An Interview with Under Secretary of State Robert Hormats

by Robert Hormats

On March 8, 2012, Fletcher alum and current Under Secretary of State for Economic, Business and Agricultural Affairs Robert Hormats spoke with theForum about his career, U.S.-China relations, the American economy and the difficult choices ahead for restoring American infrastructure, and advice for current Fletcher students. Under Secretary Hormats was formerly Vice Chairman of Goldman Sachs. 

Interview conducted by Lulu Cheng and Meghan Healy Luecke.

Q: I hear you’re just coming back from a conference on China.  Could you comment on the future of U.S.-China relations and the future of American power – do you think these two countries are headed on a trajectory of competition?

A: Well, certainly, we’re on a trajectory of competition, which we have been on for some time. But I also think that we have no choice but to cooperate, in as many areas as we can. When I was at Fletcher, we had no relations with China, and we shouldn’t forget that. It was nothing. There was no commercial relationship, no political relationship, nothing.

So, when I started in government, one of the first things I actually worked on – I was working for Henry Kissinger – was the normalization, or the beginning of normalization with China in 1971 and 1972. And at that point, there was very little expectation that economics would be a major component in the relationship – but of course that’s changed very dramatically over the course of the last 40 years and now it’s one of the major elements in our relationship. So, sure, we’re going to obviously compete with them in more and more areas, but the fact is that, whereas in 1971 and 1972 – throughout the ’70s – what happened in the Chinese economy had almost no effect on the global economy or the American economy. And from the Chinese point of view, what happened in the United States’ economy had no effect on them. They really weren’t part of the global economy; they were very insular. But now, of course, none of that’s true.

So we have to get on, in part because each economy has such as major impact on the other, and in part because together we have such a major impact on the global economy. So there is a need to work together, and if we want to prosper in the United States, and if China wants to prosper at home, it really has to work with us and we have to work with them, so that’s part of it. The other is the global economy – well, it depends on many countries: China, the U.S., the EU, Japan, South Korea, and many other countries – what happens between the U.S. and China is really a critical element of that. And if the U.S. and China are in the midst of major disputes, that will be disruptive to the global economy.

The other thing is, though, that the rules of the global economy are very important, and one of the problems we have with the Chinese is that they, while buying into the notion that they want to integrate with the global economy – also to carve out portions of the rules that they don’t apply to themselves, or they look for grey areas, for instance in the WTO, that are not quite WTO-illegal, but are counter to the principles of openness and fairness and non-discrimination. So they take advantage of those grey areas and do things that are counterproductive in terms of the adherence to the principles of open and fair and transparent global trade, which causes us lots of difficulties. But not only us – other countries as well. So, the objective is to get the Chinese not just to adhere to the WTO rules, which we’re able to deal with if they do violate those rules – there are WTO cases that we can bring against them – but alsoto have full-throated support for the multilateral system and to comply with the rules and norms of the system, both in practice and in principle, which, in intellectual property areas for instance — they have intellectual property rules but they don’t have a very good system of enforcing those rules. They give state-supported enterprises enormous amounts of support, subsidies, and cheaper factors, like cheap energy, cheap land, and protection from antitrust and also protection from others investing in those sectors. So they give them these enormous advantages and then, of course, they’re more competitive not only in China, but more competitive globally.

Q: This actually leads me to my next question. I wanted to ask you about this interaction between the political and the economic, and it’s fascinating to hear you say that not that many years ago, the economic issue was just not part of the discourse on China. What is the proper political weight to give to the issue of currency manipulation? It certainly, in terms of punditry, appears sometimes as almost number one on the list, and I’d like to know your take on where that particular issue stands.

A: Well, one of the things we’ve learned about the currency issue is that the Treasury speaks for the United States on this and not the State department. But I do think that obviously we have regarded it as very important, as a component in our relationship, as a major problem; the President’s said this, the Secretary of the Treasury’s said this. Certainly a big issue. Working out how to deal with it is something the Treasury and the Chinese Ministry of Finance and the Vice Premier, Wang Qishan, discuss on a regular basis, so it’s certainly a very high priority.

Q: This question pertains to advice for current Fletcher students. Among all the different roles that you’ve had, across all these different agencies and different sectors, what are some common themes that you find? What are differences between them in professional culture and environment, and how do you think that Fletcher students or the next generation of policymakers can prepare themselves professionally to deal with these?

A: It’s a great question, and I’ve thought about it a lot. I think there’s this great quote from Louis Pasteur, which says that good fortune belongs to those with a prepared mind. And I think that is really true. You never know which way your career is going to go, and anyone who thinks they do is probably going to be wrong. If you take one job because you think it’s going to lead to another job, that probably has maybe a fifty percent or a forty or thirty percent chance of actually materializing. So you have to be ready when opportunities strike. And that means you really have to prepare yourself for a wide variety of opportunities that could come along – not all of them will, but you never know.

For instance, when I got this job on the National Security Council staff — when I was still at Fletcher, working on my dissertation — it was largely because of Fred Bergsten, who was supposed to come here today and was sort of my mentor, who had been to Fletcher and who called up and asked Fletcher to send someone down to be his assistant. So I owe to Fred Bergsten the fact that I went to Washington in the first place. So I’m sorry he’s not here, but he’ll be here in spirit. The key point is that I never dreamt I would have that job as my first job. I never anticipated that. So you have to have prepared yourself in enough areas so that when you come into whatever job it is, you know enough about the substance to be able to do the job, and then of course you have to continue to learn on the job. So you have to come in with a substantial background of knowledge – not just of substantive knowledge, but of knowledge of how to get things done, to work with others to achieve things.

It seems to me one of the things you learn in Washington, and any job – whether it’s like Goldman Sachs, Washington, — is that you really have to work with others, because you’re never going to do it yourself. My colleague Tom Smitham here was instrumental in putting together a staff, which I never could have done, because he has been in the State Department, he knows the people there, and he’s put together a superb team. You can’t do these jobs without a superb team. If you think you can be a lone ranger in Washington, you may be a lone ranger for a month, or two, or three, but you won’t succeed. And not only will you not succeed; first of all, you won’t get the best advice, which you always need, and second, you won’t be able to establish that feeling of collaboration, which is critically important to getting anything done, wherever you are.

So the principle of having a good background gets you to a certain point, but the second principle is you really have to know you have to work with other people. And third, you have to have a few things that you can focus on. Because you can be pulled fifty different ways, and if you don’t have at least a few things that are important, then you’ll engage in every bureaucratic battle or you’ll dissipate your time. As it is, there are a lot of things you have to do, not because they’re important, because you just have to do them. So you have to at least have in mind something or several things that are important for you to focus on and pay attention to, that are meaningful in the long run. If you get sidetracked, you won’t really achieve anything at all.

Q: Related to that, do you think there are particular challenges that are not being paid enough attention to, or that need more people to focus on them? We know you have been a big advocate of the importance of public-private partnerships in building solid infrastructure in the United States, and we wonder if there is a particular problem within that or in a broader sense that you think more people should be working on.

A: Well, let’s take infrastructure. Yesterday, there was a Yale conference, a Yale CEO conference in Washington, on infrastructure. And these are people from various areas of the economy, and everyone agreed that we were not paying enough attention to our infrastructure. Tom Friedman has written about this. I think it is a national embarrassment that our infrastructure has deteriorated so much without our putting more effort and money into it.

But it’s worse than that, because it undermines our competitiveness down the road. And not just our ability to compete by having better roads and better harbors and better airports, which are important for moving goods around, but also our broadband is not nearly as extensive as, say, South Korea and Singapore and many other countries. China’s building out its broadband dramatically. And the other is our electric grid; a smart electric grid is critically important to reducing energy dependence, and if you’re going to have smart cars, you need to have a smart grid. We’re way behind in that too.

In the ’50s, Eisenhower understood the need to invest a lot of money in the highway system. As far back as Lincoln, during the Civil War, during all that chaos of the Civil War, we built the Transcontinental Railway. So, we should be doing a lot more. If you want to make us a more competitive economy and a more competitive country andmore opportunities for people, access to broadband and other things, we really have to focus on that.

There’s not a critical mass of support. Some of that is led by the states, and some of the states are doing certain things – some of them wasting money, but others are putting a lot of effort into this. I think it’s important that we do this.

The second thing is not so much lack of attention, but is a frustrating inability to mobilize resources – that is, for the Arab Spring, where we have this historic opportunity to be supportive of democratic and economic reforms. The U.S. government – for having spent a lot of money in the past, not all of it efficiently to be sure – should be doing more, but it’s constrained by the current budget situation from responding as vigorously as it should to these dramatic new opportunities and needs of the Arab Spring. Those are two areas that I think are important. A lot of attention is being paid, but there are major resource constraints.

Q: Given that budget constraints are instrumental in holding back both of those initiatives, how do you feel we should strike a proper balance between things that sap the budget, for example foreign engagements, versus domestic investments or other things like the Arab Spring that we should be supporting more?

A: Well, there are two issues. One is the foreign engagement issue. I wrote a book, in fact, where the thing I concluded was that the Iraq War – which I thought of most, but you could say the same of the war in Afghanistan – has been paid for in ways that no war ever has been paid for by the United States and that is entirely by borrowing. And in fact, we had tax cuts during this period. Whereas in the past, when we’ve gone to war, presidents have gone to the American people and said, look, if it’s important enough to go to war for, then it’s important enough to have the American people pay more taxes to pay for the war and call on patriotic sacrifice: while Americans are fighting abroad, Americans at home should be making some commitment to it.

As a result, we borrowed huge amounts of money to pay for both of those [Iraq and Afghanistan] wars, and I think that they have been very poorly financed. In the sense that other presidents, other Congresses have understood that if you go to war, and it’s important enough for the country to go to war, it’s important enough to pay for the war, in part by taxes. Roosevelt understood this; he didn’t say, we’re going to go to World War II on the cheap. He said you’re going to have to pay in taxes and bonds and bonds and taxes. Lincoln had an income tax during the Civil War; it was repealed after that. War of 1812, we had tax increases. World War I, we had tax increases. Americans throughout our history, up to recently, have understood that you have to pay for the wars you fight, or at least a portion, which we did not this time. So I think that’s one thing, in retrospect, that’s a lesson we should learn.

And the second thing is that, even if we have big budget problems, which we certainly do, and need to put our economy on stronger financial footing for the future, we still should be investing money in important parts of our economy that are going to make us more productive and competitive and grow more rapidly in the future. So, the argument against putting money into infrastructure or borrowing money to do that is that you’re imposing a higher burden on future generations by borrowing. On the other hand, if you don’t fix the infrastructure, you’re imposing a higher burden on future generations anyway. And in fact, an even higher burden, because if you don’t fix the infrastructure now, it gets worse and worse, so if it costs a million dollars to fix a road today, and you neglect it, it’ll cost two million dollars down the road, because it’ll deteriorate and you’ll just have to put that much more money into fixing it. So, if we’re thinking about the future from a fiscal point of view, we should be thinking about it from the point of view of infrastructure, and we’re not doing that.

So there are certain things that we should paying for now, because if we don’t pay for them now, they’re going to be more expensive later, and we’ll have an even greater burden on the future generation of Americans. On the other hand, I think there are a lot of things we have to be more frugal about. The President has indicated that we have to have a more frugal approach to defense spending, and we have to be more cautious about general government spending as well. We also have to have, as the President has pointed out, a better balance between tax increases and spending decreases, so at some point, there has to be a bargain between the two. It can’t be just done all by cutting spending; there has to be some revenue increase. And working that out doesn’t seem like something Washington is very good at these days.

Q: It’s definitely a challenge. Well, we understand that you have to head out very shortly; is there anything that you wanted to say to the Fletcher community, any advice for Fletcher students generally before you take off?

A: Well, my advice would be first of all, take full advantage of your time here at Fletcher. Because I think this place, from my point of view, was terrific and instrumental in whatever I’ve been able to do subsequent to coming here. You know I’ve been on the National Security Council staff, at the State Department, U.S. Trade Representative, and Goldman Sachs, now at the State Department again. So I think you can learn a lot here, and you should take full advantage of it, which I think is pretty obvious.

The second is that you should also take advantage of the friendships and the networking that is available here. One of the great advantages here is not just that you have superb faculty and a really terrific curriculum, but it’s that you have people from all over the world. And you should learn from them, because it’s a diverse world. Even when I was here, which was well before the globalization of the economy, there were people from all over. In my dorm, there was a Pakistani, there were two Thais, there was an Ethiopian, there was a Kenyan, one of my roommates was Turkish…it was wonderful. And you got to know about their cultures, their societies, their points of view, by interacting with them, by sitting down, playing football, tennis, softball – we used to have softball right out there, the Fletcher softball team…

Q: That’s kind of starting up again.

A: Oh, is that right? We did very well. We were quite successful, even though we had people in some cases who’d never played – well, before they’d played cricket or something like that, but they’d never played, so we had a fun time out there. But interacting with those people — and then you develop lifelong friendships. I can remember when I was working for Kissinger, we did this trip through Africa, and I was sitting there at the table, and he was there, and President Kenyatta of Kenya…there was this guy sitting opposite me named Bernie Adundo, who had been in the room across from me in what’s now Blakeley Hall. And you meet these people throughout your career. Or, if you don’t meet people in your class, there might be someone who’s been to Fletcher a year or two or several years later or earlier, so that’s where networking is very important also. So I think that’s important to take advantage of, but utilize your time here to learn as much as you can – the prepared mind point that I mentioned earlier – but also to develop a network of friendships and to learn from other people from other countries and other parts of this country is very useful.

Q: Well, thank you very much. This certainly is a unique place, and having people like you contribute in this way has been so helpful to us.

A: My pleasure; thanks.

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