Evening Lecture | Ambassador Robert B. Zoellick: Economics and Security in U.S. Foreign Policy

Good evening, everyone. After Ambassador Zellick makes his presentation, we'll have a Q&A. I'd like to remind everyone that the Q&A will be not for attribution, which is the tradition here at the Naval War College. I'd like to thank the Naval War College Foundation for their support in allowing us to bring Ambassador Zellick to Newport. And it is a great pleasure for me to introduce Ambassador Zellick to this audience. Since the Reagan administration, he has held a variety of high-level positions in the Treasury Department, the State Department, and at the White House. During George W. Bush's first term, he served in the Cabinet as U.S. Trade Representative. In addition, from 2007 to 2012, he served as President of the World Bank. Ambassador Zellick demonstrated throughout his government service that he had the creativity, perseverance, and strategic sense to capitalize on opportunities and advance U.S. interests. He was one of the first senior USG officials to understand the opportunities that came from the democratization of Central and Eastern Europe. He was the lead U.S. negotiator in the 2 plus 4 process that led to Germany's reunification and essentially ended the Cold War. As U.S. Trade Representative, he led an ambitious agenda to liberalize trade, both multinationally and bilaterally. Today, the United States has 20 free trade agreements completed and two major regional trade negotiations with two major regional trade organizations, the Trans-Pacific Partnership and the Transatlantic Trade Investment Partnership. Ambassador Zellick was the driving force that got the majority of these agreements completed and set the stage for those that have come since he left the U.S. Trade Representative's office. At two times during my diplomatic career, I had the opportunity to work closely with him. I can assure you that no one worked harder or more creatively to advance U.S. interests. Ambassador Zellick? Well, I want to thank Ambassador Cloud, who, as he mentioned, we had a chance to work together when he was assigned to the NSC staff working on a lot of the international economic issues when I was U.S. Trade Representative. So I can't think of a better person for you to have here. He's had a great set of diplomatic experience. And it's a wonderful opportunity, I know, for him. But I also hope for all of you. I also want to thank Provost Spain, who had a wonderful opportunity to have a little chance to talk, and I know of his years of service to the War College. I also want to thank the War College Foundation. We had a little chance. And the effort to all of you have had to try to bring in people, preserve the history of this fantastic institution is a wonderful calling. So I want to thank you as well. As someone who's a student of history and has tried to serve his country in other respects and other ways, it's a special privilege for me to be here with you at the Naval War College. This school has contributed ideas and leaders who shaped world history throughout the 20th century. And I understand that for some of the students here now, you're in the midst of a midterm exam. And I guess they worked out something for you to take a little time off to listen to me, which is a great honor to me. But if I see you thinking a little bit about that extra question, that's OK. I won't call on anybody in the back. I know very well that this is an extremely special group. And this is a group that will also leave its mark on the 21st century. So for the Americans, I'd like to thank you for your service to our country. And for the international attendees, I'm absolutely delighted that you would commit the time and effort to study and work with your US colleagues at this premier school for strategic thinking. So in that spirit of strategic inquiry, I'd like to step back a bit this evening to offer a wider perspective. What I'd like to suggest is that America's future foreign policy strategy should be founded on the recovery of a lost tradition. For America's first 150 years, US foreign policy was deeply infused with an economic logic. But with the rise of the national security concept at the start of the Cold War, economics became the unappreciated subordinate of US foreign policy. At best, the role of economics in US strategy is assumed, not analyzed. And we scarcely understand its effects on power, influence, diplomacy, ideas, institutions, and human rights. At worst, economics has become a justification for a comeback America isolationism. And economists who seem absorbed with mathematical models and debates about quantitative easing and stimulus policies, they're content to operate in their own separate universe. But it wasn't always this way. Strategic thinkers of the late 18th and early 19th centuries were highly attuned to the connections between economics, military strength, and political power. Writers such as Adam Smith, Alexander Hamilton, Friedrich List recognized the vital interrelationships, although they proposed different ideas on how to advance economics, societies, and statecraft. If one studies their writings, or even that of their predecessors, one could catalog the traditional economic sources of power. My list would include land, population, resources, especially agricultural, then mineral, sources of energy, whether Silesian coal for Frederick the Great, oil in the 20th century, or Russia's natural gas exports to Ukraine in the EU today. Financial resources to pay troops, acquire weapons, and fund partners, whether through old war chests or credit, a means to produce armaments, commerce, and ships and later planes to gain access to resources, produce wealth, supply allies, foster mutual interests, move forces, and if need be, to deny the same to an opponent. Transport systems, whether horses, mules, roads, waterways, railroads, or planes, and importantly, the ability to develop and deploy new technologies, not only as weapons, but for communications, logistics, and intelligence. So to gain some perspective on economics and security from the American perspective, let's look back a few years, say 241 years. In 1773, a tribe of Bostonians threw 342 chests of tea into the harbor to protest taxes imposed to bail out the nearly bankrupt British East India Company. This incident was the most dramatic of waves of colonial non-importation policies that dated to the 1760s. And these were early American efforts to employ trade as a tool of policy. Now, the new American republic was born amidst a world of mercantilist empires. And navigating around the trading monopolies of the established powers, the former American colonies fought for freedom to trade, a little different than free trade. The young United States, under President Thomas Jefferson, experimented with non-importation acts and even a disastrous embargo on foreign commerce in 1807. Ironically, it took the failure of Jefferson's trade and sanctions, as well as the War of 1812, for the United States to start to develop the manufacturing base that Alexander Hamilton had sought and which Jefferson had opposed. But Britain wasn't the only object to the new country's economic security policy. From 1801 to 1805, in the face of the Barbary Pirates' attacks on US ships, Jefferson rejected demands for tribute and instead sent the US Navy to the shores of Tripoli, as is memorialized in the Marine Corps hymn. In an age when power arose from the expansion of territory and resources and people and commerce, America's implicit strategy understandably concentrated on the North American continent and on open immigration, because land and settlement provided security, especially when buffered by two vast oceans. Wielding a lost tool of diplomacy, the United States resolved disputes by buying lands, Louisiana, Florida, old New Mexico, California, the Gadsden Purchase, Alaska, and even the Virgin Islands at the start of the 20th century. Admittedly, in some cases, use of force led to some price discounts. And in a touch of irony, Jefferson needed Hamilton's Bank of the United States and its credit system, which the Virginian had opposed for Jefferson's greatest achievement, the Louisiana Purchase. I was talking with the provost about the deals that fell through, such as Secretary of State William Seward's unsuccessful push to buy British Columbia in 1867, which he wanted as a land bridge for his recent Alaska purchase. The theme of Western hemispheric integration, a partnership of young democracies, not an empire, was advanced by Secretary of State Henry Clay in the 1820s. It was revived in the 1880s and 90s. And it found first fruits a century later with the North American Free Trade Agreement, and then five more US free trade agreements with Latin America. Today, the partners in those free trade agreements account for more than half of the hemisphere's non-US GDP. In the 21st century, comprehensive free trade agreements could turn out to be the ties that bind, like the alliances of old. The Federalist Papers, which most of us learn are the touchstone of American constitution, are replete with references with the need for a strong federal government that can secure the United States' place among foreign countries, including through healthy commerce and credit. The founders understood this link between economics and security. In a Prussian example, John Jay and Federalist Number Four cautioned way back in 1787 that trade with China and India could one day draw the United States into conflict with competitors. Now, the oceans that were barriers to armies became highways for the US Navy and American mariners seeking markets. In 1854, Commodore Matthew Perry opened Japan to trade. In 1899, Secretary of State John Hay was resisting carving up China, as Africa had recently been, in favor of an open door policy to secure open commercial opportunity. Over time, the US maritime links with the eastern and western borders of the great Eurasian landmass also reflected a geopolitical logic. The United States, as a maritime power, reaching across oceans from an island continent, did not want one power to dominate Eurasia, whether the Nazi German and Imperial Japan Axis, or later, the Soviet Union. Now, this race through US history is not intended to suggest that the American system was all about peaceful commerce. To the contrary, even if the connection was driven by interests and not by explicit planning, the economic and security policies worked hand in hand. These interests were also infused with a healthy dose of what those generations called spreading civilization, and what we today call values, because with the trade and flag became missionaries and their schools. As the United States settled its home continent around the opening of the 20th century, a debate arose about the expansion to territories beyond US shores. Some wanted markets or coaling stations. Others sought to carry so-called civilization to foreign peoples. Some simply wanted to keep strategic places out of the hands of others. But imperialism didn't sit well with many Americans who proudly recalled that their new nation had freed itself from old empires. The US war with Spain in 1898, precipitated by a conflict over Cuba, led the United States to acquire the Philippines for $20 million to keep the islands from being grabbed by other fleets that were hovering, particularly the German fleet. But the United States didn't take Cuba, but also President Theodore Roosevelt stirred up a revolt in Panama so he could build a canal that linked the two great oceans, commerce, and, of course, the fleets of the US Navy. Now this era, as I suspect all of you know, was the founding period of this Naval War College, whose professor and then President Alfred Thurman Hahn rewrote the lessons of naval power in national strategy. America's foreign economic policy also helped spur early interest in international law, what you now hear discussed as rules-based systems, to resolve disputes. The United States was a very active participant in the 1899 Hague Conference and led its support to a convention to try to resolve disputes peacefully through third-party mediation, international commissions, and a permanent court of arbitration. Now the decades that followed continued this pattern of melding US economic interests with foreign and security policy. Dollar diplomacy, as historians have dubbed the strategy, sought to support US enterprise in Latin America and East Asia through what we now call transnational actors. But in those days were railroad and mining engineers, bankers, and merchants. In World War I, Britain shrewdly played on the US commitment to neutral rights on the seas to draw President Woodrow Wilson to side against Germany and its U-boats. After the war, reacting against what the United States saw as the old European policies of perpetuated hostilities, America withdrew from European military security. And even during the 1920s and 30s, the United States relied on banker statesmen to negotiate debt and reparations to try to revive the broken economies. Reeling from the Great Depression, however, America withdrew from the world economy. It enacted the Smoot-Hawley tariff wall to block imports. And it subverted a last gasp effort for international economic coordination at the 1933 World Economic Conference. And political military isolationism followed. Then came 1941, and the United States again learned, through harsh experience, that economics and security were linked. The United States had imposed embargoes on the sale of petroleum and scrap iron to Japan in response to Japan's invasion of China and its threats to Southeast Asia. Imperial Japan responded with a surprise attack on the US Navy at Pearl Harbor and a bold assault ranging from Malaya and Singapore to the Philippines in order to secure the resources for its war economy. The United States, caught unprepared, paid a terrible price. The end of World War II and the opening of the Cold War led to a sharp break in this American foreign policy tradition. The dawn of the nuclear age and the face-off between communism and the West required a new approach, but became described as a national security strategy. For the very first time, the United States maintained a large conventional army and a significant part of which was based in Europe with hundreds of thousands of other troops fighting in Asia over decades. Contrary to Milton Friedman's idea that economic freedom is an end in and of itself and an indispensable means towards achieving political freedom, economics became a resource factor and the handmaiden of the strategic policy process. If you go back and you look at the US National Security Act of 1947, you'll see that it's full of references to new offices to try to mobilize people and resources for total war. Yet interestingly, the act didn't even make the Treasury Secretary a statutory member of the new National Security Council. And ever since, the US government has struggled to integrate economics into its national security strategies. So I think we need to rewrite economics back into the narrative of the Cold War and then consider the applicability to US strategy today. Now, even as World War II raged, the United States began creating new international economic institutions to address currency exchange rates, trade, reconstruction, and development. The United States and Europe then launched the Marshall Plan and Europe created an economic community to shore up the free world's economic foundations. The United States exported capital and it imported goods to boost recoveries in Europe and Japan, later South Korea and other developing countries. Now, the economic internationalists of the Bretton Woods system and the European economic community were not driven primarily by a plan for containment or to counter the Soviet Union. These strategists were trying to avoid a repeat of the economic causes of the political and security breakdown of the 1920s and 30s. Only over time did the imperatives of the Cold War lead to a very pragmatic convergence of the national security planners and the economic designers. Still, the national security model treated the economy as a source of benefits to be exchanged to support security aims. It assumed economics was about static sources of resources for the accounting or balancing of power. Now, this perspective of state power overlooked a vital reality, that sound economic policies are the underpinning of both individual freedom and national power, not only military power, but the dynamism, innovation, and influence of the economy and the society. The 20th century concept of national security also overlooked how economic changes can be a powerful force of their own in international relations. I think President Dwight Eisenhower understood this distinction. He invested political capital in balanced budgets, he controlled the size of his government, and he had sound monetary policies. He recognized the underlying strength generated by investments in national highways, education, science. Now, in the 1970s, the world economy stumbled towards a new reality of floating exchange rates, oil shocks, big bank loans of petrodollars to developing world sovereigns, and stagflation. And as the U.S. economy faltered, so did American influence. Ronald Reagan intuitively understood the connection between national economic revival and foreign policy. His priority was to revive capitalism at home and then extend it to the world. Now, the promotion of global capitalism in 1981 seemed very disruptive to many, the antithesis of rebuilding an economic international system that was still reeling from the shocks of the 1970s. Yet this very disruptive quality enables capitalism to respond flexibly and continually to technological and other changes. Now, the reform of capitalism was not just an Anglo-American venture. It was Margaret Thatcher in Britain. West Germany's commitment to sound economic policies and export competitiveness demonstrated that their social market economy could work. East Germans who were watching West German TV saw the stark contrast between their grim existence in a worker's paradise and the lifestyles of their wealthier cousins to the West. Japanese manufacturers responded to the oil shocks with a huge increase in energy efficiency. But the Soviet Union could not adapt to its economic challenges. It could not cope with changing information technology, new drivers of productivity and competition, and eventually $15 a barrel oil. Interestingly, the U.S. intelligence community, which was geared towards Cold War calculations of national security, largely missed that story. Soviet leader Mikhail Gorbachev, facing the combination of the democracy's economic regeneration, the U.S. military buildup with advanced technologies, and, critically, transatlantic solidarity, concluded that he had to reform communism. But his perestroika didn't work. Reagan believed that international institutions should boost growth, opportunity, and human rights. Moreover, at a time of great economic flux, the international economic system needed to adapt as well. Reagan didn't want international rules to constrict domestic economic revival, and he stirred some controversy by rejecting what he saw as counterproductive international schemes. But in President Reagan's second term, the United States steered the International Monetary Fund to a new role in the Latin American debt crisis, led to a major recapitalization of the World Bank to support developing countries' economic reforms and debt reschedulings until banks could write down the losses. And in 1985, Treasury Secretary James Baker launched a process of international economic coordination in the G7. The United States pushed to expand global trade liberalization through the launch of the Uruguay Round of Trade Talks, and that was completed, much of that negotiation under President George Herbert Walker Bush, and then the deal was closed under President Bill Clinton to create the new World Trade Organization. Bush also initiated the creation of Asia-Pacific Economic Cooperation Forum and negotiated NAFTA, the North American Free Trade Agreement, which President Clinton enacted. Now, the economic revitalization of the West helped to achieve national security aims in Europe with hardly a shot fired. Europe was reunited. The European community became a deeper, wider union, launched its own currency. Just as importantly, China, India, and other developing economies moved from planned socialism and import substitution schemes to market competition. Over just a decade, the number of people engaged in or actively affected by the world market economy surged from about 1 billion to four or five times that number. Larger movements of capital, trade, and people all spurred by new technologies created a new era of globalization. Yet, the adaptation to markets on a truly global scale, integrating developed and developing economies alike was bound to be complicated and disjointed. And it was. In the late 1990s, countries in East Asia and Latin America faced harsh financial blows and painful restructurings. Interestingly, the recovery strategies of some of the developing countries planted the seeds of new problems, imbalances, whether of savings, reserves, trade accounts, or other dimensions. Developing economies in East Asia saved and they exported more. And the United States and some European countries increased borrowing, consumption, and imports. Some economists maintain today that the low prices of goods available from the new suppliers led central bankers to persist in easy monetary policies for too long, risking widespread asset price inflation, especially in real estate markets. And then the bubble burst. The institutions of the international economic system adapted incrementally, often with some difficulty. In the 1990s, the economic firefighting of the IMF and the World Bank made them principal targets of an anti-globalization movement. Ultimately, neither international nor domestic supervisors of financial markets kept up with the innovations or the frauds and foolishness that inevitably come with long boom periods. The World Trade Organization added many new members. The trading system withstood terrorist attacks and fears of more. But the travails of the WTO's Doha round of trade negotiations launched back in 2001 signaled a new challenge. The traditional developed economies wanted the new rising middle-income countries, China, Brazil, India, and others, to assume more responsibility for lowering barriers to trade, while all would offer special treatment for Africa and the poorest countries. But the major developing countries, in turn, pointed to their large numbers of poor people and they wanted to maintain the special privileges. And this debate reverberates today, not only in trade, but in monetary affairs, investment, development, energy, or environmental topics. Now, the 9-11 attacks concentrated America's attention on terrorism, homeland security, and the long wars that followed, which many of you served in. Yet the connection of economics to the new security threats is also strong. Keep in mind, when Al-Qaeda targeted the United States, it aimed for the World Trade Center, the Twin Towers as symbols of American capitalism, as well as Washington. In addition to shock and destruction, the terrorists wanted to strangle economic and political freedom. But even as America fought in Iraq and Afghanistan and against terrorist threats around the globe, other forces of history didn't stand still. China, India, and other emerging economies began to change the landscape of power. The failed political and stunted economic systems of North Africa and the Middle East sparked upheavals that will shake that region for a generation. So how might a revival of an integrated approach to economic and security guide America's strategy today? Let me close by suggesting six ideas. First, the United States needs a healthy economy to be able to lead. This imperative is more than a matter of generating economic resources and preserving America's good credit, although both of those are vital. America's very identity on the global stage depends on its economic dynamism and its ability to reinvent itself. The U.S. private sector continues to stand out among developed economies for its power of innovation, to be seen, for example, in energy, the use of big data and software, bioengineering and robotics. But the U.S. government, in turn, has been preoccupied with stimulus policies, fiscal and monetary, and has not paid enough attention to structural and productivity reforms that would boost the handoff of growth to the private sector. To offer just a few examples, tax reform and disciplining the growth of entitlement spending would unleash a new surge of growth. An immigration reform that encouraged the world's talent to come to America would be good for both economic and foreign policy. And more competition, choice, and private sector investment in education and training services would help the American people develop their capabilities to the fullest while also serving a larger national good. Second, the United States should build a strong continental base through deeper North American integration. Consider the global weight of three democracies of about 500 million people with energy self-sufficiency and even exports, more integrated infrastructure, complementary manufacturing and service industries, and a shared effort to develop the human capital of those 500 million people through education, linked to workforce skills, pro-growth worker mobility policies. The international economic policies of the three North American countries are already closely connected. And over time, I believe there could be closer alignment on foreign and security policies as well. This month, former General David Petraeus and I released a report on North America for the Council on Foreign Relations. It suggests how North America could become the continental base for projecting US power globally by deepening three-way cooperation and integration on energy, economic competitiveness, security, and building of a North American community. And if you're interested, you can find this on the CFR website. Third, the United States, and I hope North America, needs a combined economic and security architecture that connects us with our principal partners on the Western, Eastern, and Southern borders of Eurasia. The Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership under negotiation could be the economic foundation if the administration can translate its rhetoric into willpower to close and then pass the deals. The complementary security challenge is to devise new strategic military postures that assure stability based on new technologies and capabilities embedded in alliance ties, especially with Japan, Korea, Australia, and ASEAN partners. NATO must also demonstrate the ability and will to defend its Eastern members from Russian revanchism. Concepts such as air-sea battle have stimulated debates over strategy and technology, equipment and positioning, just as the Defense Department is facing budget cuts. I think that the vital challenges for this Secretary of Defense and those that follow him in this decade is to press the military services and the Congress to face these challenges with a strategic concept, not the incrementalism that we've often used after long wars. Fourth, the United States needs an international economic strategy to partner with these rising developing economies that are seeking to overcome the middle income trap. This initiative could include trade liberalization efforts in WTO negotiations and bilaterally with innovation in multilateral development institutions and private sector investment. There are huge opportunities and needs, for example, in infrastructure, including through public-private partnerships, in human capital, including through educational innovation and support for girls and women, in private sector services, including in areas that were traditionally seen as public, such as education, health, and water, and in financial markets, so capital is invested most productively. The United States should customize political economy concepts to each major middle-income country and with groups of countries, such as the Pacific Alliance of Mexico, Colombia, Peru, and Chile, ASEAN, and sub-regional groups in Africa. Fifth, as the U.S. closes out over a decade of war in Southwest Asia, we should handle our security responsibilities, security obligations responsibly, but with a recognition that our military capabilities need to be directed principally towards the security of the United States and its allies. Societal transformations depend on people assuming responsibility for their own future. We can encourage, they must decide. For example, ultimately, the Muslim world will need to face up to violent Islamic radicalism. We can't solve that problem for Muslims, but we can support those who try. Economic opportunity can assist societal and political changes, but economic development requires ownership of policies and decisions at the local level. Fortunately, there is a host of successful experiences from around the world which others can learn from and then customize for their own circumstances, and the U.S. and multilateral institutions can assist in sharing this comparative experience. Economic openings will not solve all problems, but they're an important start. Economic openness and expanding middle classes can also offer a route to advance America's values, the rule of law, political liberalization, and democracy. Finally, the United States needs to develop a satisfactory working relationship with China, which is in the midst of its own historic transformation. We can't predict the course of change in China. I continue to believe that the two countries have a shared interest in China's effective integration within the international economic, political, and security system that the U.S. led in creating after World War II, so that China can become a responsible stakeholder in that continually evolving system. Of course, the U.S. and China will have differences to manage, and cooperation will be accompanied by hedging and balancing. If China acts aggressively, it will provoke counter-reactions, and the U.S. needs to be positioned to offer appropriate reassurances to Asian friends under pressure. But there are many mutual interests, too, including to those connected to China's structural economic reforms. To manage China's rise, the United States' most important aim is to maintain its own power through a strong, dynamic U.S. economy, with debt under control and sound credit, in a powerful North America, with alliances, partnership, and institutions that extend U.S. power and influence cooperatively across the Pacific and Atlantic, and by encouraging an innovative, expanding U.S. private sector that connects America and their liberties with others in the world. In sum, we need to rediscover that lost American tradition of integrating economics and security in our foreign policy. So thank you. Thank you.