional authorization to vote for such an amendment. 

We will work with Congress regarding the subscription to the IBRD capital increase. Supporting the GCI would lock in the reforms, improve the effectiveness of 

World Bank programs, and complement U.S. assistance for strategically important 

partners. In short, the package will encourage countries to be more self-sufficient 

in financing their development, focus official development resources on needier countries with less access to other sources of finance, and create a more financially-disciplined World Bank whose lending growth is constrained and therefore more sustainable. The reform package will also advance other U.S. foreign policy objectives, 

including offering developing countries development finance based on transparency 

and high standards to counter Chinese over-lending. 

IMF’s Role in Growth 

We are pursuing policies at the IMF to help make the institution both more effective and more focused on its core mission, including the purposes laid out in Article 

1 of the IMF’s Articles of Agreement, to promote high levels of employment and real 

income, promote exchange stability, maintain orderly exchange arrangements 

among members, and avoid competitive exchange depreciation. 

We have pressed the IMF to prioritize this core mission in its analysis of exchange rates and global imbalances. As mentioned above, the IMF has, in its communiques starting in October 2017, highlighted that sound policies and strong fundamentals are essential to the stability of exchange rates, contributing to robust and 

sustainable growth and investment. 

With strong U.S. support, the IMF approved in April 2018 a new enhanced framework for assessing corruption in its member countries. Under the new framework, 

IMF staff will assess the extent to which corruption is a macro-critical issue and 

propose policy recommendations to member countries. IMF lending programs may 

also include steps aimed at reducing endemic corruption. 

As countries approach the IMF for support, the United States has stepped up its 

engagement in shaping program design. We prefer programs with design elements 

that prioritize the potential for broad-based growth (i.e., increases in real median 

income, not just GDP) and allow countries to pivot away from policies that have not 

worked. This involves three major changes to the IMF’s current approach. First, fiscal policy changes need to be growth oriented. The projection of a reduction in the 

fiscal deficit cannot be an end in itself, because spending reductions often fail to materialize and recessions often derail deficit reduction based on tax increases. Second, 

IMF programs have often measured the success of a privatization in terms of the 

projected proceeds for the Government, which often means continued monopoly 

power. That is a mistake since de-monopolization of critical sectors generally has 

a more lasting growth impact. Third, monetary policies that provide sound money 

are at the core of a successful growth program. 

The last point was recently illustrated by Argentina’s first IMF program earlier 

this summer that neglected the exchange rate, which weakened precipitously. At the 

heart of the revised IMF program for Argentina is a commitment to a strong nominal anchor to recover confidence in the currency. By expressly limiting the growth 

of the monetary base, a policy that the United States strongly supported, the central 

bank was able to arrest the precipitous decline in the exchange rate, and the authorities there are on track to reduce interest rates and inflation very significantly 

(which had reached 6.5 percent per month in September and 5.4 percent in October), which will allow interest rates to support credit and growth. We support President Macri’s vision for economic reforms, and believe that the monetary and structural reforms in the IMF program, if implemented, will place the Argentine economy 

on a path of sustainable growth. 

IMF Quota Review 

The IMF is undertaking its 15th General Review of Quotas, with the goal of completing the review no later than the Annual Meetings in October 2019. The review 

will both assess the adequacy of the IMF’s resources and determine whether or not 

to adjust members’ quotas and quota shares. The IMF has requested a buildup in 

its quota resources and claims that it needs to be the center of the global financial 

safety net. We will be seeking a constructive size for IMF resources that contributes 

fully to the stability of the international financial system, but recognizes that the 

IMF is just one part of the global financial system and its various support mechanisms. 

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CURRENT IMF RESOURCES 

SDR billions USD billions 

Quota 476 $661 

Of which: U.S. 83 $115 

NAB (40) 182 $253 

Of which: U.S. 28 $39 

Bilateral loans (40) 314 $436 

Of which: U.S. 0 0 

Total 972 $1,349 

Of which: U.S. 111 $154 

Pursuant to Section 41 of the Bretton Woods Agreement Act, we will shortly send 

a notification that IMF negotiations related to quota will begin in 2019 to provide 

you with formal advance notice of discussions. As the IMF conducts its quota review, we will work closely with it to improve the approach to conditionality in lending programs in order to make them more growth oriented. We will be heavily engaged in an upcoming review of IMF compensation and benefits with the goal of 

making IMF operations less costly and inefficient. And we will ensure that the IMF 

is sufficiently and efficiently resourced to carry out its mission and role. In this regard, we note that the IMF has ample resources to achieve its mission, countries 

have considerable alternative resources to draw upon in the event of a crisis, and 

the post-crisis financial reforms have helped strengthen the overall resiliency of the 

international monetary system. 

MDB Authorization Topics and Specific MDB Objectives 

We have notified Congress of the launch of negotiations on fund raising efforts 

by IDA and the AfDB. 

The negotiations for the 19th replenishment of IDA (IDA-19) were launched on 

November 15, 2018 and will be carried out over the course of 2019. Under discussion 

is the donor funding for IDA’s fiscal 2021–2023, running from July 2020–June 2023. 

Substantial changes were made to IDA’s financial model and policy agenda before 

and during the current replenishment period.As a result, we expect IDA-19 to focus 

on taking stock of the IDA-18 reforms and IDA’s ability to implement productive 

projects. We also have several reform priorities. First, we will work with other donors to ensure IDA-19 addresses rising debt levels among low-income countries.Second, we will seek to review and better target the support the World Bank 

provides for countries as they grow wealthier and transition from concessional financing under IDA to less-concessional financing through the IBRD. Third, we will 

seek to ensure that IDA retains a strong focus on fragile and conflict-affected countries, gender and development, and good governance, including in the area of debt 

management and transparency. 

The Governors of the AfDB, over a U.S. objection, have decided to commence negotiations on the AfDB’s capital needs in December 2018. Given Africa’s enormous 

development challenges, we want a strong AfDB to serve the continent. However, 

new capital alone will not achieve a stronger institution. The AfDB needs to make 

greater progress on ongoing institutional reforms and agree on a set of further reforms that would accompany any new capital to ensure that it uses such funds more 

prudently and effectively. Among other items, we hope to see the AfDB fill critical 

vacancies in its accountability functions, better focus its lending on areas where it 

is most impactful, improve the readiness of projects before seeking board approval, 

strengthen project supervision and monitoring, and put in place a framework for financial discipline. 

As with IDA, replenishment negotiations for the African Development Fund 

(AfDF), the AfDB’s concessional arm, will occur in 2019. We intend to notify Congress of the launch of this negotiation in 2019. We are seeking many of the same 

improvements that are needed for the AfDB. In particular, given its relatively small 

scale, we want the AfDF to increase the selectivity of the areas it works in, with 

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an emphasis on regional transport and trade facilitation, electricity access, and 

water and sanitation. As a majority of AfDF recipient countries are now classified 

as fragile, heavily affected by conflict in neighboring countries, or otherwise at high 

risk of debt distress, we also expect the AfDF to maintain a strong emphasis on addressing fragility, conflict, and violence and helping countries improve their debt 

management. 

We are strongly committed to enhancing growth and development within the U.S.- 

Mexico border region. We continue to support the North American Development 

Bank (NADB). The administration has requested in our FY 2019 budget that Congress authorize the United States to subscribe to $10 million of paid-in shares at 

the NADB. We and our Mexican partners in the NADB think that the NADB can 

do even more to improve the wellbeing of people in communities along the border. 

To that end, we included the NADB in our America Crece initiative and are exploring ways to boost the NADB’s capabilities. The goal is to improve infrastructure 

along both sides of the border and create economic opportunities that increase median real incomes. We are also assessing whether the NADB has the right strategic 

and financial tools. We look forward to continuing these discussions once Presidentelect Lopez Obrador takes office and working with his administration and Congress 

to realize these goals. 

The European Bank for Reconstruction and Development (EBRD) and the Asian 

Development Bank (AsDB) are both currently well capitalized. Our paramount objective at both institutions is to ensure they remain focused on project quality rather 

than using their existing capital to grow more quickly without due regard for development outcomes. At the EBRD, this is all the more important given that most of 

its traditional countries of operation in Central and Eastern Europe have gained 

ample access to capital markets since the EBRD was created in 1991. We want the 

EBRD to focus on priority countries with less access to capital—such as Egypt, Jordan, and countries in Central Asia and the Balkans—while resisting calls to expand 

its existing geographic footprint. At the AsDB, our principal objectives are to develop a path to graduation, reduce its engagement in upper middle income countries 

such as China, and introduce higher loan prices for countries with more access to 

private capital. We also seek to introduce an enhanced financial sustainability 

mechanism to ensure that we do not encounter future unplanned requests for shareholder capital. 

Mandates Can Complicate the Goal of High-quality MDB Programs 

Treasury is proud to have the statutory lead in representing the executive branch 

in the IFIs. This is a serious task and we execute it faithfully. That said, we coordinate closely with interagency colleagues, and we benefit from the input provided by 

other parts of the Government so that we can present a whole-of-government approach. For example, our State Department colleagues actively keep us abreast of 

key foreign policy priorities in countries where the IFIs are active; the Commerce 

Department informs American companies about procurement opportunities that 

come about as a result of MDB projects; and USAID provides technical advice regarding the soundness of individual projects and linkages to our bilateral assistance. 

As we consider individual projects at the MDBs, we systematically solicit input from 

any agency that is interested, and we seek to synthesize information so it can be 

provided as useful feedback to the MDBs. 

The U.S. Government seeks high quality MDB projects that not only address the 

important development needs of recipient countries but that are also well—designed, technically sound, growth-enhancing, and based on strong consultation with 

the recipient government, affected communities, civil society, and other donor partners. We want to see strong monitoring of MDB projects, robust evaluations of completed projects, and thorough results measurement frameworks baked into every 

project so we can systematically track whether projects are performing well or not. 

We continue to press the MDBs to achieve high standards regarding transparency, procurement, and environmental and social safeguards, with the goal of 

having our funds used correctly, fairly, and transparently. These high standards set 

the MDB projects apart from projects financed by other lenders who may provide 

funding, but without transparency and other protections. 

The MDBs have substantially improved their projects over the years, often with 

significant help from Congress, including leaders on this Committee. And while we 

work to avoid situations in which people are hurt or abused in a project funded 

through the MDBs, there are instances when something goes wrong with an MDB 

project. Hence, we are advocating for robust independent mechanisms that improve 

MDB accountability and enable relief and redress. 

Treasury follows numerous congressional mandates by using its voice and vote in 

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pensive, consumes significant staff time, and often ends up reducing the U.S. ability 

to influence policy in the direction Congress desires. Treasury is implementing a 

large number of legislatively required mandates in the IFIs. At last count, there are 

well over 100 congressional policy and directed vote mandates on the books. In addition, while mandates are added year by year, few are ever removed. We diligently 

follow these mandates from Congress. But as we seek to improve and reform the 

MDBs, we also invite Congress’ attention to streamlining the number of legislative 

directives. Mandates require considerable time and resources to implement, and can 

detract from other important tasks related to loan quality. They can occasionally inadvertently undermine 

U.S. leadership in the MDBs, as other member countries pay less attention to the 

U.S. position because our votes and positions on a given loan are pre-determined. 

Many mandates and reporting requirements are simply outdated. As we seek to reform the MDBs, we look forward to having a dialogue with members about how we 

can ensure voting mandates and reporting requirements have the impact that Congress intends but do not impede U.S. efforts to advance our broader strategic objectives in the MDBs. We appreciate the dialogue that we have had with the committee, not only on legislative mandates, but also on U.S. engagement at the MDBs 

as a whole. We look forward to continuing this dialogue today and into next year. 

Debt Transparency Initiative 

Treasury has encouraged an initiative at the IMF and World Bank to develop, and 

disseminate to the public, information on international borrowing. One of the principal thrusts of the initiative is to modernize official debt data in line with market 

developments over the last 20 years. Government debt obligations are no longer limited to traditional loans and bonds. New liabilities ranging from derivative operations to pre-paid forward sales of commodities impose the same calls on government budgets. If the burden on taxpayers is the same, the disclosure, accounting 

and fiscal treatment must be the same. Investors will then have more and better 

data to make decisions, allowing markets to function more smoothly and crises to 

be less frequent and less severe. 

Over the next two years, this new standard of debt disclosure should be defined 

and endorsed by the official sector. In the case of the IMF, this practice is consistent 

with Section 42 of the Bretton Woods Act, which specifically directs the Secretary 

of the Treasury to support procedures to collect, and disseminate publicly, information on international borrowing. 

The IFIs—including the IMF and World Bank—have a key role to play in enhancing debt transparency in, and supporting sustainable borrowing and lending practices by, their member countries. Developing countries need investment to grow, including in infrastructure. But lending to low-income countries (LICs) that is nonconcessional, non-transparent, and funneled into poor quality projects will raise debt 

burdens without boosting productivity and growth. This, in turn, results in countries 

diverting scarce budget resources to service high levels of debt and poses a threat 

to countries’ growth prospects and overall economic stability and development. 

On the borrower side, the IMF and World Bank are making efforts to obtain a 

comprehensive picture of members’ debt positions in both IMF bilateral surveillance 

and as part of their lending programs, with the goal of improving debt sustainability. In particular, we are working with both institutions to improve the public 

disclosure of a broad range of sovereign debt statistics, including publicly guaranteed contingent liabilities and forward sales of commodities, by member countries 

to reduce debt surprises. This will improve policy making and reduce the frequency 

and severity of financial crises. We also strongly support the IMF and World Bank’s 

efforts to build borrower countries’ capacity in public debt management and disclosure. 

On the creditor side, the IMF and World Bank also have roles to play, in particular with emerging, non-traditional creditors such as China. The IMF and World 

Bank are engaging in more structured outreach to non-Paris Club and multilateral 

creditors, including preparing and providing workshops on debt sustainability analyses, lending frameworks, and external coordination in debt resolution. At the same 

time, they are planning reviews of their respective debt limit policies to strengthen 

data provisions and simplify conditionality. All of these steps reflect our shared priorities with the IFIs in promoting debt transparency, debt sustainability, and responsible burden sharing in debt resolution, which in turn will help reduce opportunities for corruption. 

In conclusion, while U.S. growth has accelerated, growth in many other countries 

has slowed. This gives rise to new challenges in international economic policy that 

we are working to meet through new initiatives. I appreciate the opportunity to 

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present this Committee with a description of our major activities in 2018 and policy 

direction for 2019 and beyond, and I invite your views and questions. 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO

HON. DAVID MALPASS BY SENATOR ROBERT MENENDEZ

Debt Transparency 

In your testimony you state ‘‘Secretary Mnuchin pushed forward an initiative on debt transparency that will, in the near term, significantly increase 

public disclosure and broaden the existing definition of international debt 

beyond traditional bonds and loans.’’ 

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

Answer. The purpose of the initiative is to improve the quality, consistency, and 

transparency of sovereign debt data, including the reporting of debt equivalent instruments (e.g., forward sales of commodities, asset repurchase agreements) and 

contingent liabilities (e.g., obligations of state-owned enterprises, guarantees). To do 

so, the Treasury Department is working closely with our international counterparts 

as well as the International Monetary Fund (IMF) and the World Bank to promote 

the development and adoption of stronger international standards of data collection 

and disclosure. The Department anticipates that enhanced transparency of sovereign debt statistics will promote better policy decisions and reduce the frequency 

and severity of financial crises. 

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

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

on this initiative. 

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

Answer. Yes. The Office of Legislative Affairs will contact committee staff to 

schedule these briefings. 

Multilateral Development Banks 

Regarding your testimony on Multilateral Development Banks (MDBs), 

Question 4. Will you commit to engagement with this committee on the ‘‘sweeping 

reforms’’ envisioned by the administration to make MDBs more effective? 

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

to make MDBs more effective. 

Question 5. Do you anticipate any new authorities will be required to achieve 

those reforms? If so, can you commit to timely consultations with the Committee? 

Answer. Yes. For example, continued congressional support for contributions to 

the MDBs’ concessional window replenishments advances our ability to promote additional reforms for the benefit of the world’s poorest countries and ensure effective 

use of U.S. contributions. Treasury is committed to timely consultations, and we 

look forward to working with you. 

International Monetary Fund Quota Review 

In your testimony you state ‘‘the IMF has ample resources to achieve its 

mission, countries have considerable alternative resources to draw upon in 

the event of a crisis, and the post-crisis financial reforms have helped 

strengthen the overall resiliency of the international monetary system.’’ 

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

Answer. There are many ways to estimate future demand for IMF resources, including by looking at the size of members’ economies and their trade and capital 

flows, estimates of demand based on historical IMF programs, and data from past 

global crises. In addition, demand for IMF resources also relates to the availability 

of other sources of support, such as regional financial arrangements. Moreover, it 

is not feasible to assume that the IMF resources will cover every tail risk scenario. 

Therefore, Treasury constructed several crisis scenarios. These include a mild crisis 

scenario in which a set of emerging markets face financial difficulties and request 

assistance of about 3.5 percent of their Gross Domestic Product (GDP), with resulting demand for IMF resources of about $300 billion; a moderate crisis scenario in 

which the same set of emerging markets requests assistance at 6 percent of GDP, 

with resulting demand of about $500 billion; and a severe shock scenario in which 

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1 1 See, for example, Summit of Asia-Pacific Economic Cooperation in Papua New Guinea, November 18, 2018 (failure of an agreed-upon communique among the 21 nations of APEC blamed 

on US-China trade tensions and the growing competition for influence among the South Pacific 

countries); G-20 Finance Ministers, Buenos Aires, March 20, 2018 (no agreement on usual communique of shared principles on major economic policies due to trade issues); G-7 meeting, Quebec, Canada, June 8-9, 2018 (President Trump rejected a previously agreed-upon communique 

and disparaged Canadian Prime Minister Trudeau); G-20 leaders meetings in Hamburg, July 

2017 (final text was held up by objections to the U.S. decision to withdraw from the Paris Agreement on climate change, despite agreement on most aspects of the final statement); WTO 11th 

Ministerial Meeting, Buenos Aires, Argentina, November 2017 (ended with no concluding statement and no new agreements). The NATO Summit (Brussels, July 11-12, 2018) did produce a 

communique, but also disputes over President Trump’s demand that spending increases occur 

faster than previously agreed timeframes. 2 2 Concerns over the functioning of the international economic institutions and analyses 

about how to improve them have existed for decades. A number of these ideas were summarized, 

along with the suggestion that the G-20 be used as a fora in which renovation of the WTO, IMF 

and World Bank could be coordinated, in Saving Multilateralism: Renovating the House of Global Economic Govemance for the 21st Century. Jennifer Hillman, ‘‘German Marshall Fund of the 

US,’’ attached as Appendix A. 3For example, Apple Inc. recently crossed the $1 trillion market capitalization figure, which 

makes it larger than the GDP of 183 out of the 199 countries for which the World Bank has 

GDP data. 

the set of emerging markets require assistance at amounts of 9 percent of GDP, 

with demand of about $700 billion. 

Given underlying IMF financial commitments of almost $200 billion, under these scenarios, the IMF’s medium-term overall lending needs range from about $500 to 

about $900 billion. Current IMF resources are sufficient to cover most crisis scenarios. In addition, the IMF can mobilize additional resources in the event of a severe global crisis. 

PREPARED STATEMENT OF JENNIFER HILLMAN

A. INTRODUCTION

Virtually every major international gathering of world leaders recently has ended 

in failure—or at least failure to reach enough agreement to issue a concluding statement or communique.1 These failures come at a time when many have been looking 

for signs that world leaders would come together to address the most pressing problems facing the world—including climate change, the breakdown in the rules of the 

international trading system, the need everywhere for good jobs that pay a living 

wage, and rapidly growing income inequality. 

The failure of these meetings to produce formal agreements—or even specific 

paths to reaching agreements in the future—despite the high stakes has left many 

questioning the ability of the world’s leaders to meet global challenges, shining a 

spotlight on the institutions and fora that were established for the purpose of 

achieving multilateral solutions-particularly the World Trade Organization (WTO), 

the World Bank, the International Monetary Fund (IMF), and the United Nations. 

The failure to reach agreements can best be seen as part of a long-term trend toward increased complexity in the world that makes it nearly impossible to reach traditional multilateral binding accords, combined with a waning of faith on the part 

of many countries in multilateralism and multilateral institutions.2

A number of clear trends emerge from the failures to reach accords at virtually 

all recent international gatherings: 

1.) Government policies and international arrangements for collective decisionmaking have not kept pace with changes in the world, especially the high degree 

of international economic integration and interdependence. 

Much of the increasing complexity in the international economic order stems from 

the explosive growth in the number and size of multinational corporations and financial institutions, many of which now dwarf the economic size of most of the nations in the world.3 Added to the complexity is the increase in the speed at which 

goods, money and technology move around the globe in our digital age. 

2.) Learning to operate in this vastly more complex world will require more 

multilateralism, not less. 

As countries emerged from the era of colonialization and began opening their markets, the number of players on the global stage increased, making reaching consensus among a much larger group of disparate interests more difficult. But because 

the most significant problems facing the world cross many international boundaries, 

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4 In 2017, China’s merchandise exports exceeded $2.3 trillion, far outstripping all other coun- tries in the world, as the United States merchandise exports were close to $1.6 trillion, followed 

by Germany at just over $1.4 trillion, with all other countries’ merchandise exports far below 

$1 trillion. WTO Trade Statistical Review 2018. 5 USTR Robert Lighthizer commented on the relative strength of dispute settlement compared 

to negotiation in his remarks at the WTO’s most recent Ministerial Conference (MC-11) in Buenos Aires: ‘‘[M]any are concerned that the WTO is losing its essential focus on negotiation and 

becoming a litigation-centered organization. Too often members seem to believe they can gain 

concessions through lawsuits that they could never get at the negotiating table.’’ 

solving them will require that countries come together to find regional, plurilateral, 

or global solutions. 

3.) It is essential that the international economic institutions be updated and improved, not destroyed or left to wither. 

Because it is clear that reaching major new binding accords or creating new international institutions is quite difficult, the best and most achievable solution is to 

renovate our existing institutions. Each needs to modernize and improve their governance structures to ensure that work can get done despite the increases in complexities and to update their mandates to ensure their ability to address the problems of the 21st century, many of which are quite different from those that existed 

in the 1940s when these institutions were created. 

Given that the crisis is most acute at the WTO, this testimony will focus on what 

must be done to renovate the World Trade Organization and why doing so is critical, 

both for the trading system and for the continued existence of a rules-based international economic order. The need for the WTO and its dispute settlement system 

to remain viable is particularly critical if we are to address the challenges presented 

by the explosive growth of China and its transformation into the largest exporter 

of goods in the world.4

B. THE CRISIS AT THE WTO 

The WTO was created in 1995 as a successor to the General Agreement on Tariffs 

and Trade (GATT) at the height of support for multilateralism and multilateral institutions. In recent years, many have expressed frustration with the WTO. The concerns include: 

1.) A lack of balance—the negotiating arm of the WTO is weak and WTO members have reached only one new agreement-on trade facilitation-since 1995, while 

the dispute settlement arm has been (at least until the blockage at the Appellate 

Body in 2017) considered very strong-some say too strong, while the executive arm 

is viewed as highly competent but lacking in authority to drive change.5

2.) A limited mandate that does not readily allow the WTO to take on the ‘‘trade 

and . . . ’’ issues connected to trade’s impact on the environment, labor, the uneven 

distribution of the benefits of trade, currency manipulation, competition policy, or 

corruption around trade, or to ensure that the trading system rules contribute to 

the Sustainable Development Goals agreed to by the world’s leaders in 2015. The 

WTO negotiating agenda has not been focused on the 21st century trade issues of 

digital trade, investment policy, food security, global health services, technology, on 

environmental goods and services. 

3.) A bifurcation of members into ‘‘developed’’ versus ‘‘developing’’ country camps, 

with no in between for the emerging economies such as India, Russia, Brazil, or 

South Africa and no easy way to address the rise of China-now the largest merchandise exporter and second largest merchandise importer in the world. 

4.) A recent willingness, led by the United States, to impose tariffs that violate 

the WTO’s basic rules, leading many to question the point of having a rules-based 

organization if its major members openly flout those rules. 

5.) A lack of enforcement of the transparency and notification requirements of the 

WTO, with most countries hopelessly behind on making required disclosures of their 

policies and practices, particularly with respect to the granting of subsidies. 

6.) A limited ability to respond to the explosive growth of regional, bilateral and 

preferential trade agreements, with over 400 agreements establishing trade relationships and rules outside of the fonnal ambit of the WTO. 

7.) concerns over the functioning of the dispute settlement system, particularly its 

Appellate Body, which have grown so extreme in the United States that the U.S. 

has blocked any process for the appointment of new Appellate Body members to fill 

the vacancies created by the expiration of members’ terms, potentially leaving the 

Appellate Body with too few members to hear appeals. 

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6 EU Trade Commissioner Cecilia Malmstrom noted at the close of the meeting: ‘‘All WTO 

Members have to face a simple fact: we failed to achieve all our objectives, and did not achieve 

any multilateral outcome. The sad reality is that we did not even agree to stop subsidizing illegal fishing.’’ As the Reuters report on the Ministerial Conference (MC-11) noted: ‘‘The World 

Trade Organization failed to reach any new agreements on Wednesday, ending a three-day ministerial conference in discord in the face of stinging U.S. criticism of the group and vetoes from 

other countries.’’ 7 A number of major studies have been done suggesting ways to improve the functioning of 

the WTO, including ‘‘The Future of the WTO: Addressing Institutional Challenges in the New 

Millennium: Report of the Consultation Board to the Director-General Supachia Pantichpakdi’’ 

(2004) (‘‘the Sutherland Report’’); ‘‘The Multilateral Trade Regime: Which Way Forward?’’ 

(2007), The Warwick Commission Report, and most recently, the report of the high-level board 

of experts convened by the Berertelsmann Stiftung foundation, ‘‘Revitailzing Multilateral Governance at the World Trade Organization,’’ 2018. 8 Included in the Ottawa gathering were trade ministers from Australia, Brazil, Chile, the European Union, Japan, Kenya, Korea, Mexico, New Zealand, Norway, Singapore and Switzerland. 

In advance of the gathering, Canada circulated a paper outlining the discussion proposals to 

all members of the WTO. JOB/GC/201. 9 Even more recently, the EU revised its specific proposals for changes at the Appellate Body 

(AB) into two formal submissions to the WTO, one that was introduced along with China, Canada, India, Norway, New Zealand, Switzerland, Australia, Korea, Iceland, Singapore and Mexico 

(WT/CG/W/72) that addresses five specific concerns relating to the Appellate Body (1. AB members remaining on after their term expires to finish appeals, 2. Reports taking longer than 90 

days, 3. Municipal law as a matter of fact rather than law, 4. Unnecessary findings, and 5. The 

role of precedent) and a second document introduced along with China and India (WT/GC/W/ 

753) that proposes that AB members serve one longer term, that the AB be expanded from 7 

to 9 members serving on a full-time basis, with members remaining in place until their replacement has been appointed. Both proposals were submitted on November 26, 2018 for discussion 

at the meeting of the WTO’s General Council scheduled for December 12-13, 2018. 10https://ustr.gov/about-usfpolicy-offices/press-office/reports-and-publications!2018/20l8-tradepolicy-agenda-and-2017 

Possible Fixes? 

Given the failure to reach many new agreements or even to agree on a ministerial 

declaration at its latest Ministerial Conference—the WTO’s MC-11, held in Buenos 

Aires, Argentina in December 2017—it is clear that the creation of a new and different international trade organization is a virtual impossibility.6 Therefore, it is imperative that the WTO be renovated to make it a more efficient and effective organization-one that is capable of reaching new agreements and establishing new rules 

on the pressing trade issues of today and one that finds ways to respond to the concerns noted above.7

The specifics of how to do so are beyond the scope of this testimony, but should 

retlect the work that has been done over many years and with increasing intensity 

in the past year. Most recently, Canada hosted twelve WTO members at the Ottawa 

Ministerial on WTO Reform, focusing on changes that would: I) improve the efficiency and effectiveness of the WTO monitoring function, 2) safeguard the WTO dispute settlement system, and 3) modernize the trade negotiating agenda.8 Neither 

the United States nor China were included in the Ottawa meeting, but both were 

informed of the outcome and much further discussion has flowed from the meeting. 

For its part, the European Union put forward a series of proposals to reform the 

WTO and to break the logjam regarding the appointment of new members to the 

WTO’s Appellate Body.9 These proposals come at the behest of the European Council, which mandated a pursuit of WTO modernization that would: 1) make the WTO 

more relevant and adaptive to a changing world, and 2) strengthen the WTO’s effectiveness. They involve reform ideas around broadening the negotiating agenda of 

the WTO to permit it to rebalance the system and level the playing field; establishing new rules to address barriers to services and investment, including with respect to forced technology transfers; increasing compliance with the transparency 

and notification requirements of the WTO; and shoring up the WTO’s dispute settlement system, including by resolving the current blockage in appointments to the 

Appellate Body. 

The United States, in its 2018 President’s Trade Policy Agenda,10 expressed concerns that the WTO dispute settlement system had appropriated to itself powers 

that the WTO Members never intended to give it; and lamented its inability to 

reach new agreements, its allowance for members to ‘‘self-declare’’ themselves to be 

‘‘developing’’ countries and thereby take advantage of certain additional flexibilities 

(special and differential treatment) granted to developing countries, and its lack of 

management of the rise of China. Recently, the United States, along with Argentina, 

Costa Rica, the EU and Japan recently submitted a proposal to the WTO to address 

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11WTO JOB/GC/204 and JOB/CTG/14, November 1, 2018. 12The Paris Peace Forum, led by France’s President Emmanuel Macron, is designed to be an 

annual gathering ‘‘based on a simple idea: international cooperation is key to tackling global 

challenges and ensuring durable peace. To support collective action, it gathers all actors of global governance under one roof for three days-states, international organizations, local governments, NGOs and foundations, companies, experts, journalists, trade unions, religious groups 

and citizens. Through original formats of debates and the presentation of solutions, it demonstrates there is still a momentum for multilateralism and a better organization of the planet, 

both among states from North and South and civil society actors.’’ https://parispeaceforum.org/ 13https://www.wto.org/english/news_e/news18_e/bertelsmann_rpt_e.pdf. 14Statement as delivered by Ambassador Dennis Shea, Deputy U.S. Trade Representative and 

U.S. Permanent Representative to the WTO, WTO General Council, Geneva, May 8, 2018. 15Findings of the Investigation Into China’s Acts, Policies, And Practices Related lo Technology Transfer, Intellectual Property, And Innovation Under Section 301 of the Trade Act Of 

1974, Office of the United States Trade Representative, March 22, 2018, 

troducing administrative sanctions for countries that fall behind with their reporting obligations.11

The Government of France, on the heels of hosting the 100th anniversary of Armistice Day and its follow-on Paris Peace Forum,12 hosted a conference, A WTO Fit 

for the 21st Century, on November 16, 2018 to gather representatives from government, the WTO, academia and more to discuss and debate specific ideas on modernizing and improving the WTO. 

Numerous non-governmental players-from think tanks to academics to trade practitioners--have also put forward ideas and proposals-increasingly under the banner 

of ‘‘the trading system is in crisis.’’ Prominent among them is the Bertelsmann 

Stiftung report of its high-level board of experts, Revitalizing Multilateral Governance at the World Trade Organization.’’ 13 That board recommended: 1) new policy 

dialogues to address trade policies and on the functioning of WTO bodies, 2) use of 

plurilateral negotiations among the ‘‘coalitions of the willing’’ rather than all members of the WTO; 3) an enhanced role for the WTO Secretariat to provide input and 

support to the policy debates at the WTO; and 4) an ongoing review of the institutional performance of the WTO. 

Among the cross-cutting ideas in many of these proposals are the following: 

1. The need for better enforcement of the transparency and notification requirements of the WTO; 

2. Support for new negotiation dynamics through increased used of negotiations in 

groups smaller than all of the WTO membership to allow agreements to be 

reached more quickly; 

3. A reconsideration of the role of the WTO Secretariat to permit it to recommend 

solutions and drive toward negotiated outcomes; 

4. An urgent need to resolve the blockage of appointments to the WTO Appellate 

Body; 

5. A need to expand the negotiating mandate of the WTO to include the 21st century trade issues, the many issues that fall into the ‘‘trade and . . .’’ set of issues, 

and the Sustainable Development Goals. 

C. THE UNITED STATES NEEDS THE WTO TO EFFECTIVELY ADDRESS ITS CONCERNS

WITH CHINA

For the United States, the need for a well-functioning WTO is critical, as the 

United States needs the WTO if it is to effectively address its difficulties with 

China. 

Concerns in the United States and around the world with China’s practices and 

policies have been growing with each passing year. These concerns were recently 

succinctly summarized in the statement made by U.S. Ambassador to the WTO Dennis Shea in a May 8, 2018 statement to the WTO General Council: 

China ... is consistently acting in ways that undermine the global system 

of open and fair trade. Market access barriers too numerous to mention; 

forced technology transfers; intellectual property theft on an unprecedented 

scale; indigenous innovation policies and the Made in China 2025 program; 

discriminatory use of technical standards; massive government subsidies 

that have led to chronic overcapacity in key industrial sectors; and a highly 

restrictive foreign investment regime.14

The concerns are further laid out in two recent documents: 

(1) the Section 301 Report, issued by USTR on March 2, 2018,15 which raises four 

core concerns: 

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16 USTR Update Concerning China’s Acts, Policies and Practices Relating to Technology 

Transfer, Intellectual Property and Innovation, November 20, 2018, 17 2017 Report to Congress on China’s WTO Compliance, Office of the United States Trade 

Representative, January 2018, 18Statement as delivered by Ambassador Dennis Shea, Deputy U.S. Trade Representative and 

U.S. pennanent Representative to the WTO, WTO General Council, Geneva, May 8, 2018. 

First, China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from foreign companies. 

Second, China’s regime of technology regulations forces U.S. companies seeking to 

license technologies to Chinese entities to do so on non-market-based terms that 

favor Chinese recipients and that violates China’s national treatment requirements 

to treat foreign investors no less favorably than it treats domestic investors. 

Third, China directs and unfairly facilitates the systematic investment in, and acquisition of, foreign companies and assets by Chinese companies to obtain cuttingedge technologies and intellectual property and generate the transfer of technology 

to Chinese companies. The role of the state in directing and supporting this outbound investment strategy is pervasive, and evident at multiple levels of government—central, regional, and local. 

Fourth, China conducts and supports unauthorized intrusions into, and theft 

from, the computer networks of foreign companies to access their sensitive commercial information and trade secrets. 

This initial Section 301 report was recently (November 20, 2018) updated with additional evidence and new data, with the conclusion that ‘‘China fundamentally has 

not altered its acts, policies, and practices related to technology transfer, intellectual 

property, and innovation, and indeed appears to have taken further unreasonable 

actions in recent months.’’ 16

(2) the 2017 Report to Congress on China’s WTO compliance, issued by USTR 

January 2018, which is the sixteenth such report and examines nine categories of 

WTO commitments undertaken by China (trading rights, import regulation, export 

regulation, internal policies affecting trade, investment, agriculture, intellectual 

property right, services and legal framework), with this year’s report concluding 

that ‘‘the United States erred in supporting China’s entry into the WTO on terms 

that have proven to be ineffective in securing China’s embrace of an open, marketoriented trade regime.’’ 17

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

from those same countries that the United States needs to be working with on such 

an action at the WTO. 

D. A BIG, BOLD WTO CASE IS THE BEST WAY TO

ADDRESS THE DEEP, SYSTEMIC CHINA PROBLEMS. WHY? 

First, a broad and deep WTO case represents the best opportunity to bring together enough of the trading interests in the world to put sufficient pressure on 

China to make it clear that fundamental reform is required if China is to remain 

a member in good standing in the WTO. The U.S. needs to use the power of collective action to impress upon both China and the WTO how significant the concerns 

really are. The United States simply cannot bring about the kind of change that is 

needed using a go-it-alone strategy. A coalition case also has the potential to shield 

its members from direct and immediate retaliation by China. 

Second, a comprehensive WTO case would restore confidence in the WTO and its 

ability to address fundamental flaws in the rules of the trading system. As U.S. Ambassador Dennis Shea put it, ‘‘If the WTO wishes to remain relevant, it must—with 

urgency—confront the havoc created by China’s state capitalism.’’ 18 If the WTO can 

be seen to be able to apply or, where necessary, amend its rules to take on the challenges presented by China’s ‘‘socialist market economy’’ framework, then faith in the 

institution and its rules-based system can be enhanced, for the good of the United 

States and the world. 

Third, the work to put together a coalition, to research and agree upon the Chinese measures to be challenged and the claims to be made, and to litigate in a coordinated way at the WTO would make it less likely that the United States would 

accept a limited agreement connected to the U.S.-China bilateral trade deficit. CerFOREI-42327 with DISTILLER

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19 In Beijing on May 3-4, at its first high-level meeting with China following the release of 

the Section 301 Report, the United States presented it draft framework (attached herewith as 

Appendix B) for balancing the trade relationship with China, noting that ‘‘there is an immediate 

need for the United States and China to reduce the U.S. trade deficit with China,’’ and listing 

as the first of eight issues the request for a commitment by China to reduce the US-China trade 

deficit by $200 billion. 20https://www.uscc.gov/sites/default/files/annual—reports/ 

2018%20Annual%20Report%20to%20Congress.pdf. 21 Commission Recommendation 2, page 21, Executive Summary and Recommendations, 2018 

Report to Congress of the U.S.-China Economic and Security Review Commission. 22 As stated in the Section 301 Report (at pg. 9): U.S. companies ‘‘fear that they will face retaliation or the loss of business opportunities if they come forward to complain about China’s unfair trade practices . . . ‘‘Multiple submissions noted the great reluctance of U.S. companies to 

share information on China’s technology transfer regime, given the importance of the China 

market to their businesses and the fact that Chinese Government officials are ‘not shy about 

retaliating against critics.’ For example, a representative of the Commission on the Theft of 

American Intellectual Property testified at the hearing: ‘American companies are intimidated 

and reticent over the issue, especially in China. There they risk punishment by a powerful and 

opaque Chinese regulatory system.’ In addition, according to the U.S. China Business Council, 

their member companies do not presently have ‘reliable channel[s] to report abuses and to appeal adverse decisions . . . without fear of retaliation.’ ’’ 

tainly the United States’ partners in such a coalition would raise strong objection 

to the U.S. accepting an agreement under which China simply agreed to shift its 

purchases of soybeans from Brazil to the U.S. or its sourcing of energy products 

from Russia and Central Asia to the United States. Given that the American people 

are already paying a high price as a result of the imposition of Section 301 tariffs 

on China and the corresponding retaliatory tariffs imposed by China on U.S. exports, it is essential that the United States emerge from the process with measures 

to address the many real problems with China rather than simply addressing the 

bilateral goods trade deficit.19 A coalition may be the best way to avoid a narrow, 

deficit-focused bilateral deal. 

The idea of bringing a broad, coalition-based case against China—both for specific 

violations and for its nullification and impairment of legitimate expectations that 

the United States and the other members of the WTO had at the time China joined 

the WTO—was recently endorsed in a recommendation to the Congress contained 

in the U.S.-China Economic and Security Review Commission’s November 2018 Report to Congress.20 The Commission specifically recommended that Congress examine whether USTR ‘‘should bring, in coordination with U.S. allies and partners, a 

‘‘non-violation nullification or impairment’’ case—alongside violations of specific 

commitments—against China at the World Trade Organization under Article 23(b) 

of the General Agreement on Tariffs and Trade.21

E. THE TIME IS RIPE FOR A WTO CASE NOW

The suggestion to bring a bold WTO case against China now certainly begs the 

question: if such a case is so clearly warranted and the problems have persisted for 

so long, why hasn’t it been brought before now? 

Among the reasons may be the following: 

First, many countries (and the companies within those countries) have been reluctant to take on China for fear of retaliation by China, in ways both obvious and 

hidden.22 Countries fear that China will impose trade remedies or other measures 

on their exports or deny needed permits to their companies or file WTO challenges, 

all in direct response to claims of unfair trade practices, forced technology transfers 

or intellectual property theft. While not a perfect shield, bringing a broad, coalitionbased case would lessen the likelihood that China would or could effectively retaliate against all of the coalition partners, much less the many industries and companies that would be standing behind the case. 

Second, bringing a collective case, with multiple complainants, is never easy, as 

it requires tremendous coordination of both the legal tasks of drafting and pleading 

and of the substantive arguments to be made, which may favor one country more 

than others or raise concerns for some but not all of the coalition. Only a handful 

of the 547 WTO complaints brought to date have been brought by a coalition of 

countries, but for this case to be most effective, a coalition is needed. And many of 

the potential coalition partners have been working with the U.S. in other fora, including the OECD, the G-7, and the Global Forum on Steel Excess Capacity. The 

need to pool together both the evidence and the political power of as large a coalition as can be mustered will be important to achieving sustained pressure at the 

highest levels on China. 

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23 Article 10 of the DSU provides: ‘‘It is understood that requests for conciliation and the use 

of the dispute settlement procedures should not be intended or considered as contentious acts 

and that, if a dispute arises, all Members will engage in these procedures in good faith in an 

effort to resolve the dispute.’’ 24Findings of the Investigation Into China’s Acts, Policies, And Practices Related to Technology Transfer. Intellectual Property, And Innovation Under Section 301 of the Trade Act Of 

1974, Office of the United States Trade Representative, March 22, 2018, at pg. 22. 25See the attached Appendix C for a list of the cases brought against China and their outcomes. Note that for eight of the cases, no panel has been requested, for two of the cases the 

panel is working on the case, and for two others, the DSB has agreed to establish the panel 

but the actual panelists to hear the case have not yet been appointed. 

Third, many countries in the past have been reluctant to bring WTO disputes unless they were virtually assured of a victory. No one wanted to lose, given the diplomatic and political fallout that can occur from one country accusing another foreign 

sovereign of being a rules scofflaw. But in light of the depth and breadth of the concerns about China, now is the time to throw caution to the wind and bring a big 

case that challenges a number of both specific measures and systemic matters, assuming there is sound evidence to ensure that each claim has been brought in the 

good faith required by the WTO’s Dispute Settlement Understanding (DSU). 23

Moreover, a number of the most likely applicable provisions have not yet been tested, against China or any other country. In the past when tried for the first time, 

WTO rules have usually been found to work. 

Fourth, bringing cases against China has often presented very difficult evidentiary hurdles, as much of the information and evidence needed to support a 

claim, particularly a claim based on unwritten rules or practices, can be quite difficult to obtain. As noted above, one of the ongoing complaints of the United States 

and others is the lack of transparency in China, particularly around the issue of 

granting licenses or permits. As stated in the Section 301 Report: ‘‘The fact that 

China systematically implements its technology transfer regime in informal and indirect ways makes it ‘just as effective [as written requirements], but almost impossible to prosecute.’ . . . Nevertheless . . . confidential industry surveys, where companies may report their experiences anonymously, make clear that they are receiving 

such pressure. The lack of transparency in the regulatory environment, the complex 

relationship between the State and the private sector, and concerns about retaliation have enabled China’s technology transfer regime to persist for more than a decade.’’ 1A24

However, it is clear that over the course of the last decade or more, through the 

work of the U.S.-China Economic and Review Security Commission, USTR and 

other U.S. Government agencies, along with numerous business and industry 

groups, a substantial amount of evidence has been collected here in the United 

States. The combination of the comprehensive and well-documented Section 301 Report, the annual USTR report to Congress on China’s WTO compliance and the annual reports to the Congress from the U.S.-China Economic and Review Security 

Commission already contain substantial evidence to support the potential claims 

noted above. Add to that the work done in the EU, Japan, Canada and others, and 

at the OECD along with other multilateral institutions, and it becomes clear that 

there should be more than sufficient evidence to demonstrate that China’s economy 

is operating in ways that undermine the WTO’s rules-based, market-based system. 

Indeed, one of the many benefits of bringing a case as a coalition is that each member of the coalition can contribute the evidence that they have collected and the experience of their companies. 

Fifth, some would argue that WTO cases have already been tried, with some success and some failure. It is true that China has been challenged in 40 disputes 

brought to the WTO’s dispute settlement system, with 22 of those cases arising from 

complaints filed by the United States, eight coming from the EU, four from Mexico, 

three from Canada, with Japan and Guatemala also bringing claims against 

China.25 And a number of them (at least 15) have found against China. While the 

actual extent of Chinese compliance with WTO rulings can be questioned, in a number of cases, China has removed or amended its offending measures and in five others, China has reached a settlement agreement with the complaining party. The 

problem with many of these cases is that the challenges were relatively narrow, limited to a few Chinese measures, or to a particular industry or set of producers. 

While some of the more recent cases, including in particular the case on subsidies 

for aluminum and the Section 301-related case on IPR violations, have attempted 

to bring a specific case to showcase the underlying and more systemic problems, no 

panel has yet been requested in those cases and it remains to be seen whether a 

single case can provoke a more systemic response from China. 

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26 2017 USTR Report to Congress on China’s WTO Compliance at 5.F. The WTO Case Against 

China 27Marrakesh Declaration of 15 April 1994, Preamble. 28See Report of the Working Party to the Accession of China to the WTO, WT/ACC/CHN/49, 

1 October 2001. Para 342 sets forth the specific paragraphs of the Working Party Report that 

are considered to be incorporated into the Protocol of Accession itself. These paragraphs are 

therefore considered to be equally legally binding on China as the provisions in its Protocol or 

the text of the WTO Agreements. 29The WTO Appellate Body, in EC-Asbestos described nullification and impairment: ‘‘Article 

XXIII: l(a) sets forth a cause of action for a claim that a Member has failed to carry out one 

or more of its obligations under the GATT 1994. A claim under Article XXIII: I (a), therefore, 

ties when a Member is alleged to have acted inconsistently with a provision of the GATT 1994. 

Article XXIII:l(b) sets forth a separate cause of action for a claim that, through the application 

of a measure, a Member has ‘nullified or impaired’ ‘benefits’ accruing to another Member, 

‘whether or not that measure conflicts with the provisions’ of the GATT 1994. Thus, it is not 

necessary, under Article XXIII:l(b), to establish that the measure involved is inconsistent with, 

or violates, a provision of the GA TT 1994. Cases under Article XXIII: l(b) are, for this reason, 

sometimes described as ‘non-violation’ cases.’’ Appellate Body Report, EC -Asbestos, para. 185. 30Paragraph 203, Working Party Report. See also Section 7.3 of China’s Protocol of Accession. 

As a result, some have come to believe that the WTO, as the 20 17 USTR report 

to Congress states, ‘‘is not effective in addressing a trade regime that broadly conflicts with the fundamental underpinning of the WTO system.’’ 26 I disagree. I do 

not believe that the kind of broad case, with claims across sectors and across legal 

regimes, has been tried. No one, for example, has challenged the Chinese system 

of intellectual property rights or technology transfers as a whole. The WTO, therefore, has not been given the opportunity to show what can be done to save its core 

provisions. Yet it is just such a systemic case that could provide the basis and the 

incentive to craft a legal remedy that could be beneficial to all sides. 

The essential thrust of any WTO case should be to hold China to the specific commitments it made when it joined the WTO in 200 I and to the overarching understanding embodied in the Marrakesh Declaration that WTO members participate 

‘‘based upon open, market-oriented policies.’’ 27 The specific commitments China 

made are found in the texts of the WTO Agreements, China’s Protocol of Accession 

to the WTO, certain designated paragraphs of the accompanying Working Party Report, and China’s schedules of commitments.28 The schedules cover tariffs and nontariff measures applicable to agricultural trade and industrial goods (commitments 

under the General Agreement on Tariffs and Trade, or GATT) and services (commitments under the General Agreement on Trade in Services, or GATS). The Accession 

Protocol and Working Party Report thereto also set out promises on how China intends to fulfill its WTO obligations. 

Every WTO case must be based on government measures (i.e., Jaws, regulations, 

rulings or practices), whether written or not, that violate one or more specific commitments or that ‘‘nullify or impair’’ a benefit provided to members of the WT0.29

It is this combination of both actual violations and the non-violation impairment of 

benefits that should be the focus of the case at the WTO. 

Among the things that could be included in such a big, bold case are the following, 

understanding that this is not an exhaustive list: 

1. Technology Transfer 

One of the key findings of the Section 301 Report is that the Chinese government 

uses both foreign ownership restrictions and administrative licensing and approvals 

processes to force technology transfer in exchange for either the investment approval itself or for the numerous administrative approvals needed to establish or operate a business in China. 

However, China clearly committed (in one of the legally binding paragraphs of its 

Working Party report) that it would not condition investments on the transfer of 

technology: 

The allocation, permission or rights for importation and investment would 

not be conditional upon performance requirements set by national or subnational authorities, or subject to secondary conditions covering, for example, the conduct of research, the provision of offsets or other forms of industrial compensation including specified types or volumes of business opportunities, the use of local inputs or the transfer of technology. (Emphasis 

added).30

While the Section 301 Report clearly notes the difficulty in proving the technology 

transfer mandates, given that many of them are unwritten, and that others are 

done in the course of a negotiation between two ostensibly private parties (even 

though the Chinese entity may be either state-owned or have Communist Party 

members on its board), recent decisions of the WTO Appellate Body have made it 

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31See, for example, Appellate Body Reports, Argentina—Measures Affecting the Importation 

of Goods, WT/DS438/AB/R / WT/DS444/AB/R / WT/DS445/AB/R, adopted 26 January 2015. 32Paragraph 256, Working Party Report, one of the legally binding paragraphs of China’s 

Working Party Report. 33 U.S. Chamber of Commerce, ‘‘Made in China 2025: Global Ambitions Built on Local Protections.’’ 34Paragraph 256 of China’s Working Party Report (one of the paragraphs that is legally binding). 

clear that unwritten measures can be challenged.31 Given the clear commitment 

made by China and the WTO’s Agreement on Trade Related Investments’ (TRIMs) 

prohibition on treating foreign investment less favorably than Chinese investment, 

China’s practices resulting in the forced or coerced transfer of technology should be 

challenged. 

2. Discriminatorv Licensing Restrictions 

The second key finding of the Section 301 Report is that China’s regime of technology regulations does not allow U.S. (or other foreign) firms to license their technology (or choose not to license it) under the conditions and terms that they would 

like or that would prevail in a market economy. The Chinese regulations, among 

other things, discriminate against foreign technology, putting foreign technology importers at a disadvantage relative to Chinese companies and imposing additional restrictions on the use and enjoyment of technology and intellectual property rights 

simply because the technology is of foreign origin. This violates China’s commitment 

to provide national treatment. 

Unlike the concerns for the unwritten and under-the-table nature of the forced 

technology transfer practices, these measures are formal laws and regulations that 

are well-known to the United States and others. Indeed, Japan, the U.S. and the 

EU have been raising concerns about these rules in the TRIPS Council and other 

WTO forums. Some of these same laws and regulations are the source of the United 

States’ and the EU’s May 2018 requests for consultations with China. 

China’s commitments here are clear: China ensured national and MFN treatment 

to foreign right-holders regarding all intellectual property rights across the board 

in compliance with the TRIPS Agreement32 In enacting laws and imposing regulations which discriminate against foreign holders of intellectual property rights and 

which restrict foreign right holders’ ability to protect certain intellectual property 

rights, China has broken those commitments and violated its WTO obligations. 

3. Outbound Investment and Made in China 2025 

The third major finding of the Section 301 Report is that China has engaged in 

a wide-ranging, well-funded effort to direct and support the systematic investment 

in, and acquisition of, U.S. companies and assets to obtain cutting-edge technology, 

in service of China’s industrial policy. The report also notes that the role of the state 

in directing and supporting this outbound investment strategy is pervasive, and evident at multiple levels of government—central, regional, and local. The government 

has devoted massive amounts of financing to encourage and facilitate outbound investment in areas it deems strategic. In support of this goal, China has enlisted a 

broad range of actors to support this effort, including SOEs, state-backed funds, government policy banks, and private companies. 

Concerns about these policies were heightened by the release by China’s State 

Council in 2015 of its Made in China 2025 initiative, a .. comprehensive blueprint 

aimed at transforming China into an advanced manufacturing leader [through] preferential access to capital to domestic companies in order to promote their indigenous 

research and development capabilities, support their ability to acquire technology 

from abroad, and enhance their overall competitiveness.’’ 33

Because much of the outward investment regimes and the Made in China 2025 

plan are formal laws, regulations or programs of the Chinese government, basic documentation for a WTO claim is relatively straightforward. However, the WTO rules 

have much less say over outward investment, making the nature of a WTO claim 

in this area more complicated. Nonetheless, there are some commitments that could 

form the basis for a violation claim, including a lack of reciprocity. For example, 

China stated that its IPR Jaws will provide that ‘‘any foreigner would be treated 

. . . on the basis of the principle of reciprocity.’’ 34 Yet as the Section 3 0 I Report 

amply documents, the Chinese adm in istrati ve approval regime imposes substantially more restrictive requirements than that of the United States. U.S. firms face 

numerous barriers, such as sectoral restrictions, joint venture requirements, equity 

caps, and technology transfer requirements when they seek access to the Chinese 

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35Findings of the Investigation Into China’s Acts, Policies, And Practices Related to Technology Transfer, Intellectual Property, And Innovation Under Section 301 of the Trade Act Of 

1974, Office of the United States Trade Representative, March 22, 2018, pg. 148. 36Marrakesh Declaration of 15 April 1994. 37 U.S. v. Wang Dong et al., (W. D. Pa., May I, 2014). 38 James Bacchus, ‘‘How the World Trade Organization Can Curb China’s Intellectual Property Transgressions,’’ CATO, March 22, 2018. 39 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018, pp. 83-95. 40For example, in October 2012, MOF, MIIT and MOST issued two new measures establishing a fiscal support fund for manufacturers of New Energy Vehicles (NEVs) and NEV batteries. As foreign automobile manufacturers are required to form 50-percent joint ventures with 

Chinese partners, these requirements could effectively require them to transfer core NEV technology to their Chinese joint-venture partners in order to receive the available government funding. 

market. Chinese firms do not face anything remotely approaching these types of restrictions when investing in the United States. 

In addition, China’s outward investment regime and programs like Made in China 

2025 could be challenged under the WTO’s GA TT Article XXlll ‘‘non-violation’’ given 

the non-market nature of China’s outward investment scheme. As the Section 301 

Report notes: ‘‘Market-based considerations . . . do not appear to be the primary driver of much of China’s outbound investment and acquisition activity in areas targeted by its industrial policies. Instead, China directs and supports its firms to seek 

technologies that enhance China’s development goals in each strategic sector.’’ 35 Yet 

China, in joining the WTO, was becoming part of an organization calling for the 

‘‘participation of... economies in the world trading system, based upon open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions.’’ 36

4. Theft of Trade Secrets and Other Intelelectual Property 

The fourth area identified by the Section 301 Report are cyber intrusions into U.S. 

commercial networks targeting confidential business information held by U.S. firms, 

conducted and supported by the government of China. These cyber intrusions have 

allowed the Chinese government to gain unauthorized access to a wide range of 

commercially-valuable business information, including trade secrets, technical data, 

negotiating positions, and sensitive and proprietary internal communications. 

The Section 301 Report and the numerous documents and studies it references, 

along with the Department of Justice indictment of Chinese government hackers for 

cyber intrusions and economic espionage,37 leave little doubt that China has engaged in serial theft of U.S. intelelectual property rights, trade secrets in particular. 

The clear claim under the WTO is a violation of the WTO’s Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS). TRIPS covers the broad 

array of intellectual property rights (i.e., patents, copyrights, trademarks, trade secrets, industrial designs, geographical indications, integrated circuits) and provides 

both minimum standards of protection and a broad-based requirement for enforcement. For example, Article 39 of the TRIPS Agreement provides that people and 

companies ‘‘shall have the possibility of preventing infonnation lawfully within their 

control from being disclosed to, acquired by, or used by others without their consent . . . ’’ while TRIPs Article 41 imposes an affinnative obligation on all WTO Members: ‘‘Members shall ensure that enforcement procedures... are available under 

their law so as to pennit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to 

prevent infringements and remedies which constitute a deterrent to further infringements.’’ Engaging in and permitting the theft, whether through cyber intrusions or not, is a violation of the basic requirement that China’s laws and its efforts 

to enforce intellectual property rights ‘‘must have real force in the real world of commerce.’’38

5. Investment Restrictions 

As noted above, Chinese government officials at times use China’s current foreign 

investment approval process to restrict or unreasonably delay market entry for foreign companies, to require foreign companies to take on a Chinese partner, or to 

extract valuable, deal-specific commercial concessions as a price for market entry.39

Foreign companies are often told that they will have to transfer technology, conduct 

research and development in China or satisfy performance requirements relating to 

exportation or the use of local content if they want their investments approved.40

In addition, in the name of security, a number of additional restrictions have been 

placed on foreign investment. The National Security law includes a more restrictive 

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41The recently enacted Cybersecurity Law adds additional restrictions to those in the National 

Security law. 42 China’s Protocol of Accession to the WTO, Section 7.3 43 China’s basic national treatment commitment is underscored in Paragraph 18 of the Working Party Report (one of the legally binding paragraphs): ‘‘The representative of China further 

confirmed that China would provide the same treatment to Chinese enterprises, including foreign-funded enterprises, and foreign enterprises and individuals in China.’’ 44 Article X.3(b) of the GATT. 45 China’s Protocol of Accession to the WTO, 2(D) Judicial Review. 46 ‘‘China’s top judge has fired a warning shot at judicial refonners by formally acknowledging 

that China’s court system is not independent of the Communist Party and rejecting attempts 

to make it so.’’ Financial Times, July 20, 2018. 

ment, such as restrictions on the purchase, sale and use of foreign ICT products and 

services, cross-border data flow restrictions and data localization requirements.’’ 41

The Catalogue Guiding Foreign Investmellf in Industry (Foreign Investment Catalogue), imposes significant restrictions in key services sectors, extractive industries, 

agriculture and certain manuefacturing industries. 

A number of the provisions in these laws and catalogues violate the commitment 

China made in its Protocol of Accession: ‘‘China shall ensure that...the right of importation or investment by national and sub-national authorities, is not conditioned 

on: whether competing domestic suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China.’’ 42 These 

also violate China’s basic commitment to national treatment, requiring that China 

treat foreign companies no less favorably than it treats Chinese companies.43

6. Lack of An Independent Judiciary 

The WTO rules require all members to ensure the conformity of its laws, regulations and administrative procedures with the requiren1ents of the WTO Agreement. 

Among those requirements is the maintenance of judicial, arbitral or administrative 

tribunals or procedures for the review and correction of administrative actions relating to trade matters, where the tribunals responsible for such reviews are: a) impartial, b) independent of administrative agencies subject to such review, and c) have 

no substantial interest in the outcome of the matter under review.’’ 44

When China joined the WTO, it expressly committed to .. establish or designate, 

and maintain tribunals, contact points and procedures for the prompt review of all 

administrative actions relating to the implementation of laws, regulations, judicial 

decisions and administrative rulings of general application referred to in Article X: 

1 of the GATT 1994, Article VI of the GATS and the relevant provisions of the 

TRIPS Agreement. Such tribunals shall be impartial and independent of the agency 

entrusted with administrative enforcement and shall not haye any substantial interest in the outcome of the matter.’’ 45

Yet China’s National People’s Congress and local peoples’ congresses, as controlled 

by the Chinese Communist Party, maintain the power to dictate the outcomes of 

proceedings of all agencies entrusted with administrative enforcement of WTO-related rules, of the tribunals that review the decisions of administrative agencies, 

and all other judicial organs engaged in further reviews of actions and decisions by 

trade-related agencies and reviewing tribunals, such as China’s Supreme People’s 

Court.46 Because this means that China’s legal system allows the Chinese Communist Party to secure discrete administrative, legal and economic outcomes related 

to China’s WTO obligations, China has violated its commitment to establish and 

maintain an independent judiciary and to provide for uniform, independent judicial 

review of administrative actions relating to WTO obligations and commitments. 

7. Subsidies 

Many regard the WTO’s difficulty in regulating subsidies as among its greatest 

weaknesses, particularly when it comes to the size and the nature of the subsidies 

being provided in China. For example, subsidization and the resultant overcapacity 

have been problems in China, particularly with State-Owned-Enterprises (SOEs) 

which are provided with a variety of free or below-cost resources (such as land and 

raw materials), raising questions as to whether inputs provided by such SOEs to 

downstream manufacturers should be treated as government subsidies. The provisions of the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) 

makes proving the existence of such subsidies difficult. Specifically, the agreement 

defines a subsidy as a ‘‘financial contribution by a government or any public 

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47See Article I of the SCM Agreement. Assuming that a measure is a subsidy within the 

meaning of the SCM Agreement, it nevertheless is not subject to the SCM Agreement unless 

it has been specifically provided to an enterprise or industry or group of enterprises or industries. 48See United States—Definitive Anti-Dumping and Countervailing Duties on Certain Products 

From China, WT/DS379/AB/R. 49Part V, Agreement on Subsidies and Countervailing Measures. 50 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018; pg.90. 51 ‘‘China shall eliminate all taxes and charges applied to exports unless specifically provided 

for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of 

the GATT 1994.’’ Section 11.3, China’s Protocol of Accession to the WTO. 

body.’’ 47 The WTO Appellate Body has interpreted ‘‘public body’’ to mean government or governmental entities that exercise governmental functions48 —i.e., that 

the entity must possess, exercise, or be vested with ‘‘governmental authority’’ and 

be performing a ‘‘governmental function.’’ This interpretation effectively takes Chinese SOEs out of the definition of subsidy and renders the WTO framework ineffective in addressing these cases. 

Second, demonstrating the existence of a subsidy also requires showing that a 

benefit was provided to the subsidy recipient, with ‘‘benefit’’ being defined as making the recipient better off than they would have been absent the subsidy. Such a 

demonstration requires a comparison to a market benchmark to determine whether 

the terms of a loan or the price of a government purchase were more favorable than 

market-based terms. Because of the nature of China’s economy, benchmarks are 

often hard to prove. 

Moreover, remedies available under the WTO subsidy rules are perceived to be 

inadequate in addressing concerns about China. The ASCM does not provide an outright ban on subsidies but rather allows countries to take one of two actions when 

faced with subsidized goods: 1) countervailing duty actions if the subsidized goods 

are coming into their markets and causing injury to their domestic producers, with 

the amount of the duty equal to the portion of the cost of production that has been 

covered by the subsidy, or 2) adverse effects cases at the WTO, if the damage from 

trade in the subsidized product is causing hann in third-country markets.49 The 

problem with countervailing duties is that they may simply push the subsidized 

goods into other markets, thus suppressing prices. The problem with adverse effects 

cases is that remedies in the WTO are prospective only so the requirement to ‘‘remove the adverse effects of the subsidy’’ often does little to dismantle the capacity 

that China has built to produce those goods in the first place. 

In recent years, it appears that China has begun to tie subsidies to lists of qualified manufacturers located in China. For example, the central government and certain local governments provide subsidies in connection with the purchase ofNEYs, 

but they only make these subsidies available when certain Chinese-made NEVs, not 

imported NEVs, are purchased. China appears to pursue similar policies involving 

NEV batteries, leading to lost sales by U.S.-based manufacturers.50

China made two basic commitments with respect to subsidies when it joined the 

WTO: I) to notify the WTO of all the subsidies it granted or maintained, and 2) to 

eliminate all export contingent and import substitution subsidies. It also made general national treatment commitments not to discriminate against foreigners. It appears that China is violating all three commitments. The hope in bringing a broad 

challenge would be to force a long-overdue discussion about what the WTO can do 

to change its approach to disciplining subsidies, along with achieving a fonnal finding that China is in breach and must bring its measures into compliance. 

8. Export Restraints 

In some situations, China has used its border taxes to encourage the export of 

certain finished products over other finished products within a particular sector. For 

example, in the past, China has targeted value-added steel products, particularly 

wire products and steel pipe and tube products, causing a surge in exports of these 

products, many of which ended up in the U.S. market. Furthermore, despite its commitments to the contrary, China has taken no steps to abandon its use of tradedistortive VAT export rebates. Export taxes on any products other than those specified in Annex 6 to China’s Protocol of Accession are prohibited and ripe for challenge.51

9. Standards 

China seems to be actively pursuing the development of unique requirements, despite the existence of well-established international standards, as a means for protecting domestic companies from competing foreign standards and technologies. Indeed, China has already adopted unique standards for digital televisions, and it is 

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52 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018, pp. 60-61. 53 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018, p. 125 54 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018, p. 20. 55 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018, p. 129. 56 2017 Report to Congress on China’s WTO Compliance, USTR, January 2018, p. 96. 

trying to develop unique standards and technical regulations in a number of other 

sectors, including, for example, autos, telecommunications equipment, Internet protocols, wireless local area networks, radio frequency identification tag technology, 

audio and video coding and fertilizer as well as software encryption ‘and mobile 

phone batteries. This strategy has the potential to create significant barriers to 

entry into China’s market, as the cost of compliance will be high for foreign companies, while China will also be placing its own companies at a disadvantage in its 

export markets, where international standards prevail. There are also concerns that 

integrating its domestic standards requirements into its certification or accreditation schemes would make them de facto mandatory.52

China’s standards are subject to the WTO requirements on standards, both those 

contained in the Agreement on Sanitary and Phytosanitary Standards (SPS Agreement) (relating to food, animal and plant standards) and the Agreement on Technical Barriers to Trade (TBT). Both Agreements contain basic national treatment 

requirements, preferences for the harmonization of standards with those set by recognized international standards organizations and a basic requirement that standards not be more trade restrictive than necessary to fulfill a legitimate objective. To 

the extent that China’s standards can be shown to have effectively created unnecessary obstacles to trade or to have unreasonably departed from international standards, they can be challenged at the WTO. 

10. Services 

China’s commitments with respect to services are those found in its GATS (General Agreement on Trade in Services) schedules and in more recent commitments 

China has made to improve on those initial commitments. The problem is that in 

a number of sectors, China has not followed through previously agreed upon 

changes. For example: 

Insurance: 53 While China allows wholly foreign-owned subsidiaries in the non-life 

(i.e., property and casualty) insurance sector, the market share of foreign-invested 

companies in this sector is only about two percent. Some U.S. insurance companies 

established in China sometimes encounter difficulties in getting the Chinese regulatory authorities to issue timely approvals of their requests to open up new internal 

branches to expand their operations. In November 2017, China announced that it 

would be easing certain of its foreign equity restrictions in the insurance services 

sector, but to date it has not done so. 

Securities and management services: 54 China only permits foreign companies to 

establish as Chinese-foreign joint ventures, with foreign equity capped at 49 percent. In November 2017, China announced that it would be easing certain of its foreign equity restrictions in the securities and asset management services sectors, but 

to date it has not done so. 

Legal services:55 China has issued measures intended to implement the legal services commitments that it made upon joining the WTO. However, these measures restrict the types of legal services that can be provided by foreign law finns, including 

through a prohibition on foreign law finns hiring lawyers qualified to practice Chinese law, and impose lengthy delays for the establishment of new offices. 

The WTO case should work to hold China to all of the commitments it has made 

to open up its services sector. 

11. Agriculture 

U.S. exporters continued to be confronted with non-transparent application of sanitary and phytosanitary (SPS) measures, many of which have appeared to lack scientific bases and have impeded market access for many U.S. agricultural products. 

China’s seemingly unnecessary and arbitrary inspection-related import requirements also continued to impose burdens and regulatory uncertainty on U.S. agricultural producers exporting to China, as did the registration and certification requirements that China imposes, or proposes to impose, on U.S. food manufacturers.56

Any SPS measures adopted without a sound scientific basis or without a risk assessment or without being based on certain international standards are clearly subject to challenge at the WTO, with past cases indicating a high likelihood that any 

such measures would be struck down. The inspection-related requirements may also 

violate the WTO’s Agreement on Pre-shipment Inspection, which contains both nondiscrimination and transparency requirements. 

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57 2017 Report 10 Congress on China’s WTO Compliance, USTR, January 2018, p. 137 to 141. 58 Article XXIII provides: 

Nullification or Impairment 

1. If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of: 

(a) the failure of another contracting party to carry out its obligations under this Agreement, or 

(b) the application by another contracting party of any measure, whether or not it conflicts 

with the provisions of this Agreement, or 

(c) the existence of any other situation, the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be concerned. Any contracting party thus approached shall give sympathetic consideration to the representations or proposals made to it. 59 ‘‘Although the non-violation remedy is an important and accepted tool of WTO/GATT dispute settlement and has been ’on the books’ for almost 50 years, we note that there have only 

been eight cases in which panels or working parties have substantively considered Article 

XX111: l(b) claims.’’ Panel Report, Japan-Film, para. 10.36. 60Panel Report, Japan-Film, para. 10.36. 61Mark Wu, ‘‘The ‘China, Inc.’ Challenge to Global Trade Governance,’’ Harvard International 

Law Journal, Vol. 57, Spring 2016, pp. 261-324. 

Transparency57

The issue of transparency and access to China’s laws, regulations and rules was 

of key concern to WTO members when China joined in 2001. China’s Protocol of Accession and five paragraphs of its Working Party clearly commit China to making 

all laws, regulations and other measures pertaining to trade readily available and, 

upon request, available prior to their implementation or enforcement, along with 

making them available in one or more of the official languages of the WTO (English, 

French and Spanish). As the following examples show, China has not lived up to 

these commitments and can be challenged on these (and other) transparency failures at the WTO: 

Publication of laws: While trade-related administrative regulations and departmental rules are more commonly (but still not regularly) published in the journal, 

it is less common for other measures such as opinions, circulars, orders, directives 

and notices to be published, even though they are in fact all binding legal measures. 

In addition, China does not normally publish in the journal certain types of traderelated measures, such as subsidy measures, nor does it nonnally publish sub-central government trade-related measures in the journal. 

Notice and comment procedures: At the May 2011 S&ED meeting, China committed to issue a measure implementing the requirement to publish all proposed 

trade and economic related administrative regulations and departmental rules on 

the website of the State Council’s Legislative Affairs Office (SCLAO) for a public 

comment period of not less than 30 days. In April 2012, the SCLAO issued two 

measures that appear to address this requirement. Since then, despite continuing 

U.S. engagement, little noticeable improvement in the publication of departmental 

rules for public comment appears to have taken place, even though China confirmed 

that those two SCLAO measures are binding on central government ministries. 

13. Non-violation 

Last, but certainly not least, a broad and deep case at the WTO should include 

a non-violation claim under Article XXIII of the GATT, focused on the myriad ways 

in which China’s economy fails to meet the Marrakesh Declaration that the WTO 

was designed as a world trading system ‘‘based upon open, market-oriented policies.’’ The non-violation clause of Article XXIII represents a real-world attempt to 

solve the broader problem of contractual incompleteness. It provides a legal cause 

of action against measures that do not violate the treaty but that nevertheless upset 

the reasonable expectations of the parties and can be aimed at policies that might 

otherwise be beyond the reach of the GATT/WTO agreements.58 Non-violation 

claims have been rare.59 WTO members generally agree that ‘‘the non-violation nullification or impairment remedy should be approached with caution and treated as 

an exceptional concept. The reason for this caution is straightforward. Members negotiate the rules that they agree to follow and only exceptionally would expect to 

be challenged for actions not in contravention of those rules.’’ 60

However, the wide-spread concerns with China’s economy and the difficulties it 

has raised for WTO members suggests that this is indeed the time for an exceptional approach. As made clear in Harvard Law Professor Mark Wu’s ‘‘China Inc.’’ 

analysis, China’s economy is structured differently from any other major economy 

and is different in ways that were not anticipated by WTO negotiators.61 It is the 

complex web of overlapping networks and relationships, both formal and informal, 

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62Mark Wu at 284. 63 Harry G. Broadman, ‘‘The Coalition-Based Trade Strategy Trump Should Pursue Toward 

China,’’ Forbes, April 9, 2018. 

between the state, the Communist Party, SOEs, private enterprises, financial institutions, investors and others with Chinese government oversight over state assets 

(SASAC), financial sector organization (Central Huijin Investment Ltd.), heavy state 

planning, placement of Communist party officials in key positions, specific forms of 

corporate networks and state-private sector linkages that make China’s economy so 

unique and so hard for the trading rules to deal with.62

It is exactly for this type of situation that the non-violation nullification and impairment clause was drafted. The United States and all other WTO members had 

legitimate expectations that China would increasingly behave as a market economy—that it would achieve a discernable separation between its government and 

its private sector, that private property rights and an understanding of who controls 

and makes decisions in major enterprises would be clear, that subsidies would be 

curtailed, that theft of IP rights would be punished and diminished in amount, that 

S0Es would make purchases based on commercial considerations, that the Communist Party would not, by fiat, occupy critical seats within major ‘‘private’’ enterprises, and that standards and reguelations would be published for all to see. It is 

this collective failure by China, in addition to the specific violations of individual 

provisions noted above, that should form the core of a big, bold WTO case. 

G. OBJECTIVES OF SUCH A WTO CASE

Most WTO disputes have as their goal a ruling by the Dispute Settlement Body 

that the measures complained about violate one or more provisions of the WTO 

Agreements, after which the responding party brings its measures into compliance, 

often by removing or amending the offending measures. Here, while one of the goals 

would indeed be to seek certain specific rulings of that type, the goals would be 

much broader— 

1. to seek a common understanding of where the current set of rules are failing 

and need to be changed (with disciplines on subsidies at the top of that list); 

2. to begin the process of scoping out exactly what those rule changes would look 

like to accommodate the views of the broader WTO membership; 

3. to seek recognition from China of where and to what degree its economic structure can or cannot fit within a fair, transparent and market-based trading system; and 

4. to give China the opportunity to make a choice that is its sovereign right to 

make-whether it wants to change its system to one that does fit within the parameters of the WTO or not. 

As former USTR official Harry Broadman put it, ‘‘There’s no right or wrong here. 

If China’s choice results in conduct that does not square with the rules of the WTO 

. . . so be it. Beijing should then exit the WTO gracefully or be shown the door.’’ 63

The hope would be that both China and the coalition of parties to the dispute would 

appreciate that the trading system is better off with China as part of it, that the 

WTO rules are in some places and in some ways part of the problem and need to 

be changed, but that tinkering at the margins will not suffice. 

H. Conclusion 

The concerns with China are global concerns. The tools used to address the concerns and the solution sought should be global as well. And that means using the 

WTO. And it means fixing the WTO, particularly its dispute settlement system, to 

ensure that the WTO is ready and able to take on the challenge that China presents 

to the world trading system. 

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1 Jennifer Hillman is a Professor from Practice at the Georgetown University Law Center. She 

is a former member of the WTO Appellate Body and also served as a Commissioner at the U.S. 

International Trade Commission and as an Ambassador and General Counsel in the Office of 

the United States Trade Representative. 

Saving Multilateralism—Renovating the House of Global 

Economic Governance for the 21st Century 

by Jennifer Hillman—The German Marshall 

Fund of the United States1

[INCLUDED AS A SUPPLEMENT TO MS. HILLMAN’S PREPARED STATEMENT] 

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FOREI-42327 with DISTILLER


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C 2010 The German Marshall Fund of the United States. All rights reserved. 

No part of this pubUcation may be reproduced or transmitted in any form or by any means without permission in writing 

from the German Marshall Fund of the United States (GMF). Please direct inquiries to: 

The German Marshall Fund of the United States 

1744 R Street, NW 

Washington, DC 20009 

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E info@gmfus.org 

lhls publication can be downloaded for free at http://www.gmfus.org/publications/index.cfm. Limited print 

copies are also available. To request a copy, send an e-mail to info@gmfus.org. 

GMF Paper Series 

The GMF Paper Series presents research on a variety of tmnsatlantic topics by staff, fellows, and partners of the German 

Marshall Fund of the United States. The views expressed here are those of the author and do not necessarily represent the 

view of GMF. Comments from readers are welcome; reply to the mailing address above or by e-mail to info@gmfus.org. 

About GMF 

The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grant·making institu· 

tion dedicated to promoting greater cooperation and understanding between North America and Europe. 

GMF does this by supporting individuals and instit·utions working on transatlantic issues. by convening leaders to discuss 

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82 

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SAVING MULTILATERALISM 

Renovating the house of global economic governance for the 21st century 

BRUSSELS FORUM PAPER SERIES 

MARCH 2010 

Jennifer Hillman· 

The German Marshall Fund of the United States 

Introduction: Coping with Complexity . . . . . . . . . . . . . . . . . . . 

Solid Foundations: The Architecture of Global Economic Governance . 

The Great Recession and the Steering Committee of the World Economy 

The lMF, World Bank, and WTO: From Crisis to Reform ..... 

Guardian of Global Finance: The International Monetary Fund . 

From Reconstruction to Development: The World Bank .. . 

Negotiating the Rules: The World Trade Organization ... . 

Renovating the House of Global Economic Governance for the 21st Century 

The Harbinger of Global Governance: Political Leadership and the G20 

Reaffirming Multilateralism in a World of Regionalism ...... . 

Transatlantic Multilateralism for the 21st Century. 

Conclusion . 

Bibliography 

.3 

.6 

.10 

.15 

.17 

.20 

.24 

. 27 

. 28 

.30 

.33 

.37 

.38 

•Jennifer Hillman 1$ a unior transatlantic (eUow at the Ctnnan Marshall Fund o( the United Sbt~ and a current member of the World TraM 

Organization's Appellate Body. Previously, she serwd as commissioner at the U.S. International Trade Commission and general coun,s(:l and 

chit( textiles ntgQtlator at the omce o( the U.S. '1"rade Repr~tat ·e. The author 'Yi'Ould lib to th-ank Joe Guinan, Roman Balin, Dan Prke, Ptter 

Sparding, Debra Steger, and Kat I Suomlnen for their help with this paper. 
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1 INTRODUCTION: COPING WITH COMPLEXITY 

Last Dectmbtr. the eyts of all those with a 

stake in international affairs turned to Europe. 

first they looked to Cent\t;a, for slgnsthat the 

long-running Doha Round of multilateral trade 

negotiations a t the World Trade Organization 

(WTO) would gct back on track after years o f 

stalemate. Then observers turned to Copenhagen, 

hoping to see a binding and comprehensive 

agreement rt-Oeeting a commitment on the part of 

the wor d~ governments to addrtsS the prtsSing 

global challenge of climate chrulgt. They were to 

be sorely disappointed. Inscribed on the fa«S of 

those struggling to re.-ch agreements was" deep 

frustrntion with multilateral pro«sse$ that were 

proving incapable of deUvery. Instead of agreement, 

the images playing out on televisio n screens and in 

ne\'lo'Spapers around the wortd were of fractiousness 

and d ivision, due in part to the large number of 

participants and contt':ntiousntsS of ~ iss ~s 

fa«d; of anger, on the part of all those who felt 

marginalized by the prooess; ru~d of ronctrn. from 

those looking for signs that th~ world still has the 

capadty to reach accords when it really matters. 

The failure of th ese meetings to produce formal 

agreements-or even specific paths to ~aching 

agreements in the future-despite tht high stakts 

and the poUtical c.tpital that had Wtn invested in 

advance left manyquesl.ioning the ability of the 

world~ leaders to mttt global challenge.s. shedding 

a spotlight on the institutions and fora that were 

estabUshed for the purpose of achieving muJtilateral 

solutions to the most prt$$ing collective problems 

o f the 21st century. 

Why did these meetings (;ail? Many had assumed 

that the most significant economic crisis since the 

Great Oepress.ion and the overwhelming scientific 

and circumstantial evidence of damaging changes 

to our climate would compel world leaders to 

set aside thcir diff~renc~s and ~ach meaningful 

agreements. But it did not happen. It is no t that the 

problems are not big enough or urgent en<>ugh. The 

failure to reach agretments can be-st be sttn as part 

of a long. term trend toward incrtaStd compltxny 

in the world that makes it nearly impossible to 

reach traditional multilateral binding accords, 

combined with a waning of faith on the part of 

many countries in multilateralism and multilateral 

institutions. 

This increased complexity stems from a number 

of seismic shifts in international relations-and 

especially in international economic relationssome of which have b«n u nfolding over the 

course or decades while others are of more recent 

origin. Government policies and international 

arrMgements for coUecth•e decision.making 

have not kept pace with changes in the world. 

especially the high degree of international 

economic integration and interdependence. With 

decolonization came increases in the number of 

countries who are pla)'ers on the world stage as 

well as a rd>alandng of global economic power that 

has continued with the rise of the .BRICs (Brazil, 

Russia. India. and China) and the other emerging 

market economies. The coUapse of the Soviet 

bloc. accompanied by market reforms in China 

and India in the 1980sand 1990s accelerated the 

rapid integration or the global economy. Whert 

previously only about haJf the world's populatjontht Oraganisation for Economic Co-optntion 

and Development (OECD) countries. plus parts of 

UtJn America Md Asia-were engaged in global 

economic activity. suddenly people everywhere 

were brought together in a single world economy 

based o n capitalism and markets. 

At the macro. level, this led to shifting trade 

nows and patterns of foreign direct investment. 

a rise in the number and site of multinational 

companies and financial institutions. and surging 

global demand. Tt also meant a corresponding 

increase in the speed with which goods. 

money, and technology tra\'t':rst the globe. At 

the mkro.level. the •grt<tt doubling" of the 

SAVING MULTILATERALI$,M I 3 

R.ti."NOVATIN"(l THi HOU$.1i Oli (;L0$A~ ECONOMIC OOV&R.NANCE FORTH& ~1$T CENT\Ilt.Y 

The long-term 

trend toward 

Increasing 

complexity 

combined with a 

waning faith in 

multllaterallsm 

and munllateral 

institutions 

makes it nearly 

impossible to 

reach traditional 

Oin<Jing 

multilateral 

accords. 
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The Inability 

to create new 

institutions or 

reach agreements 

means greater 

reliance on-and 

greater need 

for renovation 

of -the existing 

international 

economic 

Institutions, the 

IMF,theWorld 

Bank, and the 

WTO. 

global worlcforc.e has had a direct effect on 

wage$, lnwme levels. and employment in the 

advanced iJndustrial countries, in some instances 

prompting fears of KO-nomic inucurity and 

a public backlash against "gJobaliution.•1 

Taken togechu. ll ~ factors have stretched the 

capacity of the current institutions of muhilattral 

govtrnance to a breaking point, leading to 

fragmentation and the emttgence o( d~p dM.slons 

among groups of countries at differtnt stages of 

economic de-.·eloprnent. Throw in the increases 

in the oomplexity of the issues themselves ;,md the 

degree to which these i$$ues overlap and affect one 

anocher aOO the problems of the 21st century btgin 

to look too complu to handle. 

This J>aPft' argues that learning to operate in this 

vastly more compltx world will rtquire ~ 

multilattralism, not lt.ss.. It muns grt.attr rtl.i.anct 

than t\'er o n those ttonomic institutions and 

fora that ha\'t already ltarntd ro function in a 

global fas.h·ion-particularly the Workl8ank. 

the International Monttary Fund (IMF), and the 

WTO. lt contmds that creating n-ew international 

il'IStitutions or binding accords is nearly impossible 

in today's work!., and examints whtrt the existing 

institutions stand today and the changes that wm be 

nece$$ary if they are to form the core of an effective 

global economic architecture for the 21st century. 

Secondly, the poper explores the problems cre•ted 

by the lack of faith in multilateralism, particularly 

on the part of many denloping and emerging 

marktt countries., who either don't want to rtly on 

the multila.teral institutions designed in a bygone 

era when the transatlantic powers dominated the 

world or who find th.at their economic netds can be 

more easily addressed through bilateral or regional 

agreements rather than working through the often 

1 R,ktlatd B. Fruman. .A~• \tbrh= Oificrtl TI•OrUgfl-ts Off tht 

£)«~~~ I.XS. Ldttor Mllfltl (Ruudl S.,e f'ound&Uon.l001). 

more cumbersome pr0«$$es at the multilateral 

level. Oe$pite a new multilateralist president in 

the United States. the momentum in the world of 

global go\'ernance today is in the wrong direction, 

to~ found in the hundreds oi regional., .subrtgion.al. and bilateral agrffments that havt come 

into force in the last several dec.ades. With each 

such ag.r«ment comes a lessening of the energy, 

time, and resources left for multilateraHsm and 

multilaterallnstituHons-along with the hard fact 

that the toughest global problems thus remain on 

the table, unsolved and insoluble through such 

regional arrangements. 

Third, the paper contends that. in the a~nce of 

any prospect of building a new global teo nomic 

architecture, the existing institutions of multilateral 

economic govtrnance must be ~e ova.ted.· Their 

governance structure-S J\ttd to be changtd. to rene« 

the dramatic shifts in the distribution of economic 

weight among countries, their mandates revi.std 

in order to ensure that they cover a wider range of 

issues but with better coherence among thtm, and 

they must be adapted ilt the face of proliferating 

regionalism, with a shift tow~rd a«ommod.ating 

and incorporating regional aC(()rds within 

multilateral frame\'/Orks. 

Thjs paper ~lso contends that while these changes 

are both daunting a.nd essential if the institutions 

are to have the efficiency, effectiveness. and 

ltgitimacy they rtquire, they art in fact w~ll within 

the grasp of the cu.rrcnt world sys-tem. We are 

not, in other words, in "a 1944 moment'" -the 

constitution-1nak:ing ~pc>eh when the United 

Nations, along with the World Bank. the IMF, and 

the predecessors to the WTO were created largely 

out of whole cloth. Nor do we n«d to be in such 

a moment in order to achieve a global economic 

architecture capable of meeting the needs of 

th~ 21st ctntury. The current crisis, th~ coming 

togtthtr of world ltOO.ers through the elevation 

of the G20, and a common understanding of the 

4 I Tua Guw ... w MAllS HAL&. FuNOOF Ttcfi UNITID STATU 
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failings of the current international economic 

institutions ought to be enough to compel these 

much-ne«led renovations of the system. 

Finally, although leadership will bt nuded 

from countries aU around the workl. the paper 

condudes by suggesting the role that Europe 

and the United States mu.st play if they are to 

help save what together they started 65 years 

ago-the institutions of a mu]tilateral economic 

order created to bring about global peace and 

prosperity for all, with a commitment to think 

and ac.t globally when address.in,g the most 

presslng economic problt~ \S of the day. 

SAVIN(l MUI.TILATERAI.IS.M 

RJ!l<OOVATIN<l THB HOU$1 OF<lLOBA lCO~OMIC <lOVI!It.~A.NCB t:OR TH£ l.IST Cl}l'l'Ufi.Y 
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The UN t>ore 

responsibility 

for issues of 

diplomacy, 

security, and war; 

the world Bank 

for international 

development and 

the reduction 

of poverty; the 

International 

Monetary Fund for 

financial stability 

and economic 

cooperation; 

and the GATT, 

precursor to 

the World Trade 

Organization, for 

trade liberalization 

and institutional 

stability in the 

world trading 

system. 

2 SOLID FOUNDATIONS: THE ARCHITECTURE OF 

GLOBAL ECONOMIC GOVERNANCE 

In 1944. i.n the woods of New Hampshire. with 

the end of world war 11 already tn sight. M 

extraordinary set of gatherings occurred. bringing 

together an array of government officials whose 

vision for a better future was shaped by the hard 

lessons of the 1930s.. Rejecting the catastrophic 

"'beggar·thy-neighbor'" policies of the major 

e-conomic powers that had hastened the slide 

into worldwide depression and war,thtst- public 

servants dedicated themstlws iosttad to the 

e:reatton of a rules.. based. iJtternational economic 

order that would serve as the basis for peace and 

prosperity. 0\'tr the oourse of the Bretton Woods 

Conference, the subsequent Dumbarton Oaks 

and San Francisco meetings. and the months 

that followed, they concei\'ed of and created the 

charters for four major inter-national institutionsthe United Nations (UN). the International Bank 

for Re«>nstruction and Development (\\~rid 

&nk), the International Monetary Fund. and the 

lnteroation.al Trade Organization (IT0).2 

At their inception. each of the m~jor intermtional 

institutions pla)•ed specified roles. The VN bore 

responsibility for issues of diplomacy, security, and 

war; the World Bank for international development 

and the reduc-tion of pOVerty; the International 

Monetary Fund for financial stability and economic 

c-ooperation: and the GATT, pr«ursor to the World 

Trade Organization. for trade liberalization and 

institutiOI'aJ stabiUty Ln the world trading system. 

These institutions, while far from perfect, ha\'e 

done much to ac:oomplish their most fundamental 

goals. In Light of the tremMdou.s pressure from 

around the world to protect domestic markets 

'111~ VN.IBRD (World Bart!Oand IMF all (aM(' lnto bril'lg 

with link <Idly. HO\\•tvtr, antmpcs 10 launch 1M ITO With a 

bro.ld nund~t had tobt a~ndoncd in 19SJ ...,·hc!ntht Truman 

Admrn.itratl<>n announced tllat 11 '-'OUkl not fCtk f"''df'kotion or 

1M Havana O..utn ~to lackolsupport in d~e U.S. Consm.s. 

hulfl.d. in 1947 a.Nnalkr groupol cou.ntrits rw&Otb.1C'd tbt 

Ctnm.J Agr«mcntoo 1\rlff$ and Trtdc (CA'IT), which W$$ 

I~SfOtll'l(d in 19SIS into tht W011d T~t {)fpnitatiOn (\Y'TO). 

and job$, tht GA TT/WTO and its rules and 

disciplines ha\·e kept an outbreak of vepressJon. 

era prot«.tionism at bay for half a century. and 

eight rounds of multilateral trade negotiations 

have resulted in widespread liberalization of 

trade-at least in industrial products among 

industrial countries. The UN, while not achieving 

the ultimate goal of bringing an end to all wars. 

has dont much to contain crisu, settle regional 

COJ~tlicts, man peacekttping •ni.ss.ions.. t"radicate 

diseases, and work out agreements on everything 

(rom human rights conventions to the use of the 

seabed and of outer space. Similarly, the World 

&nk., while not eliminating poverty, has seen 

the portjoo of the world's population living in 

poverty decline from 40 percent 20 years ago to 

21 ~rcent today, along with providing loans and 

dev<':lopment assistance in mort than 126 countries 

and participating in initiatives on e\'trything 

from com baling HIV I Al OS to biodiversity to 

eduC<ttion and debt relief for the poorest countries. 

The Rank is rightfully commended for its ability 

to raise and channel resources for de\'t-lopmmt, 

for its highJy.trained staff, and for its depth of 

knowledge about de\'dOpment strategies and 

approaches across country boundaries. J The 

lMF. while it has evolved considerably from its 

initjal days o( monjtoring adherence to the par 

value system of flXed exchange rates. has made 

important changes to its key instrumentssurveillance, lending. and technical assistanceallowing it to contain a number of financial crises. 

continue concessional lending where necessary, 

and join the fight against extreme po\·t:rty. 4 

J" Rts>O'I''~r ll.g the \\Wid hnk. i:lr lllc %1$1 C<ntury." Rq«t cf lht Higt.·Ltvtl Commiuioll 011 Modmriuariol• cf WorW &nl Growp Gow:rJJ.VI« lh~ "i'JtdiUo Commission Rtport"). Oct. 

2((»,p.9. 

R.o<~riao dt Rato. ~r managing dir«1or ol tht IMF took 

1M \1twbdore tht 4()08.%«)9 rlMndal crblf tlut (undam«~UI 

rtform co die I.MFwas not nt«kd, arg.ulfll tllaa1ht IMF 

IWKl ~'Oh'td ~r its 60 ~us duo!Jih a.mndrntnts 10 its key 

instru.mnts whilt tc11lainin:s I rut to iu purpout cllofttring 

inttrnatiO•'I.I.I «<rocMnic cooptra~ prorootitiS. tbing J)f'OSpttity 

and sa(~w dingslobal fmanda.l 5tability. i.gOclt ~"Is 

t:hot IMF$ Mandal.t' StiU ReltVIIInl?" (iWMl ""nda, Jan. 2()05. 

I Tlu Gf!:llMAN MAIUHAU. fvso OP TH£ UNITt! I> STAT£$ 
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For their part. the Unittd States and the m('flll>e:r 

states of the .European Union have been among 

the me»t active and engaged participants in 

these institutions. This is unsurpri.sing. given 

the role the transatlantic partners played in 

creathtg these institutions and the intetests they 

wtre originally intended to ser.·e. At bottom. 

the postwar global economic architecture was 

e$lablished as a means to tie the West togethtr 

in the emerging Cold War context through the 

liberali-zation of international trade and capital 

flows. Fint through the institutions of the Bretton 

Woods system, and then through the Marshall 

PLan. the United States was able to rebuild the 

shattered production <>p>city and financial 

markets of Western Europe. For the United StattS, 

the overriding purpose was clear: the politicalstrategic need to buiJd up a bulwark against 

Table 1 The <Jrch1tecture of global econom1c governance 

International Monetary Fuod 

(IMF) 

Began with: 44 memtws 

Now: 186 Melrbers 

Mandate: 

Promotes international 

monetary cooperation 

Macroeconomic surveillance 

Promotes exchange stability 

Develops muttilateral 

system of payments 

Makes resources available 

to memt>e<'s experiencing 

balance of payments 

difficulties. 

ReYenue: $325 billion in quotas 

contributed by members (as of 

3/09) 

Loans or grants: $175.5 billion 

In loans committed, of wl1ich 

$124.5 billion not drawn (as of 

9/09) 

WO<kl Bank 

Began with: 44 members 

Now: 186 Melrbers 

Mandate: 

Evolved from facilitator of 

post-war reconstruction and 

dewlopment to mandate of 

wor1ctw;de poverty aiiEMation 

Promotes long-term 

economic development 

by pro'liding technical and 

financial support 

Funds loans through 

merrber country 

contributions and bond 

issuance 

ReYenue: In 2009. IBRD raised 

$44.3 billion. In FY 00-11, 

commitments of $41.7 billion 

made available to IDA 

Loans or grants: $58.8 billion 

In total commitments (loans, 

credits. guarantees. and grants) 

in 2009 

World Ttade Organization (WTO) 

Began with: 23 GATT parties 

Now: 153 Members 

Mandate: 

Forum for trade negotiations 

Handles trade disputes 

through dispute settlement 

process 

Monitors and Implements 

trade agreements 

Technical assistance and 

training for developing 

countries 

Cooperation with other 

international organizations 

Revenue: Administrative 

budget of $173 rrllllon, paid 

by oonttlbutlons from members 

based on a share or wMd trade 

Loans or grants: $28 million 

of training and technical 

assistance prOYided; support for 

Aid for Trade initiatives 

SAVIN<l M u&.TILAT!IkA&.IS.M 

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The legacy of !hiS 

history is that 

the United States 

and Europe eniw 

outsized control at 

the Bretton WOOdS 

IIIS{illlliOns. 

Communism. But It also strvtd US. economic 

sdf·tnltrUt: a ,s,a;naftcant portJOn of M.ushd t1an 

aid efr«tivdy ....... co.,_. Ewq>oan ckmand 

for zood$ from th• Unic<d ScaC<s. hotp;,. $CaY< 

off dom~tic fun of a postwar slump Ol' rm wal 

of th~ Great Depression. Over the medium tenn, 

the Brrtton \\Wd.J syst~m htlped create fordgn 

nwUc.s for ch< Unlc<d SCat .. by conjurlns up a 

mJdcUt da:ss in US. t<OnOmic partnrtn around the 

world, tomt"thing from which the Europansoncc they were b.,ck on their feet following the 

MarshaU Plan and the recoll$truetlon program 

o( tho Organlttcion f<K Europun Economic 

Coop.ration-havc obo b«o abl• co l>m<fiL 

Todoy, by-o( uJ ...... cion, D<at!y OM• third o( 

U.S. and EU e:xports an to developing countries 

where the World Bank has lending programs. 

By eos<<h<r <$Cabllshil18 th< rul., and •taJldards of 

conduct by wl\ich ""poo.l economy Is 8"'-.rmd. 

l}ae Unitnl States and Eu~Ml Union~ 

the ate ward$ o( the JnternationaJ economic order. 

running the syrtem for much of the postwar 

ua. ln return, the thr« pillal$ofthe global 

tcOnOmjc architecture thty e:stablishtd-<ov«ing 

ch< liiWidal sid< o( <eonomi<S (IMF), creek in 

zood$ and ch< r<al Ji<l< o( K<ll10mi<$ (CATT/ 

WTO), and i.ntemalfonal de\<tlopmtt~t and 

poverty alleviation (\\~r d Bank)-hnve delivered 

enormous economic btne:fits to their founders. 

O..pit< occasi<>MJ cholltnp. ch• l)"t<m has 

faml wd. h has p<OYtd<d sability and marbt 

op<ning, rdativtly stabl< forrign tJCchang< rat<>, 

the rtadyavailabiUtyof capital. and a forum for the 

coordination of mii.Croteonomic pollclt$. Between 

the Rrst GAIT round in 1947 and the lau.nch of the 

O.X... Round attht WTO in 2001, intt:mational 

track incrns<d monnowly, by mon than 100 fold. 

Clobol tonanc:ial flows haV< grown by a MID grtat<r 

amount. The i.nttgntlon o( the world economy 

has proct<d<d apaco, propdl<d by fr<edo1n of 

capital m<J'Vtmmts. the de\'dopment ol new and 

•_,.ru,g mark<u, <a>ne>ntia o( sal<, chaper 

tourca of JUpply of raw materials and finisbtd 

goods. the inter~tional migration ofl.tbor. and 

technological adv~t~nces in production p~ses, 

tra.n.sportatton. and communications;, 

Th•l<pcy o( this h'-f Is chat th< Unh<d 

Statts and Europt enjoy outsiud conttolll the 

Breuon Woods lnstitutions. Both benefit from the 

unwritten rule that the prtsidtnt oft he World Bank 

IJ always an American, while the managing director 

o( ch< JMf is olwoys a &uopoan. Sn·m o( m. top 

~ countries that are "ewtrrtp'tsmttd• at the J.MF 

(in tumsolthed.iiTtrence bttwec-n thrir lMf quota 

share a.nd their share of world GOP) are European. 

Both ch< World Bank and the JMF have a board o( 

24 oec:uth-e d.:iredors, with moA of tht aecutive 

dlr«b1 sp<aklng for (aod vocing few) a group 

o( countrits.. Five countries. hO\\·ever, havt their 

own appolnttd se3t$! the United States, Cermany, 

Franc:e, the Unittd Kingdom., and Japan. ln 

addition to the German. French. and Briti.sh uats. 

tho 2• Olh<r m•mbm o( ch< Ewq>oan Union ar< 

pon o( ch< groupo( covntrits rq>ra<nc<d by....., 

Other executive dJrte10rs,thereby s,ivlng Europe 

thr« uclusive seats and a significant presence in 

sevtn otheB. A.J suCih, the EU's member states can 

rnnutnct 32 ptrtent ol'tht \-otts at the IMF-and 

a Jlmilar (although not <DCtly <qual) nwnl><r at 

tho World Bank. At tho IYTO, ch< Unit<d Stat<S 

and Europe ha~ tradltJo.nal1y madt up t\\'0 of 

the so-called •quad• countries (the United States, 

Europ<an Union, Canada, and Japan) that for a 

loo>a tim• ,..... vi<w<d u tb< "dealmak<n" for any 

trode OSJ«<I1<n~ to wl\ic!J ch< r<St o(-'<! was 

upoct<dco•implytign on. 

a 11M• CE-lHAIIf Mu.sHAt.t. Fu~o o• TH& UNITID STATII 
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Figure 1. Under· and over-representation at the International Monetary Fund 

Under-represented Coontrles Over-represented Countries 

-6.~ .s.~ .~ -3.90 ·2·90 ·1·90 0.00 

'"""-------------~·China 

~-"!"'"-"!"'"-oi=~ United States 

:.;;;;;;;;;;;;;;;;;;~~ India 

Brazil 

Mexico 

Turkey 

Russia 

Indonesia 

0.00 1.00 2.00 

Saudi Arabia' · · 

Germany ...... 

Belgium ...... 

Ftance .. 

Nethe~ands .... 

United Kingdom ,..... 

Switzer1and ~ 

Canada -

Venezuela ... 

SWeden ill Denmark ill 

a United Arab Emirates 

IIi Poland 

Italy. 

Norway ~ 

Austria . 

Kuwait, 

Non.£U States 

OfHerence between IMF 

Quota Share and Share 

of World COP (96) 

IIi New Zealand 

• Japan 

• Thailand 

i Romania 

i Slovak Republic 

i Bangladesh 

i Moroceo 

i Kazakhstan 

i Greece 

i Nicaragua 

i CZed1 Republic 

i co1ombia 

Ubya 

Iraq ill 

Nigeria ill 

Singapore II Finland. 

Ireland . 

Malaysia ~ 

Chile ~ 

Zambia I 

Algeria ~ 

Notn;: 2$1MF ll"'tff1btt$ ,.;en the $tniii$Jt""' lellt$t <lotltffi"'Clt$ '*"""" IMF ~ &h¥t ~net ..._of 'aiQflO GOI?GOP b tdj\1$~ 

fOI"PMehe ... po<wer ~ (PPP). 

so...ee: Rebecee NelSon. "The G20 and lntet'IIMi<Wiel Etonot'* ~: Bac~&tld l,...,ieeciOns few~ss: 

~ssionel ReSNrc:h ~.Dec. 9, 2009. 

SAVlNO Mut.TII.ATilR.AUSM 

RENOVATING THB HOV$1 OPGL08AL ECONOMIC GOVER.NA.MC8 FOR TH.S l i ST CE~TUI.Y 
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The second 

majOr systemic 

response to the 

Great Recession 

has been the 

transformation of 

the lillie-Known 

G20 Into the 

premier forum 

for international 

economic 

cooperation. 

3 THE GREAT RECESSION AND THE STEERING 

COMMITTEE OF THE WORLD ECONOMY 

With tht bursting of tht housing bubblt in the 

Unittd States in 2007 and the train of evtnts that 

led to the destabilization of the global financial 

system. the world economy collapsed Into a 

st«p recession in the final quarter of 2008, with 

global real COP dropping at a 6 percent annual 

rate. This i.s undoubtedly the sharpest decline in 

world output- and especially in world industrial 

production and ·world trade-of the postwar era. 

Worklwide exports plummeted from $16. L trillion 

in 2008 to $1 1.2 trillion in 2009, a d rop of over 30 

~rcent. Virtually aU countries were suc-ked into 

tht downturn, with the world witnts.sing the first 

significant d«..int in workl rn l GOP (of nearly ont 

~rcent) in six dt<:adts. 

The full story of why thts collapse occurred is 

still being written, but it starts with a focus on 

developments in the United States- tsptdally the 

expansion and substquent collapse of the real estate 

and real estate f'lnandng bubble and its Impact on 

an overle\'eraged U.S. and global financial sys-tem. 

Add to the tale the accounts of pti'SisttJ~tly easy 

monetary policies. very low interes-t rates and 

interest rate spreads, and a general disregard of 

growing ri.d:s in the finandal system, and the key 

causes begin to come into fOGUS. Others would 

point to huge current account savings and rt:Str\'e 

accumulations in Asia, particularly C-hina, and 

the mirror·image defidts in the United States as 

another major underlying cause of the troubles. 

This Great Recession of2008-2009 has tested the 

international economic institutions as never before. 

In response. the IMF has stepped up its role as a 

lender of last ~o t, providing financial support 

package-S to (among others) lctland, Ukraine. 

Huftgary, Pakistan, Belarus, Serbla, Annt~tla, El 

Salvador, and Latvia. and has also extended crtdit 

to MexiGo, Poland, and Colombia under a new 

nexible credit line. In order to better equip the 

Fund for this task. C20 leader'S at their London 

summit in April2009 pledged to triple the lMFs 

lending capacity to $750 billion. Additionally) 

they urg«lthe Fund to intensify its eoonomic 

surveillanee and early warning S'(stems. 

The World Bank has also movtd to expand 

and sp«<l up lending, assistanct. and advice to 

dtveloping countrits. committir.g a rt<Ord high of 

nearly $60 biJU011 to countries hit by the flnanc:lal 

a-isis in fisca.l ye;tr 2009-an increase of 54 percent 

zyver the previous year. An additional $8.3 billion 

wos mobilized as pari of the World Bonk's global 

crisis response initiatjve to lessee the impact of 

the crisis on the most vulnerabl<. especiaUy in 

low-income countries. These lniliatives focus 

on safety net programs to protect the mOISt 

vulnerable, maintaining long-term infrastructure 

in'>'estment programs, and on swtaining the 

potential for private S«tOr·led eoonomic growth 

and employment creation. parti<u.larly through the 

support of small and medium.siu enterprises. 

The WTO for its part btgan a new monitoring 

and repor-ting mechanism on protectionist actions 

taken by WTO members and wc<rked to ensure 

that markets remained open and that oountries 

adhered to their WTO comJnitfrtents. The WTO 

also pushtd G20 membtl'$ to ketp their pltdge.s of 

support for Aid for Trade initiatives and worked to 

ensure th;at trade finance remained available and 

affordable. 

The steond major sys.temic re.sponse to the Great 

Recession has bte1l the transformatjon of the 

little·known G20 gatherings offinanee ministers 

and central bankers into an affair involving 

heads of state. declared by these leaders to be 

"the premier forum for internatt)nal «<OOmic 

cooperation."'S The 020 started i11 1999 in th e 

wake of the l997 Asian financial crisis as a forum 

thai brought together finance ministers from 

snc. PitUbui'J Sunvnlil; L«dm' St&lcm!111:. P*~ 19. 

·we desiiJ'Iakd the G20 to be the p~mit:r f«um lor our 

inlffNtional C'COnomic c~ntion.• 

10 I nte CnwAN MAR.SHAI.I. FuND or rn1 UNITED STATU 
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major advanc-ed and ~merging economies with 

the goal of stabili~ing global financial markets. 

With its ascendancy a.s part of the response to the 

Great Recession, it has now supplanted the G7/ 

GS meetings as the .. chief steering committee of 

the workl eoonomy."'6 The inclusion h~ the G20 

of a numbtr of countritS beyond the historical 

Gi/G8 grouping no doubt stemmed, a t least in 

part, from a recognHion ofthegro.,.,ing power of 

the emerging market and developing countrie1, 

who now account for more than 40 percent 

of the \II'Orld economy. To have any sense of 

legitimacy throughout the .... -orld and particularly 

among the emerging market economies, 

expansion of the leader'$hip circle was criticaL 

However, the initial G20 Leaders Sum mit, held in 

Washington in No\•ember 2008, was something of 

an EU~U.S. joint venture. British Prim~ Minister 

Gordon Brown had been calling for a .. Bretton 

Woods II'" to completely revise global ewnomic 

governance, and the United States responded by 

promoting the idea of a G20 goHhering, ele~ted 

to the level of heads of S-tate, rutd extended the 

invitatiOJ\ for an initial meeting in Wa:shingtoJ\. 

Europtan leaders at first exhibited diflerenus of 

viewpoint on this approath, with Fre01ch President 

Nicolas S.arkozy n«<<ing to be convinced of the 

appropriate:nm of the G20 as a venue. given that 

£U member states: hold four of the seven seats (S7 

percent) at the G7 but only those same four seats 

plus ont for the European Uniot~ (25 per«1\t) 

at the G20. But in the end there was acetptance 

of the G20 as the only available forum with the 

scope of membel'$hip required to develop ideas. 

reach consensus on their desirability, nod "'-ork to 

implement them. 

•c. F~ BtrJst(n, Ptcmon Institute for lnttmadonal 

tccnomlcs. "A Btuqwint fc. Glomi ~;:,dn-ship in the Tw~nl • 

FtM CtntW')'; Keynow Sp«<h •t tbt Global HumVt R.Hourtts 

Forum, Scoou1. KoreJ. Nov. 4, 2009. 

The evolution of the G20 also caused an e\·olution 

in the Euro~ approach to such summits. Efforts 

were made prior to and after each meeting to come 

to a Europe-wide pos.ition, with the European 

Council adopting a number of principles for action 

where agreeme11ts coukl be rtached- pritKipally 

in the art:a of enhancing sound regulation and 

reforming the international financial institutions. 

The European Commission was given the task of 

developing proposaJs for comprehensive reform 

of the financial system, which were then endorsed 

by the European Council and urged upon the rest 

of the G20 leaders by Europe-an heads of state. 

ThroughoutthtSe dorts, Europe netded to find 

common ground among competing positions, with 

the United Kingdom arguing for more stimulus 

from other governments. GermMy emphasi~ing 

the need to owoid major budget deficits., and France 

pushing for a major dampdown on executive 

compensation and a general tightening offlnancial 

regulation. The United States joined the United 

Kingdom and Japan in pushing for more stimulus 

from others while initially rtsisting any shift of 

financial regulatory policy out of the hands of 

national regulators. 

What emerged from these G20 summits is fairly 

remarkable-both in terms of the substance of 

the consensus that was reached and in terms of 

the process. Despite starkly differing views on 

how to stimulate economic growth and recovery, 

agreement was reached to pump more than $1 

trillion into the global economy-albeit through 

the IMF, rather than individual countries-in the 

form of $500 billion in new lending capacity, $250 

billion in new Speciol Drawing Rights, and $250 

billion in trade finance. Sel"""tely. the G20 asserted 

that commitments by individual countries for flscal 

expansion would total $5 trillion over two years. 

Demands from some European count.rie.s for a 

major toughening of the regulation and oversight of 

financ:ial inslitutions were met through the creation 

SAVIN(~ Mu&.TILATEikALIS.M 

RJ!t<OOVATIN(i THS HOUSE 0F(11.08AL.ICOtlOMIC (10VI!l~A.NCB FORTH£ liST Cli"TU'fi.Y 

The Inclusion 

In the G20of 

a number of 

countries beyond 

the historical 

G 7 jG8 grouping 

partly stems from 

a recognition 

of the growing 

p<YWer of the 

emerging market 

and developing 

countries, who 

now account for 

more than 40 

percent of the 

world economy. 
92 

FOREI-42327 with DISTILLER


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Table 2 Numbers count From the G7 GS to the G20 

G7 Members 

4~, 

.. ~-'1, 'F · ·- Legend 

• G7 mcrmer countf'ies 

Not members of G7 

Sourat: GlOwebslw. -.c20.ora EU G8: Frenoe. o.rm.ny, Italy. United JoUn&dOfn, 

G20Members 

·-

,.,_ 4f -.. 

Legend 

• G20 member counttic$ 

• EU countries not 

individUally represented 

in G20 

Not membets of G7 

Soutw. G20 v«<&lw: -.c20.o«& 1 EU 21: Austrill, 8elaium, Bl.fprill, Oyprus. Czedl RepubliC', 

0.~. E&:toriol. Rnlllfld,, Rtono.. Gtrm;to,, G'"". HUf'CMY, 

Ireland, ltlly, laiWI, Uthuanl•. Wten'lbou!J, Malta, Ne1hetl~. 

Pol;~nC&. Port~.~~~. $l<w;IW;o~, $1o¥$ni~. ~n. Swtdtn. lklitedKII'IfCIOtl'l. 

t Non-GS EU membeta: AuWie, Bei&IUM:. B!ApM, C)ptua, Ctectl 

FtcpA)IIc:, Ocnm.1t11, (l«)nna, finland, Grcoco,IU!ply, rrcr.anc1, 

~t>M. lith~•. WX.I'nboura. Mall.t. Nethelfencls. f'Ot.ancl. ~.AoM&nie,SIOW"akia,SioYetlia S()ein,~. 

G7 GS 

Country GOP (millions "of world 

o1 dollarsr GOP 

Canada 1.499,551 2.46% 

France 2,866,951 4.71% 

Germany 3,673,105 6.03% 

Italy 2.313,893 3.80% 

Japan 4,910,692 8.06% 

United 2,680,000 4.40% 

Kingdom 

united States 14,441,425 23.71% 

G7 32.385,617 53.16% 

Russia 1,676,586 2.75% 

G8 34,062.203 55.92% 

EU oountties 11,533,949 18.93% 

lnGS 

G20 G20 + non GS EU 

COuntry GOP (millions "otwor1d 

01 dOllars:)" GOP 

Argentina 324,767 0.53% 

Australia 1.013.461 1.66% 

Brazil 1.572,839 2.58% 

China 4,327,448 7.10% 

India 1.206,684 1.98% 

Indonesia 511,765 0.84% 

Mexico 1.086.128 1.79% 

Saudi Arabia 469,426 0.77% 

South Africa 276,764 0.45% 

South Kore-a 929,124 1.53% 

Turi<Oy 729.983 1.20% 

Subtotal 12.450,389 20.44% 

G20tota1 46,512.592 76.35% 

EU(27)' 30.18% 

G20 + non-GS 87.60% 

eu oountrles2 

.,...= 

~: IMF WOt$d Economic OUCJook DttlabeM (OCC. 2009) 

12 J TH£ GERMAN MARSHALL f uND OF THI! UNITED STATI!S 
93 

FOREI-42327 with DISTILLER


JHillpage13.eps

of a Financial Stability Board (F$8).

7 The FSB 

was designed to bring about greater coordination 

and coverage of regulatory systems to include 

hedge funds, princ:iples on ~y and compensation. 

controls on excessive bank leve e and bank 

secrecy, and oversight of aecountiltg standards and 

c:rtdit raring agendes. Those calling for a ·sretton 

Woods 11 .. and a revamping of the institutions of 

multilateral economic gcwernance were met at 

least halfway: there was eventual agreement on the 

U.S. proposal to ina-ease the lMF quo:ta share of 

the emerging market countries by five percentage 

points, along with an incre-ase in the voting powe:r 

of deve'oping and transition countries at the World 

Bank of at leas:t three percent and a commitment 

to reform the •mandatH, scope and governance,. of 

1Tht t~anCial Stability Board wu nubli.shtd a t tht Lctwk>n 

G20 Summit u • tucceuor 1o t!.e Fin:.andal Stabitity Forum, 

which was cuattd in 1999 by tht C7 finance tnitlisttn and 

cmral Un as 1 l'orum to promott coordination and 

infornulion cxchanac ttn(llnJ those rqporUibk for firun<ial stability, The FSF was madt up of finall(ial rtplatoo from dlt 

G7 CIQUntrles. A!Utralia. HooJ Kon£. NttbtrbiWh. ~ 

a.nd S\lritutland, u wdlultlltmational fi.nancl.al Wtitutiotu. inttrnatklnal "JUl•t«y and supervi501'y aroopingJ. committ«S of ~tn ral kn.k n:ptrU and the EutOptan CMIJ"&& Bank. 

Whm Cht G20 beSeTs cranslormtd tht FSF lntotht FSB. thty upanckd iU R'ltl'llbtNh.lp to lncllolde 64 partklpar'Af-all C20 

countries, plus HonJ Kong SAR, tht Nethtr\lnds, SlnpP<ft. Sp.ln. Mtutland. tbt £u10ptt11 Central Bank,. and tht 

El.WOfC'M' Commbslon. They al.so sf.81!iAcandy -e.~tpiindtd 

lb nW\datt to lndltde a~m«~csof "Uinert.blllekf In the 

fi <lncl~ system. monitoring m.u-ktt devdopments, ad'lisinJ 

on best ptaCLices In mettlng ngulat«y standard• and tlw 

ubbfisll mtnt of auiddina and tupport for tupcrv\sory 

colkg«. U.S. Treasury Sc<~ary'Omothy Ctlthntr dm:ribtd 

the FSB 11 •atourth pillu tot he a.rcflitectu re ol cooptn.lion 

utabll~ &fttt llw &econd wortd wu· rtf«rln.g to tht 

IMF, tht Wcrld Bank and the WTO, noting his -exptrution 

that the FSB will 6tt hJ.&h slobal rll\lncltl standards and 

holod all FSB me:mbnla.c:counbbk to thOle standards. 

the financial institutions, while Europe's desire to 

keep the number of seats on the E.xecutive Boards 

of the IMF and the World Bank at 24 was met. The 

WTO was induded in the later G20 meetings, and 

was given the task of monitoring G20 pledges rK>t 

to take any protectionist action and to complete the 

Doha Round of trade negotiations.• 

A pattern began to emerge from the G20 summHs 

whereby the heads of state would assign tasks to 

the multilateral economic institutions related to 

specific issues, with instructions to report bac.k 

to the next meeting of G20 leaders. While the 

response to the initial Washington summit was not 

impressive. with markets around the \\'Orld falling 

sign.iflcantly after its conclusion. as the actions 

by the multilater.al institutions and gover-nmwts 

to carry out their assigned tasks started to take 

shape, the reaction to the subsequent summits 

was much more positive. Also of interest is the 

emerging process by which disagreements among. 

for example. major Europnn players like Germany, 

fi"31'K:e. and the United Kifl$dom. or between 

Europe and the United States.. were brokered by 

other G20 members.. with Indla or China or Brazil 

serving this role of reft:ree and conciliator. 

1The \•l'rO's tun:e resources and presc-ribed lrnparliality pi~ 

won, comtntnu on Us •IXIJty to eiTtcth'tly name and sba~ 

mtmbtn ~ adoptina protectionist mt~urn. A numbtr of 

~I'll monltON. mo.c promlnent)y Global 1.'t8ck Akrt 

(GTA), _.w.gtotmt:raduatas. haw stcpptd in to llN1yu proudlonls:t m«s:u.ru u:stns a mudt. btoadtt dtflniUon of what 

constitutes a )lf«tctionist a.c:cic)n. With rcgud to th~ G20 l«<~ 

to •rtfraln frotn rt.ls:lng ntW barrters to IIWtstmrnt 01 10 trade 

i_n JOOds and ~trviCft."' GTA found that, ·on avtn:gt, 1 G20 

mt.mbcr had brol:tn tht no-pro«<tlonl&m pltdgc tVffY thrtt 

dayS' in t!.e ytar fol~ na t!.e \'/MhinJCon Ludm Summit. 

SAVIN<l MuLTILAT-EikALIS.M 

RJ!NOVATIN<l TH.S HOUSE OF<ll.OBA.L.ICONOMIC <IOVUNA.N"CB FOR THJ!.liST Cli"TUII.Y 
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Table 3 G20 leaders summ1ts Pledges and commitments 

G20 Leadars 

Summits 

waShington, 

November 2008 

London, 

Aprl12009 

Pittsburgh. 

Septembar 2009 

Participants 

Pledges/Commitments 

• AdOPted 5 principles fOt reform fela~ to tran.spareney. ac<::ountabili'ty, aoo enhanced 

regulation of financial markets, products, and participants, InclUding credit rati~ agencies, 

with an actiOn plan for their implementatiOn 

• Pie-deed to ooordlnate reeulatory fefof'l"'"'s intematiOnalty 

• Committed to refof'l"'"' Bretton Woods Institutions to ref\ect changed economic weights in the 

WOfld economy, but oo specifiCS 

• Pledged to use expansionary macroeconomic policies. both fiscal and monetary. to stimulate 

aggregate demand and encourage economic growth 

• committed to refrain from pi'OteetiOI'Iist trade poliCies and to ·stffle • to reaeh agreement on 

the Doha Roood of WTO talks. 

• Reiterated commitments of 2008 

• Clcation of Financial SUibility Board (FSB) as sueccssor to Financial Stability Fon.m with all 

G20 eomtrle.s. FSF members. Spain and the European commission as FS8 members. set up 

to establish and enf«ce high global standards for financial regulation and monitoring 

• IMF: Pledge to increase funding for the IMF and MOO$ by$ 1.1 ttillion, incbUng a tripiW., of 

the IMF's lending e&pacrty by restOCking tl'le IMF with $500 billion and creating $250 billion of 

new Special Drawing Rigfrts. 

• W:lfld BaM.: support for increase in lending of at lcaM $100 billion and implementation ot 2008 reforms 

• Commitment to concJude an "ambitious· Ooha AounCI aoo to avoid proteetionlst measures 

• Agreed on a "Framework for Strong, Sustainable aoo S&tanceel Gtowth • to COOfCilnate 

and monitor national economic policies to correct the current gJobal imbalances and 

prevent future such imbolanocs, with some peer review and some IMF OYCrsqJlt of thi& 

macroeconomic pollc:ycoordin&Oon 

• SpecifiC plans to increase the representation of emerging-market countries at the IMf by 

increasine their qvot8 by five pereenta:ee points to 4'3% ot the total aoo siml&er initiatives at 

the World Bank 

• Commitment to crack down on fmancial institution excesses. inclKIIC raisi'C capital 

standards, Implementing intem.etion&l compensation stan<J.ards and t!tdopting tramewortc..s tor cross-bo«<er resolutions of failed institutions 

• Commitment to conclude the Doha Round by the end of 2010 

Washington: Argentina, Australia, Brazil. Canada, China. France'. Germany. India. Indonesia. Italy. 

Japan, Mexico, ttle Netherlanels2• Aep. of Kofee. Russia. Stlluefi Arabia, SOuth Atrlc3, Spaln2, 

Turkey, United Kingdom, United States 

EX-otrieiO partiCipants: European commission (President), Wofld Bank (PtesiCient). 5ecfet8ry 

Genetlll of the UN, IMF (Men&gl"£ Ofrector), Fhenclal StabilitY Forum (Chairman) 

London: AU washin(ton participants pl.ts Czech Republic3 and ex<lfftcio participants: Olair of 

New P&rtnef'SI'Iil) fOt Afrka'S DevelOpment (NEPAl>). Chair Of Association Of -SOutheast Asian 

Nations (ASEAN), wro (Director-General) 

Pittsburgh: All participants from london with Sweden3 representing the EU Council rath« than 

ttle Cle<:h Repul>lle 

* R~MtltifW EU C<M.Incll end themHI'vt$ 

Ptrmltc..<:~•~,..y pttw'IC!t * RcptoscntinC tho tu Cooocil 

~: G20wtl:l<•. www.a2().org 

14 1 THECERMAN MARSHALL fUND OF THE UNIUDSTATES 
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FOREI-42327 with DISTILLER


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4 THE IMF, WoRLD BANK, AND WTO: 

F ROM CRISIS TO R EFORM 

With ~ch successive wave of economic crisis to 

hit the world-from the Asian meltdowns In 1997 

to Russia~ ruble crisis in 1998 to the coiJapse of 

Argentina in 1999and 2000-there has b«n a 

subsequent torrent ofhand·wTinging, post-monem 

analysis .. and caJls for reforms to the architecture 

of global economic governance in order to speed 

recovery and prevent such Grises from reoccurring.. 

EquaJiycompeUing has b«n a waveoftragediesfrorn the tsunami in the Indian Octan to Hurricane 

Katrina in 2005 to the ez~duri1 g poverty throughout 

much of Africa- that howe tested the world's 

ability to respond, accompanied by calls for a 

better approach to development cont.-ined in 

many a lxstselling book or prominent commission 

reporl On the trade front, the WTO took center 

stage not long aftu its creation. when prottstors 

outnumbtred dt:ltgates at its Ministerial meeting 

in $tattle in t999,scttinga pre-cedent for civil 

disturban«s at mtetin~ oftht WTO, IMF, and 

World Bank evtr since. Overall. the clamoring 

for reform reached a crescendo with the Great 

R«-mion of2008-2009\ which has prOmpted a 

numbtr of pledges from poUtical ltaders to ltarn 

from the mistakes of the past and to reform the 

global economic archittcture to mttt tht challtnges 

of the 21st ctntury. 

The various calls for rtform have pin-pOinted 

probltms of relevance, tffectiveness, and legitimacy. 

Waning rtltvanu in the case of the IM F has been 

detected ;).5 a res·ult of the ascendance of private 

capital markets; at the World Sank, ;).5 a result 

of the rise of China and othtr new economic 

powers engaging in infrastructure development; 

and at the WTO as a result of the proliferation of 

regional trade agreements. Waning tff«-tiveneJs at 

the IMF is a daim directtd at the Fund's inability 

to tackle global imbalances and its "mission 

c-reep" into bailouts; at the Wotld Bank it has been 

idtntifitd in relation to the inabiUty substantially 

to improve poverty rates, particularl)' in Africa. or 

adequately address envlronmeJ1tal, humrut rights 

or corruption concerns, along with a perceived 

"mi$$ion aeep;" and at the WTO it has ari.sen from 

the inability to conclude the Doha Round despite 

the nine years that ha\·e lapsed since taJks began 

in November 200 I. Finally, waning legWnrncy has 

been diagnosed at both the IMF and the World 

Bank as a rt-suh of the lack of voting power or 

quota levels held by emerging and developing 

countries Md the per<:eption chat the institutions 

are controlled by a handful of wealthy countries 

that impose conditionality on others but not 

themseh·es; ott the WTO, it ari56 from a perceived 

lack of transparency in its operations combined 

with conc~rns that the consensus-only decision 

making process may be getting in way of reaching 

conclusions, and from a longstMding faiJurt to 

ensure that the benefits offr« trade are more 

evtnly distributed! 

' M\Kh WOtkon rd'Otm proposab had bftn done well bd'Ote 

thot G20 Summi1s. S«, (or C':U"'f'k. World Trade Orpniz;ttioon 

(2004), Tl1c F~tturtof tJ1t WT<;k Addrwittg l11srilutifmal 

C/ttAtitrt~ iif tilt New Milltmfium: Rqort<JfllttC<J1$1lttill'ickt 

&am t<J rAt l>ir«»r-C<nc.nrlSu.podlia Pa11r~p.tldj 

(the"'Suthtrland R~p<:>rn: and tM report (){the IMF's 

lndql<ndcnt uttlon Offl«. G~'"""""4ftht IM.F: A" E~lo~~till'kllf. 2008. In .ddition to the wort of s.ud! commis.sions. 

thotorc h;,.,-e b«n countless books and Mtidn written, fNI'I)' C)( 

whkh * ooccd in the bJbl!ogtapby at the tnd ofthisattidt. Kty amo~ thtn'l would bt IAiilff rMGf«NNl Dndc>pmtrll h'.tr, John 

\'If. Heud. 2008; RLfarming tl1t I MF for tftt :1 J st ~11tury, Ed.,.,in 

M. Tn11nan, 2006: R.edaJg"l lf$1/te hWid Tnrdt Olf:d"lwtf'()n 

for the 1ht C,,.t~try. Otbnl P. Stegtr (20JO):Studiu t/IMF 

GMvnln:IKt. Ruben Lamcbny and Leomrdo IJi;n Martinon 

(2009): Tilt IMF 1J11d Its Crlttc4. (ZOI)I) and TM U~ &tttk 

$tfU(IW,Y dJWl /'cJIJdn ( 2000) (hv;cj Yin« and Ch.thtopbtt 

('.ilbert; ~Refo ming the \•lorld lb.nk." Je-ssica Einhorn, 

}i:)rt-~lt AffaiN, fJ.n./F'tb. 2006. Vol. SS, bs..ae I, •nd TJ~e IMF, 

hbrid &Mk ~t11d A>lity R.tfim", AJbn'to Pa.Jorn al'ld Mau.tiriO Z:uwdi, Rwtkdgt Studift in Ot,~klpment Econ.otnies-. 2006.. 

(n acJditlon. • number of &roUP" have 1>ct:n fomKd ck\'QCC'd 

to rdorm of tht.st JNtitu.tJons. lndudtns Tht Bretton Woods Proj«l (wwYdntiOnwoodsproj«t..ora), New Rules for Glob.l 

Finance Co.alitiewl <-w.ncw•rufet..ora) orod The Fourth Pill.u 

(www.fou.ttbpllllt.ot'J). 

SAVING MULTILATERALI$..M 115 R&NOVATIN(l THi HOU$1i Oli <iLOlJ.A~ ECONOMIC OOVE.R.NANCB FOR THii liST CENTVli.Y 

The various calls 

for reform have 

focused on a 

perceived lack 

of relevance, 

effectiveness, and 

legitimacy at the 

IMF, theWortd 

Bank, and the 

WTO. 
96 

FOREI-42327 with DISTILLER


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It is in the fa« of these c.haUenges that G20 

ltaders have called for relorms to the international 

financial ins-titutions. Thm rtforrns will primarily 

focus on chang« to their mandate$. scope. and 

gQ\'ernan ~ to reRect the increas.in.g complexity in 

the wortd and ehangt:s in the tc:Onomic wt:ight of 

tht various pla)'trs. In addition, tht rtforms wiiJ 

also involvt g.rtattr coordination and c.ohtrtnce 

among tht- thrtt economic. institutions., along with 

the newty C'J'tated Financial Stability Board. 

Implicit in various calls for reform is a 

reaffirmation of support by the G20 leaders for 

a multilateral approach to economic. problems 

and for increased relia_nce on the multilateral 

KOnomic ins.titutions to help solve them. Such 

increasts will n«tSSarily also im·olve finding a way 

to ·multilattraliR'" many of the txisting rtgional 

agretmtnlS that cut into the scopt of the work 

of these institutions. EquaiJ y implicit in the G20 

ltadtrs' stattmtnts is support for the ongoing work 

of these existing institutions of global economic 

gO'o·emance. 

In the wake of the Second World War, it was AmeriCa that largely built a system of 

international institutions that carried us through the Cold War. Leaders like Harry 

Truman and George Marshall knew that Instead of constraining our power, these 

institutions magnified it. 

Today ;t ~ become fashionable to disparage the United Nations, the World Bank, and 

other international organizations. In fac~ reform of these bodies is urgently needed 

if they are to keep pace whh the fast-moving threats we face. Such real reform will 

not come, however, by dismissing the value of these institutions, or l)y bullying other 

countries to ratify changes we have drafted in isolation. Real reform will come because 

we corrvince others that they too have a stake in change- that such reforms will make 

their world, and not just ours, more secure. 

ThenpresiOOnrial candidbt9 Barack OMma 

The Chicago Council on GJobal Affairs 

April 23, 2007 

16 1 T'II B GI»>AN MARSHALL fvND OP Till VNIT1-DSTATII$ 
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FOREI-42327 with DISTILLER


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5 GUARDIAN OF GLOBAL FINANCE: 

THE I NTERNATIONAL MONETARY FuND 

Min ion 

The principal internatio nal institution im·ol"ed 

in financial stability and fln.anu matters is lht 

International Mo neta ry Fund. The Fund has 

evolved considerably (rom its origjnaJ role, which 

focuStd on managtmtnt of the par value system 

of Rxtd exchange rates. When the United States 

d lmlnated adherence to the gokl standard and 

the syttem of pegged e.xch11.nge rates in 1971. 

countries were ltft fr« to choose their exchange 

rate rflim« and the lMF's charter was radically 

amendfd. pu$hiog it to focus h~on em~r 

countrin with ptrsistent baJanc~f·payment 

probltms and on ruponding to crists that thrntm 

the international monetary systan as a whole. The 

Fund'< S<Op< was also fundammlally alttttd by 

the tmtrg<ncf' of ntwty indtptndent nxiOlu in 

Afrlao onclds<whtre beginning in the late 1950s. 

followtd by anoch<r wave of new <nll>nl$ after 

the end o( lhe Cold w.r. bod> of whicb requirtd a 

<hans< in fu>&J>Cins one! pollcy advict to "'f''''rt 

powth-orimltd suUCl\Ual nforms oncl<nnoilions 

from cmually·plannod to matttl economiC<. 

Th< IMf aarrmllyocarries""' i<s mission 

lhrooosJ! • -of fu>&J>Cins (lypically 

don< lhrough $land· by arrangunen<sor spedal 

loam), sun-eUlanu of countries' «<fllfnic and 

flnandal policie$, <echnical OS>islana, and policy 

tndorJemmts. 

Governance 

Bolh <helM Fond the World Bonk hove a Board 

of Governors made up of a reprt$entatin of 

all 186t;ountries which meets twice a year. 

ThelMF's Board of Coverno11 Is advistd by 

two mini5terial committees, the International 

Mo ~ary and Financial Committ« (JMFC), 

and the Development Committee. While some 

spedfic powers reside with the Board. the real 

man~ge nt of the IMF is done by its Exec-utive 

b rd of24 members. five of whorn are app>inted 

(the United States, Japan, Cftmany, Franoe, and 

the United Klngdom), thrtt of whom an eltctt<l 

by a 5ingle ~;o ntry (China, Russla, and S.udl 

Arabia), and 16 or whom art elected co represent 

a group of countries, along with cht mana.glng 

director of the IMF, whoscnesas the chalrmnn 

of the Executive Board.10 0ver and above the 

appOintees of Germany, France. and the Unl1ed 

Klngdom, the remaining members of the European 

Union are all represented on the £xec;u1ive Board 

in one of seven dJfferent country groupings. Each 

manber of the £.xecutive Board controls • share 

ofthelotal vo<eallhe iMf, dep<ndlnaon <hulu 

and &n·el of puticipation of thou countritt in his 

or bf'T' group. The Unjtrd Staus has the larpst 

olnJie vo<ing sllan wilh t6.n ptrcent, followtd 

by Japan (6.02 pn<ent), Germany (5.88 ptrc<nl), 

Fnn« (US p<r«nt), one! the Vnlltd Klna<k>m 

(US ptr<enl). Whik many decisions It the 

Extculiw Bootd "" moc1e on lhc bosls of mojori<y 

rule, <orne key declslons r<qllir< a SUptr·majority 

vote o( 8S pettm~ which ,;ws the Vnlttd Slot ... 

wilh ilS t6.n p<rctnt s~~ .... the obil~y 10 block 

sud! decisions. If the lhtec lf'l"''nled Ewoptan 

rtp«Strrlaaive< VOitel fOS<lhtr. they 100 would 

hlvt .-olhan IS ptran< of lhe vote one! would 

hl''t,like the Vruttd Slota, ..-gh powor <o 

'"vm"ony ICtion !hit requirtd 1 sup<rmajori<y 

\'Otrof85 pe:rcmL WhHtthe IMF'Jquotaihlr~t~ 

art automatiealty updat«l. thdt upd.&tts have 

not resultrd tn a $ubstuuial s.htft i.n powtr IWIY 

from croerrtprtsent«l Europe: CO undtrreprtstnttd 

~merging market ecooOO'Iits. 

With resp«t to rta:nt go-.·ernanee reform efTorts 11 

the Fund, Managing Director Dominique StrauSJ:o 

Kahn CTtat«la "four pillar,. approach to rtform, 

calling for a report from the lMF's lndependenl 

Evaluation Office, from an Internal WorkJng Croup 

•o Jnducllna dw ~lncdirtccor lhtr. u. eu.r!'fnUy 10 EllrQPft.N (40 ptr«nl ohlw IOUI) wrYIIll on cht IMF'i 

Eucwti~ Boti4. 

SAVINO MULTILATII.Al.IUt 117 R.iXOVAT11'0(; TH_£ HOUSiOf (;I.Q4Al. iCON'OWIC OOVUHAHC:I f!OA THI11IT CINTUU 
98 

FOREI-42327 with DISTILLER


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DiSsatisfaction 

wfth Fund 

governance well 

pre4ates the 

crisis, reflecting a 

sense of declining 

relevance (given 

ascendant private 

capital markets), 

effectiveness 

(demonstrated tJy 

the Fund's inability 

to tackle global 

imbalances), 

and legitimacy 

(wQh institutional 

structures 

described as 

outmoded and 

feudalistic). 

on IMF Corporate Go\·trnart«, from civil soci~ry 

organizations. and lastly from the \.:OmJnittte on 

IMF C<>vernance Reform headed by South African 

Finance Minister Trevor Manuel As the Fund's 

in ter-nal report noted, ·d issatisfaction with Fund 

goycrnance wdl pre-dates the crisis;' reflecting a 

sense of waiting relevance (given ascendant private 

capital markets), effect:ivenrss (demonstrated by the 

Fund's inability to tacl<.le global imbalances), and 

legithnacy (with institutjonaJ structures describtd 

as .. outmoded and feudaUstic").11 

In attempting to address at least the concerns about 

relevance and legitimacy, the Manuel Committtt 

was established iJ1 September 2008 Md issued its 

report on March 25, 2009, in advance of the spring 

meetjng of the IMF. The Commiuee"s report called 

for: 

T1le creation of a high-level minis-terial council 

(IMF Council) to foster political e~ gageme11t 

in strattgic and critical dtdsions.: 

An acceleration of the quota and voice reform 

begun in 2009 by shifting to a 70 to 75 percent 

majority for decisions, which would ha\•e the 

effect of rtmoving the U.S. veto power while 

gi\ing low income countries the ability to band 

together to \'eto activities they do not like; 

A broader mandate for surveiUan« to include 

macroe<oJ,omic policies, prudential i.ssues. and 

financial spillovers; 

CJtartr Unes of responsibility and 

accountability atnong various decision-making 

ez~t ies in the Fund with more authority 

for member·speci6c surveillance gi\'en 

to management and greater strntegic and 

s-upervisory roles for the Executive Board; and 

'' lntnn:llk:nl.l Montcary J:unct. ·1MF GoVC'rnanu-Summuy 

oll$$\ln and Rdorm Optlom~ SlHkJY Pollqo, and Rcvle'lo• Oq:lartmtnt and 1~ Ltp.l Drpattl'l'ltnt,IW. 1,1009, 

The introduction of an optn, t.ran.sparent, and 

iodepeodenH:lf-nauomtHty selection proc.ess 

for the Ma..naging Director. thereby eliminating 

the unwritten rule that the Managing Director 

must be a European. 

for its part. the Independent .Evaluation Office 

report, Governana qf the IMF. recommended: 

Clarification and alteration of the roles and 

respomibilities within the IMF g<Wernance 

structure to minimiu overlaps and close gO'ps; 

Active ;tJ\d systematic ministerial-level 

involvement in setting strategic go..'\ls and 

ovel'$«ing performance; 

Reorientation ofthe Board away from 

exec:utive functions to a supervisory role 

focused on formulating strategy, monitoring 

policy implementation. and exercising 

executive oversight; and 

Establishment of a framework to hold 

management accountable for its perfonnance. 

Civil society organizations, for their part, 

emphasized through their "fourth pillar" process a 

greattr need for transparency and communication, 

particularly with the executive directors, along with 

strong calls for changes to the distribution of \'Oting 

power and quotas and i.ncreased aeeountabi.Hty 

for the executjve board. They also insisted that 

the selection of the managing director and the 

deputies shoukl be conducted via a merit-based, 

transparent process without any restrictions as to 

the nationaUty of the candidates. 

Mandate 

With respect to the mandate o{ the IMF, the 

current economic crisis has pointed to the need for 

a number of substantial changn to the mandate 

of the IMF. These include the establishment of a 

18 I 1'1-H! G i lMAN MAASH.ALL flti'ID Of! 1'Ht VNIT'.BO STAT'£$ 
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FOREI-42327 with DISTILLER


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sound early warning sys.tem for macroeconomic 

and financial risks, broader surveiUan<e of aU 

members' macro«onomic policies (including the 

United States and European Union member states), 

tougher oversight of exchange r~te imbalances. 

and broad-based support for growth in developing 

countries by helping finance counter-cydicaJ 

spending, bank recapitalization, infrastructure, 

trade finance, balance of payments support. debt 

rollover, and social support. 

SAVIN<I Mu&.TILA'f!lkALIS.M 

RJ!NOYATIN<I THB HOUSE OF<ILOBA.I.. lCO~OMIC <IOV£1U•'ANCB FOR THJ!.liST C!I'ITU'fi.Y 
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FOREI-42327 with DISTILLER


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Europe has 

long favored 

a World Bank 

focused almost 

exclusively on 

poverty alleviation, 

while the U.S. 

wants additional 

emphasiS placed 

on private sector 

engagement and 

development. 

6 FROM RECONSTRUCTION TO DEVELOPMENT: 

THE WORLD BANK 

Mlulon 

Among the multilateral institutions., the task 

of promoting global dtvtlopmtnl and povtrty 

a lleviation primarily falls to the World Bank. The 

World Bank has t"volv«i from its inctption as 

an institution with 44 membtr countries and a 

focus 011 postwar reconstruction to a development 

services organi-zation with more than 10,000 

employw and an administrative budget of $1.6 

bilJjon. Last ye~r. its loan commitments totaled 

$46.9 billion. Over the years. its core focus has 

shifted from growth through trade and investment 

in partnership with middle-income countries to 

an organization set on alleviating pOverty and 

promoting devtJopment in poor countries. 

In the main, the United States and Europe have 

had shar«l goals for and commitment to the work 

of the World Bank Group. Howevtr, historicaUy 

there ha,·e been some difference$ in approach. At 

its inception. the United States saw the Bank as 

responsible for building a strong middle·class and 

oveTall economic prosperity in middle· income 

countrie.s., in part to provide markets for U.S. 

exports. As the Bank moved (rom reconstruction 

to a focus on dt'\·elopmmt. the United Statts 

has typically favored a 1nlssion that continues to 

pbce strong emphasis on the pursuit of eoonomjc 

growth and productive investment that leans 

heavily on the private sector. Europe was inHiaUy 

on the receiving end of the Bank's reconstruction 

efforts. until much of that work was taken over 

by the Mars.hall Plan. Once fully recO\'ered. 

Europe began to push for the Bank to work almost 

exdusiveJy with the poortst countries and the 

poores-t (X)Ckets of the middle.i.noome countrles. 

and the Europeans remain strong proponents 

of this primary focus on poverty alleviation. 

Governance 

The governance structure of the World Bank largely 

mirror$ the structure of the IMF, with a Board of 

Go,•ernors that meets twice a year and the real 

management of the Bank done by its ExecuHve 

Boards. which are also composed of 24 directors 

who are appointed or elected by the same member 

countries or groups of countries as the IMF along 

with the president of the Bank. who serve$ as its 

chairman.11 The voting weight of ea~h country 

ls made up of both basicvott$(whoseva1ue has 

eroded over time) and votes that are dependent on 

a country's shareholding in the Bank. Unlike at the 

JMF, which has automatic quo-ta rtviews every five 

years,. shartholding adjustments art made through 

periodic-and generally very political-processes.. 

With 16.4 per«nt, the United Statts has by far 

the largest voting weight at the Executjve Board 

of the International Bank for Reconstruction and 

Development followed by Japan (7.37 percent), 

Germany (4.49 percent), France (4.31 percent), 

and the United IGngdom (4.3 1 per«nt). Thm 

t'ive oountrits have the right to apJX>int their own 

representati\'es to all four Exe~utive Boards. Three 

other countries elect a single representative to 

each of the Executive Boards (China. Russia and 

Saudi Arabia), while the remaining l6 directors 

are elected to represent a youp of countries. As 

with the IMF, all of the other members of the 

European Union participate as part of a group of 

countries represented by one of seven other elected 

representath·es OJ\ the Exe~utive Board. 

Decisions at the Bank art- made by simple maj«ity 

\'Ote for ordinary decisions and by suptrmajority 

(85 percent) for one type of decision-amendments 

to the Article of Agreement As at the IMf. be~ause 

11T«hnk:llly l lw Wodd S.nkCroup !\a$ lour board$ (IBJU). 

IOA.Ii!C. and MIG.A) of ~ntuti\~t dirMOrs with ~ghtly 

difftrmt YOtins pt'f'Clm-1azocs (or och, bul as a practkal mater. 

Ow $ai\1C lDdivWlltl typl«olty MI'Vt$ ts the cX«'\1111\-e dll't('Or on 

aU four. 

20 ) THa GU.MAN MAI\SHAU. fVN'O OP T:H£ UNIT1!1>STA'f£.$ 
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FOREI-42327 with DISTILLER


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.. .. ' : ' ' " World Bank Group Est. Areas of specialization Cumulattve Lending/ Fiscal 2009 Lending! 

commitments commltments 

(billions) (billions) 

International Bank 1944 Focuses on lending to public $479 $32.9 for 126 new 

for Reconstruction seotor entities in poor to (etreetive FY 2005, operations in 42 

and Development middle income countries. includes guarantees) countries 

International 1960 IDA lencJs to world's poorest $207 $14 tor 176 new 

Development countr1es. Pl'ovldes Interest- (effective FY 2005, operations In 63 

Association froo loans and grants to includes guarantees) counuies 

pUblic sector to bOOSt growth 

and reduce inequality. Major 

source of finan<:int for 

infrastructure. 

International 1956 Finances pnvate sector $34.4 (plus $8 in $10.5 committed 

Finance investment. mobiliZing capital syndicated lOans) and $4 mObiliZed for 

Corporation in financial markets, and 44 7 projects in 103 

prcwiding adviSOlY services countries 

to businesses. IFC invests In 

enterprises majority-owned 

by the private sector. Alms 

to address const.raints to 

private sector investment in 

infrastructure, hearth. and 

education. 

Multilateral 1988 Promotes FOI into developing $20.9 $1.4 In guarantees 

lrwestment countries by prOYiding political (includes amounts issued for 26 pr~ects 

Guarantee fisk insurance (guarantees) lewraged through 

A2ency to the pt"ivate sector. Insures the CooperatiVe 

investment against losses Underwriting Program) 

related to ex.propriation. 

currency transfer restrictions. 

civil disturbance/war, breach 

of conttact, non-honoring 

of sovereign financial 

obllgatlons. 

International 1966 Autonomous international 292 c:ases retlstered 24 cases re&istered 

Centre for institution aims to prc:wide In 2009 

Settlement of facilities for c:onclliatkwl and 

Investment art:Mtration of International 

Disputes lrwestment disputes. 

Tho term "'World Bonll" ~ fC'fors only to tho 19RD onciiOA. The Wor1c1 Bot* Gtoup 11$0 ~50$ the If¢, MIGA. and IC:SID. 

S«no: Wotfcl Bank AnnUlll flePGtt 2009. 

SAYING MutTILATUALISM 

R.E.tiOVATiti<l THI! HOUSE OF GLOBAL tCONO.MIC G()VtRNANCil FO R THE 21ST CENTURY 
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FOREI-42327 with DISTILLER


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In October 2008, 

World Bank 

President Zoe/lick 

established a highlevel rommission 

to focus on the 

modernization of 

World Bank Group 

governance so the World Bank 

Group can operate 

more dynamically, 

effectively, 

effiCiently, and 

legitimately in 

a transformed 

global poWcal 

economy. 

the United States controls more than 1 S percent 

of the vote, It alone has an effective Mveto" power 

to block any such changes to the Article. and a 

mythology has ballooned around the perceived 

reach of this veto power. 

Many proposals for governance reform at the World 

Bank have b«n made over the yea~ primarily 

a imed at addressing the various imbalances that 

result from the appointed scats held by the "'big 

three" European cou.ntries, or from the U.S. "veto" 

power. Most recently, in October 2008, World Bank 

President Robert ZoelJick established a high-level 

commission .• headtd by former MexiC<\1\ Pre-sident 

Erllt'Sto Zedillo. to Olfocus 01~ the modernization of 

World Bank Group governance so the Workl Sank 

Group can operate more dynamically, effecti\·tly, 

efficiently. and legitimately in ;a transformed. global 

political economy." 

At the outset. the Com1nlssion on Moder-nization 

of World llank Group Govern an c. nottd 

signiJicant weaknesses in three key areas of the 

Bank's dedsloJ' making and governance processes: 

strategy formulation. voice and par1icip41tion, and 

aC(()UntabiUty. 

On strategy formulation, the Commission found 

that the Bank lacks an effecth•e means to formulate 

a clear strategy that can be used to set priorities. 

balance lradeoffs. and align operations and 

resources with strategic goals.ln part, this is due to 

the advisory nature of the Development CommiHee 

and the insufficient time available to-and seniority 

among-the membtrs of the Bank's current 

Executive Board. 

On voiu aJtd partkiJMtion. the Commission noted 

that the decision-making process is widely sten 

as too exdusive and that a numbtr of conventions 

and practices create the )X"rctption that the Bank 

is accountable and responsh•e to at be$1 only a 

handful ofsha.rtholders. Contributing to thls 

perception is the significant gap between the voting 

shares of deve-loping versus dt'o·eloped countries, 

an aUocation of voting power and special majority 

rules that gives rise to the "'U.S. veto .. and the 

considerable overrepresentation of European 

countrits on the Bank's Executh·e Boards. 

On accountability, the Commission cited in 

particular the ambiguous relationship between the 

Board and management, the conflict of interest 

from the president of the Bank also serving 

as the chairman of the F.xecutive Boards, the 

difficulty in hokling the prtsidtnt accountable 

for performanee, and the non-transparent 

process for the selection of the ptes.idt~\t, with its 

unwritten convention that the president of the 

Bank mu.st be a U.S. citizen Oust as the managing 

director of the lMF must be a Europe;an). 

The Zedillo Commission issued. its report 

in October 2009, which included five 

recommendations that the Commission noted nttd 

to be adopted and implemented as a single package: 

Enhancing voice and pa.rticipatiotr by 

consolidating tht board to 20 chairs from the 

c.wrent 24, composing the board entirely of 

elected chairs that reprtsent multi-country 

constituencies. and diminat.ing the link 

between the IMf quotas ot;nd the World Bank 

voting powers; 

Restructuring the World Bank) gove-rning bodlu 

by elevating the Board to ministerial level with 

responsibility (or overall .strategy and direct.iol'l, 

major policy decisions. oversight ;and selec;tion 

of the President, delegating to management the 

apprO\'al of financ.ing operations and crtating 

an advisory council of representatives; 

Refqrming the leadership selectiqn proau by 

creating a rules-based, inclusive, competitive 

process for selecting the President that does 

22 ) 1'Ha GtllMAN MAIUHAU. fVN'D OP TH£ UNIT1!1)$1'A'f£$ 
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FOREI-42327 with DISTILLER


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•way with th~ curr~nt un·written rule that 

raer"es th~ Bank pr«idency to a U.S. dtize:n; 

Strtttgthening managtmtnt a«t>untabflityby 

r~at ng a per(ormanc~ rtview prouss (or 

the Bank pr~sident, increasing use of external 

evaluations and inc:rtaSing review$ of those 

providing safety nets for the poor<St; and 

Strtngthtn lht Bank$ rtsourct bas~ through 

lncrfOlSCS to its capital ba$e. 

Mondote 

With r .. p«t to the mandate of the World Bank. 

tfgnificant ch~ lw alrtady occurred. Ho~r. 

as the: many calb for rtform ind.ica ~. much r~maim 

to bt don~. With four brancht$ in addition to th~ 

oriJinollnt<mationa18ank for R«<>n>tru<tion and 

O.V.Iopmtnt and the atablishmoot of regional 

<l<wlopmmt banks, the World Bank basiDO\-.d far 

b<yond Its Initio! role of lending 10 public-S«tor 

C"nlitle:s (oc reconsc:naction. M\Kh of the: \\Wid 

Bank's CWT<nt suppon is provid<d thi"'UsJI equity 

lnv<Stments. finan<bl setvioes, and political risk 

insuranu. in addition 10 traditional knding and 

projKt fin.a.ncing. 

In tocby\ world. k Is clear that more needs 10 

he done to broaden and deepen the role of the 

Bank.. particularly ln its relationship$ ""ith non. 

stJte actors. bt they priYate business. NGOs. or 

bilat~ral aid donors. as central (;()Olponents of its 

devdopment strattgy and to ensure that it i.s not 

trying to be oil things to aU people. Gld>olleaders 

and tcholars alike have nottd that the path to 

economic ea:w~ y is on~ that will b~ primarily 

paved by the private sector, be it small and large 

businesstS. entrepreneurs. microlinan<t lending 

groups., or rlsk·taktrs and finanders from around 

theworkl. 

Privat~ sertor growth has~ the t:nglne that 

allowed hundred$ of millions of people to lift 

thems-elves out of j>O\'erty in China a.nd India In 

recent decades. from Dambisa Moyo~ notion, 

in Dead Aid, that development a.ssistance to 

governments is •easy money" that furthers poor 

gove:rnance and adds to tht poverty of Africa rather 

than helping it. toR. Glenn Hubbard 111d William 

Ougsan's call. in The Aid Trup, for a new Marshall 

Plan of ltnding dlrecdy to private enterptlm h1 

the world's poorest nations. to the inclusJon of a. 

glotxll partnership for dtvtk>pmtnt with the private 

S«tor as part of the Mill~nlum IW/eklpmtnt 

Goals. thu~ are VOWina calb for mort rtsOUrca 

10 be directly granted to privale and loco! business 

in order co both cuJtivatC' 1 middlt cb.sa and to 

place: market inc:tntiva and disdphnts on more-

<a>nomk activity. tn addition. th< Bank n«<b to 

adjust its approach to odclmstbe consid<nbl< 

compttition it now faces tn tM dtvdopmtnt 

of infrastructur~ from countries. patticulatty 

OUna. who an wlllins to lnvnt dlrectly In brst· scale projects >rit'-t many of lht pollcy strings 

("eonditionoldy") normally attoc:h<d by th< Bank 

to those: activities. lt also nft'ds tO tnJUff' th.at 

lht Bank is playina as big o role as poa~ble in th< 

<lfort to ensurolhat dev<lopmmt and sustainable 

eoooornl< activity go hand In hand. MortO\'tr, 

the G20 has confemd on the Banko leading role 

in responding to probl<ms requiring "globally 

coordinated action. such as dimatt thana« and: 

food securit(.'l) 

U PiUibu.rJh Sumll'lil, ~i S.tYMnt. Sqlttmbtt 24·25, ,..,,,.....,.,.,,,, 

SAVlHO MULTILAlliUI.I»-1 123 Rf}(OVATI:OO(i THI HCMJU OP G.LOIA.t.ICOHOWIC (;OVIII.HA.JrfC'I POl THil UT CINTUJ.'t 
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7 NEGOTIATING THE RuLES: THE WoRLD TRADE 

ORGANIZATION 

Mloalon 

AJ with theiMF and the World Bank, the principal 

....,rung in>tiwtlon of the sJoba!lrodlna 

I)'Jtt:m-first the: Genmal Asr«mmt on Tariffs 

and Trade, thm It& SuCC<$$01', the World Trade 

Organiu.tion-hu underpe major chanaes since 

It was lint OOO>«<vcdiJlthe 1940o. ~the 

follure of the United Scat<S 10 ratify the Hanna 

Chllrter thJt would have: crttted the International 

Trode OrpniJ;ation, a snu.llt.-J""'P o( 2J oountries 

joined tog<tiMr in ....... ....,_..t 10 provide 

redprocal tartff rfductions a.nd to agree to certain 

codes govn-nlns thdr tradlng relationships. The 

GA17 provided the forum in wiUcl> eiibt rounds 

of moltilaunl track~-. oompi....S. 

substlntially lowering tariffs on Industrial goods 

among Industrial oountrieo (althoush not yet 

IJl ,.naaitutal products Ot the labor-Intensive 

manufactured plOds ol expcn w.r ... 10 many 

developing countri.,). Through its system of tariff 

binding>. transparency, and ldherence 10 rulap<dally the priDCipleol DOallisaiminatl 

expressed In the m"'tfrM>nd llaliOfl (MFN) and 

nationtJI trMimtnl provisions-the GATT also 

provided an underpinning o( imtiwtionolsrability 

and pmlictsblllty in intm>ltlonal track that ...-..d 

as. suarantor asajnst the thrut of 19J(io.styie 

proteetloni$m throughout the stcood half of the 

20thcmtury. 

With the incrtulnc complexity of global commtrec 

came the recognltJon among GATT members of the 

need 

~ 

for an orpnJ.tation that could provide more 

reauJationollntematlonol trod<. 

The ITO as it was oriSinllly tnvlsioned would h..., 

held • wide remit beyond tradeln good&, with the 

ability 10 nego<late rules governing labor lttndarcls, 

oommodity..,_....ts, T<tUictlve businesa 

practices, inttmational inn.stment. and trede 

in ttrvic.es. With the conclusion of the Uruguay 

Roond n<gotiotloo$, the GA17 mtmbenhip 

ogrted to the launch, in 199$, ol o ful~flcdaed 

lnttmatlonal orpnlution, th• World Ttade 

Orgamzauon. whteh now has a membenhtp of 1 ~3 

oountria. AJ with the original ITO, the WTO ls 

CODW1Ied with disdplin .. on track bt)'ODd just 

goods. a.nd cover$ trade in agriculture and tuvfces 

as well u rules on lnttUcctual property, sub.sldfe:.s. 

invt$1rntn~ and trade t'ocilit2tlon. The WTO aJao 

boasb a binding diopute S<tll<rntnt mecl>anism. 

Govemtnce 

Unlib the Bank and the Fund. the wro c1o.s 

not have & formal pt:rnance strUCiure with a 

governJns or executive board. Instead. the WTO ts 

a membtr-driven institution, ru.n by its membt:rs 

with • rcbdvely small-.. that ""'very 

limjted powtr to~. much lea toimpou. 

tolutions to problems. It Ls organJud through a 

stries ol COW!CiJJ-primarily the Gtntra; Council. 

the Dbputc S<ttlemtnt Body, and tht Ttadt F1:>1icy 

Review Body, along with the Coundllbt Trade tn 

GoodJ, the Council for Trade in Services, and the 

Council forTrade-Rdattd Aspteuollntdloe~uol 

Propmy Rlght&-whlch art cholred by a Genova 

repraenlative of a WTO mernbtr country wt1h 

an annual rotation of the chairs. In addition, there 

art Dum<rOUS oommlt._ and -ldnc panltt 

on particular issues that art open to oil memben. 

Whil• theagr••mtnt estabU.hlng the WTO stt 

forth a numbtr of proc:«lures by which votes could 

be talc<n on C<rtain '-in practico the WTO has 

ClOn.tinutd to openrt on a constnsw buis. 

Cries for rtform of the WTO began fn u rnest 

&&wins the huge proe .... and Wlw.to 

mch agrttmenttl the WTO's infamous 1999 

Ministerial Conference In Seattle, Washington. 

Foot )'tal1lartr, shortly btfortanothtr It~~- than. 

.........ruJ MinlsuriaJ eoor--in Cana!n. 

the then-Oirmor ~ntral ol the WTO, S..paeha; 

Panitcllpa.kdi. estabUshed a consultative ~rd co 

toddt.., tht future ol the WTO and the institutlonal 

cba1Jens<s it fa<td. Thar IJ'OUP,Ied by lorm.,. WTO 

24 I TMJ Gta.w"" MAUHAU. FwD o• T'HI VNm.o Stuu 
105 

FOREI-42327 with DISTILLER


JHillpage25.eps

Director Gencral Pder Sutherland, issued its report 

in December 2005. on the tenth anniv-ersary of the 

creation of WTO. 

Among other things, the Sutherland Report 

focused on the consensus·based decision· making 

process. It recommended. that more onus be placed. 

on any membfl' blocking a measure dut otherwise 

enjoys strong consensus. and that the \\/'TO re· 

examine the principle of plurilateral approachts 

to ntpiations and the possibility of approving 

decisi<:ms by a critical mass of members. Also 

recommended were regular annual ministerial 

meetings. a WTO Summit of world l~ders every 

five years, and the establishment of a consultative 

body for senior officials that wou.ld meet on a 

quarterly basis.. It urged the development of a set of 

objectives for the WTO's relations with civil society 

and the public at large. The report also expressed 

deep concerns about the spread of regional 

preferential trtJdt tJgrttmtnts and called for such 

agreements to be subject to meaningful review and 

effec-tive disciplines at the WTO. 

Two years later, Warwick University in the United 

Kingdom established its first Warwick Commission 

with a broad mandate to examine the pernance 

of the multilateral trading system in light of 

growing challenges. The Commisslon looked at 

ways to counter growing oppositio 1~ to further 

trade liberalization in industrialized countries and 

to ensure that the end of the dual domination of 

the trade regime by the United States and Europe 

does not give way to long. term s.talentate or 

disengagement. It sought ways to forg~ a broad· 

based agreement aboot the WTO's obJectives and 

functions and to ensure that the WTO's many 

agreements result in benefits for its w~akest 

members. FinaUy, as with the Sutherland Report, 

it looked at w.t.)'$ to ensure that the proliferation 

of regional preferential trade agreements 

dot'S not undermine the WTO principles 

of nondiscrimination and transparency in 

international commerce. Among other things, the 

Warwick Commission recommended a critiCJJI mass 

approach to decision-making and urged that the 

industrialized countries refrain from negotiating 

preferentjal agrtements with each other as well as 

the deYelopment of WTO disciplines and review 

mKhanisms for such agreements.. At its most recent 

Ministerial Conference in 'I.Xcember 2009. in the 

face of the continued inability to conclude the Doha 

Development Round of trade talks. more than 20 

countries endorsed a proposal to establish a process 

to rtview the WTO$ "'functioning, efficiency, and 

transparency, and consider possible improvements* 

in light of the ·rapid change in the global economic 

environment'" and the need for the WTO to be 

•agile and res:ponsive.'" To date. none of these caUs 

for reform have resulted in any changes in the 

WTOS governance structure. 

M andate 

The WTO is still wrestling with the new mandate 

it was given in the transition from the GATT 

to an institution with a scope that was closer 

to that of the original ITO. Already a chorus of 

voices-including that of the European Union-is 

calling for a still-further broadening of the WTO's 

mandate~ with some attributing the failure to 

conclude the Doha Round in part on its narrow 

agenda of "ytsterday"s issues .. -namely, market 

access in agriculture, in goods. and in services.14 

Other WTO members like Bratil and South A(riea 

are more resistant. refusing to move on to new 

issues until developed country members make 

good on a promise that was made at the eod or 

u Stt for tnmple, Aadi{)'l ~tattoo and A.Mnd Subntnanial\. 

•FrQI'n Doha to tht Nut BM'M \~.A Nnt MultilattnJ 

Tradr Agn'Wia; Fofttgn A/fain. Jan.IFtb. 2009. (1001tndfrc that 

• rww rogncf oJ tlu is ne'fdtd to dewk>p • more unbiliollf agt'I\Cb than [)roha.lnvo!Ving a btoa<k:r ~~ <JitnnltutiON than 

jusl the \\'TO and foc\ISingon • wicltr arnyol Wut$.lncludlns food s«urity (n:pott bans on agrieu.luare, bioftKis poli<ks. et<), 

cat1ds, tnh'JY tr~de, exchange rues,. reg\IIAtlon or sovere.,_ 

wWthr~Wditnatt-~

SAVIN<l Mu a.TtLA'f!lkALIS.M 125 RJ!NOVATIN<l THB HOU$1 OF<ll.OBA.L.lCONOMIC <IOVI!JU~A.N"C I! FOR THJ!.liST Cl l'nUII.Y 

Already a chorus 

of voicesincluding that 

of the European 

Union-is calling 

for a still·further 

broadening of the 

WTO's mandate, 

with some attributing the 

failure to conclude 

the Doha Round 

in part on its 

narrow agenda 

of "yesterday:<; 

issues· - namely, 

market access 

In agriculture, 

in goods, and In 

services. 
106 

FOREI-42327 with DISTILLER


JHillpage26.eps

the Umguay Round- th;u. after a half· century 

of resistance. liberalization would be extended to 

trnde ht farm products and i1\ light ma.nufa.cturts 

of export interest to developing countries. This 

long-running standoff is at the hea.rt of the prestnt 

de.-.dlock in the Doha Round. 

Howev~r thest issues find resolution. it is clear that 

if the WTO is to remain relevant it will need to be 

engaged in the trade issues,. broadly defined. of the 

twenty-first century. These include competition 

policy, investment policy, energy policy, food 

security, global health services. ttc:hltology, 

environmental goods and servicts, and a host 

of additional issues that are both contentious 

and at the core of business concerns-including 

corruption, corporate sociaJ responsibility, 

exchange rates, hnmigrntion, and c~r security. 
107 

FOREI-42327 with DISTILLER


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8 RENOVATING THE HousE OF GLOBAL 

ECONOMIC GOVERNANCE FOR THE 

21ST CENTURY 

A numbtr of obvious commonalilies and themts 

stMd out from these vanous caLLs for reform of the 

Bretton \\XKKls architecture: 

All reoogniu that the irutitutions of global 

economic govecnance were created at a 

very different time and under very different 

circumstanc« but have failed to change, 

particularly with respect to the changing 

distribution of economic weight and power 

among na tions; 

AJJ recognize that the imperative for chaoge 

must come from political leaders who are 

above any particular institution in recognWon 

of the fact that it is virtuaiJy impo5Siblc to 

change governanu structures from within, 

partkuJarly when such changes im-olve $hifting 

power away from some to olhers; 

All call for incrtutd and act.ive involvement 

al higher poUiiealltvels in lhe gov<rnanee o( 

the institutions, particularly in setting strategic 

direction; and 

AU support a broadening or d«pflling of the 

range of activities and mandates of the existing 

institutions.. 

It remains to ~ seen whether the $h«r imperative 

for a coordinated global response to the financial 

crisis and the emergence of a broader and stronger 

consensus among the G20 leaders wiiJ provide 

the needed catai}'St for change, or whether these 

blueprints for reform will join a long line of well· 

thought·Out proposals Lssued with varying degrets 

of fanfare only to sink without trace jn the ocean of 

weD-meaning but failed ideM, swept away by many 

of the same forGe1 that make it harder to reach 

international consensus on anything. However this 

may be, in the meantime it is a source of hope that 

the change that is mmt needed is not impo5Sible to 

achie\•e. For the multilateral economic institutions 

do not need to be completely reconstructed 

from the ground up. That would be urt.reaUstic. 

The current crisis is unUkely to~ either deep 

enough or of sufficient duration to create a •1944 

moment• - a oonstitut.ion-mWng mome11t 

when major new institutions and institutional 

relationships: can be built anew or created out of 

whole cloth. Instead, what is most needed is more 

akin to a renovalion and not a rebuilding. 

This renovation of the house of global «onomic 

governance \'o"Ould involve a rebalancing of power 

within the existing institutions away from Europe 

and the United States and toward the rt:$t of 

the world. It would involve a broOOening of the 

mandates of these institutions to enable them 

to address the new issues of the day. It wouJd 

mean a deepening of the coordination among ~ 

institutions, including the WTO, to ensure that 

pressing issues do not faLl between the cracks. 

Finally, it wo.uJd mean a new commitment on 

the part or the major plarers to work to bring 

the proliferation of regional agreements on the 

sidelines into their folds. 

How can this be done? 

SAVING MVLTILATERALI$..M 127 R£.NOVATIN"(l THt HOU$1i Oli (;L0$AL ECONOMIC OOVfi.R.NANCB JIOR THS liST CENTVlt.Y 

This renovation 

of the house of 

global economic 

g<:Nernance 

would involve: 

a rebalancing 

of power, a 

broadening of 

mandates, a 

deepening of 

coordination, and 

a commitment 

to bring regional 

agreemenrs into 

the fold. 
108 

FOREI-42327 with DISTILLER


JHillpage28.eps

use of the G20 

as a "C<luncil of 

Governors· would 

give the emerging 

market countries 

a permanent and 

significant voice in 

global economic 

governance, 

getting them 

more engaged 

in addressing 

problems at the 

multilateral level 

and allowing 

them to play 

an important 

brokering role 

when differences 

between the 

United States 

and Europe 

threaten to cause 

global gridlock. 

9 THE HARBINGER OF GLOBAL GOVERNANCE: 

POLITICAL LEADERSHIP AND THE G20 

The s.impltst way to achieve these goals is to 

transform the vzu into a "Coundl of Governors'" 

for the three established international economic 

institutions plus the new Financial Stability Board. 

While the G20 may no t be perfect-and debate 

will doubtless continue as to whether the curnnt 

configuration i.s the optimal one-the fact is that 

it has defied its doubters in reaching co ~nsus 

on sptcific approaches to a num~r of critical and 

rontroversiallssues. Both the United State.s and 

Europe emerged from the three summits with a 

good deal of oonfiden<e in the grouping. "When 

we are talking about reform of the international 

S)'$tem ... the G20 was seen as the right body for 

these decisions to be made at."' noted British Prime 

Minister Gordon Brown. U.S. President Barack 

Obama noted that .. the G20 will take the lead in 

buiJding a new approach to cooperation: Thls 

augurs well for the G20 becoming-as Nicolas 

Sarkot.y staltd at tht World Eoonomic Forwn this 

January. ~he harbinger of gk>bal governance in the 

21st cen ury~ The G20 Council of Go .. ·ernoB would 

tstablish strategic goals and then g.ive the various 

institutions the job of carrying them out. 

Thts G20 "'Council of Governors"' ·would focus on 

three main tasks: 

Settjng the strategic directjon of the 

internal'ional institutions (JMF, World Ban~ 

WTO, and FSB) to ensure the:ir mandates are 

broad enough to cover the many issues that 

are now falling bdween the cracks yet tailored 

enough to ensurt that inefficient overlaps or 

mission creep are avoided; 

Pushing through the necessary changes 

in the voting and power struc.tures at 

the JMF and Workl &.nk to tnsure that 

those institutions• governance structures 

reflect changes in economic weight. while 

at the same time infu.sing the WTO with 

direction and support from a smaller 

group of higher level officials; and 

Holding tht international institutions 

accountable for implementing the ditectives 

that come from the G20 summii.S and giving 

the international inslitutions a forum to 

hold the G20 leaders accountable for thrir 

commitments to the institutions. 

Providing the G20 with such a role would allow the 

group to $tt strategic directlon and then use the 

considerable expertise and qualified personnel at 

each of the institutions to carry out its instructions. 

By giving the G20 the continuing role of coming 

together at least once or twice a year to pt:rform the 

fiduciary dury of direction.sttting and oversight 

for these institutions, the G20 would be assured of 

a consistent and on-going role in setting the oourse 

of global eoonomic activity. Use of the G20 for this 

rolt would also give tht emerging market countries 

a ptrmanent and significant ,.,oice in global 

e<:o J~ 1nic governance~ getting them more t1~gaged 

in addtessiJlg problems at the multilateral level and 

allowing them to play an important brokering role 

when differences between the United States and 

Europe threaten to cause global gridlock. 

A C20 Council of Governors could also ensure 

that any country putting up roodblocks to the 

implementation of agreed-upon changes can 

be singled out and pressured in the •court of 

international opinion" to penn it necessary changes 

to move ahe-ad. This increastd accountability would 

move in both dirtctions. with the institutions 

themselves having aC«SS to a high-levd political 

body to which to take concerns about failures to 

follow through with prlor 001nmitments. Playing 

this strategic leadership role would also allow the 

G20 to fill an oft-cited need for high-level political 

28 ) THa GillMAN MAIUHAU. fvrm OP TH£ UNITt! I) STA'f£$ 
109 

FOREI-42327 with DISTILLER


JHillpage29.eps

engagement in the international institutions. albeit 

at an even higher level than initially envisaged by 

the reformen. Finally. indus ion of the \\'orld Trade 

Organization within the ambit of responsibility 

of this "'Council of Governors" ...,'Ould -ensure 

that the WTO takes its rightful place among the 

international institutions, in recognition of the 

critical link betw~n finance. development, and 

trade. and the imperath·e of using the expertise and 

rules of the WTO to ensure that private enterprise 

can be fuJJy engaged in worldwide economic 

recovery and future prosperity. In addition to this 

new role for the G20. it wiU aJso be necessary to 

reaffirm support for the multilateral institutions 

at the highest politicallenls. and to addrm the 

ex.plosion of regio nal agreements. 

SAVIN<l Mu a.TILA'f!lkALIS.M 

RJ!NOYATING THB HOU$1 OF<ll.OBA.L.lCONOMIC <lOVI!IU•'ANCI! FOR THJ!.liST Cl l'nUII.Y 
110 

FOREI-42327 with DISTILLER


JHillpage30.eps

The multilateral 

institutions have 

economies of 

scale, depth of 

expertise, greater 

staying power 

and a longerterm, broaderbased approach 

to resolving 

global economic 

problems than 

any bilateral 

or regional 

agreement does. 

10 REAFFIRMING MULTILATERALISM I N A 

WORLD OF REGIONALISM 

On the one hand. the international organizations 

have been taktn someWhat for granted as a 

widely·ae«pted commonplace on the global 

scene. On the other hand. they have become the 

source of virulent protests and stinging political 

r~bukes from many quarters. Those on the right, 

partkularly in the United States, deeply resent the 

United Nations and sec it as a sinister instrument 

of foreign dominatjon. On the otht:r side of the 

ideological S-p«tru1n, those on the left freq_uently 

get out the placatds and lilte the ptotest routes for 

most m«tings: of the WTO or IMF and World 

Brutk, objecting to what they see as the role of 

these institutions in exacerbating the worst of 

globali:Uttion-growing inequality that funnels 

wealth to the multinational corporations while 

INtving the poorest countries ever farther behind. 

Particularty at this time of crisis. it is essential that 

those who understand and appreciate the critica1 

work of these institutions stand up for them and 

for the broad multilateralism that they represent. 

Failure to do so will only undermine trus.t in the 

institutions and in the belief that global economic 

problems can and should be addressed globally. If 

nothing els.t. the international institutions bring 

both «<nomies of sca1e and d«p ~pertiu that 

cannot be readily replaced. As the world and its 

problems grow more complex. this know·lt<fgeaceumulated in many countries and over a long 

period of time-can only be put to good use if the 

institutions themselves are property maintained. 

The institutions also have greater staying power and 

a longer-term, broader-based approach to resolving 

global economic problems than any bilateral 

or regio nal arrangement does. The)' have been 

bringing together people and ideas from around the 

world for more than 60 ytars in countless forums, 

meetings. project planning sessions, and rn<>re. 

Away from all the teargas and the ideological 

smoktse:runs, it is in tht mundant day-to-day 

meetings. reports, and projects being conducttd 

within these inst.ituHons that multilattralism is 

most ollen advanced. COuntries get in the habit 

of working together and come to important 

understandings about both the substance and the 

procedures for their collective action. A steady 

stream ofinfor-mation is exchanged, undcrstandings 

reached, and norms established through these: 

institutional gatherings. for example, despite 

the inability of tht WTO to rtacb consensus on 

completion of the Doha Round. much agreement 

and common wtderstanding has been achieved 

through the ongoing work of the various WTO 

committees, particularly the Council for Trade 

in Services and the Committee on SMitary 011nd 

Phytosanitary Measures.1s While these practices 

don't rise to the: lcvd o f formal rulcmaking, they do 

form much o f the bread-and-butter of multilateral 

actjvity that is c.ritica1 i.f countries arc going to a 

come together in times of crisis. 

The statements of G20 leaders and others 

supporting these multilateral institutions and 

their work in particular- and the principles of 

multilateral cooperation in general- are to be: 

commended. and will need to be repeated ovu and 

over as the institutions continue to grapple with the 

oftm4 contentious issutsoftht 21st ce:ntu.ry. At the 

same time., a number of threats to multilateralism 

must be acknowledged and addressed. Most 

importantly among these is the rapid growth 

of regionalism and re:gio1~aJ alliances and trade 

arrangements. 

~For uampk, the WTOCommill«" on Sanituy and 

PhytOf:ln.ltary r.b$11.ret. M• .oopt«<• dcdslon on the ~'ltntatiOn of Artidt -4 ofth.t SPS.Agfftn'ot'M rtprding 

r«<Snition of ~uink..-" ol difftrent stancbn:ls, proc-tdu.ra 

t.o tnhanu tran~rmc , and suWitllnu to l'u.rthtr tht 

l'l~l'ltatiOn ofthtSPS provisiOI'IJOr'lrt~l'lal and ·fm 

utas. S~ Andrtw Lang and ~nt Sooct, "'Tht Hicldtn World 

of WTO Govtma.nct: Tht Ewopt4n }Qumal f7/ l"t~nMti111M1 

U.w, ~, 20. Wut 3. 2009. pp. S7S·614. (ltrnt \liTO Doc SIC/ 

Ml8and WTO DotS/CSCIM/17. 

30 ) THa GtllMAN MAIUHAU. fVN'D OP TH£ UNIT1!1)$1'A'f£$ 
111 

FOREI-42327 with DISTILLER


JHillpage31.eps

Th~ debate Ovtr whC'thfl' rtgional agr«mftltsand res:lonalttade agr«menb in particularcontribute to or det1'1t'l (rom the multilateral 

system has grown In tntensity as the number 

o( new :weemtnl$, most r«tnlly irt Asia. has 

skyro<k<t«<. lndt«<,ln the fiul 45 years of the 

GATT-the period between l948 and the creatjon 

o(the WTO tithe conclusion of the Uruguay 

Round-124 rtg.iona1 trade •grttments were 

nocified.las than thrtt a f'"Z· By contrast, the 

last IS yean aw 333 MW notifications of such 

'8ft<111MU. moreiN.n 22 a )'tit. As ol Octob<r 

IS, 2009, 4S7 rqiooal Ired<.......,.., .. had bt<n 

no~ifltd 10th< WTO. M6 ol wt.ldl.,. <urm~dy 

in foru ... Tht moa re«nt is the Assod:ation c1 

Soulh Elll Asian Nations (ASEAN)-China Fr« 

Trod< Area (ACFTA), launc:h«<onJanuary I, 2010. 

This is lh< 1"'11'11 fm-lrodt.,.. in the world by 

p<>pulallon ( 1.9 billion), wilh a «>mbin«< GOP 

ol~ <rllllon. making II the third latgt$1 (behind 

the F.umpnn Union and NAFTA) by economic 

value. ~ AS£AN·Australta.New Zealand Free 

Trade Agreement (AANZFTA) also went Into effect 

on J•nuary 1. cm·erlng 600 million people and a 

combined GOP of $2.8 trillion. 

Nor is trade th< only area in which aspagllteti 

bowl of r<jlonal allianca are ooming iolo force. 

The Chiq Mai lnillali,.. Muhilaterizalioo 

(C~tiM), a tq!ional6nandal mechanism io 

Aslo. encornpwlns the ASEANs. Japan. Korea. and China.,.. up a $120 bdi.,., faciliry~«< 

to llr<nS~hen 1M rqionJ apociry 10 aaftptd 

apinll inmucd rlalu and chalkngea io 1M 

sk>Mleronomy. The <Oft objectiva o( this "Asian 

Monetary Fund" ore (i) 10 addrm balance-ofpaymentJ and lhort·ttrm liquidity difficulties 

in the region, and (II) to supplement the t'xisting 

international financial attangtm.tcnts. As such. it 

rtprtstniJ rtgkmal competition to the lMF, albeit 

wkh • low enouah 101.J capital boot foe now that 

lhe lMF w[U likely rtmai.n th~ e~rofbst resort 

even wrthln the CMJM rq:ion. 

Jn the development arena, the \\brld Bank has 

seen an exploslo1\ h\ the use of trust funds, which 

are bil~a craJ or regional development funds 

masqueradll\g as muJtllattral ones. The World 

Bank may admlntster them, but the funds must 

be spent where and how the often sole donor 

d<Oisn""' O.·er a thousand such '""'funds 

havt' btt:n cstabluhtd in recmt )nt'S. Last yeu. 

disbuntmenu from•uch '""' funds equakd haif 

ol lhe m.dd Bank's lOIII cllillvrum<n.._ Tog.ther 

with bilalml d<vtlopmct>l assillan«,- ltusl 

funds allow donon 10 ._their OWD soals and llra<esy. which can brins io bilateral polilieal 

prusura or tlhoft·ttrm or narrow focu.slhat may 

noc be In tht bat lnt~ra:ts of a country as a whole. 

China. Cor examplt. has put billions of dollars into 

infr~a~tructure projtd.S In A( rica while contributing 

only $30 million to the International Dcvdopmtnt 

Assoehulon (I OA), the \\~ id Bank arm designed 

to help the poortst countries.. 

All In all, thll tum to ~gional or bilateral 

arrangements In ticu of multilateral ones is 

huge, with approximattly SO percent of all tradt 

occurring und« >uch aereemenu and about 6S 

percent ol all aid currendy coming from 1tus1 

(undo, bilalffal aid funds. oe •vatical" looru oe 

snr>" focused on a parllcul.,. ;...,._ Why sud! a 

dnmatic: <111ft! Many countries around the-'<! 

have turned aWJy (rom multibtualism and the 

multibctnllrui.Jtutioos"' a number of rtaSOflS.. 

First, then are non·institutional alternatives to tbt 

multflaterlllaystem-nncing from a broad array 

o( private Investment tools that supplant the IMF 

to huge lnfra.structure projects that are financed 

by foreign governmtni.S or other aid funds. often 

undermining the role oft he Wortd Bank. Second, 

many de\'t~lng COUJ\trics arc sktpticaJ about 

institutJons ut up by the transatlantic powtTS in 

SAVUIG MUU1LAJ"UA.USN 131 ltufovAnSG TH~ HOUSE ot'Gt.OI.M.IlOOftiC»CtC OOYtllHAHC& JOlt THil11$T axrtJ'RT 

This turn 

roregional 

or 0/laretlll 

arrangemenrs In 

lieu of mullllaletal 

ones Is hll#, wilh 

approxlmare/y 

50 percelll of aN 

1/llde occurring 

under such 

aveemenrs and 

aoour 65 percenl 

of all aid currenl/y 

coming from rrusr 

funds, bllaroral aid 

funds, or "Vert/car 

loans or granrs 

focused on a 

parrlcular ISsue. 
112 

FOREI-42327 with DISTILLER


JHillpage32.eps

The multilateral 

lnsti!Utions need 

to recognize 

that the regional 

agreements 

are massive in 

magnitude and 

add enormous 

complexity to me 

system, but they 

are here to stay 

and need to be 

accommodated 

and incorporated 

into me 

multilateral 

system. 

which they don't have a significant voice or any 

great confidence that the inst.itut.ions will address 

their needs. 'fhird. they have found regional 

agreements easier to reach. tither b«aus,e they 

don't req e solving some of the hardest problems 

o n the tablt in multilateral otgotiations-for 

uample, agricultural subsidy issues at the WTOor simply btcaust reaching an agreement on a 

bilateral or regionaJ basis is easier than trying to 

reaeh an agreement among the multitude of parties 

to any agreement at the mullilateral le-.·eL 

The downsides of this rush to regionalism are 

many. The tlme, energy, and rt$0utctS required 

to negotiate bilateral or regional agreements are 

considerable, and by necmity take away valuable 

time, resource$, ;md political capital available to 

countries to devote to multilateral agreements. At 

the same time, bilateral or regional agretments 

are much more subjtct to the vagaries of domestic 

politics-indeed. they art often initiated in 

response to particularistic commercial or foreign 

policy pressures. Then. once they are in force, 

most of these agreements have wea.k or non· 

existent dis pute settlement mechanisms. making 

commitments under such agreements harder 

to enfortt. Bilateral and rtgional agrttments 

often have unique rule$ and provisiOJ\S, which 

incrtase.s <tVerall tr.ms:ac:tion ooots in the system 

and makes it difficult for developing countries 

to understand what they need to do to comply 

with a widoe array of differing sets of rule$. On 

the trade side, such agreements often exclude 

particular produc:ts or don't aUow for cumulation 

of inputs or resources from countries outside 

of the particular agreement, whidl can lead to 

inefficiencie$ and to hub-and-spoke systems of 

trade in which power-based arrangements begin 

to erode the protection of a rules-bas«l nondiscriminatory multilateral trading system.

17 

Finally- and most important.ly- proliferating 

preferential agreements by their very existence 

send astrongslgnaloh growlnglacko((alth ln 

multilotteral institutions and the multilaternl system. 

As such, it is imperative that the multilateral 

systtm work to fix problt 1ns that act as a dtterrtnt 

to deeper engagement by dt\·eloping countries 

while at the same time working to bring the 

various bilateral and regional arrangements within 

their systems. The multilateraJ ins-titutions need 

to recogni:ce that the regional agret.ments au 

massive in magnitude and scope and havt addtd 

enormous complexity to the system. but that at 

the same time they are here to stay. Most urgently 

needtd from the multilateral institutions are clear 

guidelines for any such agreements to ensu.re that 

they art stepping stones to multilattralism rather 

than barrie:-rs to rotry for anyone outside any given 

rtgional or bilateraJ arrMgtmtnt. 

Th~ pol.tnlb.l llOr rtsJoml lradt ·~ntJ toundtrmlnt 

l.lw mWUI#tl'll $1Jlt"M han b«A widtlydiK\I.f..kd. Sf~t for 

f'tamplt '-&dbh Bh~wtoti, Ttrmiln m llw Tl'lldUtt SyRt-"'C How 

Prr{trUdidl Agmmlfftts Vnd«lfdw Fret TrW. Council~ 

Fortlsn R.c-l&tkw (2008). 

32 1 TUB C U .MAN MARSHALL fuND OP THil UNlU D $TATIJ 
113 

FOREI-42327 with DISTILLER


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11 TRANSATLANTIC MULTILATERALISM 

FOR THE 21ST CENTURY 

Ourlog. the critical period oftht Bretton Woods 

conference of 1 ~44 and In the months that 

followed, a large pan of the world picked itself up 

from the rujns of depression and war and rallied 

around the vision-largely set forth by the United 

State& aOO Grt-at Britain-to ucat~ institutions 

and accords that would prevent a repetitio n of 

tht dlsa5-tr:rs of the l9l0s by allowing for global 

econo.nlc cooptration and mullUattral governance. 

Then· U.S. Pmldent Franklin Delano Roosevelt, 

In hi$ Last addr.,. to the US. Congress, deelared 

that -,he world wiU either move toward unity and 

widely shared prosperity, or it will move apart; 

noting that the then~merging pb.ru: for the Bretton 

Woods institutions and the global trading $)'$km 

l't'prtst:ntfd the chance ~o lay the economk basis 

for tht .s«ure and ptactfu1 "'wid~ aD dHil't': 

1M pr....,t global «llOOCJJic crisis has not b«n of 

tht same onkr of magnitu& c:l the n·ents cl the 

1930s. But it dou rqxu.mt anotht:r transformatn~ 

moment in wodd m-y. In particular, it pm<nl$ 

th< Uniled Stat .. one! £urope with aoocher 

opportunity IO txft'dsc' shared transatlantic 

leldtrship to ensun that the vision of thrir past 

leaden eon bo pr ... rved. up<bred. and <Wried 

forwa.dlnto th< 21st century wUh aU th• <haUeng<s 

It brlnga. Wbal do Ewop< and th< United Statts 

nttd to do co m«t this dtalk:ngt? 

First, th~ nftd co commit to not give up on the 

multilateral tcooomic institutions. but to reform 

them instead. Togtther, the Unittd. States and 

Europe atattd. tht.se multilattral institutions and 

they have as much to gain as tvtr in. k~ping thtm. 

at the core or the global economi<. architecture. 

However. ensuring that these institutions remain 

relevant. lf(titimate, and effecti\'t will mean some 

signiOcant changes in the manner in which boch 

the United StattS and Euro~ participate in their 

optrations. Thde changes art an opportunity to 

show rtal ltadtrship on tht workl stage at th t cost 

of some concessions in tht formal power structure. 

Agruing to make thew conctSSions would also 

send a powerful sign01l to the rest of the ·world 

that they can have faith that these Institutions are 

changing to accommodate shirting relationships 

in the global tconomy o.nd an equally powerful 

affirmation by the transatlnntlc powcn: of their 

continuing reliance on multti;UeraJ hutitutions. 

For its part, the United States 1houki give up on 

both the unwritten rule thJt the hHd of the Workt 

Bank must be an American and the tnslstence 

that it retain \'eto power O\'er matters requiring 

a supt-rmajority. In addition, the United States 

.should support the use of the G20 as a scrategic 

stttring group or "Council o( Govtrnorf' for the 

World Bank,IMF, end WTO to eruure 1 Jtrong 

G20 role in strattgy formulation and COOfdinadon 

thai wouJd also gi\'e crater \oke to the emergina 

morket e<onomies. 

In the same win, the member A.ares ol tht 

Eumpean 1Jn1<>n shoWcl ciY< up on th< unwrtlten 

rule thaa the bead of tb< IMF mu$t boa European. 

and work to consotidalt Europtan wus and uas 

al theiMF ond World Banke~bttlntoulngle 

EW'Clp<Oft,... (which -.ld sJ.-. Eumpe th< 

single 1atJ<S1 voting .bar.) ot 111- consolidate 

its..,. .. portio!_, with the biJitt European 

eoonomits oo thal Europe <nels up with no 

morr: than four M"atl:. As with the Unittd Stat~ 

the European Union and its member statts 

should also lend thtir support to the G20.., the 

".sttt ring committ~olt eglobQ;I economy." 

For Europt'. the form ofEuroptan participation 

in the Bretton Woods institut,lons prtStnts a 

challei'\Se and an opportunity to resolve the bat 

way to ensure the strongest collective European 

\'Oice in global economic governanu. The comins 

into Coree olthe Usbon 1'rtaty givts che Europt.,ll 

Union a formal inten1atlonal legal personality, 

and aJI around I he \\'()rid I he EU fs reorganl7.,hlg its 

reprt$tnt3tion, a process that will cont.lnue whh the 

SAVINO MULTIU.T£l ..U.IJ)t 133 R.uiOVAt1N'O TH6 HOUNtOJ Gl.OBAL IOQ:fOMIC OOv&~NAJr<ICI flOI THI1&1TCI:NTUU 

In order to save 

the instiMions 

they started, Ule 

U.S. and Europe 

need to give up 

some of their 

formal pqwer In 

order to allow 

more legitimate 

and more relevant 

instilutiolls 10 

emerge. 
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Today, at the WTO, 

Europe speakS 

with one voice1 

through sole 

representation 

l)y the European 

Commission. 

The opposite is 

the case at the 

Bretton Woods 

insUtutions. 

formation of the External Action Serviet. A reform 

of the governance structure of the intemauonal 

eoonomic institutions would give Europe another 

opportunity to put this new status into operation. 

Today, at the WTO. Europe s~ks with 01 e voice, 

through sole representation by the £urop«n 

Commi$$.ion. The opposite is the case at the Bretton 

Woods institutions, whue the European Unio n 

has no formal plac(' and can only act through 

the \'Oice of certain member states. Nor does 

the Eurozonc have a formal plac(' at the IMF. At 

the G20, the European Union and the European 

Commission have bftn present-buts~ t~ have 

heel~ iltdividual member st<'l.tes (Fr.utce, Germany. 

Italy, and the United Kingdom, loter joined by 

Spain and the Netherlands), with oome of these 

member states overshad.owing the European Union. 

Reforming the manner of European participation 

in the Bretton Woods institutions could be a winwin for uro~.lt would allow ro~ to show 

leadership and a commitment to the modernization 

of the multilateral institutions while at the same 

time consolidating European power in a single 

but larger voting share. But it will not be easy. The 

three member states with permanent seats-France, 

Gtrmany, and the United Kingdom-will no doubt 

restst giving up their exclusive rights. Many of the 

issues related to finanda1 regulation and reform artstiU carrit"d out at the national level, even within 

Europe and within the Eurozone. However, the 

opportunity to obtain more influence by acting 

collectively in this one arena of international 

economic institutional governance ought to be 

compeUing for £urope. These institutions do not 

raise the same political problems of European 

consolidation that would be present at the UN or 

in other fora. Participating a.s one Europe could be 

seen a.s furtherance of the process of a coordinated 

European approach that was begun in ptepmtion 

for the G20 Ltaders Summits and of the Lisbon 

Treaty's goal of making the European voice ht the 

world stronger. 

Nonethele$$., on paptr, all of this oould be setn as a 

dramatic Joss or power on both sides of the Atlantic. 

But as a practical matter, a diminution in sway over 

the institutions of global economic governance 

could result in longer-term gains that W"'Uld stem 

from stronger, more lcgitimat~. and mo ~ cffect v~ 

institutions that operate to the continuing benefit 

of the United States and Europe and ~ kind of 

stable, ope:n. rules·based global economy they both 

support. If the pro«ss and criterla for stlecting 

the heads of the IMF and World Bank were solely 

merit·hased, and if the United States and .European 

Union nominated highly-qualified. candidates, they 

would likely continue to take their turn in having 

their nationals serve in leadership roles. Moreover. 

while the exact 't'Oting share of countries is an 

important symbol of their pow~ . f~w if any formal 

\'Otes are taken in prac:tice.ln the pro«ss of finding 

sufficient -S upport for any giv~n proposal short of 

a formal \'Ote, the oonsolidation of Europe into a 

single voice 1nay result in more~ not less, Ouence. 

Moreover, somt diminution in the \'Oting share 

of the United States or Europe would still leave 

both powers with the ability to block obje«ionable 

changes simply by finding a small handful of other 

countries to join them. 

At the WTO, the concerns over and netd for 

transatJantic leadership are somewhat different. 

while the (.hallenges of effectiveness, legitimacy, 

and relevance are the same. Unlike the lMF and the 

\\Xlrld Bank. the WTO does not have an executive 

board or a management board. nor does the WTO 

Secretariat have the power to set prior-ities or 

propene new rules or formal structures to approve 

new rules other than through consensus-and 

traditionally only through rounds of negotiations.. 

This means that the WTO docs not need to engage 

in any formaJ rebalandng-eertainly not in the 

directio1~ of a further devolution or redistribution 

of power. However. the WTO membership does 

need to form new alliances and groups that would 

create the basi.s for decision-making in lhe absence 

of complete consensus. It is in putting together 

34 ) 1'Ha G i llMAN MAIUHAU. f VND OF T:H £ UNIT1!1)$1'A'f£.$ 
115 

FOREI-42327 with DISTILLER


JHillpage35.eps

these alliances that the United StattS and the 

.European Union should play a leaders;hip role 

by taking seriously the recommendations of the 

Sutherland Report. the Warwick Commission. and 

other contributions to put in place alternatives to 

the single undertaking- an "aJI.for-or>e and one· 

for-all" constn.Sus only process. U.S. and European 

leaders should ensure that a serious debate about 

the WTO's governance structure and Hs place in the 

global economic 3.rchitecture take1 place now, while 

leaders from around the world are focused on all 

three pillars o( the system and should make it clear 

that this examination can be conducted without 

detriment to the ongoing attempts to conclude the 

Doha Round negotiations-and in fac:t could even 

contribute to their successful conclusion. This is the 

moment for the WTO to t3.ke its rightful p13.ce as an 

equal partner with the 1M F and the \\'orkl Bank in 

the globaJ economic system. 

Second. the United States and Europe should use 

the G20 as the most efficient mec.hanism to insert 

high·level involvement in the governance of these 

institutions. particularly their strn.tegic direction 

sening and the coherence amo1tg them. They need 

to msure that the mandates of these institutions 

are modemi1.ed to cover the many issues that are 

currently going unaddressed-including food 

security, energy policy. climate change. competition 

poUcy, and oorruption- while protecting apinst 

duplication among them. They also m.ust take 

seriously the commitment to allow their own 

mac:roe:conomic polidi!'S to be subjt« to real 

scruHny by th~ G20 and the IMF for consist~nc:y 

with the G20 framework for Strong. Sustainable, 

and Balanced Growth. Moreover, both the United 

States and the EU need to takt seriou$ly the 

proposals for reform of these institutions and to 

stick with the reform pf'()Ct'SS until the-Jle<essary 

renovations of the institutions are completed. 

Third. the United States and the Europ<an 

Union should rtaffirm their commitment to 

multJiat~rali m by working to multilateraliu the 

tang ~ of their own regional agr«m~nts and to 

adopt a set of guidelines for any further agreements 

that en$ure that they do not detract from or 

undermine the multilateral system.lj As in many 

other areas, the European Union aod the United 

Stat .. have been at the fortfront of regionalism. The 

European Union itself is a regional agreementthe largest economic free trade area in the world ... 

foUowed by the North American free Trade 

Agreement, linking the United States, Canada. 

and Mexico. Given their leadership roles in both 

multilateral and regional growth. the United 

Statts and Europe should also le-ad the way in 

fmdin.g a way to muhilateraliu these agreements, 

particularly the agreements they each have in 

common with other countries. in a manner which 

brings them doser to mult.ilateralism. Currently. 

the United States and the EU remain each other's 

largest trading partner'$-(ar exceeding their trade 

with any other country. For example. U.S. two-way 

trade in goods with the EU tolaled $983 billion in 

2009, while its tv.'O-way trn.de with China was $366 

billion. However, high on the list of significant 

trading partners for both the US and the EU are 

a number of countries with whom both have 

negotiated a free trade ag.retment, mCMt norobly 

Canada (the United States• second largest partner 

and Europe's tofth). South Kor<a (the sixth largest 

trading partntr for both the Unittd States and the 

EU) and Mexico (the fourth largest partflfr for 

the United States and tenth for the EU). If these 

common agr~ments alone could be reshaped into 

multilateral agreements. the United States and the 

EU will have done much to bring a substantial 

amount o( trade back into the multilateral fold. 

" The con«p1 ol"n1ul10tttrllzlnf' gmnwnu 

has b«n mueh di:Jcussed in ae.cltmk and OLhtr forums, 

lnc:llldlngat thcSepttmber 10·1% 21Jtf/, conftttDU it the WTO, ·Muhilattn.liz.ing RtSiOf'lalittn: Qalknsn for tbt 

Clob..l Tr.dlngS)'fl(m.'" See In p1rtkubr, Rkhatd Baldwin$ 

"MuJtilatnalising Rtponalism: Spaghttti Bowl as Buildms 

1114xbon the P•lh to Clobl.l fm Tf1i<k,'" The "Wid EcOiklm)' 29(2006). 

SAVIN(l MUI.TILAT-f,lALIS.M 135 RJ!NOVATING T HB HOU$1 OFGL.O&AL.lCONOMIC GOVI JU•'AffCB FOR THJ!.liST Cli"TUII.Y 
116 

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JHillpage36.eps

The most important oontribution to be made is 

to agree upo1~ principles to guide such efforts as 

a way of distinguishjng those agreements that are 

acceptable withjn a multilateral system and those 

that are not. «Acceptable" agreements would include 

thoSt" that: 

Do not create conOicts with members• 

obligatjons under multilateral agreements,. 

such as the WTO Agreement or the IMF$ 

Articles of Agreement. 

Are at lea5t as transparent as multi]ateral 

agreements.. 

Require full disclosure of all the details to 

the muJtilateraJ institutions and subject the 

regional agreement to potentiai3S$essment 

by the relevant multilateral institutjon for 

sig_nifi:cant inconsisttneie.s with multilateral 

obligatiOI'I$, 

With respect to trade agreements. much wortc: 

has already bffn done in many forums on the 

specifics o( harmoJ~i ng rules of origjn. or 

providing opportunities to cumulate inputs into the 

manufacture of goods, resolving conflicts between 

dispute settlement provisions, mutually recognjzing 

regulatory approvals and more. 

1

9 The European 

Union and the United States need to agree to 

undertake this work now in order to show others 

that their own rtg:ional agrt-tmtntscan put thtm on 

the path to g:rtater multilateral integration. 

••~ot Ridlud Baldwin .and P.att id: l,.ov.·, MuftiJtxtmli:iltg 

R¢fomt!iSm. Antoni Esct'lldeOI'dal tnd l<ttl Suom.intn 

• 8rktging RoegiOna.lir.adot Ag toe~nu in tht Ammcu,." SptciaJ 

Report on (ntoesratlon and Trade, lnttr•American De\'dopmotnt 

"'"" 

Figure 2. U.S. and EU Free Trade Agreements 

U.S. Free Trade Agreements 

Guatemala NiCaragua 

Honduras Oman 

Singapore 

Peru 

Tht VniWI<I $\tet$ n.t 61&1*1 '"" lf&dt -~ (fTA$) With ~.t<oiM,IIMPtnatna.bvtCOrcre"SSmutceneet--tiotl 

~ 8PP«<'o'f: aocl in'll)lement MCh ecreement ... ~ few them 10 81> ln1octfcd. 

EU Free Trade Agreements 

Lebanon 

Syria 

TUnisia 

SO<JthAfrb 

Source: £U Tf11do.£~ Commbslon (1M. 11, 20t 0) 

8oth thtUt'l'l'.edStetes~ttlt U••InhCIIOQtnOf 

~an~witJitl'ldi&. 

~ Urlttd Stilt$"'*"~ ,....an FlA ln•t~tet· Tht tc .,...q 

~~•oommon'IIIIOI1<11'C~InO.C.'2009: 

fi!\181oonfitmc~~IOnoCenfTA tt~-..f'\hrft¢0fl$uftatir>n. 

'Yit.ile the U.S. has already si(ned • free trecM ~ment v.ith 

Kofea,~ss hasyettoenect~iontoape:wo.oe il. Tlle EC's 

FlA'ttoiehtl.otN 114$ 1nlltltd In OC,, '2009, Tria 1A01.t oCtht FTA mil$!; 

bt ttJn$lattd IntO .. EU ~-btfOte 1M JMi""*'*n I)I'OCt$$ 

........... 36 ) 1'Ha GillMAN MAIUHAU. fVND OF T:H £ UN11'1!1)$1'AT£.S 
117 

FOREI-42327 with DISTILLER


JHillpage37.eps

12 CONCLUSION 

The way forward-for the international community 

as a whole, and for the tran.satlanuc pattnetS 

in particular- is now clear. To cope with the 

increasing complexity of workl affairs, in which the 

challenges hem~ ves are growing more difficult 

and ~ac hi ng agreement among the large number of 

playe:rs is ever more like a huge multidimensional 

chess game, the institutions of gk>bal economic 

governance are in u.rgtnt need of rtnovation. Tht 

status quo is not an option-Jet alone the status quo 

ante, before the economic crisis struck. Failure to 

modernize the internationa1 economic instHutions 

in all likelihood will mean watching them atrophy 

and deuy. The end result would be even greater 

fragmentation of gk>baJ economic governance 

into a patchwork of m:erlapping.. competing. and 

conflicting ~onal and bilatc-:ral arrangements 

that would rtduct the ability of both indiVidual 

countries and the international community as 

a whole to act and to find solutions co the most 

urgent problems of the day. 

This need not~ the case. In spite of Copenhagen, 

in spite of the eight years of aisis and stalemate 

in the Doha Round negotiations, in spite of 

proliferating regionalism, it is stiiJ possible to save 

multilattralism and to preserve the arc:hitt'Clure 

that has served the inttrnauonal community weJJ. 

Reforms can be made to our existing imtitutions 

that both preserve the strong role and \'Oice of 

the United States and European Union while 

simultaneously encouraging stronger participation 

and commitment from the emerging market 

countries. By acting responsibly and showing 

leadership in the redistribution of power, giving 

emerging market oou.ntdes mort say over the 

strategic direction of the existing global eoo110mic 

institutions. the United States and Europe can lead 

the way in preserVing and extending the benefits 

of the multilateral economic order they created. 

By working with the emerging market countries 

through the mechanism oft he G20 Leaders 

Summit, they can provide a "Council of Governors" 

for the global economic institutions. In this 

manner, the United States and the Eui'O)>C'an Union 

can continue to proVide the kind of stewardship 

and directi01~ of the global economy they showed 

in the second half of the 20th century and that is so 

sorely nffiitd amid the increasing eompi("Xities and 

growing challenges of the 2Isl 

SAVING MVLTILATERALI$..M 137 R£.NOVATIN"(l THt HOU$1i Oli <iLOlJ.AL ECONOMIC OOVfi.R.NANCB FOR THS liST CENTVlt.Y 
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13 BIBLIOGRAPHY 

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Blustein, P..1ul. Misadventuru of the Most Favored 

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Blustein, Paul. The Chastening: Inside lhe Crisis tlral 

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Coffey, Pder and Robm J. Riley. Reform of the 

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the JMf," March lOW. http://www.econ.berkdey. 

eduJ .... eichengr/responses_globaLfive_ideas.pdf. 

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2009. 

Frttman. Richard B. America Works: Critical 

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Gilbert, Christopher L. and David Vints.. Tht 

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Cambridge Uni\•ersity Press, 2000. 

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Gresser, Edward. ·ceo-Politics.• Dtmomuy 

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H..,., Richard N. •The Case for Me"y 

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Boston' Martin us Nijhoff Publishm, 2003. 

Henl'ti.ng. Randall C. "'RegionaJ Arrangements 

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Horn. Henrick. Pero C. Mavroidis and Andre Sapir. 

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tx_btbbreugeVbp_tradeJan09.pdf. 

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Hubbard. R. Gleen and William Duggan. The 

Aid Trap. Columbia Business School. New York: 

Columbia Univ~rsity Press, 2009. 

Hufbauer, Cary and Kali Suominen. Globalization 

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l..amdany, Ruben and Leonardo Martinez...Oiaz. 

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Lang. Andrew and J<nnne Scott. "'The Hidden 

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Moyo, Oambisa and Nial ftrguson. Dend Aid: Why 

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Nelson, Rtbecca. "The G20 and lnlernadonal 

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Saeger, Debra P. RedtsigniHg drt World Trade 

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for International Governanc-e and Innovation 

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JHillpage40.eps JHillpageC4.eps

Tl•e Future of the WTO: Addressing institutional 

dtallenges in the new millennium, The Sutherland 

R~port. Consultatin Board to the Dire<:tor-General 

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40 I THB GI!JtMAN MARSHAI.I.. fUND Of'TH€ VI'UTIIDSTATII$ 

GIM IF OFFICES 

\VASHlNGTON' • 8ER.LII'<i' • BRATISLAVA. • PARIS 

8RUUt1LS • 8t1LGRADI£ • ANKARA • 8VCHAR£ST 

www.gmfus.org 
121 

ANNEXES B AND C 

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AnnexB-1.eps

ANNEX B 

DISCLAIMER: The U.S. delegation is providing the below draft framework solely to help 

facilitate candid and conslnletive exchanges between the two sides. The cumnt text is not a 

proposed international agreement and mnains subject to ongoing review. In the interCSI of time 

and out of respect for the seriousness ofthe issues that the two sides will discuss, this document is 

being pro¥ided in advance of the visit and while this review is ongoing. 

The U.S. dele galion looks forward to discussing this draft and related issues later this week in 

Beijing. 

BALANCING TIJE TRADE RELATIONSHIP 

between 

THE UNITED STATES OF AMERICA AND THE PEOPLE'S REPUBLIC OF CHINA 

The Oovemmenl of !he United Sr:ues or America ("United Stares") and the Oovcmm<nl or tbc People's 

Republic of China ("China") have strong o•crlopplng inrercsu as the wa<ld's rwo largest economits and 

the majOf drivers of &Jabal erowth. At prcscnr, the United Sllles-Chlna nde relationship Is slgnlflcantly 

Imbalanced. Uniled Sta~ invcstmenl and the sale of services into China remain severely constrained. 

China's induslrial policies now targctin& U.S. tcchnologi., and intelleclual property pose siCflificanr 

economic and sec.urity cO<>Cems to the United States. 

There is an Immediate need for lhe Uniled Stoles and China to reduce the US. lr:ade dcfteil with China by 

ensuring !hac China's nwketls open lo Unhed S1.11es lraders and lnvesrors on a fair and nonodiserimlnarory 

basis. China th•rcrore undenakes to (a) eliminate Improper tatilf and non-tariff barriers 10 Unired States 

r:xports to China. (b} address China's policies and pn1c1ic~ related to rechnology lrlnsfer and lntellecrual 

property, (c) treat Unircd Sraes service providers in China on terms equallo chose provided to Chinese 

service providers In !he United States, and (d) record China's agreement nor to target United Swes farmers 

and agricultural producu. To address rhese issues end "'""'" balance in tile Unit<d Sulles-Chlna lrldc 

"'lationship, there is an immediate need for the Unikd States and China to agree on a set or conerere and 

verifiable actions. 

SECTION I 

TRADE DEFICIT REDUCTION 

China commits to work 1vitll Chinese importers 10 engage in trade tnlnUCiions ro achieve targets ro which 

!he Parties 18/CC- These transactions are speclflcally designed to reduce the United Staks-Chlna trade 

deficit by SIOO billion in !he twelve (12) months beginning June I, 2018, and an additional SIOO billion in 

the rwelvc (12) months beginning June I, 2019, such that !he U.S. trade deficit wllh China will have 

decreased compofcd 10 2018 by otlcasl S200 billion by !he end of2020. China's purchase of U.S. goods 

will represent a! least 7S% of China's commilmeruro 1 S 100 billion increiiSe in purchases of U.S. cxports 

for the twelve months beainning J11ne I, 2018, and IIIICIISI SO% of China's commitment to an additional 

SIOO billion increase In purchases or u.s. e.•ports in the twelve (12) monrhs beginning June I, 2019. 
122 

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SECTJONl 

PROTECTION OF AMERICAN TECHNOLOGY AND INTELLECTUAL PROPERTY 

In order to address China's poli~ies, laws, regulations, practices and actions that are harming United States 

Intellectual property rights. innovatioo and technology development, China commits as follows: 

(a) China immediately will cease providing marl<et-distorting subsidies and other types of 

government support thaL can contribute to the creation or maintenance of excess capacity 

ltllhe industries targeted by the Made in China 2025 industrial plan; 

(b) by January I, 2019, China will eliminate specified policies and practices with respect to 

technology transfer; 

(c) China will take immediate, verifiable steps to ensure the cessation of Chinese government· 

cond~~~:ted, Chinese govemment-sponsored, and Chinese govc:mment-tolerated c:yber 

intrusions into U.S. commercial networks and cyber·enablcd the!\ targeting intellectual 

property, tmdc secrets and confidential business Information held by U.S. companies; 

(d) China will strengthen specified Intellectual property ri~lls protection and enforcement; 

(e) by January I, 2019, China will eliminate the provisions of the Regulations on the 

Administration of the Import and Export of Technologies and the Regulations on the 

Implementation of the Law on Chinese-Foreign Equity Joint Ventures identified in the U.S. 

request for WTO consultations In China-Certain Mtasurts Concerning tht Prollellon of 

Intellectual Pro~rty RlghJJ (05542); and 

(I) by July I, 2018, China will withdraw its request for WTO consultations in Unll~d SlaltsTariff Measures on Cerlain Goods frum China (05543) and will take no further action 

relet~d to this mauer under the WTO Und~rstanding on Rul~s and Proc~urts Qoveming 

the Settlement of Disputes ("DSU"). 

In addition, China will not take any retaliatory action, whether in th~ form of toriffs on importS of U.S. 

products or in any other fonm, including unwarranted sanitary and phytosanitary ("SPS") measures, 

unwarranted technical barriers to trade (MTBT') measures, antldumptlng and countervailing duties, and 

discriminatory insptction, quarantine and testing practices directed at importS of U.S. agricultural prod~~<:ts, 

in response to 111:tions taken or to be taken by the United States, Including any new U.S. restrictions on 

Investments or importS. China immediately will cease all retaliatory attions currently being pllrsued. 

China agrees to Immediately cease the targeting of American technology and Intellectual property through 

cyber operations, economic espionage, counterfeiting. and piracy. China also agrees to abide by U.S. 

expon control Jaws. 
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SECTION3 

RESTRJCTIONS ON INVESTMENT IN SENSITfV£ TECHNOLOGY 

In light of China's prevlllllnr:: investment restrictions and state.directed investment in sensitive U.S. 

technology seo::tors. includin& lt:tdustrial plans such as Made In Chinn 2025, China coo firms that it will not 

oppose, challenge, or otherwise retaliate against the United SUites' Imposition of restrictions on investments 

from China in sensitive U.S. technology sectors or sectors critical to U.S. national security. 

SECTION4 

UNITED STATES JNV£STII1ENT IN CHINA 

China recogni= that China should not dlston trade through investmmt restrictions, and that any 

investment restrictions or conditions Imposed by China must be narrow and transp4fent. U.S. investon in 

China must be afforded falr, effective and non·discriminatOI)' market ac~ss and treatmenl. including 

removal of the application of foreign investment restr!cti0115 and foreign ownershiplshareholding 

requirements. In funherance of these principles, China will issue an improved nationwide neptive list fOf 

fOteign investment by July 1, 2018. Within ninety (90) days of the date on whleh China issues this negative 

list, the United States will identify eKistin& Investment resrrictions thlu deny U.S. investors fair, effective 

and nonodbcriminatory marke1 nccess and treaunenL Following receipt of the U.S. list of Identified 

res~r!ct!ons, China Is to act cKpedhiously 10 remove all Identified Investment restrictions on a timetable to 

be decided by the United States and China. 

SECTIONS 

TARJFF AND NON-TARIFF BARRIERS 

China's tariffs and non·tarilf barrim ue significantly higher than those or the United States for moS1 

tradable goods. China commits to address U.S. concerns relating to tariffs and non·tariffbarricrs as follows~ 

(a) by July I, 2020, China will reduce il5 tariffs on all produet5 in non-critical sectors to levels 

that ue no higher than the levels of the United States' corresponding tui!Ts; and 

(b) Chino will remove specified non·tariffbatriers. 

China lllso recognizes that the United States may impose import restrictions and tariffs on product5 In 

critical sectors, Including sectors identified in the Made in China 202S industrial plan. 

SECTION6 

UNITED STATES SERVICES AND SERVICES SUPPUERS 

In order to achieve fair treatment with respect to U.S. services and services suppliers, China commits to 

Improve access to its market in specified ways. 
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SECTJON7 

UNITED STATES AGRlCULTURAL PRODUCTS 

In order to ~thieve fair treatment with respect to U.S. asricultural products, Chino commits to improve 

occess to its marlcetln specified ways. 

SECTION 8 

IMPLEMENTATION 

China ond the United States will me~t quanerly to review progress in meeting agreed targets and reforms. 

In the event that the United States considers that China falls to comply with ony of China's commilments 

in this Framework, Including deficit targets, China acknowledges the likelihood that the United States will 

impose additional tariffs or other lmpon restrictloru on Chinese products, or on the supply of services or invesrmen~ to such extent as the United St3tes deems appropriate. China also understands that h will not 

oppose, challenge or rake ony form of action against the United Stoles' Imposition of additional tariffs or 

restrictions pursuant to this paragraph, including action pursllllnlto the OSU. 

China will withdraw its WTO complaints regarding designutions of Chino llS a non·matket economy by the 

United Slates and European Union ( Un/ttd Srotn- Meosur~s Related to Pr/c1 CompOTISOII Mtthodologlts 

{05515), Europton Union- Measures Related ro Price Comparison Methodologl•s (DSSJ6)) and will 

refrain from challenging the treatment of China as a non·market economy under 1he DSU In the future. 

Additionally, within IS days of receiving written notice of a prohibited product that m3y have been ~hipped through one or more coontries, with or without modiftc:llion, China will provide full de1ails 

of every such shipment 10 the swpectcd destination or destinations. If ChiM fails to do so, or the 

information reveals that transshipping is occurlng, the United States will Impose tariffs equal to the amount or swpec:ted transshipments. 

China understands that if it fails to uphold ony commitment under this Framework for Dlscwslon, II Is 

likely that the United States will impose tasiffs on impons from China, and, where appropriate in the case 

of China's commitments under subsection (c) of Section 2 or the last paragraph In Section 2, U.S. Cwtoms 

and Border Protection will confiscate counterfeit and pirated goods or levy tilliffs to compensate the United 

Stales for its lost te~:hnologies and intellcctuol propeny. China commits lo not lake any retelU.tory ection 

in response to the imposition of tariffs or confiscations by lhc United States pursuant to this Section. 
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ANNEXC 

WTO Disputes filed Against China 

1. Chinn- Certain Measures Concerning the Protection of Intellectual Property 

Rights (DS 542) 

• Status: In consultations on 23 March 2018 

• Complainant and third parties: U.S 

• Relevant Agreements and Provisions: (TRJPS): Art. 3, 28.1 (a), 28. 1 (b), 28.2 

• Summarv: On 23 March 2018, the United States requested consultations with 

China concerning certain measures pertaining to the protection of intellectual 

property rights. Ja.pan, the EU, Ukraine, Saudi Arabia and Taipei have requested 

to join the consultations. 

2. Chinn- Subsidies to Producers of Primary Aluminum (DS 519) 

• Status: In consultations on 12 January 2017 

• Complainant and third parties: U.S 

• Relevant Agreements and Provisions: GATT 1994: Art. XVI:I; Subsidies and 

Countervailing Measures: Art. 2.1(a), 2.1(c), 2.2, 5(c), 6.3(a), 6.3(b), 6.3(c), 

6.3(d). 

• Summary: On 12 January 2017, the United States requested consultations with 

China concerning alleged subsidies that China provides to its producers of 

primary aluminum. Japan, Canada, Russia and the EU have requested to join the 

consultations as well. 

3. China- Tariff Rate Quotas for Certain Agricultural Products (DS517) 

• Status: Panel composed 12 february 2018 

• Complainant and third parties: U.S; Australia; Brazil; Canada; Ecuador; European 

Union; Guatemala; India; Indonesia; Japan; Kazakhstan; Korea, Republic of; 

Norway; Russian Federation; Singapore; Chinese Taipei; Ukraine; VietNam 

• Relevant Agreements and Provisions: Protocol of Accession: Part I, para. 1.2 

• GA 1T 1994: Art. X:3(a), XI: I, X111:3(b). 

• Summary: On I 5 December 2016, the United States requested consultations with 

China concerning China's administration of its tariff rate quotas, including those 

for wheat, short- and medium- grain rice, long grain rice, and com. 

4. China- Domestic Support for Agricultural Producers (DSSil) 

• Status: Panel composed on 24 June 2017 

• Complainant and third parties: U.S; Australia; Brazil; Canada; Colombia; 

Ecuador; Egypt; El Salvador; European Union; Guatemala; India; Indonesia; 
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Israel; J;1pan; Kazakhstan; Korea, Republic of; Norway; Pakistan; Paraguay; 

Philippines; Russian Federation; Saudi Arabia, Kingdom of; Singapore; Chinese 

Taipei; Thailand; Turkey; Ukraine; VietNam 

• Relevant Agreements and Provisions: Agriculture: Art. 3.2, 6.3, 7.2(b). 

• Summary: On 13 September 2016, the United States requested consultations with 

China regarding certain measures through which China appears to provide 

domestic support in favour of agricultural producers, in particular, to those 

producing wheat, India rice, Japonica rice and corn. On 22 February 2018, the 

Chair of the panel informed the DSB that the panel expected to issue its linal 

report to the parties no earlier than the third-quarter of 2018, in accordance with 

the timetable adopted after consultation with the parties. 

5. China- Duties and other Measures concerning the Exportation of Certain Raw 

Materials (OS 509) 

• Status: Panel established, but not yet composed on 23 November 2016 

• Complainant and third parties: EU; Brazil; Canada; Chile; Colombia; India; 

Indonesia; Japan; Korea, Republic of; Mexico; Oman; Chinese Taipei; VietNam; 

United States; Russian Federation; Norway; Kazakhstan; Singapore 

• Relevant Agreements and Provisions: Protocol of Accession: , Part I, para. 5.1, 

Part I, para. 5.2, Part I, para. 11.3; GATT \ 994: Art. X:3(a), XI: I. 

• Summary: On 19 July 2016, the European Union requested consultations with 

China regarding China's duties and other alleged restrictions on the export of 

various forms of antimony, chromium, cobalt, copper, graphite, indium, lead, 

magnesia, talc, tantalum and tin. The European Union also considers that the 

measur-es a lso appear to nullify or impair the benefits accruing to the European 

Union directly or indirectly under the cited agreements. 

6. China- Export Duties on Certain Raw Materials (DS 508) 

• Status: Panel established, but not yet composed on 8 November 2016 

• Complainant and third parties: U.S; Brazil; Canada; Chile; European Union; 

India; Indonesia; Japan; Kazakhstan; Korea, Republic of; Mexico; Norway; 

Russian Federation; Singapore; Chinese Taipei; VietNam 

• Relevant Agreements and Provisions: Protocol of Accession: Part I, para. 11.3, 

Part I, para. 1.2, GATT 1994: Art. X:3(a), XI: I. 

• Summary and key findings: On 13 July 2016, the United States requested 

consultations with China regarding China's export duties on various forms of 

antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum, and tin. The 

United States claims that the a lleged restrictions appear to be inconsistent with 

Paragrophs 2(A)(2), 5.1 , 11.3 of Part I of China's Accession Protocol, as well as 

paragraph 1.2 of the Accession Protocol (to the extent that it incorporates 

paragraphs 83, 84, 162 and 165 of the Report of the Working Party on the 

Accession of China), and Articles X:3(a) and XI: I of the GATT 1994. 

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7. China-Tax Measures Concerning Certain Domestically Produced Aircraft (OS 

SOl ) 

• Status: In consultations on 08 December 2015 

• Complainant and third parties: U.S 

• Relevant Agreements and Provisions: GATT 1994: Art.lll:2, 111:4, X: I, Protocol 

of Accession: Part I, para. 1.2, para 2(C)( I) and 2(C)(2). 

• Summarv: On 8 December 2015, the United States requested consultations with 

China regarding tax measures in relation to the sale of certain domestically 

produced aircraft in China. 

8. China-Measures Related to Demonstration Bases and common Service Platforms 

Programs (OS489) 

• Status: Panel established, but not yet composed on 22 April 2015 

• Complainant and third parties: U.S; European Union; Australia; Canada; India; 

Korea, Republic of; Brazil; Japan; Russian Federation; Colombia; Singapore; 

Chinese Taipei; Saudi Arabia, Kingdom of; Dominican Republic. 

• Relevant Agreements and Provisions: Subsidies and Countervailing Measures: 

Art. 3.1(a), 3.2. 

• Summary: On II February 2015, the United States requested consultations with 

China with regard to certain measures providing subsidies contingent upon export 

performance to enterprises in several industries in China. On 14 April2016, 

China and the United States informed the DSB that they had reached an 

agreement in relation to this dispute in the form of a Memorandum of 

Understanding. 

9. China- Anti-Dumping Measures on Imports of Cellulose Pulp from Canada 

(DS483) 

• Status: decided in favor of the complainant, Panel decision adopted by the DSB 

on May 22, 20 17; implementation notified by respondent on II January 20 I 8 

• Complainant and third parties: Canada; Brazil, Chile, EU, Japan, Korea, Norway, 

Singapore, Uruguay, U.S 

• Relevant Agreements and Provisions: Anti-dumping (Article VI ofGATI 1994): 

Art. I, 2.1 , 2.2, 2.2. I .I, 2.2.2, 2.4, 3.1, 3.2, 3.4, 3.5, 4.1 , 6.2, 6.8, 6.9, 6.1 0, 6.1 0.2, 

8.1 , 8.3, 12.2, 12.2.2, 9.4, Annex II; GA TI 1994: Art. VI 

• Summary and. key findings: This dispute concerned the anti-dumping measure 

imposed by China on imports of cellulose pulp originating from Canada. Canada 

challenged MOFCOM's determination of injury in the anti-dumping investigation 

at issue. Canada requested that the Panel find that the measure at issue is 

inconsistent with China's obligations under Articles 3.1 , 3.2, 3.4, and 3.5 of the 

Anti-Dumping Agreement, and as a consequence also inconsistent with Article I 

of the Anti·Dumping Agreement and Anicle VI of the GATT 1994. The Panel 

upheld some of Canada· s claims and rejected others, ruling in a number of 

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instances that MOFCOM has failed to adequately explain its anti-dumping 

findings. The Panel also upheld Canada's consequential claims that China acted 

inconsistently with Article I of the Anti-Dumping Agreement and Article VI of 

the GATT 1994. 

10. Chinn - Measures Imposing Anti-Dumping Duties on High-Performance Stainless 

Steel Seamless Tubes ("HP-SSST") from the European Union (DS460, DS 454) 

• Status: Report(s) adopted, with recommendation to bring measure(s) into 

conformity on 28 October 2015 

• Complainant and third parties: EU; Japan; Korea, Republic of; India; Turkey; 

United States 

• Relevant Agreements and Provisions: Anti-dumping (Article VI of GATT 1994): 

Art. I, 2.2, 2.4, 2.4.2, 3.1 , 3.2, 3.4, 3.5, 6.4, 6.5, 6.5.1, 6.7, 6.9, 7.4, 12.2, 12.2.2, 

Annex I, Annex II; GATT 1994: Art. VI 

• Summarv and key findings: 

ADA Arts. 2.2.1 and 2.2.2-the Appellate Body upheld much of the Panel's 

finding in that China had acted inconsistently with ADA and in one instance, 

completed the legal analysis and found that China acted inconsistently with the 

ADA's injury provisions and its requirement to disclose the essential facts 

underlying MOFCOM's dumping determination. 

The Panel also made findings of inconsistency with ADA Arts. I, 2.4, 7.4, 12.2, 

12.2.2, 6.8 and Paragraph I of Annex II that were not appealed. 

II. China - Measures Relating to the Production and Exportation of Apparel and 

Textile Products (DS4SI) 

• Status: In consultations on 15 October 2012 

• Complainant and third parties: Mexico 

• Relevant Agreements and Provisions: Agriculture: Art. 3, 9, 10; GATT 1994: 

Art. lll:4, XVI; Subsidies and Countervailing Measures: Art. I, 1.1 (a), 1.1 (b), 2, 

2.1, 2.2, 2.3, 3.l(a), 3.l(b), 4.2, 5(c), 6.3(b), 6.3(c), 6.4, 6.5, 7.2; Protocol of 

Accession: Part I, para. 1.2 

• Summarv: On I 5 October 2012, Mexico requested consultations with China 

concerning measures that allegedly support producers and exporters of apparel 

and textile products. Measures cited include tax exemptions for certain 

enterprises, reduction of import duties and VAT for purchase of equipment by 

certain groups of enterprises and those located in certain regions, measures 

contingent on use of Chinese goods and contingent on export performance, low 

cost loans by state-owned banks to certain industries, preferential land use rights, 

discounted electricity rates, support for production, sale and transportation 

provided to cotton farmers and the Chinese petrochemical industry, and cash 

payments from government agencies. 

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12. China-Certain Measures Affecting the Automobile a nd Automobile-Parts 

Industries (OS 450) 

• Status: In consultations on 17 September 2012 

• Complainant and third parties: U.S 

• Relevant Agreements and Provisions: GATT 1994: Art. XVI: I; Subsidies and 

Countervailing Measures: Art. 25.1, 25.2, 25.3, 25.4; Protocol of Accession: Part 

I, para. 1.2 

• Summacy: On 17 September 2012, the United States requested consultations with 

China concerning certain measures providing subsidies in the fonn of grants, 

loans, forgone government revenue, the provision of goods and services, and 

other incentives contingent upon export perfonnance to automobile and 

automobile-parts enterprises in China. 

13. China- Anti-Dumping and Countervailing Duties on Certain Automobiles from 

the United States (DS440) 

• Status: Report(s) adopted, no further action required on 18 June 2014 

• Compla inant and third parties: U.S; Colombia; European Union; India; Japan; 

Korea, Republic of; Oman; Turkey; Saudi Arabia 

• Relevant Agreements and Provisions: Anti-dumping (Article VI of GATT 1994): 

Art. I, 3.1 , 3.2, 3.4, 3.5, 4.1 , 5.3, 5.4, 6.2, 6.5.1 , 6.8, 6.9, Annex II; GATT 1994: 

Art. VI~ Subsidies and Countervailing Measures: Art. 10, 11.3, 11.4, 12.4.1, 12.7, 

12.8, 15.1, 15.2, 15.4, 15.5, 16.1, 22.3, 22.5 

• Summary and key findings: 

ADA Art. 6-the Panel found a variety of violations for failures with respect to 

non-confidential infonnation and failures to disclose essential facts. The Panel 

also found that MOFCOM had failed to give public notice of the findings and 

conclusions and had failed to base its price effects and causation analyses on an 

objective examination based on positive evidence, inconsistently with these 

provisions. 

14. China- Measures Related to the Exportation of Rare Earths, Tungsten and 

Molybdenum (DS 433, DS 432, DS 431) 

• Status: Implementation notified by respondent on 20 May 2015 

• Complainant and third parties: Japan; Brazil; Canada; Colombia; European 

Union; India; Korea, Republic of; Norway; Oman; Saudi Arabia, Kingdom of; 

Chinese Taipei; United States; VietNam; Argentina; Australia; Indonesia; 

Turkey; Peru; Russian Federation 

• Relevant Agreements and Provisions: GATT 1994: Art. VII, VIII, X, XI, XI: I, 

X:3(a); Protocol of Accession: Part I, para. 5.2, Part I, para. 5.1, Part I, para. 8.2,, 

Part I, para. 1.2, Part I, para. 7.2, Part I, para. 11.3 

• Summary and key findings: 

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Accession Protocol/Marrakesh Agreement/GA TT Art. XX- the Panel found that 

China's export duties on rare earths, tungsten, and molybdenum were inconsistent 

with its Accession Protocol. 

The Panel also found that China's export quotas on rare earths, tungsten, and 

molybdenum were inconsistent with GATT Art. XI but concluded that the export 

quotas were not justified under the exception in GATT Art. XX(g), which allows 

WTO Members to implement GAIT-inconsistent measures "relating to the 

conservation of exhaustible natural resources". The Panel found that China 

maintained restrictions (minimum registered capital, prior export experience and 

export performance) on the trading rights of enterprises exporting rare earths and 

molybdenum contrary to paras. 83 and 84 of China's Working Party Report. The 

Panel also found that China was entitled to seek to justify these breaches pursuant 

to Art. XX(g). However, China failed to make a prima facie case that such 

requirements were justified pursuant to Art. XX(g). 

15. China-China- Anti-Dumping and Countervailing Duty Measures on Broiler 

Products from the United States (DS 427) 

• Status: Compliance proceedings completed with finding(s) of non-compliance on 

28 February 2018 

• Complainant and third parties: U.S; European Union; Japan; Norway; Thailand; 

Saudi Arabia, Kingdom of; Chile; Mexico 

• Relevant Agreements and Provisions: Anti-dumping (Article VI of GATT 1994): 

Art. I, 2.2, 2.2.1.1, 2.4, 3.1, 3.2, 3.4, 3.5, 4.1, 5.1, 6.2, 6.4, 6.5.1, 6.8, 6.9, 12.2, 

12.2.1, 12.2.2, 12.7, Annex II; GATT 1994: Art. VI, Vl:3; Subsidies and 

Countervailing Measures: Art. 10, 11.1 , 12.3, 12.4.1, 12.7, 12.8, 15.1, 15.2, 15.4, 

15.5, 16.1 ' 19.4, 22.3, 22.4, 22.5 

• Summary and key findings: 

ADA Art. 6-the Panel found that China's Ministry of Commerce (MOFCOM) 

had failed to provide an opportunity for interested parties with adverse interests to 

meet and present their views, that the non-confidential summaries of the 

information redacted from the confidential version of the Petition did not provide 

a reasonable understanding of the information submitted in confidence, and that 

MOFCOM had failed to disclose certain essential facts. 

ADA Art. 2.2.1.1- the Panel found that MOFCOM had improperly rejected the 

cost allocations in the normal books and records of two of the respondents as it 

did not explain its reasons for doing so. 

ADA Art. 6.8 and ASCM Art. 12.7- the Panel concluded that the United States 

made a prima facie case that the rates applied were in contravention of Arts. 1\.8 

and 12.7. 

ASCM Art. 19.4 and GATT Art. Vl:3- the Panel found that MOFCOM 

improperly calculated the amount of per unit subsidization. 

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ADA Art. 3/ASCM Art. 15- the Panel determined that MOFCOM acted 

inconsistently with ADA Arts. 3.1/15.1 and 3.2115.2 when it compared domestic 

and import prices with a different product mix in its price effects analysis. 

ADA Arts. 12.2 and 12.2.2 and ASCM Arts. 22.3 and 22.5- the Panel found that 

MOFCOM had failed to disclose "in sufficient detail the findings and conclusions 

reached on all issues of fact and law considered material" or '·all relevant 

information on matters of fact" in its determinations with respect to the "all 

others" rate; and failed to explain in its final determinations its reasons for 

rejecting certain arguments made by US interested parties before MOFCOM. 

16. China-Definitive Anti-Dumping Duties on X-Ray Security Inspection Equipment 

from the European Union (DS 425) 

• Status: Implementation notified by respondent on 26 February 2014 

• Complainant and third parties: EU; Japan; United States; Thailand; Norway; 

India; Chile 

• Relevant Agreements and Provisions: Anti-dumping (Article VI of GATT 1994): 

Art. 2.4, 2.6, 3.1 , 3.2, 3.4, 3.5, 6.1 , 6.2, 6.4, 6.5, 6.5.1, 6.9, 12.2.1, 12.2.2 

• GATT 1994: Art. VI: I, Vl:6 

• Summary and key findings: 

ADA Art. 3- the Panel held that MOFCOM's price undercutting and price 

suppression analyses were inconsistent with Arts. 3.1 and 3.2.; that the price 

effects analysis was not based on an objective examination of positive evidence, 

as MOFCOM had failed to ensure that the prices it was comparing as part of its 

price effects analysis were comparable; and that MOFCOM acted inconsistently 

with Arts. 3.1 and 3.4 because of its failure to consider all relevant economic 

factors. 

ADA Art. 6.5.1- the Panel upheld the majority of the European Union's claims 

that the non-confidential summaries were inadequate to permit a reasonable 

understanding of the substance of the information submitted in confidence and 

that MOFCOM had failed to disclose certain essential facts to interested parties. 

ADA Art. 12.2.2- the Panel found that MOFCOM's failure to include in its 

public notice relevant information regarding its price effects analysis and the 

factual basis for the determination of the residual rate was contrary to the first 

sentence of Art. 12.2.2, also that MOFCOM's public notice violated the second 

sentence of Art. 12.2.2 as it failed to explain why it had rejected certain 

arguments regarding the treatment of domestic sales to affiliated distributors. 

Other aspects of the European Union's claim under Art. 12.2.2 were not upheld 

by the Panel. 

17. China-Measures concerning wind power equipment (DS 419) 

• Status: In consultations on 22 December 20 I 0 

• Complainant and third parties: U.S 

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• Relevant Agreements and Provisions: GATT 1994: An. XVI: I; Subsidies and 

Countervailing Measures: An. 3, 25. 1, 25.2, 25.3, 25.4; Protocol of Accession: 

Pan I, para. 1.2 

• Summary and key findings: On 22 December 20 I 0, the United States requested 

consultations with China concerning cenain measures providing grants, funds, or 

awards to enterprises manufacturing wind power equipment (including the overall 

unit, and pans thereof) in China. The United States indicated that the measures 

appear to provide grants, funds, or awards that are contingent on the use of 

domestic over imported goods. In addition, the United States considered that, as 

Chinn has not notified these measures, it appears to have failed to comply with 

Article XVI:! of the GATT 1994 and Article 25. 1, 25.2, 25.3 and 25.4 of the 

SCM Agreement. The United States also alleged that, as China has not made 

available a translation of these measures into one or more of the official languages 

of the WTO, it also appears to have failed to comply with its obligation under Pan 

I, Paragraph 1.2, of its Protocol of Accession (to the extent that it incorporates 

paragraph 334 of the Report of the Working Party on the Accession of China). 

18. China- Countervailing and Anti-Dumping Duties on Grain Oriented Flat-rolled 

Electrical Steel from the United States (GOES) (DS 414) 

• ~ Report(s) adopted, with recommendation to bring measure(s) into 

conformity on 12 November 2012 

• Complainant and third oonjes: U.S; Argentina; European Union: Honduras; India; 

Japan; Korea, Republic of; Saudi Arabia, Kingdom of; Viet Nom; Russian 

Federation 

• Relevant Agreements and Provjsjons: Anti-dumping (Article VI of GATT 1994): 

Art. I, 3.1, 3.2, 3.5, 6.5.1, 6.8, 6.9, 12.2, 12.2.2, Annex II; GATT 1994: An. VI; 

Subsidies and Countervailing Measures: Art. I 0, 11.2, 11.3, 12.4.1, 12.7, 12.8, 

15.1, 15.2, 15.5, 22.3, 22.5 

• Summarv and key findings: The measure at issue was China's imposition of antidumping and countervailing duties on grain oriented flat-rolled electrical steel 

from the United States 

ASCM Arts. 11.2 and 11.3- the Panel concluded MOFCOM initiated 

countervailing duty investigations into II programs without sufficient evidence to 

justify it, contrary to An. 11.3. 

ADA Art. 6.8 and Annex II para. 1/ASCM Art. 12.7- the Panel found that 

MOFCOM improperly resorted to facts available to calculate the '·all others"' 

dumping margin and subsidies rate for unknown exporters. 

ADA An. 3/ASCM Art. IS- the Appellate Body upheld the Panel's finding that 

MOFCOM wrongly relied on the •·tow price" of subject imports relative to 

domestic prices in reaching its price effects finding, as the evidence available 

could not have allowed an objective and impartial investigating authority to 

determine that subject imports were priced lower than domestic products. 

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ADA Art. 6/ASCM Art. 12- the Panel found deficiencies in MOFCOM's 

essential facts disclosure in connection with the resort of facts available, the price 

effects analysis and the causation analysis with respect to non-subject imports, 

contrary to ADA Art. 6.9 and ASCM Art. 12.8. The Appellate Body upheld the 

finding with respect to price effects. The Panel also found that MOFCOM failed 

to require the applicants to furnish non-confidential summaries in sufficient detail 

to permit a reasonable understanding of the substance of the information 

submitted in confidence, contrary to ADA Art. 6.5.1 and ASCM Art. 12.4.1. 

19. China - Countervailing and Anti-Dumping Duties on Grain Oriented Flat-rolled 

Electrical Steel from the United States (GOES) (Art. 2 1.5) (DS 414) 

• Status: Rcport(s) adopted, with recommendation to bring measure(s) into 

conformity on 31 August 2015 

• Complainant and third parties: U.S; Argentina; European Union; Honduras; India; 

Japan; Korea, Republic of; Saudi Arabia, Kingdom of; VietNam; Russian 

Federation 

• Relevant Agreements and Provjsjons: Anti-dumping (Article VI of GAlT 1994): 

Art. 3.1, 3.2, 3.4, 3.5, 6.9, 12.2, 12.2.2; Subsidies and Countervailing Measures: 

Art. 12.8, 15.1, 15.2, 15.4, 15.5, 22.3, 22.5 

• Summary and key findings: Measure at issue: Measures taken by China to 

implement the DSB recommendations and rulings in China - GOES, as set forth 

in MOFCOM's Redetermination issued on 31 July 2013. The key findings were as 

follows: 

ADA Art.3/ASCM Art.l5- the Panel found this claim was not properly before it 

as it pertained to a matter that could have been raised in the original proceedings 

but was. not, and it could not now be raised in compliance proceedings. The Panel 

found several aspects of MOFCOM's causation determination to be inconsistent 

with these provisions. 

ADA Art.6.9/ASCM Art.I2/Art. 22- the Panel upheld some claims raised by the 

United States while rejecting others. The Panel also found that the claims 

regarding inadequate public notice related to aspects ofMOFCOM's 

Redetermination on which the Panel had already found a substantive violation. 

Thus, the Panel exercised judicial economy on these claims. 

20. ChinA-Certain Measures Affecting Electronic: Payment Services (DS 413) 

• Status: Implementation notified by the Respondent on 23 July 2013 

• Complainant and third parties: U.S; Australia; Ecuador; European Union; 

Guatemala; Japan; Korea, Republic of; India 

• Relevant Agreements and Provisions: Services (GATS): Art. XVI, XVI:I, 

XVI:2(a), XVII 

• Summa ry and kev findin!!S: 

The United States alleged that China permits only a Chinese entity (China 

Union Pay) to supply electronic payment services for payment card transactions 

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denominated and paid in renminbi and also requires all payment card processing 

devices to be compatible with that entity's system and bear that company's logo. 

It further argued that the Chinese entity has guaranteed access to all merchants 

while foreign services suppliers must negotiate for access to merchants. 

Classification of the services at issue: The Panel found that electronic payment 

services for payment card transactions are classifiable under Subsector 7.B(d) of 

China's Services Schedule, which reads ··[a]ll payment and money transmission 

services, including credit, charge, and debit cards, travellers cheques and bankers 

drafts (including import and export settlement)". 

Scope of China's GATS commitments: The Panel rejected the United States' 

view that China's Schedule includes a cross-border (mode I) market access 

commitment to allow the supply of EPS into China by foreign EPS suppliers. The 

Panel found, however, that China's Schedule includes a market access 

commitment that allows foreign EPS suppliers to supply their services through 

commercial presence (mode 3) in China, so long as a supplier meets certain 

qualifications requirements related to local currency business. The Panel further 

found that China·s Schedule contains a full national treatment commitment for the 

cross-border supply ofEPS (mode I) as well as a commitment under mode 3 

(commercial presence) that is subject to certain qualifications requirements 

related tOo local currency business. 

GATS Art. XVI- the Panel rejected on the basis of lack of evidence that China 

maintains China UnionPay (CUP) as an across-the-board monopoly supplier for 

the processing of all domestic RMB payment card transactions. The Panel found, 

however, that China acted inconsistently with GATS Art. XVI:2(a) in view of its 

mode 3 market access commitment by granting CUP a monopoly for the clearing 

of certain RMB payment card transactions 

GATS Art. XVII of the GATS- the Panel found that some of the relevant 

requirements, namely the requirements that all bank cards issued in China must 

bear the Yin Lian/UnionPay logo, that all terminal equipment in China must be 

capable of accepting Yin Lian/UnionPay logo cards, and that acquirers of 

transactions for payment card companies post the Yin Lian/UnionPay logo and be 

capable of accepting payment cards bearing that logo, are each inconsistent with 

China's national treatment obligations under Art. XVII. 

21. China-Measures Related to the Exportation of Various Raw Materials (OS 398, 

DS 395, DS 394) 

• Status: Implementation notified by the Respondent on 28 January 2013 

• Complainant and third parties: Mexico; EU; U.S; Argentina; Brazil; Canada; 

Chile; Colombia; Ecuador; India; Japan; Korea, Republic of; Norway; Chinese 

Taipei; Turkey; Saudi Arabia, Kingdom of 

• Relevant Agreements and Provisions: GATT 1994: Art. VIII, VIII: I, Vlll:4, X, 

X: I, X:3, XI, XI: I; Protocol of Accession: Part I, para. 1.2, Part I, para. 5.1, Part 

I, para. 5.2, Part I, para. 8.2, Part I, para. 11.3. 

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• Summary and key findings: On 21 August 2009, Mexico requested consultations 

with China with respect to China's restraints on the export from China of various 

forms of raw materials. Mexico cites 32 measures through which China allegedly 

imposes restraints on the exports in question and note that there appear to be 

additional unpublished restrictive measures. 

DSU Art. 6.2- Based on these procedural grounds, the Appellate Body declared a 

number of the Paners findings with respect to the additional restrictions .. moot 

and of no legal effect" 

China's Accession Protocol, para. 11.3- the Appellate Body upheld the Panel's 

recommendation that China bring its export duty and export quota measures into 

conformity with its WTO obligations such that the .. series of measures" did not 

operate to bring about a WTO-inconsistent result. 

GATT Art. XX- the Appellate Body upheld the Panel's finding that there is no 

basis in China's Accession Protocol to allow the application of Art. XX to 

China's obligations under para.ll.3 of the Protocol. The Panel had concluded that 

China's export restraints were not justified pursuant to Arts. XX(b) and (g). These 

findings were not appealed. 

GATT Art. XI- the Appellate Body upheld the Panel's conclusion that China had 

not demonstrated that its export quota on refractory-grade bauxite was 

"temporarily applied" to either prevent or relieve a "critical shortage•·, within the 

meaning of Art. Xl:2(a). The Panel concluded that the failure by China to publish 

promptly the decision not to authorize an export quota for zinc was inconsistent 

with Art. X: I. This conclusion was not appealed. 

22. China-Grants, Loans and Other Incentives (OS 390) 

• Status: In consultations on 19 January 2009 

• Complainant and third parties: Guatemala 

• Relevant Agreements and Provisions: Agriculture: Art. 3, 8, 9, I 0; GATT 1994: 

Art. 111:4; Subsidies and Countervailing Measures: Art. 3; Protocol of Accession: 

Part I, para. 1.2, Part I, para. 12.1. 

• Summary and key findings: In 2009, Guatemala requested consultations with 

China with regard to certain measures offering grants, loans and other incentives 

to enterprises in China that arc contingent upon export performance. Additionally, 

to the extent that these measures provide subsidies for agricultural products, they 

appear to be inconsistent with Articles 3, 8, 9, and 10 of the Agreement on 

Agriculture. Finally, the grants, loans, and other incentives appear to be 

inconsistent with Article Ill:4 of the GATT 1994 to the extent that the measures 

benefit products of Chinese origin but not imported products. 

23. China- Grants, Loans and Other Incentives (OS 388, OS 387) 

• Status: In consultations on 19 December 2008 

• Complainant and third parties: Mexico, U.S 

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• Relevant Agreements and Provisions: Agriculture: Art. 3, 8, 9, 10; GATT 1994: 

Art. 111:4; Subsidies and Countervailing Measures: Art. 3; Protocol of Accession: 

Part I, para. 1.2, Part I, para. 12.1. 

• Summa!rY and key findings: same as above, different dates and complainant. 

Guatemala among others also requested to join the consultations in 2009. China 

informed the DSB that it had accepted the requests of Australia, Canada, 

Colombia, Ecuador, the European Communities, Guatemala, New Zealand, 

Turkey and the United States to join the consultations. 

24. China-Measures Affecting Financial Information Services and Foreign Financia l 

Information Suppliers (OS 378) 

• Status: Settled or terminated (withdrawn, mutually agreed solution) 

on 20 June 2008 

• Complainant and third parties: Canada 

• Relevant Agreements and Provisions: Services (GATS): Art. XVI, XVII, XVIII; 

Protocol of Accession: Part I, para. 1.2 

• Summarv and key findings: Canada makes claims against a number of Chinese 

measures affecting financial information services and foreign financial 

information service suppliers in China. Such measures include no fewer than a 

dozen legal and administrative instruments which require foreign financial 

information suppliers to supply their services through an entity designated by 

Xinhua News Agency (Xinhua). Xinhua has designated only one such agent, 

China Economic Information Service (CEIS), one of Xinhua's commercial 

enterprises. 

• Canada also claims that China is preventing foreign financial information service 

suppliers from establishing any commercial presence in China other than limited 

representative offices. Canada therefore considers that the measures at issue are 

inconsistent with Articles XVI, XVII and XVIII of the GATS, the horizontal 

standsti II commitment contained in China's Schedule of obligations under the 

GATS, and China's Accession Protocol. 

On 4 December 2008, China and Canada informed the DSB that they had reached 

an agreement in relation to this dispute in the form of a Memorandum of 

Understanding: 

China confirms that the State Council will, by 31 January 2009, authorize a new 

regulator of financial information services (the "new regulator") and that the new 

regulator will be a governmental entity separate from, and not accountable to, any 

supplier of financial information services. The new regulator, within its mandate, 

will have the authority to require that suppliers of financial information services 

comply with all relevant Chinese laws, regulations, and departmental rules. 

China confirms that a legal instrument (the "new measures") will be promulgated 

by 30 April 2009 to replace the 2006 Measures, effective no later than I June 

2009. 

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China confirms that under the new measures, a new licensing system will be 

applied to foreign suppliers of financial information services. China further 

confirms that this new licensing system will conform to the commitments that 

China made in paragraph 308 of the Working Party Report to the Protocol of 

Accession. 

China confirms that it will accord foreign financial information services and 

foreign suppliers no less favorable treatment than that accorded to Chinese 

financial information services and service suppliers. 

China clarifies that Chinese laws, regulations, and departmental rules do not 

impose any prohibitions on the supply, through commercial presence, of financial 

information services. 

25. China- Measures Affecting Financial Informa tion Services and Foreign Financial 

Informa tion Suppliers (DS 373) . 

• Status: Settled or terminated (withdrawn, mutually agreed solution) on 4 

December 2008 

• Complainant and third parties: U.S 

• Relevant Agreements and Provisions: Services (GATS): Art. XVI, XVII, XVIII; 

Protocol of Accession: Part I, para. 1.2 

• Summary and key findings: same as above. 

26. China - Measures Affecting Financia l Information Services and Foreign Financial 

Information Suppliers (DS 372) 

• Status: Settled or terminated (withdrawn, mutually agreed solution) on 4 

December 2008 

• Complainant and third parties: EU 

• Relevant Agreements and Provisions: Services (GATS): Art. XVI: 2(a), XVJ:2(b), 

XVII, XVIII; Protocol of Accession: Part I, para. 1.2 

• Summary and key findings: same as above. 

27. China-Measures Affecting Trading Rights and Distribution Services for Certain 

Publications and Audiovisual Entertainment Products (DS 363) 

• Status: Implementation notified by Respondent on 24 May 2012 

• Complainant and third parties: U.S; Australia; European Communities; Japan; 

Korea, Republic of; Chinese Taipei 

• Relevant Agreements and Provisions: Services (GATS): Art. XVI, XVII; GATT 

1994: Art. III:4, XI: I; Protocol of Accession: Part I, para. 1.2, Part I, para. 5.1, 

Part I, para. 5.2 

• Summarv and key findings: On 10 Apri12007, the United States requested 

consultations with China concerning: (I) certain measures that restrict trading 

rights with respect to imported films for theatrical release, audiovisual home 

entertainment products (e.g. video cassettes and DVDs), sound recordings and 

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publications (e.g. books, magazines, newspapers and electronic publications); and 

(2) certain measures that restrict market access for, or discriminate against, 

foreign suppliers of distribution services for publications and foreign suppliers of 

audiovisual services (including distribution services) for audiovisual home 

entertainment products. 

• Regarding trading rights, on various Chinese measures that reserve, to 

centain Chinese state-designated and wholly or partially state-owned 

enterprises, the right to import films for theatrical release, audiovisual 

home entertainment products, sound recordings and publications; 

Regarding distribution services, on various Chinese measures that impose 

market access restrictions or discriminatory limitations on foreign service 

providers seeking to engage in the distribution of publications and certain 

audiovisual home entertainment products. 

China's Accession Protocol- the Panel found that provisions in China's measures 

that either limit to wholly State-owned enterprises importation rights regarding, or 

prohibit foreign-invested enterprises in China from importing, reading materials, 

A VHE products, sound recordings, and films, were inconsistent with China's 

obligation, under paras. 1.2 and 5.1 of China's Accession Protocol a:nd paras. The 

Appellate !Body upheld the Panel's findings that the relevant provisions of the 

measures were subject to, and inconsistent with, China's trading rights 

commitments. 

GATT Art. XX(a)- the Appellate Body found that, by virtue ofthe introductory 

clause of para. 5.1 of China's Accession Protocol, China could, in this dispute, 

invoke Art. XX( a) to justify provisions found to be inconsistent with China's 

trading rights commitments under its Accession Protocol and Working Party 

Report. The Appellate Body upheld the Panel's conclusion that China had not 

demonstrated that the relevant provisions were '"necessary" to protect public 

morals, and that, as a result, China had not established that these provisions were 

justified under Art. XX(a). 

GATS Arts. XVI and XVII- the Panel concluded that China's measures regarding 

distribution services for reading materials and A VHE products, as well as 

electronic sound recordings, were inconsistent with China's market access or 

national treatment commitments in respect of Arts. XVI and XVII, respectively. 

The Appellate Body upheld the Panel's finding that China's measures prohibiting 

foreign-invested entities from engaging in the distribution of sound recordings in 

electronic form were inconsistent with the national treatment obligation in 

Art. XVII. 

GATT Art. lll:4-the Panel found that certain Chinese measures affecting the 

distributio.n of imported reading materials were inconsistent with Art. lll:4. These 

findings were not appealed. 

On 9 May 2012, China and the United States informed the DSB of key elements 

relating to films for theatrical release as set forth in the Memorandum of Understanding 

mentioned at the DSB meeting on 22 February 2012. At the DSB meeting on 24 May 

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2012, China said that it had taken all necessary steps and had thus complied with the 

DSB recommendlations. The United States said that the Memorandum of Understanding 

represented significant progress but not a final resolution. 

28. China- Measures Affecting the Protection and Enforcement of Intellectual 

Property Rights. (DS 362) 

• Status: Implementation notified by Respondent on 19 March 2010 

• Complainant and third parties: U.S; Argentina; Australia; Brazil; Canada; 

European Communities; India; Japan; Korea, Republic of; Mexico; Chinese 

Taipei; Thailand; Turkey 

• Relevant Agreements and Provisions: TRJPS: Art. 3.1 , 9.1, 14, 41.1, 46, 59, 61 

• Summary and key findings: The four matters on which the United States requests 

consultations arc: 

the thresholds that must be met in order for certain acts of trademark 

counterfeiting and copyright piracy to be subject to criminal procedures 

and penalties; 

goods that infringe intellectual property rights that are confiscated by 

Chinese customs authorities, in particular the disposal of such goods 

following removal of their infringing features; 

the scope of coverage of criminal procedures and penalties for 

unauthorized reproduction or unauthorized distribution of copyrighted 

works; and 

the denial of copyright and related rights protection and enforcement to 

creative works of authorship, sound recordings and performances that 

have not been authorized for publication or distribution within China. 

TRIPS Art. 61- the Panel found that while China's criminal measures exclude 

some copyright and trademark infringements from criminal liability where the 

infringement falls below numerical thresholds fixed in terms of the amount of 

turnover, profit, sales or copies of infringing goods. 

TRIPS Art. 59- the Panel found that the customs measures were not subject to 

Trips Agreement Arts. 51 to 60 to the extent that they apply to exports. The Panel 

concluded that the way in which China's customs auctions these goods was 

inconsistent with Art. 59. 

TRIPS Art. 9. 1/ TRIPS Art. 41.1- the Panel found that while China has the right 

to prohibit the circulation and exhibition of works, this does not justify the denial 

of all copyright protection in any work. China's failure to protect copyright in 

prohibited works (i.e. that are banned because of their illegal content) is therefore 

inconsistent with Art. 5(1) of the Berne Convention as incorporated in Art. 9.1 , as 

well as with Art. 41.1, as the copyright in such prohibited works cannot be 

enforced. 

29. China-Certain Measures Granting Refunds, Reductions or Exemptions from 

Taxes and Other Payments (DS 359) 

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• Status: Settled or terminated (withdrawn, mutually agreed solution) on 7 February 

2008 

• Complainant and third parties: Mexico; Argentina; Australia; Canada; Chile; 

Colombia; Egypt; European Union; Japan; Chinese Taipei 

• Relevant Agreements and Provisions: GATT 1994: Art. 111:4; Subsidies and 

Countervailing Measures: Art. 3, 3.l(b), 3.2; Trade-Related Investment Measures 

(TRIMs): Art. 2, 2.1, Annex I; Protocol of Accession: Part I, para. 1.2, Part I, 

para. 7.2, Part I, para. 7.3, Part I, para. I 0.3 

• Summarv and key findings: The request for consultations identifies various 

measures, including any amendments and any related or implementing measures. 

There were several clarifications and affirmations made in the memorandum of 

understanding, although there were no new commitments: China has explained 

that legal instruments of at least equal legal stature to the circulars identified in 

the complaints will contain provisions stating that these circulars are repealed, and 

will be issued by the competent authorities, by 31 December 2007, effective no 

later than I January 2008. China confirms that the tax preferences under the 

circulars identified will not be reinstated. 

Article 3 provided an exemption for certain foreign-invested enterprises from 

payments to the State for worker allowances. China has explained that, at the time 

the State Council promulgated the State Council Provisions, Article II of the 

State Council Regulations on Labor Management in Sino-Foreign Joint Ventures, 

Guo Fa [ 1980) No. 199 (26 July 1980), required foreign-invested enterprises to 

make such payments to the State. China has confirmed, however, that because this 

requirement was eliminated by the State Council Decision on Abolition of Certain 

Administrative Regulations Promulgated Prior to the End of 2000, Order [200 I] 

No. 319 ( 6 October 200 I), the exemption provided under Article 3 of the State 

Council Provisions is no longer operative. China confirms that Article 3 of the 

State Council Provisions may no longer serve as a legal basis to exempt foreigninvested enterprises from making payments required by Chinese law, regulation, 

or other official measure. 

WTO-consistency of value-added tax (VAT) refunds: China has stated that these 

circulars do not create a preference, either in law or on a de facto basis, for the use 

of domestic over imported goods in connection with purchases of domesticallyproduced equipment. China also confirmed that it will ensure that imported 

equipment receives VAT treatment under terms and conditions no less favorable 

than those applicable to domestically-produced equipment. 

30. China- Certain Measures Granting Refunds, Reductions or Exemptions from 

Taxes and Other Payments (DS 359) 

• Status: Settled or terminated (withdrawn, mutually agreed solution) on 19 

December 2007 

• Complainant and third parties: U.S; Argentina; Australia; Canada: Chile; 

Colombia; Egypt; European Union; Japan; Chinese Taipei 

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• Relevant Agreements and Provisions: GATT 1994: Art. 111:4; Subsidies and 

Countervailing Measures: Art. 3, 3.1(b), 3.2; Trade-Related Investment Measures 

(TRIMs): Art. 2, 2.1 , Annex I; Protocol of Accession: Part I, para. 1.2, Part I, 

para. 7.2, Part I, para. 7.3, Part I, para. I 0.3 

• Summary and key findinQs: same as DS 359 

31. China- Measures Affecting Imports of Automobile Parts (DS 342, DS 340, DS 339) 

• Status: Implementation notified by respondent on 31 August 2009 

• Complainant and third parties: Canada; Argentina; Australia; Brazil; Japan; 

Mexico; Chinese Taipei; Thailand 

• Relevant Agreements and Provisions: GATT 1994: Art. II, II: I, Ill, Ill: I, III:2, 

III:4, 111:5, X: I, X:3; Rules of Origin: Art. 2; Subsidies and Countervailing 

Measures: Art. 3, 3.1(b), 3.2; Trade-Related Investment Measures (TRIMs): Art. 

2, 2.1; Protocol of Accession: Part I, para. 1.2, Part I, para. 7.2, Part I, para. 7.3 

• Summarv and key findings: Measure at issue: Three legal instruments enacted by 

China which impose a 25 per cent '·charge" 3 on imported auto parts 

"characterized as complete motor vehicles·• based on specified criteria. 

• Key findings: The Appellate Body upheld the Panel's characterization of the 

charge as an "internal charge·• (Art. III:2), rather than as an "ordinary customs 

duty'" (first sentence, Art. II: I (b) 

GATT Arts. Ill- the Appellate Body upheld the Panel's findings that the 

measures violated: (i) Arts. 111:2 because they imposed an internal charge on 

imported auto parts that was not imposed on like domestic auto parts; and (ii) 

Art. 111:4 because they accorded imported parts less favorable treatment than like 

domestic auto parts by, inter alia, subjecting only imported parts to additional 

administrative procedures. 

GATT Arts. 11- the Panel found that, even if the "charge·· were an ordinary 

customs duty, it was still inconsistent with Art. ll:l(a) and (b) because it 

corresponded to the tariff rate for motor vehicles (25 per cent), in excess of the 

applicable tariff rate for auto parts (l 0 per cent) under China's Schedule. The 

Panel rejected China's argument that a rule under the HS would allow auto parts 

to be classified as complete motor vehicles. 

GATT Arts. XX- the Panel rejected China's defense of its measures under 

Art. XX( d) because China had not proven that the measures were '·necessary to 

secure compliance .. with its Schedule. 

32. Chinn- Value-Added Tax on Integrated Circuits 

• Status: Settled or terminated (withdrawn, mutually agreed solution) 

on 5 October 2005 

• Complainant and third parties: U.S 

• Relevant Agreements and Provisions: Services (GATS): Art. XVII; GATT 1994: 

Art. I, Ill 

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• Summary and key findings: On 18 March 2004, the United States requested 

consultations with China concerning China's preferential value-added tax 

("VAT") for domestically-produced or designed integrated circuits (''IC"). 

The United States claims that, although China provides for a 17 percent VAT on 

ICs, enterprises in China are entitled to a partial refund of the VAT on ICs that 

they have produced, resulting in a lower VAT rate on their products. China also 

allows for a partial refund of VAT for domestically-designed ICs that, because of 

technological limitations, are manufactured outside of China. China thus appears 

to be subjecting imported JCs to higher taxes than applied to domestically 

produced !Cs and to be according less favorable treatment to imported ICs. 

According to the notification to the DSB on 14 July 2004, China agreed to amend 

or revoke the measures at issue to eliminate the availability ofV AT refunds on 

ICs produced and sold in China and on ICs designed in China but manufactured 

abroad by I November 2004 and I September 2004 respectively. 

On 5 October 2005, China and the United States informed the DSB that they were 

in agreement that the terms of the agreement had been successfully implemented. 

18 
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Examining the Debt Implications of the Belt and Road 

Initiative from a Policy Perspective 

John Hurley, Scott Morris, and Gailyn Portelance 

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Contents 

1. Introduction .................................................................................................................................. 1 

2. Debt sustainability and BRJ ....................................................................................................... 2 

3. Methodology ................................................................................................................................. 6 

3.1 Debt vulnerability in BRJ countties ................................................................................... 6 

3.2 Identifying BRJ projects ....................................................................................................... 8 

3.3 Constructing the BRI lending pipeline in 23 countries ................................................. 10 

3.4 The debt effect of the BRl lending pipeline ................................................................... 11 

4. Eight focus countries ................................................................................................................. 16 

5. How will China respond to problems of debt distress in BRI countries? ........................ 19 

6. Recommendations ..................................................................................................................... 21 

6.1. MultilateralizingBR1 .......................................................................................................... 21 

6.2. O ther mechanisms for standru:d-setting in BRJ ............................................................ 22 

6.3. China as donor .................................................................................................................... 24 

Appendixes ...................................................................................................................................... 26 

Appendix A: Limitations of the methodology ...................................................................... 26 

Appendix B: Select debt figures for countries significantly or highly vulnerable to debt 

distress ......................................................................................................................................... 28 

Appendix C: Debt relief actions taken by Chinese authorities ........................................... 29 

References ....................................................................................................................................... 33 
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1. Introduction 

Ducingthe 19"' National Party Congress in 2017, China's Communist Party formally 

adopted the Belt and Road Initiative (BRI) under its Pa.ty Constitution as part of a 

resolution to achieve "sha<ed growth through discussion and collaboration." As a result, 

President Xi Jinping entered his second teon with a strategy of international engagement 

defined b)' BRJ, signaling a sustained commitment lo rut initiative that has already been 

heavily invoked by China's leadership. The Par<y Congress may mack the point at which 

-:.1.mbitloo~ chetoOc sl,jfted to Qrl op e:rAhooal pcog"Cam. 

As envisioned, BRJ spans at least 68 countcies with an announced investment as high as $8 

trillion for a vast netwo rk o f transportation, energy, artd teleoornmunications infrastructure 

linking Europe, Africa, and Asia.' It is an infrastructure fUlancing initiative for a large part of 

the global economy that will also serve key economic, foreign policy, and secucity objectives 

for the Chinese government. 

Yet, important questions anse on sustainable fmancing o f the initiative widlin BRl countries, 

and how the Chinese government will position itself on debt sustainability. Infrastructure 

financing, which often entails lending 10 sovereigns o r the use o f a sovereign SIU~rantee, can 

c reate challenges for sovereign debt sustainability. And when the creditor itself is a 

sovereign, o r has official ties to a sovereign as do China's policy banks--China Development 

Bank (CDB), dte E"port-lmport Bank o f China (China Exim Bank), and dte Agcicultural 

D evelopment Bank of China (ADBC)- these challenges o ften affect the bilateral 

relatjonship between the two governments. They are also, to varying degrees, guided by 

standards determined by multilatecal institutions like the Wodd Bank and [ntecnational 

Monetary FtUld (IMF), or by multilatecal mechanisms like me Paris Oub. 

It remains tmcleac the degree to which BRl, a Chinese-led bilateral initiative that seeks to 

employ some multilateral mechanisms to achieve its fmrutcing goals. will be guided by 

multil.atecal standards o n debt sustainability. Tlus paper will e><plore the policy considerations 

facing China and possible multilateral partners in BRJ like the \XIodd Bank, Asian 

InfrastrUcture Investment Bank (AIIB), and Asian Development Brutk (ADB) when it comes 

to sustainable financing and when debt problems acise. 

As a starting point, the paper assesses the current debt vulnerabilities of all ~kcly BRJ 

prospect cotmtcies. ln a subset of 23 countcies that we detemline to be significandy or highly 

vulnerable to debt distress, we construct a BRl project lending pipeline based on publicly 

reported sources. l ntegrating this ftnancingdata into a countty's debt as of end-2016, we 

consider the movement in a countty's overall public debt-to-G DP ratio, as well as the 

concentration of that debt with China as o:edito(. Along these two dimensions, we identify 

eight courttries where BRI appears to create the potential for debt sustainabiliry problems, 

and where China is a dominant creditor in the key position to address those problems. We 

next describe the credit risk mat China faces in each of the eight cotottries. Finally, we 

11l1e higheot «tlmote we've tdennfted in medlll report$. See B:>lding, 2017; Mooer, 2017; Wo-lop, 2016. 
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exaJnjne China's experience as a creditor facing debt problems with a borrowing sovereign 

country. We consider lf>e degree to which China has pa.rticipated in multilateral approaches 

to managing these problems, and highlight cases where China has managed a debt pwblem 

strictly d1cougll lf>e bilateral relationship Md with ad hoc outcomes d1at do not follow ltle 

practices of other leading creditor countries. 

Based on dus assessment; we offer conclusions and recommendations about how BRl, and 

me Chinese government as its e;~.ding architect, should approach me question of debt 

sustainability in BRI countries. 

We conclude that multilater-..J actors can, and should, encourage policies and procedures for 

BRllhat would improve the initiative's development impact. To do so, they should obtain 

clear commitments from me Chinese architects of BRI about the applicability of multilateral 

stMdards that pertain to debt sustainability. For its part, tius isM opportunity foe China 

to embrace more sustainable lending practices in its bilateral engagements. By adhering 

to widely accepted "rules of dte road" for sovereign creditors, titis i1utiative cot~d make great 

strides in spurring productivity gco'vd' thtough sound infcasttucture investments in 

developing economies. The alternative will be an initiative ltlat introduces new debt 

vulnetabilities in developing countries and risks growm setbacks in some of these cOtultries. 

2. Debt sustainability and BRI 

Some public reporting has expressed alaOll about the inlplications of BRI foe debt 

sustainability.2 TI1e primacy concern is mat an $8 trillion-dollar initiative will leave cotultries 

wim debt "overhangs" that will inlpede sound public investment and economic growth more 

generally (see Box 1). ·n,ece is also concern that debt problems will create an unfavoroble 

deg~ee of dependency on China as a creditor. (ncceasi.ng debt, and China's cole in managing 

b ilateral debt problems, has already exace<bated internal and bilateral tensions in some BRl 

cou11tcies, such as Sri Lanka, where citizens have regularly clashed with police over a new 

industrial zone surrounding Hambantota port,~ and PakistM, where Chinese officials openly 

appealed co opposition politicians to embrace the construCtion of me China-Pakistan 

Econo1njc Con1dor (CPEC), SRI's "flagship project" to bolster ties between Beijing and 

Islam'tbad.' 

The sustainability of BRJ financing will depend in part on d1e productivity of me BRJ 

projects themselves. The developmental benefits of increased public infrastructure 

investment more broadly have been promoted by multilateral development institutions. Foe 

e.~ampl e, a widely quoted ADB study asserts that in Asia alone, $26 trillion in infmstcuctuce 

investments are needed over me 2016-2030 period to maintain 3 to 7 percent economic 

growth, eliminate poverty, aJld respond to climate change. s 

2 H•ycbtian 20 17; Ktaka.,ska 20 17; Zhang 2017. 

>An .. z 2017. 

• The Eoonomist, M•y 2017. 

' ADB,20!7. 

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Box 1: Why debt sustainability maners 

If infrastructure is a critical engine of growth in developing economies, then d ebt financing is the 

fuel fo r that engine. Public bo rrowing to support productive investment is central to the 

development narratives of today's wealthy countries and it continues to drive growth in 

emerging economies. However, there is also considerable evidence indicating significant negative 

impacts on countries and their people when govemments incur too much debt. 

When government borrowing is no t accompanied by enough economic growth and revenue 

generation to full y service the debt, it can generate a d ownward spiral that inevitably ends in the 

need fo r debt restructuring or reduction.6 Domestic spending on infrastructure and social 

services may be sacrificed [n o rder to service the debt, with the problem compounded when 

goverrunents borrow additional funds just to meet debt servicing needs.' This occurred from the 

1970s into the 1990s, when developing countries' debt compounded at an annual average of 

roughly 20 percent, rising from $300 billion to $1.5 trillion. Fo r the poorest countries, external 

public debt increased from slightly above 20 percentofGDP in 1970 to almost 140 percent of 

GDP by 1994. Between 1978 and 1988, interest payments alone on low-income countries' 

external debts jumped from $230 million to $1.3 billion.• 

Doubts about a country's ability to service its debt as debt ratios worsen can increase the cost of 

capital as investors demand a higher return to compensate for increased risk, creating a selffulfilling debt prophecy.• In Argentina, for example, prior to default the average interest rate of 

the total public debt went from 5.8 percent in 1996 to 9.4 percent in 2001, and bonds issued in 

2001 required dollar interest rates of about 15 percent.

10 Imbalances in the external accounts due 

to negative shocks on the terms of trade or weak exports can result in a real exchange rate 

depreciation that increases the burden of payments in terms oflocal currency and enhances the 

probab[lity of a sovereign default.11 

The macroeconomic impacts of a rapidly increasing conn try-risk premium and, if it occurs, a 

sovereign default, result in significant dan1age to the economy and to citizen livelihoods. A 

sovereign default can lead to a banking crisis, as banks have to make write-downs on credits 

provided to the state; an economic crisis, as aggregate demand falls; and a currency crisis due to a 

sudden stop in foreign capital.'2 The negative effects can be relatively short-lived, depending on 

the nature of the workout, but the impacts on individuals who fall into poverty can be lasting. In 

the case of Argentina, for example, by the end of 2002, 58 percent of the population was living 

on incomes below the national poverty line and a quarter were considered destitute." 

There are also po ten tial cross-border spillover effects from a sovereign default. For example, in 

the wake of the Latin American debt crisis, commercial creditors who were exposed to sovereign 

default risks, be it directly via their holdings of foreign goverrunent debt or indirectly via their 

exposure to the banking sector of tl1e defaulting country, reduced their overseas exposure 

and/ or raised the country-risk premiums." While state-owned financial intermediaries such as 

CDB and China Exim Bank can operate in a Liskier manner than purely private institutions, even 

they could apply a much more conservative business model on a portfolio-wide basis if 

borrowers exhibit financial stress. 

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Evidence in some countries apperu:s to support the idea that debt-financed infrastructure 

investment can play a key role in catalyzing economic growth. For example, Ethiopia has 

achieved rapid economic growth in a lru:ge part due to a massive public investment program 

financed through loans and o ther c redit instn.unents.t5 Public infrastructure investment in 

Ethiopia rose from about 5 percent of G OP in the eru:ly 1990s to 18.6 percent of GOP in 

2011, and GOP growth averaged over 10 percent between 2010 and 2015. China's economic 

performance has also benefited from a massive infrastructure investment program, though 

Chinese authorities have also had to address the monetary expansion, instability in fi nancial 

mru:kets, economic fragility, and build-up of debt that resulted from these investments. 

More generally, the evidence of a causal relationship between public investment and 

economic growth is mixed. One widely cited study concludes that there is only a weak and 

short-term positive association between investment spending and growth, with lagged 

impacts proving insignificant.'• Another recent analysis fmds that investment and 

infrastructure projects are less likely to be successful when they are undertaken during 

periods of higher-than-average public investment, which is pru:ticularly relevant in light of 

the BRl "big-push" approach to infrastructure investment." 

The sustainability of a country's debt depends not only on macroeconomic variables, but 

also on the structure of its debt portfolio. For low-income countries (L!Cs), access to 

concessional fmancing is critical for achieving the twin goals of debt sustainability and 

progress toward reaching development goals. The higher the concessionality, or grant 

element, of the loan, the less risk of default on the pru:t of the borrower. For multilateral 

institutions such as the World Bank and the AIIB, the financing terms for loans to sovereign 

governments are publicly available. This practice is also followed by most bilateral 

development finance institutions. However, COB and China EximBank do not disclose the 

terms of their loans, making it difficult, if not impossible, to accurately assess the present 

value of the debt owed by a country to China. Anecdotal evidence from media and IMF 

reports indicate that the terms of COB and China Exim Bank loans vary widely, from 

interest-free loans in the case of some Pakistan pro jects to a fully commercial rate in the case 

6 Srurzenegger and Zectelmeyer, 2005. 

7 Shabir and Yassin, 2015. 

8 World Bank International Debt Statistics. 

~Nicolini, 2016~ 

to Damill, Frankel, and Rapetti, 2006. 

11 Sturzl9'negger and Zettelmeyer, 2006. 

tz Borensztein and Panizza, 2008 

13 World Bank Argentina Poverty Assessment, 2003. 

"Trebesch et al., 2012. 

"Moller and Wacker, 2017. 

16 Warner, 2014. 

17 Presbitero, 2016. 

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of the Ethiopia-Djibouti railway." Bo rrowers ace also susceptible to exchange rate risks 

given that most CDB and China Exim loans ace denominated in dollars or renminbi. 

Other majo r country creditocs may be pacticulacly sensitive to the pcospect of BRI 

investments leading to debt overhang problems and another ro und of debt relief on a 

multilateral basis, having already spent billions of dollars to relieve many count11es of their 

debt burdens through Paris Club treatments, the Heavily Indebted Poor Country (HIPC) 

Initiative, and the Multilateral Debt Relieflnitiative. For these reasons, it is appropriate to 

identify debt sustainability as a key variable in BRl (MDRl) and one that deserves scrutiny 

during the eady stages of the initiative. 

Our analysis finds that BRl is unlikely to cause a systemic debt pcoblem in the regions of the 

initiative's focus. While the aggregate nucnbecs look large, when assessed in the context of 

the size of the economies that are likely to benefit from BRl investments, the amo unts ace 

conslstent with current levels o f infrastructure investment. O ver a 20-year span, an $8 trillion 

investment program for BRl countries would amount to less than 1.5 percent of GDP per 

annum, and about 2.5 percent e.~clucling China. It is also likely that some of the Chinasourced fmancing will merely substitute for other sources. These levels are modest in 

comparison to the ADB's estimated infrastructure fmancing "needs" in Asia, which ace 

pro jected to be 5.1 percent of the region's GDP. 

Nonetheless, we conclude that there ace some countries, most of whom are small and 

relatively poor, that face a signifi cantly increased risk of a sovereign debt default if planned 

BRl projects are implemented in an expeditious manner and fi nanced with sovereign loans 

o r guarantees. 

Our methodology focuses on two facto rs: 1) the general risk of sovereign debt distress that 

individual BRI countJ.les ace facing today, and 2) the degree to which BRl financing will add 

to the risk of debt distress. Because of the policy implications, we center our attention on 

countries where debt to Chin a, as a share of total public external debt, would be particularly 

high due to BRl-related pro jects. 

In the following sections, we elaborate on each stage of our methodology (Figure 1): 

1. We first identify 23 BRI countries at risk of debt distress today according to 

standard measures of debt sustainability. 

2. For each of these countries we construct a BRI lending pipeline based o n 

publicly available sources. 

18 See IMF,July 2016 for grant elements calculated for select D j1bouti projects, and Mughal, 2017 for reporting 

on Pakistan. AidData also calculates grant elements for a variety of projects. 

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3. \Ve integr-.tte th e lending pipeline lnl'o the countries' overall debt and debt to 

Olina as of end-2016.19 

4. \Ve detennine eight countries for whom BRl creates the potential for debt 

sustainability problems. 

There 3re clear lirnitations to this methodology, which ace addressed in appendix A. 

68 

BRI countnes 

Figure J: Me thodology 

Remove: 35 countries rated 

inv6tment grade or near 

investment grade by one of the 

three primary ratine aeencies 

Removt!: 15 countries where the 

QRIIendine pipeline does not 

appear to create potential for 

debt sustainability problems 

,--

1 

I 

I 

I 

3 23 countne5 

at nsk of debt d1stress 

today 

/nteqrote:BRI Iending pipeline 

4 Into each country's debt as of 

end-2016 

----r- 1 

I 

I 

I 

6 Eight countnes 

vulnerable to debt 

d1stress due to future 

SRI-related fmancmg 

3. Methodology 

3. 1 Debt vulnerability in BRI countries 

We identify 68 countries that fall under the scope of BRJ based on reports from Chinese 

qu3si-offici::tl ocgani~ations and BRI's geo~phical representation. By region, these countri es 

are gco1.1ped as follows: 

East and Southeast Asia (14): Brunei, China, Indonesia, Malaysia, Mongolia, 

Myanmar, Cambodia, Laos, Philippines, Singapore, South Kocea, Thailand, TimorLeste, and Vietnam; 

Central and South Asia (13): Afghanistan, Bangladesh, Bhutan, India, Kozakhstan, 

Kyrgyzstan, Maldives, Nepal, Pakistan, Sci Lanka, TaJikistan, Turkmenistan, and 

Uzbekistan; 

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25 

20 

~ 

· c 

§ 

0 

u 

15 

.... 0 

.z 

§ 

10 

z 

0 

Middle East and Africa (17): Bohmin, Djibouti, Egypt, Ethiopia, leon, Iraq, lsmel, 

Jordon, Kenya, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab 

Emirates, and Yemen; 

Europe and Eurasia (24): Albania, Armenia, Azerbaijan, Belarus, Bosnia and 

Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, 

Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, 

Slovakia, Slovenia, Turkey, and Ukmine. 

The annual economic output of these 68 countries is roughly $25 trillion, with China itself 

accounting fo r some 45 percent of the total. They are heterogenous economies, small and 

large, developed and developing, commodity-dependent and more diversified exporters. To 

assess current levels of debt risk among these countries, we apply a series of filters. 

We first look at the sovereign credit risk ratings issued by the three major credit rating 

agencies: Standard & Poor's, Moody's, and Fitch Ratings. Of the 68 BRJ countries we 

identified, there are 35 countries at the time of publication that are rated investment grade o r 

near investment grade, and therefore have a low risk of debt d istress (Figure 2).20 As a result, 

we believe the risk of debt distress from additional BRI-related financing in these countries 

is small. 

F igure 2: Sovereign credit ratings for like ly BRI countries 

- I I I AAA/A:aa AA/Aa A BBB/Baa BB/Ba B Not Rated 

20 These 35 countries have long· term foreign currency ratings of BB-/ Ba3 or better from one of the tluee 

primary rating agencies: (Standard & Poor's, Moody's, and Fitch Ratings). We use the hlghest rating from any of 

the three agencies. 

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We then focus on the risk of debt distress for the remaining 33 countries that are currently 

rated below investment grade. We draw primarily from the debt sustainability analyses 

(DSAs) conducted by the IMF and the World Bank. We remove from consideration Brunei, 

Iran, Moldova, Myanmar, Nepal, Timor-l..este, Turkmenistan, and Uzbekistan, all "not 

rated" countries that are at a low risk of debt distress. Moldova, Myanmar, and Nepal have a 

low risk of debt distress according to their most recent IMF / World Bank DSA, and the 

others have a public debt-to-GDP ratio below 25 percent. We also remove Syria and Yemen, 

both countries in conflict that are unlikely to be active BRI countries in the short to medium 

term. By region, this leaves the following 23 countries: 

• East and Southeast Asia (3): Cambodia, Mongolia, and Laos; 

• Central and South Asia (7): Afghanistan, Bhutan, Ky.gyzstan, Maldives, Pakistan, Sri 

Lanka, and Tajikistan; 

• Middle East and Africa (7): D jibouti, Egypt, Ethiopia, Iraq, Jordan, Kenya, and 

Lebanon; 

Europe and Eurasia (6): Albania, Armenia, Belarus, Bosnia and Herzegovina, 

Montenegro, and Ukraine. 

Given their current risk ratings, these 23 countries represent those for whom the risk of debt 

distress due to additional BRI-related fi nancing could be quite high. To investigate this 

question in these countries, we next identify publicly reported projects under BRI, estimate a 

lending pipeline, and integrate this financing data into a country's debt. 

3.2 Identifying BRI projects 

China does not report cross-border project lending in a systematic or transparent manner. 

Beyond topline investment numbers that have been announced by Chinese officials, and the 

occasional projection on intended country-level investment under the initiative, BRI project 

information is not centrally reported?' Additionally, while Chinese policy and commercial 

banks will sometimes make public announcements about pro ject investments, this is no t 

done consistently and specific financing agreements are rarely published. It is also 

uncommon for the debtor countries to fully and completely disclose loan information. 

Given this reality, we identify BRI pro jects mainly through media publications, replicating 

the metl1ods of other pro jects that have attempted to identify Chinese overseas lending (see 

Box 2). 

We first identify publicly reported Chinese financed infrastructure projects starting from the 

first announcement of BRI by President Xi in Astana, Kazakhstan on September 7, 2013, 

21 One notable exception is for projects in CPEC. The Pakistan-China Institute and China Radio International 

have developed a CPEC portal that lists transportation> energy, and port infrastructure projects under the 

initiative, including varying levels of detail regarding progress and financing. CPEC, 2017. 

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through December 20 17.22 Consistent with the rheto ric of Chinese officials, we consider any 

Chinese infrastructure project in an identified BRI country since the announcement of the 

initiative to be a BRI pro ject. Because we focus on the debt sustainability of countries 

implicated in BRI, we only identify infrastructure projects that we believe were or would be 

financed through sovereign or sovereign-guaranteed co ncessional and commercial loans or 

export credits. 23 This includes loans from Chinese policy banks to state-owned enterprises in 

BRI countries, e ven if the authoritie s might claim that there is no sovereign guarantee.24 

There may be some ambiguity about the degree to which there is a sovereign obligation or 

guarantee on the borrowing side of some of these tran sactions, but we en toward greater 

inclusion in o rder to identify debt risks. Experience shows that even in cases where there is 

no explicit sovereign guarantee, the obligatio ns of state-owned or quasi-official entities are 

often implicitly guaranteed by the natio nal government. 

Box 2: Existing methods to identify Chinese overseas finaucutg 

The The College of William and Mary's AidData research lab hosts a global dataset on 

China's official development spending from 2000-2014. AidData has identified mo re than 

$350 billion in Chinese foreign aid and other forms of state financing using their Tracking 

Underreported Financial Flows (TU FF) methodology. Projects are identified through a 

comprehensive search of public official sources and verified by media and other 

additional sources. The Center for Strategic and International Studies' Reconnecting Asia 

project uses a similar method to catalogue Asian infrastructure projects. The 

Reconnecting Asia team collects project information f rom open primary sources, 

including natio nal government agencies, international financial institutions, and project 

contracts. Infmmat:ion from these sources is supplemented and verified by other media 

publications. The United States Expo rt Import Bank (US EXlM) conservatively estimates 

activities by Chinese export credit agencies by measuring expo rt buyer's and seller's 

credits and concessional lending using media reporting. Johns Hopkins School of 

Advanced International Studies' China-Africa Research Initiative (SAIS-CARI) tracks 

loans to African governments from 2000-2015. SAIS-CARI applies a " forensic internet 

sleuthing" approach and identifies project loans through official websites of central banks, 

ministries of finance, Chinese contracto rs, and media reports. They supplement this data 

collection with in-country interviews and meetings with Chinese and African officials. 

22 Jinpmg, 2013. 

We cecognize that loans to the private sector, patticulady financial institutions, can have spillover effects on the 

sovereign, but we do not believe this will be the case with respect to BRI projects due to the focus on public 

infrastructure investments. 

24 One example is the Lao~Chi a Railway Company set up to build and operate the Vientiane to China highspeed 

railway. The Lao MuUstry o f Finance asserts that no sovereign guarantee will be provided for the debt of the joint 

venture company, but ultimately the goverrunent would need to act if the company could not pay its debts. 

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We start with the databases referred to in box 2. For projects outside the scope of these 

databases,25 we consult reporting by recipient country government agencies, reporting by the 

Chinese policy and commercial banks, and to a significantly lesser extent, project contracts 

released by BRI contractors, 89 percent of which are Chinese state-owned enterprises 

(SOEs).2' Finally, and most prominently for projects announced in 2017, we rely on other 

media publications, ranging from Chinese state-owned news agencies, media in debtor 

countries, and other international media outlets. 

3 .3 Construding the BRI lending pipeline in 23 countries 

We next seek to identify the debt effects of adding a BRI project pipeline to our 23 target 

countries. Drawing from our estimated universe of BRI projects, we chara,cterize a BRl 

pipeline project as any pro ject whose fmancing may not be captured by a country's latest 

public debt figures, which we have through the end of 2016. In most cases, this includes: 1) a 

project announced in 2017, and 2) a project announced at any time since the beginning of 

the initiative, but with undisbursed loan commitments due to a delay in pro ject 

implementation or other facto rs. Using these pipeline projects, we are able to estimate a 

lending pipeline value for each country by aggregating the debt component of each identified 

pro ject.27 A complete table of debt and lending pipeline statistics for these 23 countries can 

be fotmd in appendix B. 

We include the second group in the lending pipeline because these projects appear to reflect 

firm political commitments even though they have yet to move beyond the initial 

commitment phase. These projects may be a symptom of a broader trend--11ccording to 

info rmation available in the SAIS-CARI Loan Database on the three African countries in 

our elevated risk universe (Djibouti, Ethiopia, and Kenya), of the approximately $19 billion 

in Chinese loans of government o rigin between 2000-2015, over $5 billion have yet to be 

implemented.28 For example, a coal power plant in Kenya, announced in 2015 and to be 

financed with an approximately $900 million loan from the Industrial and Commercial Bank 

of China (ICBC), is still in the proposal phase due to local protests over environmental and 

economic viability concerns. However, government offi cials continue to vocally support the 

pro ject.29 

2S AidData: post 2014, SAIS-CARI: post 2015, US EXIM: post 2016. 

" US Congress, 2018. 

27 We estimated, when the lending information for a project was Wlavailable, that China would finance roughly 80 

percent of the total cost of a project There are various unofficial sources that provide anecdotal evidence of an 

8020 debt-to-equity ratio for projects in CPEC1 BRJis flagship project. Additionally, in our own review of media 

sources we identified a fmancing ratio between roughly 80:20 and 75:25 for projects outside of CPEC. See 

Chaudhury, 2017; Dadwal ond Purushothaman, 2017; Su, 2016; Husain, 2016. 

28 SAIS-CARI identifies whether a project has been signed, is signed but inactive, is in the implementation phase, 

or has been completed. 

"ICBC, 2015; Medium, 2017. 

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3.4 The debt effed of the BRI lending pipeline 

We then integrate the BRI lending pipeline into a country's debt as of the end of 2016.30 In 

order to estimate those countries that may suffer from debt distress due to BRI-related 

financing, we use a debt threshold. There has been considerable research on debt thresholds, 

defined as a tipping point for public indebtedness beyond which economic growth drops off 

to such a degree that it leads to default or debt treatment. The evidence is mixed; some 

economies with relatively low debt levels have t~m into debt difficulties while others have 

been able to grow at relatively high levels of indebtedness for long periods without any 

apparent difficulty. That said, we base our analysis and judgments on recent research that 

shows a statistically significant threshold effect in the case of countries with rising debt-toGOP ratios beyond 50-60 percent. 31 

Using this threshold, we fmd that of the 23 countries identified above, there are 10-15 that 

could suffer from debt distress due to future BRI-related financing, with eight countries of 

particular concern. These countries are Djibouti, the Kyrgyz Republic (Kyrgyzstan), Lao 

People's Democratic Republic (Laos), the Maldives, Mongolia, Montenegro, Pakistan, and 

Tajikistan (Figure 3). 

)0 We add the total pipeline figure to the numerator and denominator of the debt ratios. The limitations of this 

method are addressed in Appendix A 

" Chudik et a!., 201~ 

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g 

1-

ffi 

0 

" Q. 

Q. 

<i 

z 

"' "' 1-

1:5 

< z 

'i: 

u 

~ 1-

ffi 

0 

100 

90 

80 

70 

60 

50 

40 

31) 

20 

10 

0 

Figure 3: Immediate marginal impact of BRI lending pipeline 

0 10 20 31) 40 50 

PPG DEBT/GOP (%) e Eod-2016debl st~tislics 

4 Prokct«< debt with SRI lending pipel~ 

HIGH DEBTTO·GDPTHRESHOLD 

60 70 80 

Note::~isnot5hownheffMit~a 

muthhi&:hetPPGOebVGOP(143-6"111\anthe othiercountrie11tudicd,.lnd/Usnoickntihed 

8Riproietts. 

Souru:AuthOrS'uiCulations based on putlllic report~n~ onBRiproject:s. 

90 100 110 

Ce ter '\\:Y .g Global 

Development 

Figure 3 identifies these eight countries (red), and illustrates the estimated changes from BRI 

project lending in public and publicly guaranteed debt-to-GDP ratios, as well as the changing 

shares of Chinese debt relative to all external public and publicly guaranteed debt. This can 

be described as the current "upper botmd," or worst-case scenario, of 6.1ture debt if the 

initiative is implemented to the fullest extent of President Xi's vision. 

Because we are inte rested in those countries that may invite a policy response from China, it 

is evident from this illustration that these eight countries are more significant for the 

purposes of our analysis than others. Countries of lesser concern (blue) are the following: 

While Albania, Bhutan, Jordan, and Lebanon have been represented at BRI events 

or have expressed interest in engaging more completely in the initiative, we did not 

identify any BRI projects in these countries. 

Afghanistan and Cambodia may see a significant rise in total debt to China as a 

percentage of total public external debt, but we do not believe the projects in these 

two cotmtries will lead to a debt default or debt treatment due to the overall low 

level of debt. 

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• The Sci Lankan government may agree to additional BRl-celated financial 

commitments but their size is likely to be tempered by the Hambantota Poet 

experience. 

• While our pipeline includes projects in Armenia, Egypt, Iraq, and Ukraine, the level 

of sovereign oc sovereign-backed lending foe BRl projects in comparison to the size 

of their economies oc their total external debt exposure is not high enough to have 

an appreciable effect on debt levels. 

• In Belarus, Bosnia and Herzegovina, Ethiopia, and Kenya, there could be an 

increase in the risk of debt distress in the short-teem due to BRl-related projects. 

However, total public debt should remain low enough to mitigate the likelihood of 

default. Foe example, China has played a leading cole in financing Ethiopia's 

investment program, providing 30 percent of total new public external debt over the 

past five years, and 90 percent of new bilateral debt. Nonetheless, with one of the 

most rapidly growing economies in the world, we expect Ethiopia will remain within 

p rudent borrowing limits over the next several years. 

To further test the risks of debt distress in the eight focus countties, it is useful to consider 

existing debt and growth projections foe these countries. With recent research showing that 

rising debt-to-GDP ratios ace as important as the level of debt in assessing the risk of debt 

distress,32 table 1 shows the change in debt levels (actual and forecast) over the 2015-2018 

period in our eight focus countries, based on IMF surveillance reports. Given the stylized 

fact that countries ace more capable of sustainably financing high levels of public debt as 

they become wealthier, the table also provides averages foe the world, middle-income 

economies, and low-income economies. It demonstrates that the expected levels of debt in 

the eight focus countries ace well above the average foe their peecs.33 

» Chudik et al., 2015. 

33 Note that the Maldives information reflects statistics prior to the rebasing of its gross domestic product. 
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Table 1: General government gross debt(% ofGDP) 

Actual Forecast 

2015 2016 2017 2018 

World 80.6 83.6 83.1 82.8 

MICs 44.5 47.4 48.6 49.8 

Mongolia 62.1 87.6 85.3 89.0 

Montenegro 76.8 78.0 79.7 80.9 

Palcistan 65.7 70.0 69.1 67.6 

LICs 36.1 40.4 41.9 41.6 

Maldives 73.1 83.1 96.5 109.0 

Djibou ti 72.1 86.6 88.1 87.5 

Laos 65.8 67.8 69.0 70.3 

Kyxgyz Republic 65.0 62.1 64.2 65.5 

Tajikistan 33.4 44.8 51.8 56.8 

Moreover, IMF surveillance documents and DSAs indicate that forecasts may underestimate 

the pace of debt accumulation in these eight countries, suggesting that the risk of debt 

distress may prove to be higher if or when IMF forecasts become more accurate. Figure 4 

shows recent changes in IMF forecasts of debt-to-GDP ratios in 2018 for each of the eight 

focus countries. For example, the IMF staff report fo r Mongolia published in May 2017 

projects that the public debt to GDP ratio will be 101.3 percent in 2018, while the D SA 

conducted in 2013 projected that the ratio would be 50.1 percent.34 

34The Tajikistan forecast for 2017 is based on the author>s calculations due to lack of a publicly available IMF 

data The Maldives data uses the 2016 projection due to the rebasing of the national acconnts in 2017. 

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Figure 4: Forecasts of public debt/GOP for2018 

Mald1ves (IMF2016) 

(IMF2014) 

Mongolia (IMF2017) 

(IMF2013) 

DJiboUti (IMF2016) 

(IMF20!3) 

Montenegro (IMF2017) 

(IMF2014) 

PakiStan (IMF20!7) 

(IMF20!4) 

Kyrgyz R.epubhc (IMF20!7) 

(IMF20!4) 

TaJikistan (Hur!ey20!7) 

(IMF2015) 

0% 10% 20% 300.4 40% 500,{, 60% 70% 80% 90% 100% 

Recent research reinforces this point. 35 An evaluation o f DSAs fo r low-income countries 

(L!Cs) from 2005-2015 finds evidence of a bias towards optimism for public and external 

debt projections. The bias was most significant for L!Cs with the high est incomes, greatest 

access to capital markets, and at a "mo derate" risk of debt distress. 

Finally, figure 5 summarizes the BRI debt effects identified in our study, highlighting in red 

the eight countries of greatest concern with the integrated BRI pipeline, with the o ther BRI 

cow1tries coded by low and signifi cant risk as determined by the majo r credit rating agencies. 

" Mooney and de Soy res, 2017. 

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Center \(Y .2 Global 

Development 

Figure 5: Risk including BIU pipeline projects 

Risk Category 

Significant Hi,f,F 

Not~: This mop is foriHus ratlwpurpo~ond~ nolimplyt~~ICP«Uioll ofan opinionon ~por of h~outhors 

concerning IM/tgal statusolonycauntryor territoryarconceming thedtiimitationoffroot~rs or boundaries. 

4. Eight focus countries 

Beyond rlle quantitative measures and projections of debt risk, it is useful to consider the 

qualitative picture for the eight most vulnerable colmtries. In particular, a characterization of 

the existing bilateral relationships with China can help to inform expectations about policy 

behavior in each case. 

Djibouti: Djibouti is the site o f China's only overseas military base. The most recent IMP 

assessment stresses the extremely risky nantre of D jibouti's bo rrowing program, noting that 

in just two years, public external debt has increased from 50 to 85 percent of GO P, the 

highest of any low-income country. Much of the debt consists of govemment-gu.aranteed 

public enterprise debt and is owed to China Exim Bank. According to multiple reports, 

01ina has provided nearly $1.4 billion of funding for D jibouti's major investment projects, 

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equivalent to 75 percent of Djibouti's GDP.

36 Future projects reportedly include at least two 

new aitports, a new port at Ghoubet, an oil tetminal, and toll road." While a number of 

Chinese loans have been extended at below-market rates, which will reduce the risk of 

default, others, such as the financing for the Addis Ababa- Djibouti railway, are reported to 

be closer to commercial rates.38 Moreover, despite cautionary statements from the IMF, 

there is no indication that new borrowing will be limited to the projects that generate 

sufficient revenues to meet debt service requirements. 

The Maldives: This archipelago in the Indian Sea is in the midst of an unprecedented 

public investment program aimed at promoting additional tourism, upgrading urban 

infrastructure, and adapting to climate change in accordance with its National Sustainable 

Development Strategy. The three most prominent investment projects in the Maldives are an 

upgrade of the international airport costing around $830 million, the development of a new 

population center and bridge near the airport costing around $400 million, and the relocation 

of the major port (no cost estimate). 39 China is heavily involved in all these projects. While 

China Exim Bank has reportedly announced financing at concessional terms-the airport is 

reportedly to be repaid in 20 years with a five-year grace period""-other creditors have 

apparently not been as genewus, and the country is considered by the World Bank and the 

IMF to be at a high risk of debt distress due to its vulnerability to exogenous shocks. 

Lao People's Democratic Republic ("Laos"): Laos is among the poorest countries in 

Southeast Asia, though it has been expanding rapirlly with GOP growth averaging 8 percent 

over the past decade. Since 2013, the IMF has been raising doubts about the ability of Laos 

to service its debts if it moves ahead with its plans to build the China-Laos railway, in 

addition to other major capital projects. The $6 billion cost for the railway represents almost 

half the country's GDP, and although Lao Ministry of Finance officials stress that the 

government will not guarantee the vast majority of the financing from China EximBank, the 

Laotian government will be under considerable pressure to cover any losses. 41 The financial 

terms for many elements of the pro ject remain a secret, although one source has reported 

that a $465 million loan from China Exim Bank fo r the joint company building and 

operating the railway will be provided at 2.3 percent interest with a five-year grace period 

and 25-year maturity.<> The Laotian government has also reportedly signed a $600 million 

loan agreement with China EximBank for a hydropower project." 

Montenegro: Montenegro's debt problem is enormous. The World Bank estimates that 

public debt (including guarantees) as a share of GDP will climb to 83 percent in 2018 in the 

absence of fiscal adjustment. The source of the problem is o ne very large infrastructure 

36 Downs and Becker, 2017; Downs et al., 2017£ 

"IMF, April 2017; Downs and Becker, 2017; SAIS.CARl, 2017. 

"'Sun, 2017. 

39 IMF, December 2016. 

40 Naish, 2015. 

'~IMP, January 2017. 

42 Janssen, 2017. 

43 The Nation, 2016. 

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project, a moto[Way linking the port of Bar with Serbia that would integrate the Montenegrin 

transport network with those of other Balkan countries. The Montenegro authorities 

concluded an agreement with China Exim Bank in 2014 for the latter to finance 85 percent 

of the estimated $1 billion cost for the fu:st phase of the project. The estimated cost has 

since Lisen to $1.1 billion, or over 25 percent ofGDP. The loan for the first phase of the 

project will reportedly be extended with an interest rate of 2 percent, five-year grace period, 

and 20-year repayment period .... The road is being built in three phases, and the IMF 

believes the second and third parts of the highway should only go fo[Ward with highly 

concessional funds because non-concessional terms would likely result in debt default. 

Mongolia: Mongolia is in a particularly difficult position because its future economic 

prosperity depends, in large part, on large infrastructure investments that will increase 

productivity and facilitate exports. Financing for these investments will need to be secured 

on a concessional basis, which has not generally been the case in the past. Recognizing 

Mongolia's difficult situation, China EximBank agreed in early 2017 to provide financing 

under its $1 billion line of credit at concessional rates for a hydropower project and a 

highway project from the airport to the capital. However, according to local reporting; the 

hydropower project has stalled, and elements of this financing is reportedly being redirected 

to other projects. 45 But if reports that Beijing expects to channel some $30 billion in credit to 

BRl-related projects over the next five to ten years are true, then the prospect of a Mongolia 

default is extremely high, regardless of the concessional nature of the financing. 46 

Tajikistan: Tajikistan has been described as the "first leg" of the land-based elements of 

BRl. One of the poorest countries in Asia, it is assessed by the IMP and World Bank to have 

a "high risk" of debt distress. Despite this, it is planning to increase its extemal debt, both at 

concessional and non-concessional rates, to pay for infrastructure investments in the power 

and transportation sectors, including those elements supporting BRl. Most significantly, a $3 

billion portion of the Central Asia-China gas pipeline (Line D) will pass through Tajikistan, 

reportedly financed through Chinese foreign direct investment (FDI), although there could 

be pressure for the Tajik government to cover some of the financing costs. There are 

conflicting reports on whether this project has stalled. 47 Most recently, Tajikistan issued $500 

million in Eurobonds to pay for a new hydropower generating facility. -IS Debt to China, 

Tajikistan's single largest creditor, accounts fo r almost 80 percent of tl1e total increase in 

Tajikistan's extemal debt over the 2007-2016 period. 

Kyrgyz Republic ("Kyrgyzstan"): Like Tajikistan, Kyrgyzstan is a relatively poor country 

with significant new BRl-related infrastructure projects being constructed, much of it 

fi nanced by external debt. By the end of March 201 7, public and publicly guaranteed debt 

amounted to roughly 65 percent of GDP, of which external debt represented about 90 

44 Government of Montenegro, 2014. 

" Kohn, 2016; Mongolian News Agency, 2017. 

4-$ Kenderdine, 2017. 

"Kosolapova, 2017; Michel, 2017. 

~Reuters, 2017. 

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p ercent o f the total. Chin a's EximBank is the largest single creditor, with reported loans by 

the end o f 2016 totaling $1.5 billion, or roughly 40 p ercent of the country's total external 

debt. Kyrgyz and Chinese autho rities are reportedly discussing the con struction of a chain of 

hydropower plants, a China-Kyrgyzstan-Uzbekistan railway, additional highway con struction, 

and completion of the Central Asia-China gas pipeline.49 While currently considered to be at 

a "moderate" risk o f debt distress, Kyrgyzstan remains vulnerable to shocks resulting from a 

sizeable exchange rate depreciation exacerbated b y the scaling up o f public investments. 

Pakistan: Through CPEC, Pakistan currently serves as a centerpiece for BRl. The total 

value of CPEC projects is currently estimated at $62 l~o , with at least $33 billion of this 

amount expected to b e in vested in energy projects. 50 China will reportedly fmance roughly 

80 percent o f that amount." Yet despite this ambition, there h ave already b een canceled 

projects, most recently three major road projects at the end of 2017'2 Adding to Pakistan's 

risk of debt distress are the relatively high interest rates being charged by China. Unlike the 

2-2.5 percent uconcessional rate" given to some China EximBank customers, reports 

indicate that some of Pakistan's loans reflect rates as high as 5 p ercent. 53 The IMF notes that 

adverse shocks could lead to public debt ratios well above 70 percent. As a country that h as 

requested six debt treatments from the Paris Club, Pakistan's massive amount of borrowing 

from China raises concerns that it will need to return a seventh time. 

5. How will China respond to problems of debt distress in 

BRI countries? 

In countries suffering from debt distress, the Chinese government has provided debt relief in 

an ad hoc, case-b y-case manner." It has generally refrained from participating in multilateral 

approaches to deb t relief, tho ugh it does participate in debt relief discussions at the 

international financial institution s and engages info rmally with IMF staff o n individual 

country cases. This contrasts with o ther major official credito rs, all of whom participate 

actively in multilateral mechanisms dealing with sovereign defaults, in particular the Paris 

Club. While China is an ob server at meetings o f the Paris Club, it is not a member, so it is 

under no b~gati n to act in solidarity with Paris Club members or even to info rm the Paris 

Club about the management of its credit activities. 

Without a guiding multilateral or o ther framework to defin e Chin a's approach to debt 

sustainability problems, we only have anecdotal evidence of ad hoc actions taken by Chin a as 

the basis for characterizing the country's p olicy approach. 

49 Taldybayeva, 2017. 

"Shaikh and Tunio, 2017. 

~~ See footnote 25. 

'"NDTV, 2017. 

!13 Naviwala, 2017. 

~The examples cited are taken primarily from press reports and IMF program documents. China does not 

disclose information on the details of any bilateral debt agteements. 

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Examples of the ways in which China has managed its claims include the following: 55 

In 2011, China reportedly agreed to write off an unknown amount of debt owed by 

Tajikistan in exchange for some 1,158 square kilometers of disputed territory. At the 

time, Tajik authorities said they only agreed to provide 5.5 percent of the land that 

Beijing originally sought. 56 

• In 2011, with Cuba in a desperate economic situation and seeking debt relief, China, 

its largest single creditor, agreed to restructure between $4-6 billion of the debt. The 

details of the transaction were not disclosed, but it reportedly included an agreement 

by China to extend additional trade credits and financing for port rehabilitation. 

Some recent reports indicate that some of the debt was forgiven." 

The IMF estimates that China has delivered over 80 percent of what it is expected 

to provide under HIPC. It was a creditor to 31 of the 36 HIPC countries, and the 

most recent publicly available inforrruttion indicates that it provided relief in at least 

28 of them, including 100 percent forgiveness for several (e.g., Burundi, 

Afghanistan, and Guinea). 

With Sri Lanka unwilling to service a $8 billion loan at 6 percent interest that was 

used to finance the construction of the Hambantota Port, China agreed in July 2017 

to a debt-for-equity swap accompanied by a 99-year lease for managing the port. 

China has also demonstrated a willingness to provide additional credit so a borrower can 

avoid default. A prominent example is China's agreement in early 201 7 to extend an RMB 15 

billion swap line to Mongolia for three years in support of an IMF Extended Fund Facility. 

China's case-by-case approach to debt relief is likely to continue in the absence of full 

membership in the Paris Club or commitments to some multilateral framework. China gave 

set1ous consideration to Paris Club membership during its G20 presidency in 2016 but 

ultimately did not make a commitment to pursue membership. It did, however, agree to keep 

the door open and to play a "more constructive role'' in Paris Club discussions. 58 Given 

Paris Club membe rs' commitment to share data on their claim s on a reciprocal basis, a 

decision by the Chinese authorities to fully participate in Paris Club activities would be a very 

significant signal of the government's willingness to change a history of non-transparent 

credit activities. 

Finally, despite ad hoc approaches to the treatment of debt problems, there are some signs 

that Chinese officials are moving toward greater policy coherence and discipline when it 

comes to avoiding unsustainable debt. For example, in November 201 7, the China Banking 

ss Appendix C includes a table on debt relief actions taken by Chinese authorities according to public so urces. 

~ Atovulloev, 2016. 

" Franks and Frank, 2010. 

" G20, 2017. 

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Regulatory Commission issued its first ever regulations for China's policy banks, 

emphasizing greater risk controls for the overseas activities of COB, China EximBank, and 

theADBC.>• 

6. Recommendations 

It is unlikely that BRI will be plagued with widescale debt sustainability problems. But it is 

also unlikely that the initiative will avoid any instances of d ebt problems among its 

participating countries. To date, China's behavior as a creditor has not been subject to the 

disciplines and standards that other major sovereign and multilateral creditors have adopted 

collectively. Following are recommendations for h ow China and major BRJ partners can 

better align BRJ with such disciplines and standards. 

There are two underlying 1-ationales for pursuing this alignment. First, there is the appeal to 

China as a good global citizen, so that its investment practices align with the p rodevelopment rhetoric of BRJ. In part, this will require pressure from leading partners in the 

in itiative, and particularly the multilateral development banks (MOBs). Second, there is the 

appeal to China to take more effective approaches in its own interests as a creditor, 

recognizing the power of collective action over go-it-alone strategies. 

These recommendations serve both purposes. 

6. 1. Multilateralizing BRI 

A first-order question fo r BRI when it comes to debt sustainability-and operational 

features that relate to deb t sustainability, such as lending transparency, procuremen t 

standards, and concession ality-is the degree to which the initiative will be multilateral in 

character, with a high degree of Chinese government influence, versus an initiative that is 

overwhelmingly directed, financed, and operated by the Chinese government. Chinese 

officials h ave encouraged participation by multilateral institutions like the World Bank and 

ADB, and BRJ itself has coincided with the creation of Chinese-led MOBs like theAIIB and 

New Development Bank. Both suggest that Chinese officials see some value in a multilateral 

approach. But multilateral institutions, including the AIIB, adhere to a conunon set of 

practices pertaining to deb t sustainability cl1at do not refl ect China's bilateral lending 

practices. Will BRJ bend to the will of existing multilateral norms and standards, or will these 

standards fail to shape the activities of the dominant sources of BRI fin ancing, which so far 

have been COB, China EximBank, and the Silk Road Fund? 

The very creation of the AIIB, and its adoption of existing MOB rules, demonstrates a 

willingness to embrace multilateral norms in some instances. But the AIIB remains very 

59 Xiaomeng and Jia, 2017. 

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small as a share of China's international financing; with annual investments so far of about 

$2 billion, compared to annual lending from the bilateral institutions of$30-40 billion. 60 

The World Bank, ADB, AIIB, and European Bank fo r Reconstruction and D evelopment 

(EBRD) have repo rtedly signed a memorandum of understanding with the Chinese 

government to support BRI.61 Yet, characterizations of the MOU suggest that it does not 

seek to apply MOB standards to the initiative overall, instead focusing more narrowly on 

cooperation among the MOBs themselves on BRI projects.oS2 This approach by the MOBs is 

a missed opportunity. They are lending their reputations to the broader initiative while only 

seeking to obtain operational standards 1hat will apply to a very narrow slice ofBRI projects: 

those financed by the MOBs themselves. 

Before going further, the Wodd Bank and other MOBs should work toward a more detailed 

agreement with the Chinese government when it comes to the lending standards that will 

apply to any BRI project, no matter the lender. 

6.2. Other mechanisms for standard-setting in BRI 

When it comes to an agreement on lending standards, there are additional mechanisms for 

the Chinese government to consider. 

6.2.1 A post-Paris Club approach to collective c redito r action 

The Chinese government has moved closer to joining the Paris Club in recent years, 

participating alongside some Paris Club treatments on an ad hoc basis and signaling 

intentions to join through the G20 and the US-China Strategic and Economic Dialogue." 

The task fo r Paris Club members to date has been to convince Chinese officials 1hat 

membership is in China's interests as a creditor. The Club, after all, is a fo rum for ensuring 

maximum repayment under distressed conditions, rather than a "debt relief' forum. To date, 

China has determined that its interests are better served outside of the Club, and in 

particular, that it has sufficient leverage in its bilateral relationships to protect its interests. 

However, this view may continue to evolve as the number of strained bilatera1 relationships 

grow as a result of debt distress. One of the key protections afforded by the Paris Club's 

collective action approach is reputational. No one creditor country can be singled out for 

bad behavior since the members agree to act together. 

60 A review of the CDB and China Exim annual reports indtcates total foreign currency exposure for these two 

banks increased by roughly $40 billion in the 2016 fiSCal year. though not all of this involves sovereign lending. 

61 Kim, 2017. 

62. It is also notable that the MOU itself is not publicly vailable~ suggesting that transparency standards no[mally 

associated with the 'MDBs have been set aside in favor of those associated with the Chinese government. 

63 The September 2016 "W'hite House Fact Sheet on the dialogue included this statement ('China will continue to 

participate in the Paris Club on a [egular basis and play a mo[e consttuctive [Ole, including further discussions on 

potential membership," The White House, 2016. 

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Nonetheless, even if China becomes co nvinced of the b enefits of a collective app roach, the 

political barriers to jo in ing a G7-dominated institution may continue to delay Chin ese 

membership in this debt fo rum. And it now appears that the US-China dialogue, the forum 

in which p rogress toward China's Pru.1s Club memb ership has been made to date, h as been 

set asid e by the Trump administration." 

As a result, it may b e incumbent on the wider Paris Club membership to consider the 

leverage that Ch ina has in these membership discussions as the basis for moving forward 

with a new agreement. Club members should con sider, for example, that outstanrling Paris 

Club claims curren tly total just over $300 billion. Chin a's claims alone likely approach this 

figure, if no t surpass it. For example, we estimate that China Exim Bank has credit exposu re 

that is Paris Club " treatable'' o f about $90 billion, and we estimate CDB's foreign sovereign 

credit exposu re at approximately $125 billion.•> These are just two sources o f Chin ese 

government financing that are clearly Paris Club treatable. O ther sources include the ADBC, 

as well as the n ewly launched Silk Ro ad Fund, which was irutially capitalized at $40 billion. 

There is no aggregate reporting on the Chinese government's credit exposure to other 

sovereigns, so the two figures for China Exim Bank and CDB certainly und erstate the extent 

o f China's role as a credito r to other governments. It is unambiguously the case that Ch ina is 

the largest sovereign-to -sovereign creditor in the wo rld based on the p olicy bank figures 

alone, and it is almost certainly the case that it has no close rival. 

From this standp oint, it may be worthwhile to reorient the Paris Club membership 

discu ssion in favor of somethin g new. The aim would be to maintain the core prin ciples that 

guide the Paris Club, while opening the rliscussion to the possibility of a new forum, one in 

which China plays a meaningful role as a founding architect. 

Whether the questio n is Ch ina's m embership in the Paris Club, o r movemen t toward a n ewly 

defin ed group o f sovereign creditors, progress will dep end on concession s from both sides 

o f the deal. Ch inese officials would do well to con cede that the op erating principles o f the 

Paris Club have b een forged through exp erience and do no t inh erently reflect a Western 

bias. For the existing Paris Club members, there needs to be clear recognition that the list of 

the world's largest sovereign creditors looks different today than it did in 1956 when the club 

fo rmed. If the club is to continue to be effective in p rovirling a public good to developed 

and developing countries alike, then China, along with a prosp ective class of emerging 

sovereign c redito rs, canno t continue to be outside the fo ld. 

6.2 .2. Implementing a China-led G20 sustainable financing agenda 

As part o f Ch ina's 2016 G 20 presidency, G 20 leaders endorsed the "G20 Agenda toward a 

More Stable and Resilient In ternational Financial Architecture." This agenda was cart1ed 

fo tward in 2017 to includ e "G 20 O p eratio nal G uidelines fo r Sustainable Financing," which 

p rovide a detailed, multifaceted app roach to improving debt sustain ability and debt 

restructuring p rocesses. G iven the provenance of this agenda, and China's o ngoing 

454 Flemming and Donnan, 2017. 

(IS China Exim Bank, 2016; CDB figures compiled fr om the AidData database. 

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leadership role as a 2017 member of the G20's "troika," the operational guidelines provide a 

sound basis fo r new Chinese commitments and leadership on debt issues. Pursuing these 

commitments in a BRl context would strengthen China's reputation in the G20 at a time 

when it is eager to be viewed by other G20 members as a rightful leader within the group. 

Moving fmward on the operational guidelines would include commitments with respect to: 

• " enhanced information sharing with respect to debt sustainability, including 

signaling to IFis' staff if large public liabilities appear not to be included in the DSA 

of a debtor country''; 

• "as a general policy, information on past debt restructurings from official and 

private creditors should be made public''; 

• a shared responsibility between borrowing countries and sovereign lenders in 

maintaining debt on a sustainable path, including recognition of the "applicable 

requirements of the IMF's Debt Limit Policy and of the International Development 

Association's Non-Concessional Bo rrowing Policy." 

It would fall to the IMF to play a leading role in monitoring progress toward these 

cornrnitments. 

6.3. China as donor 

Crunese officials have emphasized the commercial nature of BRl while down playing the role 

that traditional foreign aid will play. Yet, Cruna's role as an aid donor is expanding globally. 

Increasingly, alongside loans and FDI, China is providing grant resources in L!Cs and 

through multilateral mechanisms like the World Bank's International Development 

Association (IDA). The evolution of Clllna's participation in IDA is telling. After two 

decades as an aid recipient from the World Bank's fund for the poorest countries, China 

"graduated" from IDA assistance in 1999. In the years that followed, China was a very 

reluctant dono r to IDA, allocating nominal sums while claiming that it remained a poor 

country and therefore was unable to play the role of donor. However, in the last funding 

round for IDA in 2016, China emerged as one of the largest dono rs. This rapid shift appears 

to be part of a broader strategy that embraces the role of grant-based foreign aid as part of 

China's engagement with developing countries. 

Given China's outsized role as a commercially o riented creditor to developing countries, 

there is a case for directing some of these aid dollars in ways that mitigate the risks of 

commercial lending and better promote the development impact of that lending. We offer 

two recommendations for Chinese aid here: 1) to finance technical legal support to 

developing country borrowers, through new and existing multilateral mechanisms; and 2) to 

offer debt swap arrangements in suppo rt of environmental objectives. 

China should take the lead in establishing and funding an international legal support facility 

(LSF) that would address potential asymmetries in financial sophistication between BRI 

creditors Qargely Chinese institutions) and BRl borrowers. Some BRl borrowers may be well 

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informed about markets and financial techniques while others may not enjoy the same level 

of knowledge. An LSF would allow LICs to secure expert counsel to advise them on the 

negotiation of debt operations. Since this recommendation would have China playing a 

leading financial role in the establishment of a facility, care would need to be taken that such 

funding would not constrain or bias the outcome of any negotiation. This facility would 

build upon the success of the African Legal Support Facility (ALSF), hosted by the African 

Development Bank. The ALSF was originally established in 2008 to help HIPCs establish a 

" level playing field" in the fight again st litigating creditors, commonly known as vulture 

funds. Over time, it has increasingly focused on the negotiation of complex commercial and 

business transactions, including large-scale infrastructures, extractive resources, and debt 

operations. The total amount committed has been fairly small, $11.3 million in 2016 ($9 

million for advisory services) and $46 million since the ALSF was established, but the ALSF 

has received widespread praise for the value of its services. 

Following the ALSF model, a new LSF should partner with an existing MDB. There are 

various potential options, including the World Bank, which currently provides advisory 

services for structured finance and guarantees across a range of countries; the EBRD, which 

has a rich history of providing legal support for economic transition issues; and the ADB, 

which currently offers expertise in the development and structuring of public-private 

partnership projects. Housing a LSF at an existing MDB would give the parties involved in 

an individual transaction confidence that the advice is being rendered in an ethical, 

accountable, and professio nal manner. 

There are also existing facilities-tile World Bank-IMF Debt Management Facility and 

UNCTAD's Debt Management and Financial Analysis System- which rely on donor 

support and do not yet count China among their donors. Both initiatives provide technical 

support to developing country governments to improve debt management practices. By 

channeling support through these multilateral mechanisms, China would ensure an arm'slengtll approach to its aid. 

Finally, China could adopt debt-for-nature swaps, an approach championed by 

environmental organizations since the 1980s and used extensively by the United States and 

some multilateral funds like the Global Environment Facility. Under a swap arrangement, 

borrower country debt is forgiven in exchange for the country's commitment to ftmd key 

environmental objec tives, such as tropica.l fore st preservation. These swaps proved to be 

enduringly popular in the United States until the pool of countries that owed money to the 

US government a11d had worthy environmental objectives to address became too small to 

justify an ongoing program. In contrast, China has a growing number of debtor countries to 

draw from, and the swap mechanism itself could be deployed in support of a wider range of 

public goods. Care should be taken that the swap's environmental objectives do not obscure 

debt reduction tetms or conditions that are unfavorable to the debtor country. For example, 

there should be no requirement for the purchase of Chinese goods or services. The 

fundamental objective would be to address an indebtedness problem in a manner that 

achieves a wider benefit (and in the case of forest protection, even a global benefit) and 

allays concerns about China's bel1avior as evidenced in the cases of St1 Lanka and Tajikistan. 

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Appendixes 

Appendix A: Limitations of the methodology 

Transparency: As we discuss on page S, dle level of t<ansparency around reporting on BRJ 

projects and financing greatly ir1Auences ll1e accuracy we can a scribe to our estimates of d1e 

project pipeline. As much o f 1.he information is gadlered from media publications (in bo th 

ou r own analysis as well as the other databases), lhe majority of projects remain unver:ified 

and there is a risk of inaccuracy o n pt-oject-level reporting. We do not claim our lending 

pipeline to be comprehensive, but rather an illustration based on what we can reasonably 

estimate from available info llnation. It is inevitable in our calculations we wlintentionally 

omitted announced projects or included projects dlat may not add to a country's future debt. 

Proje c t pipeli.ne: In addition to transparency limitations, while we identify this pipeline as 

dle current "upper bound" of risk, new p rojects will likely be announced, while o dlers will 

be delayed, modified, or cancelled. This implies a potential furlhec "upper bound" beyond 

lhe estimates in 1his paper. Foe example, according to a Sci Lankan goverrunent o flicial, 

Beijing says it is " willing to give" an estimated additional $24 billion as part of BRI.~ In 

Camborua, China proposed a plan to develop over two million kilometers o f national 

expressways b y 2040 tmder SRI, at a cost o f approximately $26 billion . ., China-Belarus 

agreemen ts are reported to be as high as $15.7 billio n,68 and in Pakistan, approved Chinese 

financing has reportedly reached $62 billion.69 We also do no t know the financcng terms foe 

most of dle pipeline projects nor the terms foe many existing project loans. If all new 

projects are financed with h ighly concessional loans rhcn the risk of debt d istress drops 

considerably, but 1he prospect for this is unlikely based on public reporting. 

Project implerne ntati.on: We do not know the pace of project implementation for a 

significant nwnber o f projects. There is tl1e possibility 1hat p roper public frnancial 

management will resul t in the delay of projects until feasibility studies deteunine that the 

debt can be properly runoctized ru1d financing will be o n extremely concessiooal terms. 

Additionally, beyond disbursement schedules o utlined in a limited rrwnber of government 

docwnen ts, we do n ot know, for many projects, if funds have been completely or partially 

disbursed for a project. 70 

Oebt·growth d ynamics: We do no t incorporate any debt-growth dynamic effect into our 

assessment, assuming that ru1y such positive impact will only occur over 1he long run. And 

we do no t know lhe degree to which Ch inese frnancing wilJ merely substitute for o t:hcc 

" The E<:ononuc Ttmes, 2017 . 

., ChllWlg. 2017. 

<e SCMP, 2015 . 

., V enk3locholom, 2017. 

7fJ For txam l~1 the Sn I..:ankan Ministry of Finane~ reports loan disbutstmtnt schedule$ fot many Chintst 

proJe<:ts, so ow: projt!c:t plpt:line could tttimate how mudt, if at aU, credit lints had ~M a"U~n down on a 

1peofic prOJect. In other cases, dus mformation wu not available, so the authot$ made an esu.mate based on the 

pubhcly 3v:ailable SIOtusof the pro,ecL 

26 
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external (or domestic) financing. To address 1hat issue, we focus our attention on those 

countries where the BRI pipeline is so large that substitution is unrealistic. 

27 
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Appendix B: Seled debt figures for countries significantly or highly 

vulnerable to debt distress 

All figures in USD millions 

Countrv GDP P I'G Debt PPG ED <l~hiebt to BRililcndmg · .. na ptpc nc 

Djibouti 1,727 1,496 1,464 1,200 1,464 

Kyrgyz Republic 6,551 4,068 3,976 1,483 4,564 

Lao, PDR 15,903 10,782 8,604 4,186 5,471 

Maldives 4,224 2,775 879 240 1,107 

Mongolia 10,951 9,593 7,392 3,046 2,469 

Montenegro 4,374 3,412 2,406 200 1,535 

Pakistan 278,913 195,239 58,014 6,329 40,021 

Tajikistan 6,952 2,906 2,252 1,197 2,807 

Afghanistan 19,469 1,558 1,227 0 1,280 

Albania 11,864 8,696 4,069 100 0 

A onenia 10,572 5,825 4,916 341 60 

Belarus 47,407 25,552 17,588 3,094 3,828 

Bhutan 2,213 2;370 2,341 0 0 

Bosnia and Herzegovina 16,910 7,474 5,124 0 2,329 

Cambodia 20,017 6,465 6,385 3,191 3,495 

Egypt 332,791 333,124 43,096 4,779 740 

Ethiopia 72,374 39,154 21,785 7,314 3,719 

Iraq 171,489 114,726 67,395 7,010 1,000 

Jordan 38,655 36,761 14,496 200 0 

Kenya 70,529 36,957 19,325 4,089 6,879 

Lebanon 49,599 71,224 18,848 500 0 

Sri Lanka 81,322 69,286 32,565 3,850 2,136 

Ukraine 93,270 79,186 50,832 1,590 2,475 

PPG Debt = Public and Publicly Guaranteed Deb; ED = External Debr, PPG ED = Public and Publicly 

Guaranteed External Debt 

Note: All GDP and debt statistics reflect 2016 or end-2016 values, with the exception of the lending pipeline, 

which reflect estimated values post-2016. 

Source: World Bank, IMF, authors' estimates based on public:y available sources and the various databases cited 

in th~papet 

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Appendix C: Debt relief adions taken by Chinese authorities 

• ~ Amounl (tlS ' C'M Count f) D<-SC'r.ptlo n Doll .us) 

2000 Vanuatu China 2&'"' to write ofT 5 million lJSO of oUistandmg loan payments ftom Vanuatu relating to 5,000.000 

the consttuct10n of a pari1amentaty complex and law school 

2001 Equatorial Gun\U Chmest Prt$1dtntJ1ang Ztmm announces an agreemtnt on debt rtheffoc Equatout1Gu1nH but NA 

no spec1fte amount 1s mentioned 

2001 Cameroon Chmt. «ncels up to $}4 mJ!hon ofCamtcoon's deb! 34,000,000 

2001 Elh!Opla Chma cancels $122.56 m1lho n of Eth10p1:1on debt 122.560,000 

2001 Mali China eaneds 37 bdbon CFA fran« worth of Mali debl. 49,900,000 

2001 Sud on China cancels 63 percent (S40.131 million) of Sudan's $63.7 million debt. 40,131,000 

2001 Zambia Ch1na cancen USD140mlllion m ZillTib1an debt. 40,000,000 

2001 Uganda Ugandan VICe Ptui<knt Wandira Sp«IOU Kuibwe and Ch1neu Vtee Pruicknt Hu Jmtao s1gn an 50,000,000 

sgreement for Chma to c:~.ncel 50 m1ll.on USD of debt 

2001 Burundi Burundi's External Rclat1cms and CooperattOn M1mster and the Chmese :ambauador lO Bu[\mdi 45,722,5n 

s1gn an :agtte~nt foe parti:alwr•te off of debt worth 38 b•llion Burun<h FrAA«. 

2001 Angola A Chmese economiC and trade delegatiOn prom1se1 to wute off about 10 perc-ent of Angola's $80 8,000,000 

m11l10n external debt to China durmg a three-day V'IS•t to Luanda. 

2001 Congo, Rep. Chinese deputy economy m~mster Ztung Xumg s1gns an agreement c:anctlhng 175 m1llion of 75,000,000 

matunngdebt ~d by the Republic of Congo. 

2001 Gu•nt2·Bisnu China ancels $5.8 m•lltotl m debts owed by Gu•ne2-81U2u. 5,600,000 

2001 Niger Pruident T:andja and PM Hama Am:adou s1gn 2. pcotocol on forgiving $12 m1Uion ofN•get"s debt 12,000,000 

~dtoCh1na. 

2001 Mozambique Sun Zhenyu, Onnese vice-minister ofFore~n Trade and Economic CooperatiOn, announces that 22,000,000 

Chma will wr1tt off 22 mtlhon US dollars of Mozambique's debt. 

2001 Keny2 The Ch•nese gowrnment cancels 113 m1lhon RMB yuan (about $13.66 mill1011 USD) of Kenya's t3.6S2.tn 

debts~toChma. 

2001 Tan:zama The government ofCh1n.a ~ogrees to cancel part ofT~onun121'sdebt W1lh 21 nlue ofowr $70 m1ltion. 10.an ,11S 

2001 MJdagascar The Chinese An•stant Mm•ster ofFore•gn Trade and EconomiC Coopera110n and the MJ<lag.ascar 30,000,000 

Acting Mmister of Foreign Amnrs Sign an agceementto reduce USD 30 milhon of debt (64% of 

the total debt owtd). 

2001 RW3nda Chinese PreSident Jiang Zemin and Rwandan President Paul Kagame signed a debt reductton du1 13,673,924 

a.ncelhng loans totaling 113 million yuan. 

2001 Lesotho Chin2. writes off R40.millton debt~ by IAsotho for the construction or 2. nat ;anal convoent;on 4,646,203 

center. 

2002 Afghamstan China agrees to write off all of Afgh:anist:an's dt:bt. 19,500,000 

2002 Cambod1a At tht ASEAN summit, Chmese Prem~r Zhu. Ron&• annoone«< the cancellat.on orC2mbocha's 200,000,000 

debts 

2002 c~meroon China and Cam«oon 2gree to reschedule a loan of nearly 4,000 m1llion FCFA (6 millton dollars). 5,738,978 

2002 Ghana Ch.na agrees to Wflte off85 ptrcent ofthe4tbt O\vtd by GhAAa. thttqu•wlent of$53.5 million 5),500,000 

USD. 

2002 Mytnmar Chmt. Wfltt-s off$72 milhon of the debt ou.-ed by Mytnm#lr to Ctun1.. 72,000,000 

2002 Yt~n Y tmen and China $ign an agreement th2.t d 1m1nates 84 million USD 01.1t or 2.n outstand1ng $185 84,000,000 

m1lhon debt to Ch.na. 

200) Bob111a Chin2. age«$ to focg.vt debt owed by Bohvi:a. The amount •s not prov•ded. N/A 

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, \uwunl (l s \ t~.tr ( 0111\lf'\ n~( raptton IJoll.tr<) 

2003 Gh:;.na 

2003 Guy an:;. 

2003 Eritrea 

2003 Kyrgyz Republic 

2003 St:rb1aand 

Montenegro 

2003 Nigeria 

2003 Zimb2bwe 

2004 Zimbabwe 

2005 Equ2tonaiGuinea 

2005 GUinta 

2005 Som:;.lia 

2006 Benin 

2006 FIJI 

2006 Georgi:;. 

2006 lAoo 

2006 My:at~mu 

2006 S.moa 

2006 Senegal 

2006 Zambia 

2007 Angola 

2007 Burundi 

2007 C2meroon 

2007 CapeVecde 

2007 Central Afncan Rep. 

2007 Chid 

2007 Congo, DR 

2007 Congo, Rep. 

Chm2. cancels the 166 million USD debt owed by Ghana. 

Chin:a cancels 20 million USD of loan rep.ayments from Guy:ma. 

Eritrean Economic Adviwr and China's V~<:e Minister for Foreign Tt:lde and Economic 

Cooper~rion s1gn a 13m debt c:a.ncellation agreemenl. 

China EXIM re1.Uuctures Kyrgynt2n's st:ote debr of 250,000 dollars pursu:on110 rhe Pars Club 

2greement on the consolid:olion of the Kyrgy2 Republic's debL 

In 2003, Ch1na agrees to fotg~ve 170 million of the arrears the Serbian 011 and pcompany Naf\na 

lndustci;a SrbiJe (NIS) owtd to S1nochem, a Chinese state-owned company. 

Chinese V1ce Fore1gn M1nistec Qiao Zonghuai s1gns a N325 m111ion debt cancellalion agreement 

with Nigeria. 

66,000,000 

20,000.000 

3,000,000 

239,216 

70.000.000 

The Chine~ government t.gr«S to resthtdule a 1 42 m1llion IOtn that the Ch ne~ govtmment had 42,000.000 

m1gm2.ltf provi~d to t he Z1mbabwe Iron and Steel Comp.any (ZISCO). 

Exlm Blnk officials sign two rescheduling agreements with Zimbabwe for loans totaling $17.9 17,900,000 

milhon US dollars. 

Fol!OWJng' visit to Ch1na. Equatori2l Gume:a's President Teodoro Obiang Nguema referenced NA 

Ch1n:a d~bt rehefbvt 11 IS und~:ar when 1t occurr~ and th~ amount mvolwd. 

Chm:a cancels Gume:a's debt m th~ amount of$45 mdhon USD. 45,000,000 

A Ch1nese delegatiOn (no further In formation) wa.ives 1 3 million o f Somalla'sdebL 3,000,500 

Durmg his vis1t to Benin, Chinese foreign mimster l.i Zhaox:ingagrees to c'ru::el t he country's 

d~bl 

Ch1ne$e Prtme Mmi$ter Wen j1ab~ pledges to Cjilncel Chmese loans to FIJI th:at m'tuced at the ~nd 

or200~. The value or the debts Is unt.nown. 

At a meeting between Chine~ President Hu j1ntao and Georgian President Mil:heil Sur.uhvili. 

Ch1na '11nounces it would forgi~ most of Georgia's $ 3 million debt. 

Chinese Presi~nt Hu Jmtao visited V1entiane 'nd offers assist2nce and debt forgiveness. 

Chma jilfld Myanmar sign 21n agreement for Chm' to cancel240 million yu'n ($30 million) in debt. 

Sam()jil Finance Minister Nito Lee H:ang reports that China had forgivtn $ 11.5 million USD of 

S:it.moa's~bL 

China 'gr~s to c=ance1 $18.5-$20 m1llion USD in debt. The e:act amount is uncleu. 

China writes off$211 million of Zambia's debt which was incurred in the 1970s to bu1ldthe 

T AZARA railway lme. 

The Chine~ government signs an :agreement with the Angolan government to ance1 ~m11lion 

RMB (approximately 7 million USD) of debt owed by the Angolan governmenl 

During a two-day conference m Burundi, Chma announces it 11 cance1hng213 m1lhon CNY ($ 28 

mdhon) of Burund1an debt. 

Chmese Pres1dent Hu Jmtao agrees to ancel 16 b1\lion CFA of Cameroon's debt to Ch1n1 

Ch nu~ Premier Wen Jtabao announces cancellatton of Cape Verde deb!$ that matured ~ the end 

of200S. No figures d isclosed. 

Ch1nese fore1gn mm1ster Lt Zhaoxmg announces m the Central African Repubhc a debt 

O!tneell,hon worth 5 "billoon XAF ($ 11 m.llion USD) 

Chme$e Foreign Mimster Li Zhaoxmg signs a CFA 16 billion debt-teliefdeal With Ch:ad. 

Chtna cancels $29 million of ouuund1ng DRC debt 

Repubh< of Congo and Chma stgn a protocol 'greement on the canceli2tion of 30.6 b1tlion CF A 

funcs (~bout64 million U.S. dollars) of debt owed toCh1na. 

30 

NA 

NA 

2.600.000 

45,000.000 

30.099.938 

11,500.000 

18,500,000 

211,000,000 

6.572,433 

27,998,566 

32.000.000 

NA 

11,475,863 

33,384.329 

29.000.000 

64,000,000 
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, \mount (l S 'f'.tr Countn, Dt"t ropluon Dollt"') 

2007 Cote D'lvoite China writes off 40'/t of the debt owed by Cot d'lvoire. amountmg to 18 million EUR. 24,636,020 

2007 Equatorial Guinea Chinese foreign minister Li Zhaoxing 1igns an agreement with Equatorial Guinea to write-off $75 75,000,000 

million debl 

2007 Ethiopoa Ethiopoa and Chona sign a debt relief agreement for $18.5 rrnlhon. 18.500,000 

2007 Ghana China and Ghana sign a series or agt«mtnts, indudong one for debt eanct!lation wotth 1 126 126,000,000 

million USD. 

2007 Guinea China promi-sn Guinea debt relief worth $4 milhon USD. 4,000,000 

2007 Liberia President Hu Jmtao formally signs :~w:ty 80 million RMB and 1 million USD in Lt~rian debt owed 11,000,000 

to Chona. 

2007 MadagaKar Fouc deals were s•gntd With Mad~~ roc pattoal debt cancellation. No amounts wece 

announced. 

2007 M:~unt11ma China forgives S61 mol1ion USD worth ofM:iurit:~man debt. 61,000,000 

2007 Mozambique Chinese Pres! dent Hu Jmtao :~nnounces the c:~ncdla ion of 1111 MozambiC111n publiC debt to Chma 30,000,000 

incurred on the penod 1980 to 2005. Aceordmg to Mo:umbo~an Fmance Monister Manuel Chang, 

this debt amounts to about 30 million US dollars. 

2007 Rwand:a Rwa.ndan President P-aul Kagame and Chinese President Hu Jint-ao sign an S.jVtement cancelmg 160.000.000 

Rwandan debt owed to China 'up through 2005' worth 160 million dollars. 

2007 Sierra Leone Chinese Vice Foreign Minister Zh:~iJun and Sierra Leone's Foreign Mimster Zlilinab Bangura sign 22.000,000 

s.n s.greement to canctl$22 mllhon USO worth of Sierra Leone's debl 

2007 Sudan Sudan's President Umar al·Bash•r and China's President HuJintao sign an agcetment foe forgiving 70,000,000 

p:;ort of Sud :;on's debts due to China ~n ing to some 470 million RMB (10 molllon US D). 

2007 Tan:z:~nia The governments of China :~nd Tan:zania :~gree to forg~ve payment for 7 interest-free IOllns. The NA 

V:ilue oft he debts :;ore not d i1elosed. 

2007 Togo Togoleu- Fore1gn Mimsttc Aytva Zaflfou reports that the Chmese govtrnment hu fulfilled an 18,687,045 

~reement to can~ell49 m11lion RMS of debt owed by Togo. 

2007 Uganda Chins's Assisunt Minoster for Commerce and Ugand:a's Fonan~ Mmister sign 'lin s.greement for 17,000,000 

Chins to e:ancel 17 milhon USD worth ofUgands's debt. 

2007 Zambia The Chinese government c:mcels Z:~mbi:~ debt worth 8 million USD (60.3 million RMB). 8,000,000 

2008 8ol1via Chin:~'s Ambass:ad01 signs :1 debt rel1ef protocol m L:i P2.2. The amount of relief was not repolted. NA 

2008 Cuba China agceesto postpone the repayment ora part (S7.2 milhon) of Cuba's debt to Chu'la. 7,200,000 

2008 Kyrgy: Repubh~ The Govttnment$ of Chona and Kyrgyutan s1gned an agreement tcansforming a credit wotth 17 7,000.000 

million into a grant. 

2010 Cambod•a Hun Sen, Cs.mbodia's Pnme Min1ster :and Wu Bangguo, ch'llirmsn of the Nahon:al People's 200.000.000 

Congress, sign an agteement tonn~el the 200 mollion USOdebl owed byCambod1a. 

2010 Cameroon At the Africa-Chin:~ Fo(Um, Chma commits to lilddition'lll debt cancelbtton for C:~meroon. valued 4,095,000 

at CF A 2.1 bithon. 

2010 luq China and ltaq s•gn an agcumel'lt to officially for31ve so-;. of!r11q's debt···UOUI'Id 16.8 bolliol'l 6.800,000 

USD. 

2010 Sudan The Chmese :~mbusador to Sudan :~nd Sudanese offictals Sign an agreement toc:~nce\40 million 5,908,185 

RMB wocch of Sudan's debt. 

2010 Zimbabwe Tht Chinese govemment teaches an agt:etment woth Zombabwtan $latt-owned stetl company 54.684.000 

ZiKosteel to reKhedule the $54.684 mdlion in debt owed by the Z1mbabwun steel producer. 

2011 Tan:zania, Z1mboa The Chinese government :;ogrees to wnte off roughly 50 percent oft he 1 150 m111ion USD owed by 75,000,000 

Tusra. 

2011 Cote D'lvoire The Chinese Vice F01:eign Minister and Cote d'lvoire Foteign Minister sign documents th :~t c:~ncel NA 

~ettain debts. Details were not diKiosed. 

31 
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'(' \r Counln l><''' np111m 

2<l11 

2<lll 

2<l12 

2<l14 

2<)!7 

Cuba Chin:a restructures or forgives Cub:a's $6 bill•on debt roChin:a. DeuJls not provided . 

Seychelles China ctsehedules Seychelles' debt, allowing it to pay •ts 321 million cand debt owr a period of20 

yurs.. With a gr11ce penod of 10 ~:u:s. 

Togo Chin:a cancels CFA 8.3 billion of Togo's debt 

Sud2.n Sud2.n's Mn1ster of Fmance uys the Chmese havt ofteced more hme (or Khartoum to pay debts 

but declines to d1sclose any further detllils. 

Comor~ Chma announcu rhat •t will wnte oiTComocian govtmment debt worth Cfc630m (11.43m) 

Source: Drawn from the Aid Data database and supplemented by references to debt rehef in IMF public 

documents 

32 

\mounl (l S 

Doll.u·-.) 

6,000,000.COO 

44.207,982 

16,061,830 

NA 

1,430,000 
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RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO

SCOTT MORRIS BY SENATOR ROBERT MENENDEZ

Multilateral Development Banks 

In your testimony you state ‘‘the MDBs have been rated as the most effective development institutions by multiple systematic reviews of aid and development finance.’’ 

Question 1. Please provide support for that statement. 

Answer. See the information provided below. 

• Nancy Birdsall and Homi Kharas (2010 and 2014). The Quality of Official Development Assistance (QuODA), 1st and 3rd Eds. Washington, DC: Center for 

Global Development; Global Economy and Development at Brookings. 

• William Easterly and Tobias Pfutze (2008). ‘‘Where Does the Money Go? Best 

and Worst Practices in Foreign Aid,’’ Journal of Economic Perspectives 22(2): 

29-52. 

• Stephen Knack, F. Halsey Rogers, and Nicholas Eubank (2010). ‘‘Aid Quality 

and Donor Rankings,’’ World Development 39(11): 1907-17. 

• Samantha Custer, Zachary Rice, Takaaki Masaki, Rebecca Latourell, and 

Bradly Parks (2015). Listening to Leaders: Which Development Partners Do They 

Prefer and Why? Williamsburg, VA: AidData at William and Mary 

• UK Department of International Development (2011). Multilateral Aid Review: 

Ensuing maximum value for money for UK aid through multilateral 

organisations. 

• UK Department of International Development (2016). Raising the Standard: the 

Multilateral Development Review 2016. 

In your testimony you state ‘‘by my estimates, one-third to nearly half of 

the bank’s lending in China is not appropriately focused.’’ 

Question 2. Please explain. 

Answer. See the attached report, ‘‘Examining World Bank Lending to China: 

Graduation or Modulation?’’ Expected publication date January 2019. 

[The report referred to above follows:] 

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EXAMINING WORLD BANK LENDING TO CHINA: 

GRADUATION OR MODULATION

Scott Morris and Gailyn Portelance 

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Contents 

I. ffiRD Eligibility Rules ................................................................................................................. 1 

The Elements ofiBRD Graduation ......................................................................................... 2 

Policy Reforms in 2018 ............................................................................................................... 3 

II. Borrowing Practices of Graduation-Eligible Countries ........................................................ 5 

III. Examining China's ffiRD Borrowing According to the 2018 Agreement ...................... 7 

Overview of the World Bank-China Relationship ................................................................. 8 

Aggregate and Provincial-Level Analysis of World Bank Lending to China ..................... 9 

IV. Qualitative Assessment of World Bank Projects in China ............................................... 17 

Global Public Goods in China: Trends and Focus Areas ................................................... 17 

Capacity Building ....................................................................................................................... 18 

The Rest of the Portfolio ......................................................................................................... 19 

V. Conclusion .................................................................................................................................. 21 
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TI1e \'(lorld Bank and its shareholders have wrestled with the question of eligibilit)' for 

assistance since the bank's founding in 1944. In recent decades, the non-borrowing members 

(tl1e United Stares in particular) have tended to press for clearer standards and a meaningful 

way to end country eligibility based on measures of economic progress, relying heavily on 

growth in per capita income within the borrowing country. TI1e borrowing member 

countries, particularly countries like China that have seen the most economic progress, have 

tended to resist f~tm rules and automatic triggers, seeking to maintain access to me bank's 

preferential lending rates and technical support. 

'Ibe eligibility issue came to tl1e fore again early in 2018 as me bank's shareholders stmck a 

deal to increase the bank's capital and lending capacity going forward. The written agreement 

reveals the contours of me debate. It affirms the need for a "graduation policJ'' that 

ultimately makes some countries ineligible for bank lending while also affuming mat all 

countries who want access to IBRD assistance should get it. 

Clearly, tl1e World Bank's approach to country graduation remains contested among the 

bank's shareholders. This paper seeks to inform me ongoing debate by: 

• reviewing the World Bank's rules pertaining to eligibility and graduation to 

ineligibility, including new language contained in the 2018 capital agreement (section 

I) 

• examining the borrowing practices of countries tl1at arc deemed read)' for 

graduatio n according to the rules (section IT) 

• assessing me borrowing practices of China as a leading borrower according to the 

policy framework in the 2018 capital agreement (sections Ill and IV) 

In particular, the paper introduces new analysis of China's borrowing from me World Bank 

in order to better understand the degree to which bank policies around graduation affect the 

composition of projects for a major borrower. China is tl1e focus of iliis analysis (among 

oilier possible graduation-eligible borrowers) because its project portfolio wiili tl1e World 

Bank is large and its borrowing has been a target of criticism by the United States, the World 

Bank's largest shareholder. 

We conclude with recommendations for how current World Bank policy on graduation, and 

the ongoing debate that drives it, could best be supported by changes in countr)r-level 

operations to better align country portfolios witl1 bank policy and modest changes in 

reporting practices to facilitate tllis alignment. On balance, we conclude that tl1e way forward 

for me World Bank's engagement in countries like China calls for modulation ramer man 

graduation. 

I. IBRD Eligibility Rules 

According ro bank policy, countries remain eligible to borrow from tl1e International Bank 

for Reconstruction and Development (IBRD) until iliey are able to sustain long-term 
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development programs without relring on bank financing. Thus, graduation is not an 

automatic consequence of passing an income d1reshold but is based on whether a country 

has reached a level of institutional development and capital-market access that enables it to 

sustain these programs. However, there is significant ambiguity surrounding what bank 

programs in graduation-eligible countries should look like, and little clarity, beyond these 

broad guidelines, on what exactly makes a country ready to graduate. Reinforcing this 

ambiguity is d1e fact tl1at graduation from d1e IBRD has not represented an orderly, linear 

trajectory--of the 25 countries d1at have graduated from IBRD eligibility, eight have since 

"degraduated" or received additional loans after graduation. 

The Elements of IBRD Graduation 

'The bank's Articles of Agreement provide the legal basis for IBRD graduation policy. 

Specifically, there arc two relevant provisions (italics added): 

• Article Ill, section 4 (i): 'll1e bank may make or guarantee a loan when " tile bank 

is satisfied that in the prevailing market conditions tl1e borrower would be tmable 

otherwise to obtain the loan under conditions which in the opinion of tl1e bank are 

rttiSOI!able for the borrower." 

• Article 1 (u): "When private capital is not available on reaso11abk terms, [the purpose 

of ti1e bank is] to supplement private investment b)' providing, on suitAble 

conditions, finance for productive purposes." 

Use of a " reasonableness" standard i11 both articles introduces considerable ambiguity to the 

question of eligibility and eventually to graduation.lt also accounts for the ongoing debate 

attached to graduation policy. Various elements of policy relating to graduation have 

emerged over tl1e years, adding some detail to tl1e otherwise ambiguous nature of tile 

language in the Articles. In 1973, the bank fu:sr proposed using d1e "rough benchmark" of 

$1,000 gross national income (G I) per capita, in 1970 dollars, to trigger a conversation of 

graduation.' The policr also included a provision that this threshold was to be adjusted 

yearly based on prices and exchange rates. 

Tn 1982, the World Bank's executive directors approved a more comprehensive policy that 

went beyond the limited focus outlined in the Articles of Agreement. 2 The new policy 

established that a graduation decision should be based on two key factors: a counur's level 

of development and overall economic situation, and a country's capacity to sustain a longterm development program. '!hey further directed the bank to assess these conditions by a 

country's ability to access capital markets on reasoNable terms and a country's progress in 

establishing kry institutions for economic and social development. The new policy stated that 

l Jac C. Heekelman, Ste-phen Knitck, F. Halsey RogerS, cm~ing the ·Ibreotbold· An Analysis of IDRD 

Grndu:ttion Poijcy" Policy Research \XI'orking P!tper 5531, \Xlorld Bank,J:tnuary 2011. 

' Ibrnhim F.l. Shil1a1•, Tbe lf?orfd Bonk Lt~ll PaptrJ, 2000. 
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graduation should be "flexible and fair," with graduation from new lending ideally occurring 

within five years after a country passes the threshold. 

A rear later, the bank affirmed that the G J per capita guidelines should continue to be 

adjusted based on the annual rate of change of the SDR-<Ieflator. Today (FY2018), the 

threshold for " initiating graduation" is $6,895 per capita and is set tO fall to $6,795 per 

capital for FY2019.3 

In 1984 bank policy further clarified that the GNI per capita threshold is one of many 

indicators of development and should only be used as a trigger to start the discussion of 

grad uation on the basis of a country's ability to access capital markets and irs progress on 

institutions for economic and social development. Shortly after, five reports were 

published-for Cyprus, Oman, the Bahamas, Trinidad and Tobago, and Barbados-starting 

this very conversation of graduation' Three of these countries did in met graduate within 

five years, though one (frinidad and Tobago) reversed course in 1990 and remains eligible 

for IBRD lending today. 

Policy Reforms in 2018 

In April 2018, the World Bank's shareholders reached an agreen1ent to expand the bank's 

capital. The agreement also outlined a set of policies pertaining to engagement in graduationeligible counrries. 5 Importantly, tl1e 2018 agreement docs not adjust e.xisting policy when it 

comes to basic eligibility for borrowing and reaffirms the core clements of tl1e policy 

established in 1982. 

In fact, tl1e 20181anguage puts the graduation decision in the hands of tl1e borrowing 

country, indlcat.i.ng that tl1e "[b)orrowing cotultries' decision to graduate from IBRD 

involves a dialogue between the country and the bank, and takes place on a case-by-case 

basis reflecting country context. " 6 Consistent with this approach, the 2018 report adopts tl1e 

designation "Graduation Discussion Income" (GDI) tO describe the threshold of per capita 

country income that will trigger a discussion about graduating from IBRD assistance. 

Rather than adopting harder triggers for graduation or hastening the timeline for country 

graduations, the 2018 agreement focuses on the terms of engagement with countries that are 

above tl1e graduation tlueshold. Specifically, it adopts tluee approaches: 

a liullr.uiuu ou dtc overall sltarc of dtc JBRD portfolio allut:atcd to dtcsc t:ouutrics 

) Sh~.nt~yanan Devarajan, f [:tishan Fu, B~a Bhaskar Kalimili, "Ps:r Capita l pcoms Gujdsljnc;:; for Operatjonal 

~·· X' odd Bank, ~hy 2018. The threshold for a g1ven. year is based on per c--apita income dat:.l. from two 

years· prior. 

' Jbmhim F.l. Shih•••, Tbt Jli'orld Bank Llg<zl Popt11, 2000 

s \X'orld Bank Group, "Sustainable financing Cor Smtaioable Deye)opmenr \XIorld Bapk Group Capjral Package 

~," April20!8 

6 Ibid., J'll"'gr<tph 32 
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• a hardening of pricing o n IBRD lending to these countries 

• an articulation of principles for the types of engagement by the IBRD in these 

countries 

O n portfolio shnres, the agreement indicates that the share of non-crisis lending allocated to 

graduation-eligible or "GDI" countries will be targeted at 33 percent duough FY2030 and 

30 percent after FY2030. At current lending levels, these constraints do not appear to be 

binding and are consistent with historical lending levels (see figure 1 in section II). However, 

d1ey may become binding over time as more countries e.-.:ceed the per c,~pi a income 

d1reshold that determines graduation eligibiliry. 

On pricing, the agreement adopts a very modcsr hardening in terms for GDI cotmtrics, 

introducing loan surcharges of 5 to 25 basis points for these cotmtries. Compared to the cost 

of marker borrowir1g for an illustrative list of affected countries, these surcharges are very 

small and still provides a substantial "discount" in borrowing for d1ese countries relative to 

d1eir cost of borrowing in bond markets. 

Table 1. ffiRD "discounts" to borrowing countries as compared to 10-year 

government bonds 

10-year government bond IBRD "discount" 

China 4.03 +0.51 to + 1.0 1 

Brazil 9.84 +6.32 to +6.82 

Mexico 7.58 +4.06 to +4.56 

Chile 4.57 +1.55 

Turkey 11.45 +8.43 

Romania 4.32 +1.30 

Noned1eless, the agreement marks d1e flfst time that dte bank has sought to differentiate 

pricing based on country income levels, with higher-income countries paying more. 

On the principles guiding TBRD engagement in GOT countries, the agreement indicates that 

"new IBRD activities ... wiU have a primary focus on interventions to strengthen policies and 

instirutions required for sustainable lBRD graduation."' This language carries forward the 

vagtre standards of the 1982 policy. 

However, additional language suggests dtat the bank's engagement could include: 

I 

managing potencial crisis risks that can have regional and global spillovers; ... 

delivery of regional and global public goods; innovative solutions to poverty and 

' Ibid, paragr,.ph 9 
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I shared prosperity challenges rl1at can be scaled up ... and generate lessons for lower 

income countries; and creating knowledge. s 

E<lch of these e.~amples illustrates a type of global public good, which suggests a strong 

intent to focus on engagements that can demonstrate value for other cowltries. 

II. Borrowing Practices of Graduation-Eligible Countries 

lt is quickly becoming an lBR.D world.ln 1969 there were 62l.DA cow1tries and 311BRD 

counrries.9 As of2017 the composi6on has flipped: there are now 24 IDA countries and 78 

IBR.D countries.•o Of the IBRD borrowing countries, 29 are currently above the G.Dl 

threshold, 8 of which are high-income countries." 

Over the past 10 fiScal years, lending to GDI countries has accounted for a minority share of 

the TBRD portfolio, although the spike in crisis-lending circa 2009- 2010 and its aftermath 

distorted these shares. Figure 1 shows, in real terms, the share of IBR.D annual commitments 

to GDI countries botl1 in aggregate and as a total share of ffiRD lending, which has 

averaged about one-third of the pottfolio over the decade.12 

From this standpoint, the bank's new policy to allocate 30 percent of resources to countries 

above the GDI secn1s to align with rl1e exis6ng pattern ofiBRD lending. 

Of the 30 countries tl1at were graduation-eligible in FY 2018, 13 borrowed from d1e IBRD.13 

Many countries, including Trinidad and Tobago, Suriname, St. Kitts and Nevis, Palau, and 

Malaysia, have not borrowed from the 113RD over the past 10 years, but their continuing 

eligibility reflects the bank's concern that external shocks could place a countly in a posi6on 

where IBRD financing is necessary, a characteriza6on seemingly at odds with the 1982 

policy, wl~ch suggests a country should ideally graduate from new ffiRD lending widlin five 

years of crossing the GDI. Cucrently, there are 10 countries- Brazil, Chile, Gabon, 

Lebanon, Mexico, Panama, Romania, Seychelles, Turkey, and Uruguay-that crossed the 

GDI five or more years ago yet received lBRD loans in FY 2018. 

• Ibid., p•mgr:tph 32 

9 For:~ mor~ comprehensive an:tlysis of lr:m.sfonnation.s in \\i'orld Sank engagement s.incc its establishment, sec 

r .. Dle \"X'orld Bank ;u 75 .. by Scott ·Morris ~1\d Madeliae Gleave, Ceattet for GloOOI Development, ?\~rch 2015. 

lOlfie 78 IBRD coutllries includes 9 •cBlend, countries; see \Vorkl B:\nk Policies Financi:tl Terms :tnd 

Coodjtions of Bank Financing. 

It Six of these councrie-s--DomiJljca_, Gre1l:ld~. Grenadines, the M::\Jdives.. St. Lucia, and St Vincent- receive 

IDA ftn>tncing on Small Economy terms. 

1Z Titese figures were c-alcuhted by aggregating the total amount of lending for ~ch country ~bove a1xl below the 

COl given (.~ ch fisc~l years"lhrcshold. N01 every country thai excced<..."t{ I he threshold in a given yc~r exceeded il 

in :Ftilycan. 

13 Argcrltina. Brazil. Chile. Chirt..1> Gahon. Leba.non.1vfex.ico, Montenegro, Pftmtm:t, Romania, Seychelles) T orkey, 

and Uruguay. 
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so 

" 

.. 

lS 

~ 10 

s " .. 

·' E 

z 

20 

IS 

10 

Figurel. 

IBRO annual commitments to countries above the GDI 

Shares of IBRO lending 

11 year average 

share of 33.6% 
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Some research finds d1at observed correlates of graduation are generally consistent with 

stated bank policy. For example, among the IBRD graduates that have crossed d1e GDI, 

d1ose d1at are weald1ier and more institutionally developed, as well as d1ose d1at are less 

vulnerable to trade, financial, and other shocks, are more likely to have graduated. 14 

Additionally, the bank's Independent Evaluation Group (lEG) recently concluded that 

IBRD support remains highly relevant for higher-income borrowers from two perspectives: 

in helping countries address certain developmental challenges (such as improving tl1e quality 

of public sector institutions) and in having a key demonstration effect for other low-income 

countries. 15 

However, the lEG also found that broad systemic improvements to public sector 

institutions were less common, and despite noticeable individual project and country 

achievements, significant challenges persisted for ad1ieving large and sustained 

improvements in the quality of basic public services and for strengthening national natural 

resource management institutions. Considering that 2018 principles for bank engagement in 

GDl countries emphasize institutional c,~paci y building, further investigation into the 

constraints around lending in support of these activities is needed. 

Ill. Examining China's IBRD Borrowing According to the 

2018 Agreement 

China represents a leading case for questions about IBRD eligibility and engagement 

following the 2018 capital agreement. It is one of30 borrowing countries that sit above the 

FY 2018 GDI threshold of$6,895. Since China first crossed the tlu:eshold in FY 2016, tl1e 

IBRD has made commitments to the country totaling over $7.8 billion. On a per capita 

basis, China is not the bank's weald1iest borrower. TI1ere are currently eight borrowing 

countries witl1 higher per capita incomes. Nonetheless, China is among the bank's largest 

borrowers. further, China's economy is the second largest in the world, and the Chi.nese 

government has become one of d1e largest official lenders to other countries, rivaling World 

Bank lendi.ng itself. This juxtaposition has made China emblematic of the need to encourage 

graduation in d1e eyes of key World Bank shareholders like the United States.16 But it also 

represents a test of whether the World Bank docs in fact take a different approach in its 

weald1ier borrowing counuies and d1e degree to which d1e emphasis on global public goods 

in the 2018 agreement might already inform engagement in these countries. 

H Jac C. Heckelm~n~ Stephen Knack, F. Halsey Rogers, "Cros!ijog the11>rphgld· Ap Aoaly"is of IBRQ 

G.-.du•tion Policy •• Policy Rese•r<:h Working P•per 5531, Wodd S.nk,J•nu•ry 2011. 

l S \XIodd Bank, .. \Vorld B~nk Group Engagement in Uppe -~lidd e: ncome Countries: Fvidence from IF.G 

Eyaluatjon" .. 2017. Independent Evaluation Group. Synthesis Report. \Vashington, DC: \Xlotld Bank. 

Aner :t review of the portfolio of eng."gement in these countries, they found that the bank had a positive role in 

helping to address gaps in the quality of UMJCs• public sector institutions; in accelerating growth in private sector 

productivity and i.r'u"lo,~ation; in in.creasirtg the private fi1\:.tncing of infrastructure; i1\ ensuring improved qu:ility of 

basic hh, educttion, and urban sen· ices; and in providing crucial support ro enhance ~HC's resilience 10 

environmental and security shocks. 

16 See Financia.l1imes, .. Mtu.lchin call for sweeping IMF aL"Id \Xlorld B:tnk refonn/' October 13, 2017, 
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Overview of the World Bank-China Relationship 

Despite the critical view of the United States, the relationship between rhe bank and China 

appears ro be strong, such that it appears unlikely that China will seek to graduate from 

IBRD any time soon. Since graduating from IDA in 1999, three documents have shaped the 

World Bank's relationship wirh China: rhe Country Partnership Strategy (CPS) covering FY 

2006-10; 17 Cbi11a 2030: B11ildi11g a Modem, HanJ/olliolls a11d Draliue Higb-lHcomc Socie!)•;'s and the 

CPS covering FY 2013-16.

19 

The first CPS outlines a clear role for TBRD lending: to employ international expertise to 

help tl1e government of China (GoC) "complete the transition to a market economy, 

improve the welfare of the poor and near-poor, and develop and implement sustainable 

resource-management practices." 'Ine bank directly addresses the question as to why China 

is a client of tl1e bank, staring tl1at altl10ugh rhe GoC can access international capital markets 

at similar or lower interest rates tl1an what tl1e IBRD charges, it still borrows from tl1e IBRD 

because it values the non-financial services it provides as a part of its lending package. 

Indeed, whatever advantage China obtains from preferential IBRD lending rates, it applies ro 

an extremely small amount of borrowing in context: over tl1e past decade, IBRD 

commitments have hovered around $2 billion per annum, for an economy that reached $1 1 

trillion in 2016. 2.() 

1l1e bank also clarifies in the 2006-10 CPS that while China remains eligible for IDRD 

lending, there is no reason to treat it differently from other borrowers, a position now at 

odds with the 2018 capital agreement.21 China 2030, developed in partnership between the 

bank and GoC, establishes the new era of China's development strategy and identifies China 

as an uppe.r-midrllc-income country (UMIC) aiming to achieve high-income country status in 

the next couple of decades. There is no comment on China's impending "graduation" from 

TBRD's assistance. 

1l1e most recent CPS, covering FY13-16, characterizes World Bank engagement based on 

two strategic themes: supporting greener growth and promoting more inclusive 

development, and one cross cutting theme to advance China's relationship with the rest of 

tl1e world.22 These themes of engagement are designed to align with China's 12•h Five-Year 

17 \XIorld B:t~lk. "Couqtry Par(J)er§hip Stmtegy for D1e Peopte•s Reoublic of China For the Period 2006-2010." 

May 2006. 

18 \XIotld B:t~lk and the Development Research Ce11ter of the State Co\11lCil, the Peopte•s Rep\1blic of China, OJiJJ/l 

2010: R11ilding a AJodmt T-lamtOnitJII.f n11d CnaliPt SIK'it(l. 2013. \Vashington, DC: \Vorld B:.nk. 

19 \Vorld Bank, "Couotcy Partneg.hip Strategy for Dw People's Republic o(Cbjna for the Period WOI3-

FY2016." Oc1obcr 2012. 

210 Scott Morris, "Chjpa Borrow~ a Ipt of Money from the \Vor!d Bank and "O>at'§ Okay." January 2018. 

21 \Vorld B:tnk. ucountcy Par•nershil? SLnnegy for The Peol?te•s Republic of Chin:. for the Period 2006-2010." 

May 2006, page 17. 

22 The CPS broadly defines the str.uegic themes as jnduding the followjng projects: Supportjng Greener Growth 

(sustainable energy, urban cnvironment>tJ services, low-carbon urban trnnsport, sustainable agcicuJturnl practices, 

sustain:lble nMuml resource manageme,nt approaches, poJJution management, and mechanjsms for managing 

climate chMge); Promoting Inch1sive Development (Increase access to quality health services and social 
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Plan. In tl1e CPS, the World Bank explicitly acknowledges that Clllna has asked for new 

IBRD instruments (Development Policy Loans (DPLs) and Pay for Results (P4R)) ro 

respond to the new economic context, and references China's growing role as a WBG 

stakeholder as donor to IDA. TI1e bank states that its comparative advantage in Cl~na 

remains in its ability to provide and facilitate knowledge sharing botl1 with Clllna and in 

relation to other countries, particularly related to environmental remediation, health sector 

interventions, and in tl1e energy and transport sectors. 2J 

'The most recent CPS articulates an overall objective to focus on the less-developed western 

and inland provinces ("move west") and on environmental objectives, particularly aligning 

with Cl:Una's Air Pollution Prevention and Control Action plan which focuses on pollution 

control in or around the three-main urban and industrial regions: Beijing-Tianjin-1-lebei 

Qing-Jin-Ji). There is not yet a CPS for China beyond the most recent document covering 

FY13-16. However, in the most recent Performance and Learning review covering Bank 

engagement during rills time, tl1e bank categorizes current and pipeline projects under rhe 

tl1tee aforementioned thematic categories. 

Aggregate and Provincial-Level Analysis of World Bank Lending to 

China 

Taking the 2018 capital agreement as a new framework for engagement in graduation eligible 

countries, we seek ro apply it to IBRD lending ro China in practice. Specifically, we use 

provincial-level anal)•Sis to examine the degree to which China's borrowing on an aggregate 

basis is aligned with the principles for GDI countries established in the 2018 capital 

agreement: efforts ro berrer enable graduation, including it~tiatives explicitly framed as 

"capacity building," and support for global public goods (GPGs). 

According to information available in project documents, dle bank generally appears to 

orient engagement in China at the provincial level. A provincial or municipal government 

actor or a subnational project management office is tl1e implementer for nearly every project. 

TI1is allows for a basic analysis on the provincial distribution of cumulative project financing 

since Cl~na became graduation-eligible. 

We find in project level analysis tl1at just 44 percent of tile Cl:Una portfolio comprises 

activities that are clearly GPG-related (primarily pollution control and sustainable 

infrastructure) or designated strictly as capacity building. This suggests weak alignment witl1 

dle 2018 principles. 

protection. strengthening skills development, enhanciJlg opportunities ln rural :..l.relS, ~nd improving trn.nsport 

connectivity); Cross-<:uning 'nleme (advance murually beneficial relations with 1he world, b)1 suppor1ing Chjna's 

South-South coopcrntioo and China's role •• • global st•kcholdcr). 

2J \"\'orld Bank Group. ccPerfo m~nce :lnd Le~trni.ng Review of rhe Count[)' P1trtnership Srcuegy (or che People's 

Republic of China ror 1he Period FY13- FY16." January 2016, p~c 13. 
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MenMor-12.eps

Figure2. 

IBRD commitments to China by volume and by sector, FY16-18, USD millions 

TOTAL: $7.89 billion 

Other 

57% 

Rural development 

9% 

Solln'f: \Votld BaJlk Projects and Operatioas. authors calculations 

GPG 

38% 

Soolr>:e: Wotld Bonl: Project$ ond 

'-..... Opetutions, outhots cokulations 

Capacity Building 

5% 

But a strict measure of capacity building may be overly limiting. 1l1e stated 2018 goal of 

"institutional strengthening" could also accommodate a broader rationale and approach to 

eng;1gement. N:unely, we interpret a key element of this rationale to be a focus on subregions within the country where economic progress has been weak. From a geographic 

perspective, World Bank focus on lower income provinces would generally support the 

principle of assisting d1e country toward graduation. 

From this srandpoint, we consider World 13ank lending to China from a provincial 

perspective. First, we identify Chinese provinces in relation to the IBRD's GDJ threshold 

(see figure 3). 

J ust over half of Chinese provinces have per capita incomes below the GDT threshold, with 

45 percent o f p.rovinces above the threshold. 1l1e latter are concentrated in the eastern half 

of country. 
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Next, we compare d1is distribution of provinces by income with the pattern of TBRD 

lending by identifying the location of projects supported through JBRD loans. Figure 4 

compares tl1e previous map illustrating provinces above and below tl1e GDI with aggregated 

project pipeline commitments by province over the past tluee fiscal years. 

As outlined in the CPS, bank projects by volume do appear to be concentrated in the inland 

provinces: about 83 percent of lending by volume are in non coastal provinces, wid1 the 

smaller share of lending in the coastal provinces where GDP per capita is significantly higher 

and growth has been rapid over the past decade. 

However, by a more precise measure of provincial-level per capita income, just 58 percent of 

lending has gone to provinces below tl1e GDI threshold. IfiBRD lending were designed to 

be strictly focused on the poorer provinces as a path toward graduation, then actual lending 

appears to have fallen well short. 

Nonetl1eless, the 2018 agreement also emphasizes tl1e value of GPG activities in GDI 

countries. From tlus standpoint, we consider the IBRD lending pottfolio according to GPG 

alignment. Of the $7.9 billion lending portfolio during the period, $3 billion was devoted to 

GPG-related activities, 60 percent of which were in the wealthier provinces. In principle, we 

can expect leading GPG activities to be concentrated in areas of higher economic activity 

and therefore higher incomes. Specifically, climate mitigation efforts within China, which 

represent a clear GPG, are likely to be associated witl1 provinces and regions where 

emissions are lugh. For example, a large concentration of climate-related financing is in d1e 

wealduer province of Hebei, where the bank and the GoC have focused efforts on pollution 

control. More generally, nearly two-tlllids of GPG-related lending by volume is concentrated 

in GDI provinces, witl1 just over a tlurd in below-GDI provinces (see figure 5). 

Tn sum, the majority of TBRD lending has been concentrated in China's below-GOT 

provinces. Of tl1e lending that has gone to GDI provinces, 54 percent has been devoted to 

GPG activities. Of the non-GPG activities generally, there is a strong bias in favor of d1e 

below-GDI provinces. Seventy percent of the bank's non-GPG portfolio is allocated to 

these provinces. And of all of the bank fu1ancing going to below-GDI provu1ces, 74 percent 

is for non-GPG activities (see figures 6 and 7). 

MenMor-14.epsFOREI-42327 with DISTILLER

Figure 3. 

14 Chinese provinces are above the Graduation Discussion Income over FY16-18 

Xlnj&.anv 

G•n•u 

Qinoh•l 

Sk'hllill'l 

Vunn.art 

bt:lowCOI 

l i'INr '4:MIOOI JiUn 

llaonino 

Hinqd"' 

ilta•n•i 

Chongqlno 

.. i;ino 

TUI'I.)I.n 

Sh4llx1Hebe.l 

Sl\utdono 

ttt.n•n Jianow 

ttubltl A1thul Shan_vh.aa 

lhoe:J .. no 

Hune_n )loM,IJOi 

fuJI4n Cu l:lt.ou 

Guu.g.xl Guomqdono 

H&Jn•n 

abo\,le 

Note for all maps: This map template includes 31 prov;nciaHeve,l ad

divisions, includine 22 four municipalities, and five autono

regions. This template does not include the two Spedal Administrati

{SAR) of 

Macau and Hong ICong or Taiwan Authorities from 

regions report separate social and economic statistics to the Wotld 

Disdaimer: All maps in this paper we for illustrative purpose:sand d

imply the exPfesslon of MY opinion on the part oftheCenmr for Glo

Development concerning the legal status of any rountry or territory 

concerning the delimitation of frontiers or boundaries. 

Note: Evoluoted against per mpito income from 2014-16. Th

1016 !>€' copita /N}IX<S for 1M FY 2018 GDI, 1015 !>€' cop figuros f or 

GD/,etr. 

Sourer: World Bonl< Projoas ond ()pe<otions, World Bonk: doe

Bonl< classify countries? 

MenMor-15.epsFOREI-42327 with DISTILLER

-

...... 

Figure 4. 

Provinces above and below the GDI (l•t) vs. concentration of IBRD lending (2"") 

-

Sk:ll:ooH!Io 

...... ""' 

2-' m1p lendiln& [n •urea ate namlnal USD mil ions over • three-year pet"iod, fYl&-f'Vl8 

"' ...... \6 

(liM ..... 

......... Mt 

.. 

_ 

"' ... -

.. 

..... .. 

....... 

............. 

..... .... 

.....,_ JIMI:ol 

.... 

...,_ 

_, .. 

........ 

0 2SO SOO 7SO 1000 

-

MenMor-16.epsFOREI-42327 with DISTILLER

Figure 5. 

Concentration of lending by province for Global Public Goods (GPGs) related projects 

An "X• identifies a province above the GDI 

Xinji.lnQ 

Xluno 

••tilono.ii•no 

X 

Inner Nongof 

Gan5u 

Hl.ngxla 

Ql.nQhAI 

ttena.n Ji•nusu 

Skhu•n X I 

Yunn•n 

Chono<aino X Zht;jlang Guithou 

X 

Hunan 

Gw.•nodcu•ngdono 

X 

H•ln•n 

IA!lJtll\ 

X 

0 

HO 

500 

1SO 

Where are $3 billion in GPG pro

located (by province)? 

$1,200 

miUion,or 

40% 

Source-: World Bank Proje<ts and Operation

MenMor-17.epsFOREI-42327 with DISTILLER

Figure 6. 

Of $7.89 billion in IBRD financing in 

China over FY16-FY18 .... 

The majority has gone t o poorer provinces 

$4,578 million, 

or 

700 

600 

500 

4()(1 

300 

200 

100 

I! 

Projects in provinces above the GOI 

GPG-related 

1 

I -I 

I - - - j -

- - -

I 

I - -I 0 --..-- --..-- e 

a o-.§' 

::> ,-s 4f ,y*' # ,l' !?-§' ,F -,_'/$ 

.._(.li <..(.li .. -$ 

!::>#' '-"' .. 

c,; .,.;$>" soun:e:W<Irtd Bolnt PNJCCl$a

MenMor-18.epsFOREI-42327 with DISTILLER

Figure 7. 

Concent ration of lending by province for non-GPG related projects 

An ")(• indicates a province above the GOI 

Xlz.a.n9 

Yunn•n 

HciiO<IQ)!.og 

"'~·~ 

.lillft 

X 

LWoni"9 

a.vinv ::--__ X 

Tloftiin -- X 

Sh•n•IHtbol ~ X 

Shandong 

X 

SII••9""'_ x ::..&:

•• f«iion u••;t O X 

H•ln• n 

1,0 

100 

7lO 

Where are $4.89 billion in non-G

related projects located (by prov

$3,378 

For all projects in provinces b

the GDI: 

$3,378 

million., or 

74% 

SouOI!: W«td lbnk P10jl!ds lind 
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IV. Qualitative Assessment of World Bank Projects in 

China 

This section uses projects e.xamples to illustrate the categorizations used in figure 1 and in 

our provincial-level analysis, which sought to categorize World Bank projects according to 

GPGs, bolstering economic and political institutions to prepare for sustainable graduation, 

and projects that fall outside of these categories. 

Global Public Goods in China: Trends and Focus Area s 

A focus on global public goods does appear to genuine!)' define some of the \Xi odd BankChina partnership. GPGs account for 38 percent of the lending portfolio and encompass a 

range of activities and sectors, with climate change mitigation the leading objective. 

Po1111fio11 tYJJI!rol. Since 2013, d1e GoC has focused on and monitoring Particulate Matter 

(PM2.5), considered to be the most critical pollutant for public health.24 In response to this 

concentrated focus, the bank is implementing projects ro help mitigate PM2.5. For e.xample, 

two projects totaling $600 million are in I lebei- an air pollution prevention and control 

project and a clean hearing project-where pollution levels are some of d1e highest in d1e 

country. 25 Additionally, me bank has focused on cleaning up water and land pollution in 

areas of both regional and global significance. For example, d1ere are two projects in d1e 

provinces of Jiangxi and Zhejiang to control water pollution, me fonner targeting a large 

freshwmer lake d1at flows into the Yangze river (a sigruficant ocean polluter), and the latter 

cleaning up a lake to address, in part, broad negative ecological effects due to water 

pollution. u All three projects include a small provincial capacity building component. for 

example, the latter project will include an inter-provincial capacity building piece and focus 

on d1e institutional strengmening of me provincial project management office. Additionally, 

a project in me province of Hunan is oriented towards remediating brownfields and 

combatting soil pollution. 27 TI1ere are no pollution control projects in d1e province of 

Henan, which has me highest concentration ofPM2.5 when weighted by population.:zs 

S11sfaillable i11fmstmct11re. Tn response ro today's compelling development and climate 

imperatives, financing for sustain,1ble infrastJ:ucmre-mainly financing productive, efficient, 

24 PM2.5 is a par1icuh1e mall~r 1hat causes a wide rnnge ofhcahh <!ff<!cls. es~ci:t )' r(!spirnlory and cardiov:1.scular 

systems. It js mc:lsur<:d through primary partklcs (fine p:t.ctidcs d.irecdy emitted from a soun:c such ~s dust from 

construction sires), and second~ry (produced through chemical reactions in rhe atmosphere, which includes SO:, 

NOz, and NH3. ·nlese subst:mces :uc emitted from the combustion of fossil fuels, use of fenilizers,liv<'stock 

waste, and industrial production. 

2S Hd><:i c~n Htat:ing Prois:;cl, Hchs:;i Air Pollution l)rs:;vs:;nt:ion and l,.ontrol Program 

26 Poyang Lake lla,<tjo To-.vn \Vater Gnvjmomsnt l\ofao~gemcot pmjecr Zhejiaog Oiandao Lake Xjn'ao Rjvsr 

Basin \XI;uer Resource' and Ecologjcal Environment Prolecrion Project 

.27 Zhuzhou Brownfield Remedjatjon Project 

l8 A1tgel Hsu, ••Proyinces in China commit to air pollutjon mrgers." February 2014. 
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and green infrastructure investments-is a key component of d1e GPG agenda.29 The 

IBRD's financing in China reflects this effort in me areas of transpottation and urbanization. 

For example, the bank is currently financing sustainable urban transport projects including 

supporting low carbon development of inland waterway transport capacity in H ubei 

province, focusing on data integration and utilization to improve green public transportation 

efficiency and reliability in Shaanxi province, and upgrading to a green metro system and 

encouraging public transportatioll i11 urba11areas ofTia11ji11 provi11ce.JO Additionally, one 

urbanization project in Sha11ghai, another high emirter, will focus on providi11g sustainable 

lo11g-term fina11ci!lg to gree11 infrastructure in selected small towns. Jl As will be discussed 

later, this appears to be 011e of few urban regeneration projects d1at has a clear climateoriellted program component. 

lVI0/11/edge sharillg. Part of me bank's Strategy in China is to facilitate Soum-Soum knowledge 

sharing, and dus objective is a key component of a few projects. One project focused on 

reforming two provincial health programs-in Anhui and Fujian- includes an explicit 

intention to facilitate study tours for Chinese officials to Brazil and Costa Rica to learn about 

health reforms in those countries and share the Chinese experience.J2 Additio11ally, a project 

in d1e province of Chongqing is applying evidence-based approaches to urban regeneration 

to reduce e11vironme11tal inlpact and i11troduce green solutions in select cities. lhe project 

aims to share these experiences across the municipality and globally, and situates the project 

among oilier cities around me world d1at are looking to apply such strategies.l.l 

Deuelopmmt polity data and mean1J. A few projects indicate me bank's intention to help develop 

China's data collection frameworks. For example, one project aims to expand capacity for 

open data at d1e subnational level. Starting wid1 Guangdong province as a pilot city, me bank 

aims to demonstrate how China is "a unique place to benefit from me use of technology and 

data to improve its development outcomes." As illustrated above, me bank aims to support 

me development of an Intelligent Public T ransport Management System in d1e Shaanxi 

province, using data integration and utilization to improve operations within the public bus 

system.J< 

Capacity Building 

In the previous section, we suggested that a focus on below-GO I provinces in itself reflects 

a core principle of me 2018 agreement: "institutional strengrl1ening to promote graduation." 

29 Nancy Birdsltll and Scott Morris, uMulril:\teml D evelopment Banking for This. Ceon1pt'!!; Deydopment 

Ch:Uienges: five Recommend:ltions to Sh:ueholden of the Old :md New Multil1tter:1l Development B:tnks." 

Cenler for Global Development, October 2016. 

JO ChinA' TI~njin Urban Ttallsport Improve-ment Project Chio~· H\1bei ln ld \XIaterway Improvement Project, 

Sh~ftnxi Xi' an City I ntdligent Public Tpm~po t Project 

Jl Shanghai New Urbapjzatjon finapcjng and Ippovation Project 

32 China Heahh Reform ~1m (Anhuj :md fuji:m) 

ll Chongqing New Urhani 7~"ltjon Pilol and Dcmomtrntjon Project 

l4 ShMnxi Xi' an Citv Intelligent Public Trnn~po t Project· Cftpacicy Buildittg ftnd Sunporring P~ram for Open 

Dat:l lnili:-..lives in Chin:•· 
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Nonetheless, it is also wortl1 considering the degree to which me bank is directly engaged in 

"institutional strengdtening" or "capacity building" irrespective of provincial-level income. 

A clearly identifiable focus on capacity building yields a much smaller number of World 

Bank projects witrun China, whetltcr witltin non-GDI provinces or narionaU)'· Titese 

projects account for just 5 percent of me overall portfolio. 

The bank is currently implementing two subnarional pilot programs to support fiscal 

sustainability and control subnational debt. In a fiscal sustainability project in Hunan, tlte 

bank states "tlte nature of I Iunan's current economic and fiscal situation breeds significant 

risks for local progress on poverty and social indicators," implying a concerted effort by the 

bank to target subnational provinces that have a capacit)' problem.35 ·n ,e implementing 

agency is Hunan Provincial Financial Bureau, and project documents describe that "the 

operation is encouraged by me pride and determination of the I lunan Provincial 

Government." The second pilot project is inlplcmented by the Chongqing Municipality 

Finance Bureau and Dadukou District Government in Chonqing province. Project 

documentation indicates "tlte operation is encouraged by the pride and determination of 

Dadukou District to transform itself from one of many fiscaU)' distressed local government 

in China into a positive example of fiscal turnaround that could be followed by otlter 

localities."36 

There appears to be one national-level capacity-building project. The bank is currently 

implementing one project to provide technical assistance for China's reforms in public 

finance. This is to align with China's own program of reform for the nation's tax system, of 

which, per bank documents, "many details of these reform plans are being developed or not 

yet proposed." Ths project aims to supplement-at tlte request of me GoC--tlte fiscal plan 

by informing tlte design and implemenL1tion of reforms in mese select areas.37 

The Rest of the Portfolio 

Over half of the remaining bank portfolio in China is neither GPG-related or explicitly 

capacity-building. A large portion of these projects are in the transportation sector-and lack 

a clear sustainability related focus-in line wim me bank's second pillar of promoting 

inclusive growm. Interestingly, mese projects are often targeted towards provinces below the 

GDI, but will sometimes target incidences of high poverty in cities. For example, the bank is 

inlplementing three transportation projects in the province of Hubei alone (a province above 

the GDI): two projects developing freight logistics infrastructure through improved 

technologies in the low-income regions of Yichang and Xiaogan, a pilot project for a 

regional program focusing on improving transport amongst multiple cities in the 

35 f [un~n Fiscftl Su:;t:Un:thilily DJ.>F 

J6 ChongQing:P:tdukou fitc:\1 Sustain~tbi ity DPF 

37 Building a ivfodern Fiscal Sys1em Technical Assil>t:tnC<' 
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municipality of Wuhan.38 In some cases, rhe bank makes a clear effort ro focus a transport 

project in the poorest provinces. For example, the bank is aiding the Anhui provincial 

transport department ro upgrade rural roads in various poor counties, which will include a 

capacity building piece oriented towards d1e municipalities. According to project documents, 

mis is because as part of decentralization reform in a province like Anhui, mw1icipalities and 

counties are now responsible for a significant share of transpott budgets.39 

In Guizhou province, one of the poorest in China, the bank is implementing two transport 

projects. One project strengdlens rural connectivity and transport in me poor city of 

Tongren, and in Qianxinan, another poor city, there is a focus on applying new technologies 

to evaluate rural accessibility, and me bank plans to train staff to use an open-source 

platfo= for quantifying and evaluating accessibility and focus on municipal capacity 

building.<O 

The bank has financed mree projects in me education sector, two of which are in provinces 

below d1e GDI. An early childhood education innovation project in Ywman aims to boost 

enrolhnent and is being implemented by me Yunnan Provincial Department of Education 

(which has 10 percent of China's total population in poverty),4 1 and a technical and 

vocational education and training program in dte second poorest province of Gansu is being 

implemented by d1e Gansu Provincial Department of Edttcation.42 However, neimer of 

mese projects include a significant project component devoted to capacity building at eimer 

d1e subnational or mtuucipal level. In Guangdong, one of d1e wealduest provinces but wid1 a 

large urban-rural divide, the bank is funding a compulsory education project in rural 

Guangdong, which is being implemented by me Guangdong Department of Education. •3 

Similarly, there is no explicit project component mat inlplies efforts to also help d1e 

provincial government build capacity and institutional strength. 

One cluster of projects includes d10se d1at are focusing on town conservation, to promote 

"heritage-based sustainable tourism." In Gansu, me bank aims to enable lower-income 

communities in historic cities, towns and villages to benefit from d1e overall BRI and 

maximize partnership with me private sector. •• Finally, me bank is engaging on a variety of 

urban regeneration programs oriented at the city or municipal level. These projects tend to 

target poor cities or regions that have fallen behind during periods of rapid growdt.•STitis is 

33 CN-f luhci Xi:tog::tn lpgil>tics lnfm.structurc·llm;c Gorges .\·lodcrn Logjslics Center lnfm.struelurc Project· 

\Vuhap lntrsgrnted Trampon D eve)gpment. 

» Anhui Road Maint<.'n:\nce Innov:t1ion :tnd Demonstration Projec-t Anhui Rural Rood lmRrovement and 

Upgrnding t>forR \XIuhan nt~g lit~d Tran.c;port D~vdC?l'm~nt 

,t() Gujzboy Iopgren Rum! Transport Project Oianxinan Rural Transport Program for Results 

• 1 Yunnru1 Early Childhood Education lnnO\·~tion Project CXECEJP} 

•2 Cbjna· Ggosu Tcchnjcttlttnd Voc~rional Educatjonttnd Training Project 

•.l China· Guapgdopg Compul-toey Educarjon Project 

••CH-S('Cond Gan~u Cu!turil:ind Natural Heritage Protection and Development Project· Hubei jingzhou 

Histo ric Town Conscn•ation Project· G::tnsu Silk R<Y.td <;:vit~liz::tt ion project 

•s Sb~anxi Sust:\inable Towns Development Pro jeer Sha~nxj Poor Rural Areas Community Deye1QPment 

Project· Guan~i Rur.t! Poverty A1leviation Pilot Project 
205 

Æ 

FOREI-42327 with DISTILLER


MenMor-23.eps

a part of the GoC's National New-Type Urbanization Plan (2014-2020), among other 

national directives, which aims to create a new urban development model by 2020. 

V. Conclusion 

The 2018 agreement to increase the World Bank's capital also established a consensus 

around core principles to guide bank policy on country eligibility for borrowing and 

approaches to graduation from borrowing. Our effort to apply these principles in practice to 

China's borrowing from the bank reveals a program of engagement that is broadly consistent 

with the 2018 principles, although significant areas of bank engagement do not appear to fall 

within the parameters of these principles. 

This picture suggests that in China's case, shareholder discussions within the World Bank 

should be less about graduation and more about modulation. Specifically, the question of the 

bank's ongoing engagement with China as a borrower should focus on how best to align the 

entire portfolio with the 2018 principles and what adjustments in project-level selection and 

decisions might be necessary to achieve that. 

The 2018 agreement points to further discussions within the institution aimed at elaborating 

the parameters and details of bank engagement in GDI countries and approaches to 

graduation. This language reveals the degree to which the question of graduation remains 

contested among the bank's shareholders. With the ongoing discussion and debate in mind, 

it will be helpful going forward for these discussions to include a consideration of consistent 

terminology and categorization of bank projects to better enable all shareholders to have a 

common understanding of the bank's lencling practices in GDI countries. With this as a 

starting point, country programs can then seck greater discipline in lending practices such 

that nontrivial volumes of lending do nor fall outside of agreed parameters for engagement 

or are otherwise hard to assess as consistent or inconsistent with these parameters.