C. Peter McColough Series on International Economics with Lael Brainard

ARYAR SHIRZAD: Okay, ladies and gentlemen. Welcome to today's CFR -- welcome to today's CFR meeting with Lael Brainard, the undersecretary of international affairs at the Department of Treasury. This meeting is part of the C. Peter McColough Series on International Economics. Our next meeting in the series will take place on March 2nd and will feature Thomas Hoenig, the president and CEO of the Federal Reserve Bank of Kansas City.

Please completely turn off, not just put on vibrate, your cell phones, BlackBerrys and all wireless devices to avoid interference with the sound system. And I'd like to remind the members that this meeting is on the record. As everyone knows, Lael is the undersecretary for international affairs with Treasury. She's had a distinguished service both in the private sector and the public sector, previously serving in government as the deputy assistant to the president for international economic affairs with the Clinton administration.

She was vice president of the Brookings Institution, worked at McKinsey and was a professor at MIT. We're going to start off with a few minutes of remarks by Lael to discuss the Hu visit. I'll ask her a series of questions, and then we'll turn to all of you in the audience for an opportunity to ask your questions. And we will stay on schedule to close the meeting at nine o'clock.

So Lael.

LAEL BRAINARD: Thank you. Well, it's nice to be here. Thank you for the kind welcome, Faryar, and it is good to see many long-time friends in the audience.

All eyes were on the meeting between President Obama and President Hu of China this week, and understandably so at a time when the strength of America's jobs engine depends more than ever on demand from outside our borders. Whether we achieve our ambitious export goals will depend in great measure on improving access to China's market given the sheer scale and velocity of its growth.

U.S. exports grew twice as fast to China as to the rest of the world this past year and are on track to reach a hundred billion dollars. If you think back to just one decade ago, China was not even in the top 10 of our export destination markets. It is now the third largest market for our exports and growing quickly.

On the other side, China is wrestling with economic transition challenges of its own. China is facing the challenge of shifting from a developing country dependent on foreign consumption and technology to a middle-income country with growth driven increasingly by domestic consumption and innovation, of shifting from closed capital markets and a fixed exchange rate to a currency that will be increasingly used in international transactions with increasingly open financial markets. The course it steers, the choices it makes will affect greatly the opportunities and constraints faced by American innovators, producers, workers and farmers in its markets.

China's rise has been enabled, to a very significant extent, by open trade and the investment system that was nurtured for decades and supported by America throughout that period. And China's ability to successfully navigate the transition challenges it currently faces while maintaining its strong growth will depend in no small part on continued access to America's markets and investment opportunities, and continued American support for that open investment and trade system.

So a lot was at stake for the two leaders on the economic agenda. And President Obama advanced our four priority objectives. First, to just review progress very quickly, China made a very important commitment to level the playing field by agreeing not to link the provision of government procurement preferences to its innovation policies. We, along with U.S. industry, have long been concerned about the possibility that that linkage would used to discriminate unfairly against innovative U.S. products and services, especially given the size of the Chinese procurement market.

With innovation at the heart of American competitive advantage, we pursued intensive and consistent engagement at the highest levels with China on this issue, and this was a major step forward. China also committed to submit a revised offer to the WTO on government procurement, which would extend well beyond the central government, which is extremely important given the size of China's government procurement market at local and provincial levels.

Second, we secured concrete progress on intellectual property rights enforcement, particularly in the area of software where China agreed to put in place audit and budget mechanisms to ensure that government agencies use legitimate software and publish the audit results.

Third, China affirmed its commitment to enhance exchange rate flexibility, and for the first time dropped previous references to maintaining basic civility and equilibrium rate, while noting the connection of the exchange rate flexibility to their broader goals of transforming their economic development market.

This is very consistent with the thrust of their new five-year plan, which is very much oriented towards promoting the role of domestic consumption, rebalancing the economy. It's very consistent with our global goals. And if you look over the past six months, China's exchange rate has appreciated against the U.S. dollar by 3.5 percent in nominal terms. If you take into account the much faster rate of inflation in China relative to the U.S., this amounts to roughly a 10 percent rate of appreciation on an annual basis.

Of course, we're going to stay very closely and intensively engaged with China on this critical issue.

Finally, commercial deals for U.S. firms amounting to about $45 billion in exports were announced across a range of industries, which will support roughly a quarter million of U.S. jobs. This is a critical priority item for the U.S., and we were pleased to move forward on this.

Generally speaking, we were pleased with the progress that was made, but we can't be complacent as a country. China's economic dynamism, much as it poses a challenge, should be viewed, I think, as an opportunity to remind us to tend to the core foundations of our economic security, our capacity to save and invest, to innovate and to learn.

So let's turn back, Faryar, to you, and if you want to talk further about that or turn to other subjects.

SHIRZAD: Lael, thank you. That was very helpful. You know, if we could drill down on one aspect of what you were talking about, which is currency policy, I think among the most complicated items in your portfolio is negotiating as a currency issue, not only with the Chinese, but also managing the domestic political dimension of that with the U.S. Congress.

Can you talk a little bit about that, and when people see the issue rise and fall in terms of the public aspects of your comments and Secretary Geithner's comments on this issue, how should we interpret that? Do we interpret that as a loss of interest or a lack of interest or what's the dynamic there?

BRAINARD: We, in the administration, have viewed the currency issue as a key priority in our economic engagement with China since the first day of the administration. We've maintained very consistent and very detailed, intensive discussions with the Chinese government as they have themselves been debating internally how to move on this very important issue and as they have, indeed, moved forward, as you know, with the commitment on June 19th and then the subsequent 3.5 percent nominal appreciation since then.

The president stood next to President Hu. He was very clear that this was extremely important to Americans that we need to see more progress on this. But it's important also to recognize that there is progress and that China's leadership at the very highest levels has been clear that they do not intend to reverse course, that they are committed to this course, and that increasingly they do see it as part of their own economic restructuring policies.

So we will continue to engage on it. We will continue to see it among our top priorities, but we cannot be a -- focused only on one issue. We have a very broad set of interests with China, and that's why we are also pleased that after a very long period of intensive engagement, we have made material progress on the issues of indigenous innovation, on intellectual property, on government procurement. And we're just going to stay on a tight set of very important issues.

SHIRZAD: Let me turn to the G-20, another issue or item in your portfolio. The G-20 was launched two years ago now with really four big issues: the reform of the international financial institutions, the development of Basel-based prudential requirements, a regulatory agenda and then economic coordination to deal with the depths of the financial crisis. You could argue that all four of those agenda items have run their course.

What is the future of the G-20? Will it continue to have a central role in your work and the administration's international economic agenda?

BRAINARD: Well, first, Faryar, I appreciate the notion that we got everything done we needed to get done in the G-20. But, in fact, we still feel like we've got a lot of heavy lifting to do in the G-20. We made some progress.

G-20 was very effective, very important to us in cooperating with the most important economies in the world, both the established economic powers and the rising powers, through the crisis, and really made a, I think, very important contribution to pulling us out of the depths of the crisis and ensuring the continued functioning of the international financial system and coordination of individual governments' response -- very much consistent with the thrust of our priorities during the crisis.

But we have a lot of work to do going forward. If you think across some of the issues that you mentioned on financial regulatory reform, we're just at the beginning of that agenda. We now have broad agreement at the international level which very much is consistent with the Dodd-Frank act that passed here. So having moved quickly on that I think put us in a good position to really drive the agenda internationally both through the G-20 and through the G-20's relationship to the Financial Stability Board.

But now we need to go through the very complicated process of implementation and, of course, continuing to coordinate. The work has just begun. What we learned through the crisis is that supervisors need to be much more intensively engaged in their work and they need to work together much more closely to be seeing around corners in terms of risks and to be managing those. So if you look at the agenda for the year ahead, I think we've made progress on the capital framework, on most elements. We still have a few things that need to be really worked through.

But the resolution area, extremely important. We have a strong resolution law in place here. We need to implement it. But other -- many other jurisdictions do not, and so we need to work through specifically what needs to be done at the national level, at the resolution -- sort of legal issues, as well as who has authority, and then to construct above that mechanisms for cross-border cooperation.

On the issue of coordination, the hard work just is beginning. We are in a world with a two-speed recovery. The advanced economies are still repairing their balance sheets. Consumers are still deleveraging here in the United States. We are not going to be the place that supplies the command for the rest of the world for some time to come.

Emerging markets: very different set of problems, moving very quickly, contending, if anything, with potential concerns about overheating. And so trying to navigate the interface between that and make sure we grow in ways that are mutually reinforcing is a very important agenda item for the G-20 that's here.

SHIRZAD: You know, one of the legacies, you could argue, of the G-20 is the creation of a number of international bodies that now have very powerful and important roles in setting regulations and standards. A common feature of these international institutions, the FSB, the Basel Committee, the IMF and so on is the degree to which public participation is limited, let's say.

Is that a fair assessment that I'm making? Is that a fair characterization of the process? And is that an issue that you are focused on and the administration's focused?

BRAINARD: We're very focused on both making sure that we have effective mechanisms for setting rules and making sure people, countries abide by the rules and making sure that the countries -- again, there's a whole set of players in the system that really just were not at that table 20 years ago. We need to make sure those players are sitting with us as the system continues to evolve.

But it's very important that the -- that the authority still resides at the national level, and so a lot of the governance mechanisms, the accountability mechanisms are still going to reside here with us, in the -- in the U.S. executive branch and through the accountability that Congress ensures is there. We are looking for mechanisms for these bodies to increase their outreach. And we have had a major reform of the IMF's governance system over the course of the last G-20, which will make it a much more representative body in terms of the various nations at the table. But we will continue to pay a lot of attention to this issue, and make sure that the actual implementation and the rules setting takes place at the national level here in the United States.

SHIRZAD: And when you talk about the international agenda, you know, you talk about the prudential rules, the Basel process, the regulatory agenda, Dodd-Frank. Where does an economic growth agenda figure in it? Is that implicit in getting the rules right, that growth will emanate from that? Or is that a separate track that somehow needs to be balanced in the broader portfolio that you manage?

BRAINARD: We actually very much think about our regular regulatory agenda being about providing much more secure and stable foundations for more sustainable growth going forward. So the regulatory agenda -- the financial regulatory agenda, which is really more about reform of the system in the wake of the most devastating financial crisis that we've seen in a century, creating much more strong foundations for that system, making sure that banks are well capitalized, perform the functions that they are supported publicly to do, we think will provide very robust foundations to nurture our growth going into the future.

But of course we are also working on the growth agenda through rebalancing, where, again, we're really putting the onus a bit on countries that have traditionally relied on other countries for -- to power their own growth, countries that have consistently run very large surpluses, to start to rebalance their own economy so that they can contribute more to the world economy in terms of domestic demand at a time when the U.S. needs to export more to grow.

SHIRZAD: You know, if we could sort of take that last point and kind of put a finer point on it, you know, one of the big issues that you personally negotiated in the context of the Seoul G-20 summit was an agreement among the G-20, including, notably, China, Germany and others, on developing a mechanism for dialogue among countries with persistent and large deficits or surpluses. Could you talk about that process? What should we look for in the weeks and months ahead coming out of that Seoul summit?

BRAINARD: Yeah, so I think this issue of rebalancing really does need to be viewed in the context of a broader system where the U.S., which really was the consumer of last resort going into the crisis, and which we saw is not a good model -- it's just not a good model for us. It's not a sustainable model. It's not a good model for countries like China, because that makes their own growth very vulnerable to the demand that comes from outside their borders, rather than unleashing the capacity of their vast potential consumer market.

And so that conversation I think has gotten some very important sort of benchmarks of progress in it, among which is just to recognize -- it's long been known that large and sustained deficits are not good for the system. For the first time, we really have a dialogue that treats large, sustained surpluses also as issues that are legitimate for international debate and negotiation. And what we'll expect to see is a set of indicators, very clear indicators of where unsustainable imbalances are building up in the system, and a policy dialogue around the underlying policies that are contributing to that.

The reason we think that's so important is because the U.S. can't address its savings deficit, its need to grow by exporting more, unless other countries are willing to shift their own growth models. And so that's why this give-and-take is going to be very important in the G-20.

SHIRZAD: You know, this may be too early to be able to really answer this question, but let's sort of play it -- play it out. We're at -- this -- these indicative guidelines, or these indicators, are developed. You're at the negotiating table. You're having a discussion with a country with which we have a persistent surplus or deficit. And the issue of U.S. -- a lack of U.S. savings comes up. How does that play itself out? Is this an issue that will then be negotiated in an international setting? Or -- and then you bring that policy back? Or what's the -- what's the exact kind of next step that occurs?

BRAINARD: We're very clear that over the medium term, the U.S. needs to save more. The U.S. needs to grow more based on its productive capacity and its innovative capacity and its ability to export.

And so it's actually very consistent with our own domestic economic-policy agenda, which is to get the economy back on track, to get the jobs engine cranked up again. We have unacceptably high levels of unemployment in our system still. So we need to get companies back hiring. We're starting to see signs of that.

And as we do that, our savings rate needs to improve. As we do that, we're going to need to take on the deficit very strongly and put that onto a sustainable path. And right now, the administration's plans do that. The tax package that was negotiated is broadly viewed as leading to a slightly higher deficit in the initial year, but in a way that will ultimately put us on a faster deficit-reduction path because it will be materially contributing to the rate of recovery in 2011.

So absolutely we're having that conversation with other countries about our own plans to increase savings, to be fiscally responsible in this country and what that means for them, which is, again, they can't be depending on the U.S. consumer to power their growth.

SHIRZAD: Let me switch to Europe for a second. You know, obviously the stresses in the European system are in all the headlines. What is your assessment of the -- what's going in Europe? Is this a fundamental deficiency in the European model that if not addressed is fatal to the future of Europe as a political entity?

BRAINARD: Well, Europe, of course, is very important to the overall outlook for the global economy at the moment, very important to us. As we saw back in the spring, European risks can spill over and affect our recovery here as it can the broader tone of the global recovery.

Our sense is that the European leaders have put in place an array of mechanisms that they simply didn't have back in the spring in response to financial-market strains and they are now in a much better position to manage through the set of difficult challenges that the periphery economies -- some of the periphery economies are facing.

The politics are complex. There's no -- there's no getting around that, but we see both the will and the capacity to grapple with these problems; and again, in a stronger position than they were back in the spring when they really had to invent some of these mechanisms from scratch.

SHIRZAD: You know, if we could go back to Asia and just to broaden the conversation a little bit -- you talked about China. There's a -- there's a school of thought that we are about to enter the decade, the century of China -- of Asia generally, for a lot of reasons, including the aftermath of the financial crisis in some ways shifting the capital market centers more to Asia, the Asians stepping up and becoming more ascendant in terms of becoming an economic power.

One of the issues that administrations have to deal with -- the Bush administration had to deal with, you're confronting -- is the role of the United States in the Asia-Pacific and particularly in the Asia theater. Could you talk about that in terms of how you see Asia broadly, the role of economic and financial diplomacy, your particular role? How do you strategically view that region?

BRAINARD: The president, I think, has strategically from the very earliest days made a very clear commitment that the U.S. was going to engage deeply and broadly in Asia. His first international trip, not coincidentally, was to Asia. And, you know, we saw a very strong visit to India as well as to Korea and most recently, of course, with the state visit of President Hu.

So we are strengthening our relationships around the region -- extremely important to us -- and we think the U.S. is actually very well positioned. Our -- the strength of our economy are very complementary with many of the growing Asian markets. And so we, of course, are intensively engaged throughout the region in making sure that our financial services firms, that our exporters, that our farmers are well-positioned to take advantage of that growth.

And, of course, at a policy level, we want to make sure that we are at the table. And so, of course, for the first time we'll be participating in the East Asia Summit. We are hosting APEC this year, which is -- which will be quite a big event. And we were delighted that Korea was the first non-G-7 country to host the G-20.

So we're going to continue to use a variety of mechanisms to deepen engagement in the region, and again, I think we've had some good successes on that front so far.

SHIRZAD: Let me ask you one more question regarding the -- kind of the international mechanisms. You know the G-7 has -- it seems to have largely given away that the G-7 and the G-8 have largely given away to the G-20. You yourself have worked very actively in terms of making the IMF and World Bank boards more representative of the global community.

Does the democratization, if we can use that term, of these international economic fora -- will that necessarily lead to what's happened, at least on the trade side, which, as you know, the WTO, for example, seems paralyzed, seems too large, seems too cumbersome in terms of an ability to take hard decisions and you know, for example, see the Doha negotiations through.

Is that future the future that we'll -- that we should expect in terms of the international financial policy platforms that you're engaged in?

BRAINARD: Well, just on -- when I work backwards from -- you mentioned trade. I think that is a good analogy. Of course, we're working hard to try to deliver results in the WTO that is good for America. We're not there yet. But that's not the only thing we're doing. So we're able, even as we continue to make progress in this universal forum, to move forward with a subset of countries in the Asian Pacific region through the trans-Pacific partnerships. And we think, you know, we'll probably be able to move quite quickly there because a smaller group of countries more aligned in terms of what we're trying to achieve, and similar -- true of the Korea-U.S. free trade agreement.

So, you know, we'll continue to engaging -- to engage, of course, in the broader platforms, but also where there are particular issues that we can get done with a smaller group of countries will do that.

Now, turning to the international financial and the international economic realm, the G-20 is a very important umbrella organization where we have, for the first time, a lot of the right countries in the room to actually move some of these issues. But we also continue to meet in smaller groupings, and so I think we'll continue to use flexibility in terms of how we achieve our goals. I don't think we, you know, we don't need to have every member of the G-20 agree with us on every issue to get what we think is important for America done. We can get some of these issues done with smaller groupings and we've been pretty effective at doing that.

They're less high profile; some of them are -- you know, we don't necessarily need to have big communiques for every event, but we can actually make a lot of progress in those smaller groupings.

SHIRZAD: You know, at this time, I want to turn to -- invite our members to have an opportunity to ask Lael questions. There are people with microphones. If you want to ask a question, raise your hand, I'll recognize you. And if you can state your name, your affiliation and then ask a concise question just so that we give everyone a chance to participate.

QUESTIONER: Hello. You expressed some confidence -- I'm -- (name inaudible) -- you expressed some confidence in making some progress on intellectual property issues with China. What's the basis for that confidence? How have the other countries who share our concern about it moved in beside us or behind us in acting on that problem?

BRAINARD: Well, the very concrete issue that we got an agreement around at the visit was in the area of software, which is a huge issue for our software companies, as you know. The use of pirated software in China is really quite a sizeable loss to our software producers. And so, for the first time, we got a very concrete commitment that state entities' use of software would be using legal licensed software. That it would be subject to audits. Those audits would be subject to publication, software asset management programs and that there would be clear budget allocated for the purchase of that legal software.

So that was a very concrete step forward that we believe will be meaningful for our software producers and software producers more generally around the world.

The intellectual property issues with China are large and we will continue to work to move forward. The Chinese government at the highest levels increasingly, I believe, internalizes this agenda, because again, as they move from being a country that is mostly absorbing foreign technology to a country that is putting an emphasis on innovating, which they'll need to do as they move up the value chain, increasingly you will get domestic constituencies in China, as you did in places like South Korea or Japan, who themselves have an interest in a stronger intellectual property regime.

But of course, we're not counting on that process. It may take some time. What we're doing is we're working very hard to identify concrete mechanisms to ensure that the laws that are in place actually get enforced, and they get enforced down to the local level, where a lot of the problems occur.

In terms of the question you asked about working with other countries, we try to build coalitions of common interests across groups of countries. We've worked a lot with the European Union and with the Japanese to advance these goals, and we have very common interests, as you know, in these areas.

QUESTIONER: Thanks. Hi, Lael. Dan Rosen, Rhodium Group and the Peterson Institute.

So it's been somewhat described as a a turning point, the Hu visit, the software breakthroughs, you just talked about, the 45 billion (dollars) in increased exports over the existing level of 100 billion (dollars), apparently, it is now. So did the Chinese have a change of heart, or did they ask us for something that we had to put on the table? And was that ask for us not to do something negative, like let trade policy go wild over the next couple years, or was it something positive -- market economy status, something like that?

I'm curious what the asks were on the Chinese side that greased the way for the what appear to be breakthroughs, to some extent, that you guys achieved. Thanks.

And good work on the whole visit.

BRAINARD: So I think what is important to China is to broaden and deepen the cooperation between our two economies. Increasingly, they would like to deepen cooperation in key technologies, critically in areas such as green energy. Increasingly, they're going to have, as you know, Dan, better than anybody, not only interests in having foreign companies come and invest in their market, but also in having their companies invest abroad and invest in America's very vibrant market.

And so they have a set of interests that I think they would like to see advanced. And of course, at the base is a very critical issue in -- interest in making sure that our investment and trade relationship remains open and stable. So I think their interests were advanced during this visit and it did give us the ability to move forward on our priority areas, where we think we had some concrete results that will show up concretely in increased exports and opportunities for U.S. producers.

QUESTIONER: Good morning. Brian O'Neill with Lazard Freres. Lael, could you share with us the hurdles that you face, the executive branch faces, Treasury, perhaps you and the team you lead in particular, with getting congressional approval and congressional appropriation for the funding of our capital commitments to IFIs and to MDBs? And what's the status now? And what are the indicators we could look for that show signs of progress or setbacks in that regard?

BRAINARD: I'm glad you asked the question, because it's not an area that is really ever on the sort of front burner for most Americans and for most members of Congress, is very important in terms of U.S. leadership and U.S. ability to advance its goals in the developing world and more broadly.

This year is very unusual. This is the first time that any of us can remember when we have engaged in negotiations to recapitalize every single one of the multilateral development banks -- Asia, Latin America, Europe, the World Bank, the African Development Bank, very importantly, as well as negotiations to increase the concessional financing at several of those banks.

Those recapitalizations are extremely important to the U.S. for advancing our goals. First of all, with respect to the banks, we pushed very strong reform agendas in each of these banks and were very successful in terms of improving the governance, transparency, accountability, and the result of which is these banks will be working with developing countries in places like Africa, Latin America, China, elsewhere, to ensure that when they do infrastructure investing, which they need to do to grow and to become richer, more vibrant markets, they'll do so in ways that meet U.S. standards of transparency and accountability.

So this set of reforms was very good for us. It'll push these banks much more in the direction of doing green energy. So it's serving a lot of our goals -- food security, addressing the needs of the poorest. And it only happens once every 10, 20 years. And it's actually very cheap. These are highly leveraged institutions, so that for every $1 we put into them, we multiply the effect of that, because these are lending institutions, and because other countries come in on top of that.

So this is some of the highest -- the best leveraged U.S. contributions to development that we have. But they are not as well-known to many congressional members as some of our bilateral programs are. And so we really need a lot of help in bringing alive the differences that these investments make in the lives of ordinary people in developing countries, the differences they make to our national security goals in places like Afghanistan and Pakistan, where they are making the big investments in the railroad systems, the road systems, the energy systems that are going to make those more stable economies. So we need a lot of help in sort of making that story more compelling.

QUESTIONER: Hi. (Name and affiliation off mic.) I wonder if you could comment on the extent to which you see GSE reform as a topic that's fair game on the international policy agenda, and in particular, have you or will you seek the input of China as a major holder of that debt on the options in that discussion?

BRAINARD: So generally speaking, we understand that the U.S. financial market, U.S. securities, that the GSEs -- we are a big player in the system. We have a very attractive financial system, deep and liquid market. There are a lot of foreign investors, both official and private, around the world who have a great interest in investing in agency securities, Treasury securities and our market more generally. So we make sure that our communication channels are very open, and that we are communicating as policy changes on these issues, very clearly and frequently, with all of the stakeholders in our financial system. We think that's in our interest. And we certainly believe that, you know, we see loads of evidence of continued investor interest here in the United States, in part because of the transparency of that process.

SHIRZAD: Bob.

QUESTIONER: Thank you. Hi, Lael. Bob Bestani. Just going to back to the IFIs for -- and the multinationals for a second, every few years the pendulum seems to come back to the issue of removing the nationality requirement for the leadership of these institutions, as well as a whole slew of jobs below the presidency level. I'm wondering where that issue stands and whether that's going to be revisited at this point.

BRAINARD: So -- you know, I think it's an issue, as you said, that comes up at sort of various times in the discussions. And you know, it is important for these institutions to be viewed as legitimate and to have the membership well represented.

It is not an issue that has actually been joined in any way in the discussions at ministerials or at the summit. So there's no real change of course that has been discussed, certainly not agreed at this juncture, but it's an issue that I think merits continued discussion.

QUESTIONER: I'm Mike Moran. I work -- Mike Moran, Roubini Global Economics. Neither the president of -- the leader of the Senate, a Democrat, nor the leader of the House, a Republican, attended the state dinner. How -- in your rounds, how do our foreign partners view the political risk in Congress this year with regard to trade? And do you think that there's still a plurality in either or both houses of Congress that believes in free trade?

BRAINARD: On the question of trade, and particularly the new Congress, you know, I think that at a time when America's own recovery, the strength of our recovery, the strength of our jobs creation, is going to necessarily be more oriented towards being able to engage in export-driven growth, just given the need to continue to repair balance sheets here for consumers to improve their household savings, it's inevitable that, you know, we're going to put a bigger emphasis on the need to export, the need to trade.

The president has made a very clear and explicit goal to help orient that conversation, which is to double exports in five years. It's a very ambitious goal, by the way. But we are on the way to achieving it. And there are a whole host of mechanisms that undergird that goal, including supporting our companies as they go and seek contracts around the world; helping small businesses, which are really very under-represented in trade, to get a foothold in the system; and importantly, passage of the Korean-U.S. free trade agreement.

A lot of members coming to Congress are going to start thinking about some of these issues -- for some of them, for the first time. And so I think it's incumbent on all of us to be very clear about the critical need to create more sources of demand, to be able to create more of a momentum on job creation. And so we'll be spending a lot of time on those issues and, you know, I think generally it's a conversation that will pick up in the coming weeks.

SHIRZAD: Barbara.

QUESTIONER: Barbara Matthews, BCM International Regulatory Analytics. I've got a question about the IMF. The current president of the G-20, President Sarkozy, has expressed an interest in continued work on reform of the IMF, in particular. And in addition, at the end of the year, the beginning of this year, the IMF board approved an expansion of the IMF's activities on regulatory policies. I'm wondering if you could give us a sense of how you see the IMF's role evolving. And the context here is macroprudential policy is very important, has economic policy implications. Obviously, the IMF has a role to play, but there are other organizations out there: the FSB, the Basel Committee. How do you see the system evolving over the course of the next couple of years, and what do you think is important for the United States?

BRAINARD: Well, the -- as you said, the architecture there has evolved very quickly, in a very short period of time. And, you know, the role of the standard-setting bodies continues, still is really the anchor of that system. But there is now much greater need for coordination across a much greater number of countries, among the G-20 and then a few additional important financial centers. And the FSB is performing some of that coordination role.

The IMF also has a very important role to play in terms of surveillance, and has a lot of capacity in the area of surveillance. And so as you, I'm sure, are aware, they do financial-sector assessment programs every few years. The G-20 members have committed to subject themselves to that process on a much more frequent basis. Having just gone through it in the U.S., it's quite a rigorous process. It's quite a time-consuming process. But it's an important one, because we think it's increasingly important that surveillance of the financial system be joined with macrosurveillance, so that we don't miss the buildup of risks in the financial system that may have hugely important implications for macroeconomic stability and hugely important spillovers to other countries. So that is going to be a continued priority area.

It's going to -- there is still a lot of improvement needed, both within the IMF and between the IMF and some of the other supervisory and standard-setting bodies, between the FSB and the set of Basel and standard-setting bodies. So that's something that is a priority. I think we're focused on it. But it's a work in progress.

SHIRZAD: Donna.

QUESTIONER: Donna Milrod, Deutsche Bank. I'd like to go back to your comments around foreign direct investment. And I'd be interested in your comments, if you have any concerns around the CFIUS process, especially as Chinese companies come to the United States and look to invest.

BRAINARD: Yeah, well, I am somebody that was in government and, you know, an observer of the CFIUS process in -- during my earlier period in government; left when the new law was enacted, and I inherited this new process. It's a very good process. It is a very good example where, you know, good legislation leads to a very strong and clean process.

And so it is transparent, it's predictable, it's very clear what the criteria are. And the criteria are very clearly and narrowly related to national security, full stop. And you know, I observed the system; it works. And we would be very happy if other countries adopted similarly clear, narrow, predictable regimes. It would serve us in good stead rather than the host of much more opaque investment barriers that we -- that our companies encounter in a lot of other parts of the world.

QUESTIONER: If I could ask to follow up on that, Lael, you know, with regard to that bilateral, the model bilateral investment treaty, as you know, your administration has been undertaking essentially a two-year review of the model BIT. And it doesn't seem as though that process is going to be winding down anytime soon. Where we should look at in terms of investment policy, the development and negotiation of new investment treaties, and the kinds of protections that American industry needs in terms of being able to invest in foreign markets?

BRAINARD: Well, we are engaged with several countries, but in particular China, because they were just here. And this issue of improving investment in both directions is so important to both of us. You know, we are engaging with China on the possibility for a bilateral investment treaty, even as we're also working on what our model BIT will look like. And you know, there's a lot of -- there's actually a lot of differences between the way China approaches investment treaties traditionally and our model BIT traditionally. So it will take some time to work through those issues.

But we're also committed more broadly to maintaining a strong and open investment regime. And so we engage with China through additional mechanisms, the strategic and economic dialogue, which will take place now in the spring and brings together all of the economic authorities across both governments to try to address barriers. And then we'll also host a -- well, actually, China this year will host -- we do a(n) annual investment forum where officials from both countries sit and go through the -- any concerns about access that, you know, companies have raised. And we're going to increasingly try to include local officials, state-level officials in those dialogues because they are so important in the investment process, and in both countries, actually.

SHIRZAD: Over in the back.

QUESTIONER: Hi, Lael. Laurie Garrett from the council. A quick question about various elements. We've had quite a scare this year, this last 12 months recognizing that China has a virtual monopoly over REEs, and then Germany saying that China was trying to cut them off, and then -- going to WTO and then, indeed, China announcing a 40 percent reduction in export. And Evo Morales is kind of threatening the same thing with lithium. Where are we going on this? And is there any kind of mechanism for creating an even playing field on the trade in REEs? Or are we doomed to have only Chinese batteries?

BRAINARD: Well, I think we have expressed concerns about China's reducing its export quota on rare earths. And also the predictability of supply is very important because this is a critical input into a host of various commercial areas. China has given us assurances. As you know, last year, the secretary of State had a discussion on this where we were given some assurances. But I think the -- this is an issue that we and other trade partners have engaged on. It's a matter of concern. And there are a variety of different fora, including the WTO, where it's relevant. So we'll continue to work to improve the predictability of supply on this issue, and of course, we'll have a sort of vigilance about other potential cases of the same kind of issues cropping up.

QUESTIONER: I'm Win Neuger from PineBridge Investments. I wonder if you could comment on Africa, because clearly it would appear that China has been much more aggressive than the U.S. there.

BRAINARD: Well, I guess with regard to many countries in Africa -- (laughs) -- in particular there are a variety of places where we're seeing really very encouraging growth and very impressive and now increasingly sustained policy records. And so, you know, generally speaking, we're very encouraged that we're starting to see the kind of growth that we're going to need to materially catapult some of these economies onto much improved trajectories, per capita income, and much better human-development indicators as well. Not -- there are other places where there's obviously governance issues, but are -- trends are going the other direction.

The U.S. is actually very engaged in Africa. I think perhaps you're referring to the infrastructure area, where China has taken a lead in terms of private infrastructure. And it's an area that we've actually started to talk to China about engaging together through the multilateral development banks, in part because we think that the standards that we've developed through the multilateral development banks and the platform they provide for public-private partnerships in infrastructure could raise the standards of investment and, you know, improve the sort of -- the social benefits of a lot of these investments as well. So we think that their investments, to some degree, present us an opportunity to partner and to raise standards. And so we're working on that. It's -- you know, it's not going to happen overnight. It will take some time.

QUESTIONER: My name is Andrew Gundlach, Arnhold and S. Bleichroeder. Could you comment on food security? It says that -- in your bio that you're responsible for it. Specifically, obviously, we're the Saudi Arabia of corn, so exports for agriculture a huge, huge opportunity, but more importantly, perhaps, the prices for agricultural products around the world have skyrocketed. Some of that is Bernanke's policies, but some of it is also real scarcity and real demand. And I wonder if it's a risk to the global recovery.

How do you see it?

BRAINARD: Well, certainly we are following the food prices very closely. We want to avoid a repeat of 2007. You're right. What we're seeing, I think, although I don't have a complete analysis, is a combination of picking up demand, as -- which is a good thing, as countries are moving, you know, sort of along their income trajectories. And so we're beginning to see that as the recovery goes at a faster pace, the emerging markets are starting to see those demands picking up again. But we've also had some supplies disruptions.

And the -- you know, the -- President Obama's been committed since the first year, where he announced in L'Aquila a very kind of ambitious joint food security initiative, very committed to this area. We have programs that are through the -- AID and the programs that we focus on at Treasury on the multilateral development banks. I have -- that's where we do our development work.

And so we worked with a variety of countries in Africa, in Europe, Canada, to put together a multilateral fund that is a kind of platform that sits at the World Bank, it's administered by, but it actually uses all of the multilaterals. And it awards grants on a competitive basis, and it's doing fantastic work. It's badly underfunded because of our own budget situation, the U.S. in part. So we're working hard with members of Congress to fund our piece of it. But it's a terrific new initiative. And we've spent a lot of time on it, because it's a very high priority for the president.

SHIRZAD: Let's do one last question.

Carol (sp).

QUESTIONER: Thanks very much. The small elephant or whatever you want to call it in the room is called Tunisia, Middle East, North Africa. Our -- I'm sure that you're doing work in Treasury with the -- both the African Bank and the World Bank.

Is there anything you can share with us in terms of the potential for this shock to reverberate much more through the region and to reassess policies there? Thank you.

BRAINARD: Well, it's obviously a situation that the secretary of State in particular is very focused on. You know, Treasury, as you know well, comes in in support when countries are undergoing complicated political transitions and helps to mobilize the capacity of both the IMF and the multilateral development banks in support of democratizing countries. And, you know, we also look at debt burdens and lead the negotiations on addressing debt in the wake of major political transitions.

So that's -- the particulars of Tunisia are obviously a kind of very fluid situation, but those set of tools are the ones that we would generally deploy in support of a successful transition to democracy.

SHIRZAD: Well, Lael, thank you so much for that. We really appreciate it. Thank you to all the members for participating.

BRAINARD: Thank you. Thank you, everybody. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

ARYAR SHIRZAD: Okay, ladies and gentlemen. Welcome to today's CFR -- welcome to today's CFR meeting with Lael Brainard, the undersecretary of international affairs at the Department of Treasury. This meeting is part of the C. Peter McColough Series on International Economics. Our next meeting in the series will take place on March 2nd and will feature Thomas Hoenig, the president and CEO of the Federal Reserve Bank of Kansas City.

Please completely turn off, not just put on vibrate, your cell phones, BlackBerrys and all wireless devices to avoid interference with the sound system. And I'd like to remind the members that this meeting is on the record. As everyone knows, Lael is the undersecretary for international affairs with Treasury. She's had a distinguished service both in the private sector and the public sector, previously serving in government as the deputy assistant to the president for international economic affairs with the Clinton administration.

She was vice president of the Brookings Institution, worked at McKinsey and was a professor at MIT. We're going to start off with a few minutes of remarks by Lael to discuss the Hu visit. I'll ask her a series of questions, and then we'll turn to all of you in the audience for an opportunity to ask your questions. And we will stay on schedule to close the meeting at nine o'clock.

So Lael.

LAEL BRAINARD: Thank you. Well, it's nice to be here. Thank you for the kind welcome, Faryar, and it is good to see many long-time friends in the audience.

All eyes were on the meeting between President Obama and President Hu of China this week, and understandably so at a time when the strength of America's jobs engine depends more than ever on demand from outside our borders. Whether we achieve our ambitious export goals will depend in great measure on improving access to China's market given the sheer scale and velocity of its growth.

U.S. exports grew twice as fast to China as to the rest of the world this past year and are on track to reach a hundred billion dollars. If you think back to just one decade ago, China was not even in the top 10 of our export destination markets. It is now the third largest market for our exports and growing quickly.

On the other side, China is wrestling with economic transition challenges of its own. China is facing the challenge of shifting from a developing country dependent on foreign consumption and technology to a middle-income country with growth driven increasingly by domestic consumption and innovation, of shifting from closed capital markets and a fixed exchange rate to a currency that will be increasingly used in international transactions with increasingly open financial markets. The course it steers, the choices it makes will affect greatly the opportunities and constraints faced by American innovators, producers, workers and farmers in its markets.

China's rise has been enabled, to a very significant extent, by open trade and the investment system that was nurtured for decades and supported by America throughout that period. And China's ability to successfully navigate the transition challenges it currently faces while maintaining its strong growth will depend in no small part on continued access to America's markets and investment opportunities, and continued American support for that open investment and trade system.

So a lot was at stake for the two leaders on the economic agenda. And President Obama advanced our four priority objectives. First, to just review progress very quickly, China made a very important commitment to level the playing field by agreeing not to link the provision of government procurement preferences to its innovation policies. We, along with U.S. industry, have long been concerned about the possibility that that linkage would used to discriminate unfairly against innovative U.S. products and services, especially given the size of the Chinese procurement market.

With innovation at the heart of American competitive advantage, we pursued intensive and consistent engagement at the highest levels with China on this issue, and this was a major step forward. China also committed to submit a revised offer to the WTO on government procurement, which would extend well beyond the central government, which is extremely important given the size of China's government procurement market at local and provincial levels.

Second, we secured concrete progress on intellectual property rights enforcement, particularly in the area of software where China agreed to put in place audit and budget mechanisms to ensure that government agencies use legitimate software and publish the audit results.

Third, China affirmed its commitment to enhance exchange rate flexibility, and for the first time dropped previous references to maintaining basic civility and equilibrium rate, while noting the connection of the exchange rate flexibility to their broader goals of transforming their economic development market.

This is very consistent with the thrust of their new five-year plan, which is very much oriented towards promoting the role of domestic consumption, rebalancing the economy. It's very consistent with our global goals. And if you look over the past six months, China's exchange rate has appreciated against the U.S. dollar by 3.5 percent in nominal terms. If you take into account the much faster rate of inflation in China relative to the U.S., this amounts to roughly a 10 percent rate of appreciation on an annual basis.

Of course, we're going to stay very closely and intensively engaged with China on this critical issue.

Finally, commercial deals for U.S. firms amounting to about $45 billion in exports were announced across a range of industries, which will support roughly a quarter million of U.S. jobs. This is a critical priority item for the U.S., and we were pleased to move forward on this.

Generally speaking, we were pleased with the progress that was made, but we can't be complacent as a country. China's economic dynamism, much as it poses a challenge, should be viewed, I think, as an opportunity to remind us to tend to the core foundations of our economic security, our capacity to save and invest, to innovate and to learn.

So let's turn back, Faryar, to you, and if you want to talk further about that or turn to other subjects.

SHIRZAD: Lael, thank you. That was very helpful. You know, if we could drill down on one aspect of what you were talking about, which is currency policy, I think among the most complicated items in your portfolio is negotiating as a currency issue, not only with the Chinese, but also managing the domestic political dimension of that with the U.S. Congress.

Can you talk a little bit about that, and when people see the issue rise and fall in terms of the public aspects of your comments and Secretary Geithner's comments on this issue, how should we interpret that? Do we interpret that as a loss of interest or a lack of interest or what's the dynamic there?

BRAINARD: We, in the administration, have viewed the currency issue as a key priority in our economic engagement with China since the first day of the administration. We've maintained very consistent and very detailed, intensive discussions with the Chinese government as they have themselves been debating internally how to move on this very important issue and as they have, indeed, moved forward, as you know, with the commitment on June 19th and then the subsequent 3.5 percent nominal appreciation since then.

The president stood next to President Hu. He was very clear that this was extremely important to Americans that we need to see more progress on this. But it's important also to recognize that there is progress and that China's leadership at the very highest levels has been clear that they do not intend to reverse course, that they are committed to this course, and that increasingly they do see it as part of their own economic restructuring policies.

So we will continue to engage on it. We will continue to see it among our top priorities, but we cannot be a -- focused only on one issue. We have a very broad set of interests with China, and that's why we are also pleased that after a very long period of intensive engagement, we have made material progress on the issues of indigenous innovation, on intellectual property, on government procurement. And we're just going to stay on a tight set of very important issues.

SHIRZAD: Let me turn to the G-20, another issue or item in your portfolio. The G-20 was launched two years ago now with really four big issues: the reform of the international financial institutions, the development of Basel-based prudential requirements, a regulatory agenda and then economic coordination to deal with the depths of the financial crisis. You could argue that all four of those agenda items have run their course.

What is the future of the G-20? Will it continue to have a central role in your work and the administration's international economic agenda?

BRAINARD: Well, first, Faryar, I appreciate the notion that we got everything done we needed to get done in the G-20. But, in fact, we still feel like we've got a lot of heavy lifting to do in the G-20. We made some progress.

G-20 was very effective, very important to us in cooperating with the most important economies in the world, both the established economic powers and the rising powers, through the crisis, and really made a, I think, very important contribution to pulling us out of the depths of the crisis and ensuring the continued functioning of the international financial system and coordination of individual governments' response -- very much consistent with the thrust of our priorities during the crisis.

But we have a lot of work to do going forward. If you think across some of the issues that you mentioned on financial regulatory reform, we're just at the beginning of that agenda. We now have broad agreement at the international level which very much is consistent with the Dodd-Frank act that passed here. So having moved quickly on that I think put us in a good position to really drive the agenda internationally both through the G-20 and through the G-20's relationship to the Financial Stability Board.

But now we need to go through the very complicated process of implementation and, of course, continuing to coordinate. The work has just begun. What we learned through the crisis is that supervisors need to be much more intensively engaged in their work and they need to work together much more closely to be seeing around corners in terms of risks and to be managing those. So if you look at the agenda for the year ahead, I think we've made progress on the capital framework, on most elements. We still have a few things that need to be really worked through.

But the resolution area, extremely important. We have a strong resolution law in place here. We need to implement it. But other -- many other jurisdictions do not, and so we need to work through specifically what needs to be done at the national level, at the resolution -- sort of legal issues, as well as who has authority, and then to construct above that mechanisms for cross-border cooperation.

On the issue of coordination, the hard work just is beginning. We are in a world with a two-speed recovery. The advanced economies are still repairing their balance sheets. Consumers are still deleveraging here in the United States. We are not going to be the place that supplies the command for the rest of the world for some time to come.

Emerging markets: very different set of problems, moving very quickly, contending, if anything, with potential concerns about overheating. And so trying to navigate the interface between that and make sure we grow in ways that are mutually reinforcing is a very important agenda item for the G-20 that's here.

SHIRZAD: You know, one of the legacies, you could argue, of the G-20 is the creation of a number of international bodies that now have very powerful and important roles in setting regulations and standards. A common feature of these international institutions, the FSB, the Basel Committee, the IMF and so on is the degree to which public participation is limited, let's say.

Is that a fair assessment that I'm making? Is that a fair characterization of the process? And is that an issue that you are focused on and the administration's focused?

BRAINARD: We're very focused on both making sure that we have effective mechanisms for setting rules and making sure people, countries abide by the rules and making sure that the countries -- again, there's a whole set of players in the system that really just were not at that table 20 years ago. We need to make sure those players are sitting with us as the system continues to evolve.

But it's very important that the -- that the authority still resides at the national level, and so a lot of the governance mechanisms, the accountability mechanisms are still going to reside here with us, in the -- in the U.S. executive branch and through the accountability that Congress ensures is there. We are looking for mechanisms for these bodies to increase their outreach. And we have had a major reform of the IMF's governance system over the course of the last G-20, which will make it a much more representative body in terms of the various nations at the table. But we will continue to pay a lot of attention to this issue, and make sure that the actual implementation and the rules setting takes place at the national level here in the United States.

SHIRZAD: And when you talk about the international agenda, you know, you talk about the prudential rules, the Basel process, the regulatory agenda, Dodd-Frank. Where does an economic growth agenda figure in it? Is that implicit in getting the rules right, that growth will emanate from that? Or is that a separate track that somehow needs to be balanced in the broader portfolio that you manage?

BRAINARD: We actually very much think about our regular regulatory agenda being about providing much more secure and stable foundations for more sustainable growth going forward. So the regulatory agenda -- the financial regulatory agenda, which is really more about reform of the system in the wake of the most devastating financial crisis that we've seen in a century, creating much more strong foundations for that system, making sure that banks are well capitalized, perform the functions that they are supported publicly to do, we think will provide very robust foundations to nurture our growth going into the future.

But of course we are also working on the growth agenda through rebalancing, where, again, we're really putting the onus a bit on countries that have traditionally relied on other countries for -- to power their own growth, countries that have consistently run very large surpluses, to start to rebalance their own economy so that they can contribute more to the world economy in terms of domestic demand at a time when the U.S. needs to export more to grow.

SHIRZAD: You know, if we could sort of take that last point and kind of put a finer point on it, you know, one of the big issues that you personally negotiated in the context of the Seoul G-20 summit was an agreement among the G-20, including, notably, China, Germany and others, on developing a mechanism for dialogue among countries with persistent and large deficits or surpluses. Could you talk about that process? What should we look for in the weeks and months ahead coming out of that Seoul summit?

BRAINARD: Yeah, so I think this issue of rebalancing really does need to be viewed in the context of a broader system where the U.S., which really was the consumer of last resort going into the crisis, and which we saw is not a good model -- it's just not a good model for us. It's not a sustainable model. It's not a good model for countries like China, because that makes their own growth very vulnerable to the demand that comes from outside their borders, rather than unleashing the capacity of their vast potential consumer market.

And so that conversation I think has gotten some very important sort of benchmarks of progress in it, among which is just to recognize -- it's long been known that large and sustained deficits are not good for the system. For the first time, we really have a dialogue that treats large, sustained surpluses also as issues that are legitimate for international debate and negotiation. And what we'll expect to see is a set of indicators, very clear indicators of where unsustainable imbalances are building up in the system, and a policy dialogue around the underlying policies that are contributing to that.

The reason we think that's so important is because the U.S. can't address its savings deficit, its need to grow by exporting more, unless other countries are willing to shift their own growth models. And so that's why this give-and-take is going to be very important in the G-20.

SHIRZAD: You know, this may be too early to be able to really answer this question, but let's sort of play it -- play it out. We're at -- this -- these indicative guidelines, or these indicators, are developed. You're at the negotiating table. You're having a discussion with a country with which we have a persistent surplus or deficit. And the issue of U.S. -- a lack of U.S. savings comes up. How does that play itself out? Is this an issue that will then be negotiated in an international setting? Or -- and then you bring that policy back? Or what's the -- what's the exact kind of next step that occurs?

BRAINARD: We're very clear that over the medium term, the U.S. needs to save more. The U.S. needs to grow more based on its productive capacity and its innovative capacity and its ability to export.

And so it's actually very consistent with our own domestic economic-policy agenda, which is to get the economy back on track, to get the jobs engine cranked up again. We have unacceptably high levels of unemployment in our system still. So we need to get companies back hiring. We're starting to see signs of that.

And as we do that, our savings rate needs to improve. As we do that, we're going to need to take on the deficit very strongly and put that onto a sustainable path. And right now, the administration's plans do that. The tax package that was negotiated is broadly viewed as leading to a slightly higher deficit in the initial year, but in a way that will ultimately put us on a faster deficit-reduction path because it will be materially contributing to the rate of recovery in 2011.

So absolutely we're having that conversation with other countries about our own plans to increase savings, to be fiscally responsible in this country and what that means for them, which is, again, they can't be depending on the U.S. consumer to power their growth.

SHIRZAD: Let me switch to Europe for a second. You know, obviously the stresses in the European system are in all the headlines. What is your assessment of the -- what's going in Europe? Is this a fundamental deficiency in the European model that if not addressed is fatal to the future of Europe as a political entity?

BRAINARD: Well, Europe, of course, is very important to the overall outlook for the global economy at the moment, very important to us. As we saw back in the spring, European risks can spill over and affect our recovery here as it can the broader tone of the global recovery.

Our sense is that the European leaders have put in place an array of mechanisms that they simply didn't have back in the spring in response to financial-market strains and they are now in a much better position to manage through the set of difficult challenges that the periphery economies -- some of the periphery economies are facing.

The politics are complex. There's no -- there's no getting around that, but we see both the will and the capacity to grapple with these problems; and again, in a stronger position than they were back in the spring when they really had to invent some of these mechanisms from scratch.

SHIRZAD: You know, if we could go back to Asia and just to broaden the conversation a little bit -- you talked about China. There's a -- there's a school of thought that we are about to enter the decade, the century of China -- of Asia generally, for a lot of reasons, including the aftermath of the financial crisis in some ways shifting the capital market centers more to Asia, the Asians stepping up and becoming more ascendant in terms of becoming an economic power.

One of the issues that administrations have to deal with -- the Bush administration had to deal with, you're confronting -- is the role of the United States in the Asia-Pacific and particularly in the Asia theater. Could you talk about that in terms of how you see Asia broadly, the role of economic and financial diplomacy, your particular role? How do you strategically view that region?

BRAINARD: The president, I think, has strategically from the very earliest days made a very clear commitment that the U.S. was going to engage deeply and broadly in Asia. His first international trip, not coincidentally, was to Asia. And, you know, we saw a very strong visit to India as well as to Korea and most recently, of course, with the state visit of President Hu.

So we are strengthening our relationships around the region -- extremely important to us -- and we think the U.S. is actually very well positioned. Our -- the strength of our economy are very complementary with many of the growing Asian markets. And so we, of course, are intensively engaged throughout the region in making sure that our financial services firms, that our exporters, that our farmers are well-positioned to take advantage of that growth.

And, of course, at a policy level, we want to make sure that we are at the table. And so, of course, for the first time we'll be participating in the East Asia Summit. We are hosting APEC this year, which is -- which will be quite a big event. And we were delighted that Korea was the first non-G-7 country to host the G-20.

So we're going to continue to use a variety of mechanisms to deepen engagement in the region, and again, I think we've had some good successes on that front so far.

SHIRZAD: Let me ask you one more question regarding the -- kind of the international mechanisms. You know the G-7 has -- it seems to have largely given away that the G-7 and the G-8 have largely given away to the G-20. You yourself have worked very actively in terms of making the IMF and World Bank boards more representative of the global community.

Does the democratization, if we can use that term, of these international economic fora -- will that necessarily lead to what's happened, at least on the trade side, which, as you know, the WTO, for example, seems paralyzed, seems too large, seems too cumbersome in terms of an ability to take hard decisions and you know, for example, see the Doha negotiations through.

Is that future the future that we'll -- that we should expect in terms of the international financial policy platforms that you're engaged in?

BRAINARD: Well, just on -- when I work backwards from -- you mentioned trade. I think that is a good analogy. Of course, we're working hard to try to deliver results in the WTO that is good for America. We're not there yet. But that's not the only thing we're doing. So we're able, even as we continue to make progress in this universal forum, to move forward with a subset of countries in the Asian Pacific region through the trans-Pacific partnerships. And we think, you know, we'll probably be able to move quite quickly there because a smaller group of countries more aligned in terms of what we're trying to achieve, and similar -- true of the Korea-U.S. free trade agreement.

So, you know, we'll continue to engaging -- to engage, of course, in the broader platforms, but also where there are particular issues that we can get done with a smaller group of countries will do that.

Now, turning to the international financial and the international economic realm, the G-20 is a very important umbrella organization where we have, for the first time, a lot of the right countries in the room to actually move some of these issues. But we also continue to meet in smaller groupings, and so I think we'll continue to use flexibility in terms of how we achieve our goals. I don't think we, you know, we don't need to have every member of the G-20 agree with us on every issue to get what we think is important for America done. We can get some of these issues done with smaller groupings and we've been pretty effective at doing that.

They're less high profile; some of them are -- you know, we don't necessarily need to have big communiques for every event, but we can actually make a lot of progress in those smaller groupings.

SHIRZAD: You know, at this time, I want to turn to -- invite our members to have an opportunity to ask Lael questions. There are people with microphones. If you want to ask a question, raise your hand, I'll recognize you. And if you can state your name, your affiliation and then ask a concise question just so that we give everyone a chance to participate.

QUESTIONER: Hello. You expressed some confidence -- I'm -- (name inaudible) -- you expressed some confidence in making some progress on intellectual property issues with China. What's the basis for that confidence? How have the other countries who share our concern about it moved in beside us or behind us in acting on that problem?

BRAINARD: Well, the very concrete issue that we got an agreement around at the visit was in the area of software, which is a huge issue for our software companies, as you know. The use of pirated software in China is really quite a sizeable loss to our software producers. And so, for the first time, we got a very concrete commitment that state entities' use of software would be using legal licensed software. That it would be subject to audits. Those audits would be subject to publication, software asset management programs and that there would be clear budget allocated for the purchase of that legal software.

So that was a very concrete step forward that we believe will be meaningful for our software producers and software producers more generally around the world.

The intellectual property issues with China are large and we will continue to work to move forward. The Chinese government at the highest levels increasingly, I believe, internalizes this agenda, because again, as they move from being a country that is mostly absorbing foreign technology to a country that is putting an emphasis on innovating, which they'll need to do as they move up the value chain, increasingly you will get domestic constituencies in China, as you did in places like South Korea or Japan, who themselves have an interest in a stronger intellectual property regime.

But of course, we're not counting on that process. It may take some time. What we're doing is we're working very hard to identify concrete mechanisms to ensure that the laws that are in place actually get enforced, and they get enforced down to the local level, where a lot of the problems occur.

In terms of the question you asked about working with other countries, we try to build coalitions of common interests across groups of countries. We've worked a lot with the European Union and with the Japanese to advance these goals, and we have very common interests, as you know, in these areas.

QUESTIONER: Thanks. Hi, Lael. Dan Rosen, Rhodium Group and the Peterson Institute.

So it's been somewhat described as a a turning point, the Hu visit, the software breakthroughs, you just talked about, the 45 billion (dollars) in increased exports over the existing level of 100 billion (dollars), apparently, it is now. So did the Chinese have a change of heart, or did they ask us for something that we had to put on the table? And was that ask for us not to do something negative, like let trade policy go wild over the next couple years, or was it something positive -- market economy status, something like that?

I'm curious what the asks were on the Chinese side that greased the way for the what appear to be breakthroughs, to some extent, that you guys achieved. Thanks.

And good work on the whole visit.

BRAINARD: So I think what is important to China is to broaden and deepen the cooperation between our two economies. Increasingly, they would like to deepen cooperation in key technologies, critically in areas such as green energy. Increasingly, they're going to have, as you know, Dan, better than anybody, not only interests in having foreign companies come and invest in their market, but also in having their companies invest abroad and invest in America's very vibrant market.

And so they have a set of interests that I think they would like to see advanced. And of course, at the base is a very critical issue in -- interest in making sure that our investment and trade relationship remains open and stable. So I think their interests were advanced during this visit and it did give us the ability to move forward on our priority areas, where we think we had some concrete results that will show up concretely in increased exports and opportunities for U.S. producers.

QUESTIONER: Good morning. Brian O'Neill with Lazard Freres. Lael, could you share with us the hurdles that you face, the executive branch faces, Treasury, perhaps you and the team you lead in particular, with getting congressional approval and congressional appropriation for the funding of our capital commitments to IFIs and to MDBs? And what's the status now? And what are the indicators we could look for that show signs of progress or setbacks in that regard?

BRAINARD: I'm glad you asked the question, because it's not an area that is really ever on the sort of front burner for most Americans and for most members of Congress, is very important in terms of U.S. leadership and U.S. ability to advance its goals in the developing world and more broadly.

This year is very unusual. This is the first time that any of us can remember when we have engaged in negotiations to recapitalize every single one of the multilateral development banks -- Asia, Latin America, Europe, the World Bank, the African Development Bank, very importantly, as well as negotiations to increase the concessional financing at several of those banks.

Those recapitalizations are extremely important to the U.S. for advancing our goals. First of all, with respect to the banks, we pushed very strong reform agendas in each of these banks and were very successful in terms of improving the governance, transparency, accountability, and the result of which is these banks will be working with developing countries in places like Africa, Latin America, China, elsewhere, to ensure that when they do infrastructure investing, which they need to do to grow and to become richer, more vibrant markets, they'll do so in ways that meet U.S. standards of transparency and accountability.

So this set of reforms was very good for us. It'll push these banks much more in the direction of doing green energy. So it's serving a lot of our goals -- food security, addressing the needs of the poorest. And it only happens once every 10, 20 years. And it's actually very cheap. These are highly leveraged institutions, so that for every $1 we put into them, we multiply the effect of that, because these are lending institutions, and because other countries come in on top of that.

So this is some of the highest -- the best leveraged U.S. contributions to development that we have. But they are not as well-known to many congressional members as some of our bilateral programs are. And so we really need a lot of help in bringing alive the differences that these investments make in the lives of ordinary people in developing countries, the differences they make to our national security goals in places like Afghanistan and Pakistan, where they are making the big investments in the railroad systems, the road systems, the energy systems that are going to make those more stable economies. So we need a lot of help in sort of making that story more compelling.

QUESTIONER: Hi. (Name and affiliation off mic.) I wonder if you could comment on the extent to which you see GSE reform as a topic that's fair game on the international policy agenda, and in particular, have you or will you seek the input of China as a major holder of that debt on the options in that discussion?

BRAINARD: So generally speaking, we understand that the U.S. financial market, U.S. securities, that the GSEs -- we are a big player in the system. We have a very attractive financial system, deep and liquid market. There are a lot of foreign investors, both official and private, around the world who have a great interest in investing in agency securities, Treasury securities and our market more generally. So we make sure that our communication channels are very open, and that we are communicating as policy changes on these issues, very clearly and frequently, with all of the stakeholders in our financial system. We think that's in our interest. And we certainly believe that, you know, we see loads of evidence of continued investor interest here in the United States, in part because of the transparency of that process.

SHIRZAD: Bob.

QUESTIONER: Thank you. Hi, Lael. Bob Bestani. Just going to back to the IFIs for -- and the multinationals for a second, every few years the pendulum seems to come back to the issue of removing the nationality requirement for the leadership of these institutions, as well as a whole slew of jobs below the presidency level. I'm wondering where that issue stands and whether that's going to be revisited at this point.

BRAINARD: So -- you know, I think it's an issue, as you said, that comes up at sort of various times in the discussions. And you know, it is important for these institutions to be viewed as legitimate and to have the membership well represented.

It is not an issue that has actually been joined in any way in the discussions at ministerials or at the summit. So there's no real change of course that has been discussed, certainly not agreed at this juncture, but it's an issue that I think merits continued discussion.

QUESTIONER: I'm Mike Moran. I work -- Mike Moran, Roubini Global Economics. Neither the president of -- the leader of the Senate, a Democrat, nor the leader of the House, a Republican, attended the state dinner. How -- in your rounds, how do our foreign partners view the political risk in Congress this year with regard to trade? And do you think that there's still a plurality in either or both houses of Congress that believes in free trade?

BRAINARD: On the question of trade, and particularly the new Congress, you know, I think that at a time when America's own recovery, the strength of our recovery, the strength of our jobs creation, is going to necessarily be more oriented towards being able to engage in export-driven growth, just given the need to continue to repair balance sheets here for consumers to improve their household savings, it's inevitable that, you know, we're going to put a bigger emphasis on the need to export, the need to trade.

The president has made a very clear and explicit goal to help orient that conversation, which is to double exports in five years. It's a very ambitious goal, by the way. But we are on the way to achieving it. And there are a whole host of mechanisms that undergird that goal, including supporting our companies as they go and seek contracts around the world; helping small businesses, which are really very under-represented in trade, to get a foothold in the system; and importantly, passage of the Korean-U.S. free trade agreement.

A lot of members coming to Congress are going to start thinking about some of these issues -- for some of them, for the first time. And so I think it's incumbent on all of us to be very clear about the critical need to create more sources of demand, to be able to create more of a momentum on job creation. And so we'll be spending a lot of time on those issues and, you know, I think generally it's a conversation that will pick up in the coming weeks.

SHIRZAD: Barbara.

QUESTIONER: Barbara Matthews, BCM International Regulatory Analytics. I've got a question about the IMF. The current president of the G-20, President Sarkozy, has expressed an interest in continued work on reform of the IMF, in particular. And in addition, at the end of the year, the beginning of this year, the IMF board approved an expansion of the IMF's activities on regulatory policies. I'm wondering if you could give us a sense of how you see the IMF's role evolving. And the context here is macroprudential policy is very important, has economic policy implications. Obviously, the IMF has a role to play, but there are other organizations out there: the FSB, the Basel Committee. How do you see the system evolving over the course of the next couple of years, and what do you think is important for the United States?

BRAINARD: Well, the -- as you said, the architecture there has evolved very quickly, in a very short period of time. And, you know, the role of the standard-setting bodies continues, still is really the anchor of that system. But there is now much greater need for coordination across a much greater number of countries, among the G-20 and then a few additional important financial centers. And the FSB is performing some of that coordination role.

The IMF also has a very important role to play in terms of surveillance, and has a lot of capacity in the area of surveillance. And so as you, I'm sure, are aware, they do financial-sector assessment programs every few years. The G-20 members have committed to subject themselves to that process on a much more frequent basis. Having just gone through it in the U.S., it's quite a rigorous process. It's quite a time-consuming process. But it's an important one, because we think it's increasingly important that surveillance of the financial system be joined with macrosurveillance, so that we don't miss the buildup of risks in the financial system that may have hugely important implications for macroeconomic stability and hugely important spillovers to other countries. So that is going to be a continued priority area.

It's going to -- there is still a lot of improvement needed, both within the IMF and between the IMF and some of the other supervisory and standard-setting bodies, between the FSB and the set of Basel and standard-setting bodies. So that's something that is a priority. I think we're focused on it. But it's a work in progress.

SHIRZAD: Donna.

QUESTIONER: Donna Milrod, Deutsche Bank. I'd like to go back to your comments around foreign direct investment. And I'd be interested in your comments, if you have any concerns around the CFIUS process, especially as Chinese companies come to the United States and look to invest.

BRAINARD: Yeah, well, I am somebody that was in government and, you know, an observer of the CFIUS process in -- during my earlier period in government; left when the new law was enacted, and I inherited this new process. It's a very good process. It is a very good example where, you know, good legislation leads to a very strong and clean process.

And so it is transparent, it's predictable, it's very clear what the criteria are. And the criteria are very clearly and narrowly related to national security, full stop. And you know, I observed the system; it works. And we would be very happy if other countries adopted similarly clear, narrow, predictable regimes. It would serve us in good stead rather than the host of much more opaque investment barriers that we -- that our companies encounter in a lot of other parts of the world.

QUESTIONER: If I could ask to follow up on that, Lael, you know, with regard to that bilateral, the model bilateral investment treaty, as you know, your administration has been undertaking essentially a two-year review of the model BIT. And it doesn't seem as though that process is going to be winding down anytime soon. Where we should look at in terms of investment policy, the development and negotiation of new investment treaties, and the kinds of protections that American industry needs in terms of being able to invest in foreign markets?

BRAINARD: Well, we are engaged with several countries, but in particular China, because they were just here. And this issue of improving investment in both directions is so important to both of us. You know, we are engaging with China on the possibility for a bilateral investment treaty, even as we're also working on what our model BIT will look like. And you know, there's a lot of -- there's actually a lot of differences between the way China approaches investment treaties traditionally and our model BIT traditionally. So it will take some time to work through those issues.

But we're also committed more broadly to maintaining a strong and open investment regime. And so we engage with China through additional mechanisms, the strategic and economic dialogue, which will take place now in the spring and brings together all of the economic authorities across both governments to try to address barriers. And then we'll also host a -- well, actually, China this year will host -- we do a(n) annual investment forum where officials from both countries sit and go through the -- any concerns about access that, you know, companies have raised. And we're going to increasingly try to include local officials, state-level officials in those dialogues because they are so important in the investment process, and in both countries, actually.

SHIRZAD: Over in the back.

QUESTIONER: Hi, Lael. Laurie Garrett from the council. A quick question about various elements. We've had quite a scare this year, this last 12 months recognizing that China has a virtual monopoly over REEs, and then Germany saying that China was trying to cut them off, and then -- going to WTO and then, indeed, China announcing a 40 percent reduction in export. And Evo Morales is kind of threatening the same thing with lithium. Where are we going on this? And is there any kind of mechanism for creating an even playing field on the trade in REEs? Or are we doomed to have only Chinese batteries?

BRAINARD: Well, I think we have expressed concerns about China's reducing its export quota on rare earths. And also the predictability of supply is very important because this is a critical input into a host of various commercial areas. China has given us assurances. As you know, last year, the secretary of State had a discussion on this where we were given some assurances. But I think the -- this is an issue that we and other trade partners have engaged on. It's a matter of concern. And there are a variety of different fora, including the WTO, where it's relevant. So we'll continue to work to improve the predictability of supply on this issue, and of course, we'll have a sort of vigilance about other potential cases of the same kind of issues cropping up.

QUESTIONER: I'm Win Neuger from PineBridge Investments. I wonder if you could comment on Africa, because clearly it would appear that China has been much more aggressive than the U.S. there.

BRAINARD: Well, I guess with regard to many countries in Africa -- (laughs) -- in particular there are a variety of places where we're seeing really very encouraging growth and very impressive and now increasingly sustained policy records. And so, you know, generally speaking, we're very encouraged that we're starting to see the kind of growth that we're going to need to materially catapult some of these economies onto much improved trajectories, per capita income, and much better human-development indicators as well. Not -- there are other places where there's obviously governance issues, but are -- trends are going the other direction.

The U.S. is actually very engaged in Africa. I think perhaps you're referring to the infrastructure area, where China has taken a lead in terms of private infrastructure. And it's an area that we've actually started to talk to China about engaging together through the multilateral development banks, in part because we think that the standards that we've developed through the multilateral development banks and the platform they provide for public-private partnerships in infrastructure could raise the standards of investment and, you know, improve the sort of -- the social benefits of a lot of these investments as well. So we think that their investments, to some degree, present us an opportunity to partner and to raise standards. And so we're working on that. It's -- you know, it's not going to happen overnight. It will take some time.

QUESTIONER: My name is Andrew Gundlach, Arnhold and S. Bleichroeder. Could you comment on food security? It says that -- in your bio that you're responsible for it. Specifically, obviously, we're the Saudi Arabia of corn, so exports for agriculture a huge, huge opportunity, but more importantly, perhaps, the prices for agricultural products around the world have skyrocketed. Some of that is Bernanke's policies, but some of it is also real scarcity and real demand. And I wonder if it's a risk to the global recovery.

How do you see it?

BRAINARD: Well, certainly we are following the food prices very closely. We want to avoid a repeat of 2007. You're right. What we're seeing, I think, although I don't have a complete analysis, is a combination of picking up demand, as -- which is a good thing, as countries are moving, you know, sort of along their income trajectories. And so we're beginning to see that as the recovery goes at a faster pace, the emerging markets are starting to see those demands picking up again. But we've also had some supplies disruptions.

And the -- you know, the -- President Obama's been committed since the first year, where he announced in L'Aquila a very kind of ambitious joint food security initiative, very committed to this area. We have programs that are through the -- AID and the programs that we focus on at Treasury on the multilateral development banks. I have -- that's where we do our development work.

And so we worked with a variety of countries in Africa, in Europe, Canada, to put together a multilateral fund that is a kind of platform that sits at the World Bank, it's administered by, but it actually uses all of the multilaterals. And it awards grants on a competitive basis, and it's doing fantastic work. It's badly underfunded because of our own budget situation, the U.S. in part. So we're working hard with members of Congress to fund our piece of it. But it's a terrific new initiative. And we've spent a lot of time on it, because it's a very high priority for the president.

SHIRZAD: Let's do one last question.

Carol (sp).

QUESTIONER: Thanks very much. The small elephant or whatever you want to call it in the room is called Tunisia, Middle East, North Africa. Our -- I'm sure that you're doing work in Treasury with the -- both the African Bank and the World Bank.

Is there anything you can share with us in terms of the potential for this shock to reverberate much more through the region and to reassess policies there? Thank you.

BRAINARD: Well, it's obviously a situation that the secretary of State in particular is very focused on. You know, Treasury, as you know well, comes in in support when countries are undergoing complicated political transitions and helps to mobilize the capacity of both the IMF and the multilateral development banks in support of democratizing countries. And, you know, we also look at debt burdens and lead the negotiations on addressing debt in the wake of major political transitions.

So that's -- the particulars of Tunisia are obviously a kind of very fluid situation, but those set of tools are the ones that we would generally deploy in support of a successful transition to democracy.

SHIRZAD: Well, Lael, thank you so much for that. We really appreciate it. Thank you to all the members for participating.

BRAINARD: Thank you. Thank you, everybody. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

ARYAR SHIRZAD: Okay, ladies and gentlemen. Welcome to today's CFR -- welcome to today's CFR meeting with Lael Brainard, the undersecretary of international affairs at the Department of Treasury. This meeting is part of the C. Peter McColough Series on International Economics. Our next meeting in the series will take place on March 2nd and will feature Thomas Hoenig, the president and CEO of the Federal Reserve Bank of Kansas City.

Please completely turn off, not just put on vibrate, your cell phones, BlackBerrys and all wireless devices to avoid interference with the sound system. And I'd like to remind the members that this meeting is on the record. As everyone knows, Lael is the undersecretary for international affairs with Treasury. She's had a distinguished service both in the private sector and the public sector, previously serving in government as the deputy assistant to the president for international economic affairs with the Clinton administration.

She was vice president of the Brookings Institution, worked at McKinsey and was a professor at MIT. We're going to start off with a few minutes of remarks by Lael to discuss the Hu visit. I'll ask her a series of questions, and then we'll turn to all of you in the audience for an opportunity to ask your questions. And we will stay on schedule to close the meeting at nine o'clock.

So Lael.

LAEL BRAINARD: Thank you. Well, it's nice to be here. Thank you for the kind welcome, Faryar, and it is good to see many long-time friends in the audience.

All eyes were on the meeting between President Obama and President Hu of China this week, and understandably so at a time when the strength of America's jobs engine depends more than ever on demand from outside our borders. Whether we achieve our ambitious export goals will depend in great measure on improving access to China's market given the sheer scale and velocity of its growth.

U.S. exports grew twice as fast to China as to the rest of the world this past year and are on track to reach a hundred billion dollars. If you think back to just one decade ago, China was not even in the top 10 of our export destination markets. It is now the third largest market for our exports and growing quickly.

On the other side, China is wrestling with economic transition challenges of its own. China is facing the challenge of shifting from a developing country dependent on foreign consumption and technology to a middle-income country with growth driven increasingly by domestic consumption and innovation, of shifting from closed capital markets and a fixed exchange rate to a currency that will be increasingly used in international transactions with increasingly open financial markets. The course it steers, the choices it makes will affect greatly the opportunities and constraints faced by American innovators, producers, workers and farmers in its markets.

China's rise has been enabled, to a very significant extent, by open trade and the investment system that was nurtured for decades and supported by America throughout that period. And China's ability to successfully navigate the transition challenges it currently faces while maintaining its strong growth will depend in no small part on continued access to America's markets and investment opportunities, and continued American support for that open investment and trade system.

So a lot was at stake for the two leaders on the economic agenda. And President Obama advanced our four priority objectives. First, to just review progress very quickly, China made a very important commitment to level the playing field by agreeing not to link the provision of government procurement preferences to its innovation policies. We, along with U.S. industry, have long been concerned about the possibility that that linkage would used to discriminate unfairly against innovative U.S. products and services, especially given the size of the Chinese procurement market.

With innovation at the heart of American competitive advantage, we pursued intensive and consistent engagement at the highest levels with China on this issue, and this was a major step forward. China also committed to submit a revised offer to the WTO on government procurement, which would extend well beyond the central government, which is extremely important given the size of China's government procurement market at local and provincial levels.

Second, we secured concrete progress on intellectual property rights enforcement, particularly in the area of software where China agreed to put in place audit and budget mechanisms to ensure that government agencies use legitimate software and publish the audit results.

Third, China affirmed its commitment to enhance exchange rate flexibility, and for the first time dropped previous references to maintaining basic civility and equilibrium rate, while noting the connection of the exchange rate flexibility to their broader goals of transforming their economic development market.

This is very consistent with the thrust of their new five-year plan, which is very much oriented towards promoting the role of domestic consumption, rebalancing the economy. It's very consistent with our global goals. And if you look over the past six months, China's exchange rate has appreciated against the U.S. dollar by 3.5 percent in nominal terms. If you take into account the much faster rate of inflation in China relative to the U.S., this amounts to roughly a 10 percent rate of appreciation on an annual basis.

Of course, we're going to stay very closely and intensively engaged with China on this critical issue.

Finally, commercial deals for U.S. firms amounting to about $45 billion in exports were announced across a range of industries, which will support roughly a quarter million of U.S. jobs. This is a critical priority item for the U.S., and we were pleased to move forward on this.

Generally speaking, we were pleased with the progress that was made, but we can't be complacent as a country. China's economic dynamism, much as it poses a challenge, should be viewed, I think, as an opportunity to remind us to tend to the core foundations of our economic security, our capacity to save and invest, to innovate and to learn.

So let's turn back, Faryar, to you, and if you want to talk further about that or turn to other subjects.

SHIRZAD: Lael, thank you. That was very helpful. You know, if we could drill down on one aspect of what you were talking about, which is currency policy, I think among the most complicated items in your portfolio is negotiating as a currency issue, not only with the Chinese, but also managing the domestic political dimension of that with the U.S. Congress.

Can you talk a little bit about that, and when people see the issue rise and fall in terms of the public aspects of your comments and Secretary Geithner's comments on this issue, how should we interpret that? Do we interpret that as a loss of interest or a lack of interest or what's the dynamic there?

BRAINARD: We, in the administration, have viewed the currency issue as a key priority in our economic engagement with China since the first day of the administration. We've maintained very consistent and very detailed, intensive discussions with the Chinese government as they have themselves been debating internally how to move on this very important issue and as they have, indeed, moved forward, as you know, with the commitment on June 19th and then the subsequent 3.5 percent nominal appreciation since then.

The president stood next to President Hu. He was very clear that this was extremely important to Americans that we need to see more progress on this. But it's important also to recognize that there is progress and that China's leadership at the very highest levels has been clear that they do not intend to reverse course, that they are committed to this course, and that increasingly they do see it as part of their own economic restructuring policies.

So we will continue to engage on it. We will continue to see it among our top priorities, but we cannot be a -- focused only on one issue. We have a very broad set of interests with China, and that's why we are also pleased that after a very long period of intensive engagement, we have made material progress on the issues of indigenous innovation, on intellectual property, on government procurement. And we're just going to stay on a tight set of very important issues.

SHIRZAD: Let me turn to the G-20, another issue or item in your portfolio. The G-20 was launched two years ago now with really four big issues: the reform of the international financial institutions, the development of Basel-based prudential requirements, a regulatory agenda and then economic coordination to deal with the depths of the financial crisis. You could argue that all four of those agenda items have run their course.

What is the future of the G-20? Will it continue to have a central role in your work and the administration's international economic agenda?

BRAINARD: Well, first, Faryar, I appreciate the notion that we got everything done we needed to get done in the G-20. But, in fact, we still feel like we've got a lot of heavy lifting to do in the G-20. We made some progress.

G-20 was very effective, very important to us in cooperating with the most important economies in the world, both the established economic powers and the rising powers, through the crisis, and really made a, I think, very important contribution to pulling us out of the depths of the crisis and ensuring the continued functioning of the international financial system and coordination of individual governments' response -- very much consistent with the thrust of our priorities during the crisis.

But we have a lot of work to do going forward. If you think across some of the issues that you mentioned on financial regulatory reform, we're just at the beginning of that agenda. We now have broad agreement at the international level which very much is consistent with the Dodd-Frank act that passed here. So having moved quickly on that I think put us in a good position to really drive the agenda internationally both through the G-20 and through the G-20's relationship to the Financial Stability Board.

But now we need to go through the very complicated process of implementation and, of course, continuing to coordinate. The work has just begun. What we learned through the crisis is that supervisors need to be much more intensively engaged in their work and they need to work together much more closely to be seeing around corners in terms of risks and to be managing those. So if you look at the agenda for the year ahead, I think we've made progress on the capital framework, on most elements. We still have a few things that need to be really worked through.

But the resolution area, extremely important. We have a strong resolution law in place here. We need to implement it. But other -- many other jurisdictions do not, and so we need to work through specifically what needs to be done at the national level, at the resolution -- sort of legal issues, as well as who has authority, and then to construct above that mechanisms for cross-border cooperation.

On the issue of coordination, the hard work just is beginning. We are in a world with a two-speed recovery. The advanced economies are still repairing their balance sheets. Consumers are still deleveraging here in the United States. We are not going to be the place that supplies the command for the rest of the world for some time to come.

Emerging markets: very different set of problems, moving very quickly, contending, if anything, with potential concerns about overheating. And so trying to navigate the interface between that and make sure we grow in ways that are mutually reinforcing is a very important agenda item for the G-20 that's here.

SHIRZAD: You know, one of the legacies, you could argue, of the G-20 is the creation of a number of international bodies that now have very powerful and important roles in setting regulations and standards. A common feature of these international institutions, the FSB, the Basel Committee, the IMF and so on is the degree to which public participation is limited, let's say.

Is that a fair assessment that I'm making? Is that a fair characterization of the process? And is that an issue that you are focused on and the administration's focused?

BRAINARD: We're very focused on both making sure that we have effective mechanisms for setting rules and making sure people, countries abide by the rules and making sure that the countries -- again, there's a whole set of players in the system that really just were not at that table 20 years ago. We need to make sure those players are sitting with us as the system continues to evolve.

But it's very important that the -- that the authority still resides at the national level, and so a lot of the governance mechanisms, the accountability mechanisms are still going to reside here with us, in the -- in the U.S. executive branch and through the accountability that Congress ensures is there. We are looking for mechanisms for these bodies to increase their outreach. And we have had a major reform of the IMF's governance system over the course of the last G-20, which will make it a much more representative body in terms of the various nations at the table. But we will continue to pay a lot of attention to this issue, and make sure that the actual implementation and the rules setting takes place at the national level here in the United States.

SHIRZAD: And when you talk about the international agenda, you know, you talk about the prudential rules, the Basel process, the regulatory agenda, Dodd-Frank. Where does an economic growth agenda figure in it? Is that implicit in getting the rules right, that growth will emanate from that? Or is that a separate track that somehow needs to be balanced in the broader portfolio that you manage?

BRAINARD: We actually very much think about our regular regulatory agenda being about providing much more secure and stable foundations for more sustainable growth going forward. So the regulatory agenda -- the financial regulatory agenda, which is really more about reform of the system in the wake of the most devastating financial crisis that we've seen in a century, creating much more strong foundations for that system, making sure that banks are well capitalized, perform the functions that they are supported publicly to do, we think will provide very robust foundations to nurture our growth going into the future.

But of course we are also working on the growth agenda through rebalancing, where, again, we're really putting the onus a bit on countries that have traditionally relied on other countries for -- to power their own growth, countries that have consistently run very large surpluses, to start to rebalance their own economy so that they can contribute more to the world economy in terms of domestic demand at a time when the U.S. needs to export more to grow.

SHIRZAD: You know, if we could sort of take that last point and kind of put a finer point on it, you know, one of the big issues that you personally negotiated in the context of the Seoul G-20 summit was an agreement among the G-20, including, notably, China, Germany and others, on developing a mechanism for dialogue among countries with persistent and large deficits or surpluses. Could you talk about that process? What should we look for in the weeks and months ahead coming out of that Seoul summit?

BRAINARD: Yeah, so I think this issue of rebalancing really does need to be viewed in the context of a broader system where the U.S., which really was the consumer of last resort going into the crisis, and which we saw is not a good model -- it's just not a good model for us. It's not a sustainable model. It's not a good model for countries like China, because that makes their own growth very vulnerable to the demand that comes from outside their borders, rather than unleashing the capacity of their vast potential consumer market.

And so that conversation I think has gotten some very important sort of benchmarks of progress in it, among which is just to recognize -- it's long been known that large and sustained deficits are not good for the system. For the first time, we really have a dialogue that treats large, sustained surpluses also as issues that are legitimate for international debate and negotiation. And what we'll expect to see is a set of indicators, very clear indicators of where unsustainable imbalances are building up in the system, and a policy dialogue around the underlying policies that are contributing to that.

The reason we think that's so important is because the U.S. can't address its savings deficit, its need to grow by exporting more, unless other countries are willing to shift their own growth models. And so that's why this give-and-take is going to be very important in the G-20.

SHIRZAD: You know, this may be too early to be able to really answer this question, but let's sort of play it -- play it out. We're at -- this -- these indicative guidelines, or these indicators, are developed. You're at the negotiating table. You're having a discussion with a country with which we have a persistent surplus or deficit. And the issue of U.S. -- a lack of U.S. savings comes up. How does that play itself out? Is this an issue that will then be negotiated in an international setting? Or -- and then you bring that policy back? Or what's the -- what's the exact kind of next step that occurs?

BRAINARD: We're very clear that over the medium term, the U.S. needs to save more. The U.S. needs to grow more based on its productive capacity and its innovative capacity and its ability to export.

And so it's actually very consistent with our own domestic economic-policy agenda, which is to get the economy back on track, to get the jobs engine cranked up again. We have unacceptably high levels of unemployment in our system still. So we need to get companies back hiring. We're starting to see signs of that.

And as we do that, our savings rate needs to improve. As we do that, we're going to need to take on the deficit very strongly and put that onto a sustainable path. And right now, the administration's plans do that. The tax package that was negotiated is broadly viewed as leading to a slightly higher deficit in the initial year, but in a way that will ultimately put us on a faster deficit-reduction path because it will be materially contributing to the rate of recovery in 2011.

So absolutely we're having that conversation with other countries about our own plans to increase savings, to be fiscally responsible in this country and what that means for them, which is, again, they can't be depending on the U.S. consumer to power their growth.

SHIRZAD: Let me switch to Europe for a second. You know, obviously the stresses in the European system are in all the headlines. What is your assessment of the -- what's going in Europe? Is this a fundamental deficiency in the European model that if not addressed is fatal to the future of Europe as a political entity?

BRAINARD: Well, Europe, of course, is very important to the overall outlook for the global economy at the moment, very important to us. As we saw back in the spring, European risks can spill over and affect our recovery here as it can the broader tone of the global recovery.

Our sense is that the European leaders have put in place an array of mechanisms that they simply didn't have back in the spring in response to financial-market strains and they are now in a much better position to manage through the set of difficult challenges that the periphery economies -- some of the periphery economies are facing.

The politics are complex. There's no -- there's no getting around that, but we see both the will and the capacity to grapple with these problems; and again, in a stronger position than they were back in the spring when they really had to invent some of these mechanisms from scratch.

SHIRZAD: You know, if we could go back to Asia and just to broaden the conversation a little bit -- you talked about China. There's a -- there's a school of thought that we are about to enter the decade, the century of China -- of Asia generally, for a lot of reasons, including the aftermath of the financial crisis in some ways shifting the capital market centers more to Asia, the Asians stepping up and becoming more ascendant in terms of becoming an economic power.

One of the issues that administrations have to deal with -- the Bush administration had to deal with, you're confronting -- is the role of the United States in the Asia-Pacific and particularly in the Asia theater. Could you talk about that in terms of how you see Asia broadly, the role of economic and financial diplomacy, your particular role? How do you strategically view that region?

BRAINARD: The president, I think, has strategically from the very earliest days made a very clear commitment that the U.S. was going to engage deeply and broadly in Asia. His first international trip, not coincidentally, was to Asia. And, you know, we saw a very strong visit to India as well as to Korea and most recently, of course, with the state visit of President Hu.

So we are strengthening our relationships around the region -- extremely important to us -- and we think the U.S. is actually very well positioned. Our -- the strength of our economy are very complementary with many of the growing Asian markets. And so we, of course, are intensively engaged throughout the region in making sure that our financial services firms, that our exporters, that our farmers are well-positioned to take advantage of that growth.

And, of course, at a policy level, we want to make sure that we are at the table. And so, of course, for the first time we'll be participating in the East Asia Summit. We are hosting APEC this year, which is -- which will be quite a big event. And we were delighted that Korea was the first non-G-7 country to host the G-20.

So we're going to continue to use a variety of mechanisms to deepen engagement in the region, and again, I think we've had some good successes on that front so far.

SHIRZAD: Let me ask you one more question regarding the -- kind of the international mechanisms. You know the G-7 has -- it seems to have largely given away that the G-7 and the G-8 have largely given away to the G-20. You yourself have worked very actively in terms of making the IMF and World Bank boards more representative of the global community.

Does the democratization, if we can use that term, of these international economic fora -- will that necessarily lead to what's happened, at least on the trade side, which, as you know, the WTO, for example, seems paralyzed, seems too large, seems too cumbersome in terms of an ability to take hard decisions and you know, for example, see the Doha negotiations through.

Is that future the future that we'll -- that we should expect in terms of the international financial policy platforms that you're engaged in?

BRAINARD: Well, just on -- when I work backwards from -- you mentioned trade. I think that is a good analogy. Of course, we're working hard to try to deliver results in the WTO that is good for America. We're not there yet. But that's not the only thing we're doing. So we're able, even as we continue to make progress in this universal forum, to move forward with a subset of countries in the Asian Pacific region through the trans-Pacific partnerships. And we think, you know, we'll probably be able to move quite quickly there because a smaller group of countries more aligned in terms of what we're trying to achieve, and similar -- true of the Korea-U.S. free trade agreement.

So, you know, we'll continue to engaging -- to engage, of course, in the broader platforms, but also where there are particular issues that we can get done with a smaller group of countries will do that.

Now, turning to the international financial and the international economic realm, the G-20 is a very important umbrella organization where we have, for the first time, a lot of the right countries in the room to actually move some of these issues. But we also continue to meet in smaller groupings, and so I think we'll continue to use flexibility in terms of how we achieve our goals. I don't think we, you know, we don't need to have every member of the G-20 agree with us on every issue to get what we think is important for America done. We can get some of these issues done with smaller groupings and we've been pretty effective at doing that.

They're less high profile; some of them are -- you know, we don't necessarily need to have big communiques for every event, but we can actually make a lot of progress in those smaller groupings.

SHIRZAD: You know, at this time, I want to turn to -- invite our members to have an opportunity to ask Lael questions. There are people with microphones. If you want to ask a question, raise your hand, I'll recognize you. And if you can state your name, your affiliation and then ask a concise question just so that we give everyone a chance to participate.

QUESTIONER: Hello. You expressed some confidence -- I'm -- (name inaudible) -- you expressed some confidence in making some progress on intellectual property issues with China. What's the basis for that confidence? How have the other countries who share our concern about it moved in beside us or behind us in acting on that problem?

BRAINARD: Well, the very concrete issue that we got an agreement around at the visit was in the area of software, which is a huge issue for our software companies, as you know. The use of pirated software in China is really quite a sizeable loss to our software producers. And so, for the first time, we got a very concrete commitment that state entities' use of software would be using legal licensed software. That it would be subject to audits. Those audits would be subject to publication, software asset management programs and that there would be clear budget allocated for the purchase of that legal software.

So that was a very concrete step forward that we believe will be meaningful for our software producers and software producers more generally around the world.

The intellectual property issues with China are large and we will continue to work to move forward. The Chinese government at the highest levels increasingly, I believe, internalizes this agenda, because again, as they move from being a country that is mostly absorbing foreign technology to a country that is putting an emphasis on innovating, which they'll need to do as they move up the value chain, increasingly you will get domestic constituencies in China, as you did in places like South Korea or Japan, who themselves have an interest in a stronger intellectual property regime.

But of course, we're not counting on that process. It may take some time. What we're doing is we're working very hard to identify concrete mechanisms to ensure that the laws that are in place actually get enforced, and they get enforced down to the local level, where a lot of the problems occur.

In terms of the question you asked about working with other countries, we try to build coalitions of common interests across groups of countries. We've worked a lot with the European Union and with the Japanese to advance these goals, and we have very common interests, as you know, in these areas.

QUESTIONER: Thanks. Hi, Lael. Dan Rosen, Rhodium Group and the Peterson Institute.

So it's been somewhat described as a a turning point, the Hu visit, the software breakthroughs, you just talked about, the 45 billion (dollars) in increased exports over the existing level of 100 billion (dollars), apparently, it is now. So did the Chinese have a change of heart, or did they ask us for something that we had to put on the table? And was that ask for us not to do something negative, like let trade policy go wild over the next couple years, or was it something positive -- market economy status, something like that?

I'm curious what the asks were on the Chinese side that greased the way for the what appear to be breakthroughs, to some extent, that you guys achieved. Thanks.

And good work on the whole visit.

BRAINARD: So I think what is important to China is to broaden and deepen the cooperation between our two economies. Increasingly, they would like to deepen cooperation in key technologies, critically in areas such as green energy. Increasingly, they're going to have, as you know, Dan, better than anybody, not only interests in having foreign companies come and invest in their market, but also in having their companies invest abroad and invest in America's very vibrant market.

And so they have a set of interests that I think they would like to see advanced. And of course, at the base is a very critical issue in -- interest in making sure that our investment and trade relationship remains open and stable. So I think their interests were advanced during this visit and it did give us the ability to move forward on our priority areas, where we think we had some concrete results that will show up concretely in increased exports and opportunities for U.S. producers.

QUESTIONER: Good morning. Brian O'Neill with Lazard Freres. Lael, could you share with us the hurdles that you face, the executive branch faces, Treasury, perhaps you and the team you lead in particular, with getting congressional approval and congressional appropriation for the funding of our capital commitments to IFIs and to MDBs? And what's the status now? And what are the indicators we could look for that show signs of progress or setbacks in that regard?

BRAINARD: I'm glad you asked the question, because it's not an area that is really ever on the sort of front burner for most Americans and for most members of Congress, is very important in terms of U.S. leadership and U.S. ability to advance its goals in the developing world and more broadly.

This year is very unusual. This is the first time that any of us can remember when we have engaged in negotiations to recapitalize every single one of the multilateral development banks -- Asia, Latin America, Europe, the World Bank, the African Development Bank, very importantly, as well as negotiations to increase the concessional financing at several of those banks.

Those recapitalizations are extremely important to the U.S. for advancing our goals. First of all, with respect to the banks, we pushed very strong reform agendas in each of these banks and were very successful in terms of improving the governance, transparency, accountability, and the result of which is these banks will be working with developing countries in places like Africa, Latin America, China, elsewhere, to ensure that when they do infrastructure investing, which they need to do to grow and to become richer, more vibrant markets, they'll do so in ways that meet U.S. standards of transparency and accountability.

So this set of reforms was very good for us. It'll push these banks much more in the direction of doing green energy. So it's serving a lot of our goals -- food security, addressing the needs of the poorest. And it only happens once every 10, 20 years. And it's actually very cheap. These are highly leveraged institutions, so that for every $1 we put into them, we multiply the effect of that, because these are lending institutions, and because other countries come in on top of that.

So this is some of the highest -- the best leveraged U.S. contributions to development that we have. But they are not as well-known to many congressional members as some of our bilateral programs are. And so we really need a lot of help in bringing alive the differences that these investments make in the lives of ordinary people in developing countries, the differences they make to our national security goals in places like Afghanistan and Pakistan, where they are making the big investments in the railroad systems, the road systems, the energy systems that are going to make those more stable economies. So we need a lot of help in sort of making that story more compelling.

QUESTIONER: Hi. (Name and affiliation off mic.) I wonder if you could comment on the extent to which you see GSE reform as a topic that's fair game on the international policy agenda, and in particular, have you or will you seek the input of China as a major holder of that debt on the options in that discussion?

BRAINARD: So generally speaking, we understand that the U.S. financial market, U.S. securities, that the GSEs -- we are a big player in the system. We have a very attractive financial system, deep and liquid market. There are a lot of foreign investors, both official and private, around the world who have a great interest in investing in agency securities, Treasury securities and our market more generally. So we make sure that our communication channels are very open, and that we are communicating as policy changes on these issues, very clearly and frequently, with all of the stakeholders in our financial system. We think that's in our interest. And we certainly believe that, you know, we see loads of evidence of continued investor interest here in the United States, in part because of the transparency of that process.

SHIRZAD: Bob.

QUESTIONER: Thank you. Hi, Lael. Bob Bestani. Just going to back to the IFIs for -- and the multinationals for a second, every few years the pendulum seems to come back to the issue of removing the nationality requirement for the leadership of these institutions, as well as a whole slew of jobs below the presidency level. I'm wondering where that issue stands and whether that's going to be revisited at this point.

BRAINARD: So -- you know, I think it's an issue, as you said, that comes up at sort of various times in the discussions. And you know, it is important for these institutions to be viewed as legitimate and to have the membership well represented.

It is not an issue that has actually been joined in any way in the discussions at ministerials or at the summit. So there's no real change of course that has been discussed, certainly not agreed at this juncture, but it's an issue that I think merits continued discussion.

QUESTIONER: I'm Mike Moran. I work -- Mike Moran, Roubini Global Economics. Neither the president of -- the leader of the Senate, a Democrat, nor the leader of the House, a Republican, attended the state dinner. How -- in your rounds, how do our foreign partners view the political risk in Congress this year with regard to trade? And do you think that there's still a plurality in either or both houses of Congress that believes in free trade?

BRAINARD: On the question of trade, and particularly the new Congress, you know, I think that at a time when America's own recovery, the strength of our recovery, the strength of our jobs creation, is going to necessarily be more oriented towards being able to engage in export-driven growth, just given the need to continue to repair balance sheets here for consumers to improve their household savings, it's inevitable that, you know, we're going to put a bigger emphasis on the need to export, the need to trade.

The president has made a very clear and explicit goal to help orient that conversation, which is to double exports in five years. It's a very ambitious goal, by the way. But we are on the way to achieving it. And there are a whole host of mechanisms that undergird that goal, including supporting our companies as they go and seek contracts around the world; helping small businesses, which are really very under-represented in trade, to get a foothold in the system; and importantly, passage of the Korean-U.S. free trade agreement.

A lot of members coming to Congress are going to start thinking about some of these issues -- for some of them, for the first time. And so I think it's incumbent on all of us to be very clear about the critical need to create more sources of demand, to be able to create more of a momentum on job creation. And so we'll be spending a lot of time on those issues and, you know, I think generally it's a conversation that will pick up in the coming weeks.

SHIRZAD: Barbara.

QUESTIONER: Barbara Matthews, BCM International Regulatory Analytics. I've got a question about the IMF. The current president of the G-20, President Sarkozy, has expressed an interest in continued work on reform of the IMF, in particular. And in addition, at the end of the year, the beginning of this year, the IMF board approved an expansion of the IMF's activities on regulatory policies. I'm wondering if you could give us a sense of how you see the IMF's role evolving. And the context here is macroprudential policy is very important, has economic policy implications. Obviously, the IMF has a role to play, but there are other organizations out there: the FSB, the Basel Committee. How do you see the system evolving over the course of the next couple of years, and what do you think is important for the United States?

BRAINARD: Well, the -- as you said, the architecture there has evolved very quickly, in a very short period of time. And, you know, the role of the standard-setting bodies continues, still is really the anchor of that system. But there is now much greater need for coordination across a much greater number of countries, among the G-20 and then a few additional important financial centers. And the FSB is performing some of that coordination role.

The IMF also has a very important role to play in terms of surveillance, and has a lot of capacity in the area of surveillance. And so as you, I'm sure, are aware, they do financial-sector assessment programs every few years. The G-20 members have committed to subject themselves to that process on a much more frequent basis. Having just gone through it in the U.S., it's quite a rigorous process. It's quite a time-consuming process. But it's an important one, because we think it's increasingly important that surveillance of the financial system be joined with macrosurveillance, so that we don't miss the buildup of risks in the financial system that may have hugely important implications for macroeconomic stability and hugely important spillovers to other countries. So that is going to be a continued priority area.

It's going to -- there is still a lot of improvement needed, both within the IMF and between the IMF and some of the other supervisory and standard-setting bodies, between the FSB and the set of Basel and standard-setting bodies. So that's something that is a priority. I think we're focused on it. But it's a work in progress.

SHIRZAD: Donna.

QUESTIONER: Donna Milrod, Deutsche Bank. I'd like to go back to your comments around foreign direct investment. And I'd be interested in your comments, if you have any concerns around the CFIUS process, especially as Chinese companies come to the United States and look to invest.

BRAINARD: Yeah, well, I am somebody that was in government and, you know, an observer of the CFIUS process in -- during my earlier period in government; left when the new law was enacted, and I inherited this new process. It's a very good process. It is a very good example where, you know, good legislation leads to a very strong and clean process.

And so it is transparent, it's predictable, it's very clear what the criteria are. And the criteria are very clearly and narrowly related to national security, full stop. And you know, I observed the system; it works. And we would be very happy if other countries adopted similarly clear, narrow, predictable regimes. It would serve us in good stead rather than the host of much more opaque investment barriers that we -- that our companies encounter in a lot of other parts of the world.

QUESTIONER: If I could ask to follow up on that, Lael, you know, with regard to that bilateral, the model bilateral investment treaty, as you know, your administration has been undertaking essentially a two-year review of the model BIT. And it doesn't seem as though that process is going to be winding down anytime soon. Where we should look at in terms of investment policy, the development and negotiation of new investment treaties, and the kinds of protections that American industry needs in terms of being able to invest in foreign markets?

BRAINARD: Well, we are engaged with several countries, but in particular China, because they were just here. And this issue of improving investment in both directions is so important to both of us. You know, we are engaging with China on the possibility for a bilateral investment treaty, even as we're also working on what our model BIT will look like. And you know, there's a lot of -- there's actually a lot of differences between the way China approaches investment treaties traditionally and our model BIT traditionally. So it will take some time to work through those issues.

But we're also committed more broadly to maintaining a strong and open investment regime. And so we engage with China through additional mechanisms, the strategic and economic dialogue, which will take place now in the spring and brings together all of the economic authorities across both governments to try to address barriers. And then we'll also host a -- well, actually, China this year will host -- we do a(n) annual investment forum where officials from both countries sit and go through the -- any concerns about access that, you know, companies have raised. And we're going to increasingly try to include local officials, state-level officials in those dialogues because they are so important in the investment process, and in both countries, actually.

SHIRZAD: Over in the back.

QUESTIONER: Hi, Lael. Laurie Garrett from the council. A quick question about various elements. We've had quite a scare this year, this last 12 months recognizing that China has a virtual monopoly over REEs, and then Germany saying that China was trying to cut them off, and then -- going to WTO and then, indeed, China announcing a 40 percent reduction in export. And Evo Morales is kind of threatening the same thing with lithium. Where are we going on this? And is there any kind of mechanism for creating an even playing field on the trade in REEs? Or are we doomed to have only Chinese batteries?

BRAINARD: Well, I think we have expressed concerns about China's reducing its export quota on rare earths. And also the predictability of supply is very important because this is a critical input into a host of various commercial areas. China has given us assurances. As you know, last year, the secretary of State had a discussion on this where we were given some assurances. But I think the -- this is an issue that we and other trade partners have engaged on. It's a matter of concern. And there are a variety of different fora, including the WTO, where it's relevant. So we'll continue to work to improve the predictability of supply on this issue, and of course, we'll have a sort of vigilance about other potential cases of the same kind of issues cropping up.

QUESTIONER: I'm Win Neuger from PineBridge Investments. I wonder if you could comment on Africa, because clearly it would appear that China has been much more aggressive than the U.S. there.

BRAINARD: Well, I guess with regard to many countries in Africa -- (laughs) -- in particular there are a variety of places where we're seeing really very encouraging growth and very impressive and now increasingly sustained policy records. And so, you know, generally speaking, we're very encouraged that we're starting to see the kind of growth that we're going to need to materially catapult some of these economies onto much improved trajectories, per capita income, and much better human-development indicators as well. Not -- there are other places where there's obviously governance issues, but are -- trends are going the other direction.

The U.S. is actually very engaged in Africa. I think perhaps you're referring to the infrastructure area, where China has taken a lead in terms of private infrastructure. And it's an area that we've actually started to talk to China about engaging together through the multilateral development banks, in part because we think that the standards that we've developed through the multilateral development banks and the platform they provide for public-private partnerships in infrastructure could raise the standards of investment and, you know, improve the sort of -- the social benefits of a lot of these investments as well. So we think that their investments, to some degree, present us an opportunity to partner and to raise standards. And so we're working on that. It's -- you know, it's not going to happen overnight. It will take some time.

QUESTIONER: My name is Andrew Gundlach, Arnhold and S. Bleichroeder. Could you comment on food security? It says that -- in your bio that you're responsible for it. Specifically, obviously, we're the Saudi Arabia of corn, so exports for agriculture a huge, huge opportunity, but more importantly, perhaps, the prices for agricultural products around the world have skyrocketed. Some of that is Bernanke's policies, but some of it is also real scarcity and real demand. And I wonder if it's a risk to the global recovery.

How do you see it?

BRAINARD: Well, certainly we are following the food prices very closely. We want to avoid a repeat of 2007. You're right. What we're seeing, I think, although I don't have a complete analysis, is a combination of picking up demand, as -- which is a good thing, as countries are moving, you know, sort of along their income trajectories. And so we're beginning to see that as the recovery goes at a faster pace, the emerging markets are starting to see those demands picking up again. But we've also had some supplies disruptions.

And the -- you know, the -- President Obama's been committed since the first year, where he announced in L'Aquila a very kind of ambitious joint food security initiative, very committed to this area. We have programs that are through the -- AID and the programs that we focus on at Treasury on the multilateral development banks. I have -- that's where we do our development work.

And so we worked with a variety of countries in Africa, in Europe, Canada, to put together a multilateral fund that is a kind of platform that sits at the World Bank, it's administered by, but it actually uses all of the multilaterals. And it awards grants on a competitive basis, and it's doing fantastic work. It's badly underfunded because of our own budget situation, the U.S. in part. So we're working hard with members of Congress to fund our piece of it. But it's a terrific new initiative. And we've spent a lot of time on it, because it's a very high priority for the president.

SHIRZAD: Let's do one last question.

Carol (sp).

QUESTIONER: Thanks very much. The small elephant or whatever you want to call it in the room is called Tunisia, Middle East, North Africa. Our -- I'm sure that you're doing work in Treasury with the -- both the African Bank and the World Bank.

Is there anything you can share with us in terms of the potential for this shock to reverberate much more through the region and to reassess policies there? Thank you.

BRAINARD: Well, it's obviously a situation that the secretary of State in particular is very focused on. You know, Treasury, as you know well, comes in in support when countries are undergoing complicated political transitions and helps to mobilize the capacity of both the IMF and the multilateral development banks in support of democratizing countries. And, you know, we also look at debt burdens and lead the negotiations on addressing debt in the wake of major political transitions.

So that's -- the particulars of Tunisia are obviously a kind of very fluid situation, but those set of tools are the ones that we would generally deploy in support of a successful transition to democracy.

SHIRZAD: Well, Lael, thank you so much for that. We really appreciate it. Thank you to all the members for participating.

BRAINARD: Thank you. Thank you, everybody. (Applause.)

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ARYAR SHIRZAD: Okay, ladies and gentlemen. Welcome to today's CFR -- welcome to today's CFR meeting with Lael Brainard, the undersecretary of international affairs at the Department of Treasury. This meeting is part of the C. Peter McColough Series on International Economics. Our next meeting in the series will take place on March 2nd and will feature Thomas Hoenig, the president and CEO of the Federal Reserve Bank of Kansas City.

Please completely turn off, not just put on vibrate, your cell phones, BlackBerrys and all wireless devices to avoid interference with the sound system. And I'd like to remind the members that this meeting is on the record. As everyone knows, Lael is the undersecretary for international affairs with Treasury. She's had a distinguished service both in the private sector and the public sector, previously serving in government as the deputy assistant to the president for international economic affairs with the Clinton administration.

She was vice president of the Brookings Institution, worked at McKinsey and was a professor at MIT. We're going to start off with a few minutes of remarks by Lael to discuss the Hu visit. I'll ask her a series of questions, and then we'll turn to all of you in the audience for an opportunity to ask your questions. And we will stay on schedule to close the meeting at nine o'clock.

So Lael.

LAEL BRAINARD: Thank you. Well, it's nice to be here. Thank you for the kind welcome, Faryar, and it is good to see many long-time friends in the audience.

All eyes were on the meeting between President Obama and President Hu of China this week, and understandably so at a time when the strength of America's jobs engine depends more than ever on demand from outside our borders. Whether we achieve our ambitious export goals will depend in great measure on improving access to China's market given the sheer scale and velocity of its growth.

U.S. exports grew twice as fast to China as to the rest of the world this past year and are on track to reach a hundred billion dollars. If you think back to just one decade ago, China was not even in the top 10 of our export destination markets. It is now the third largest market for our exports and growing quickly.

On the other side, China is wrestling with economic transition challenges of its own. China is facing the challenge of shifting from a developing country dependent on foreign consumption and technology to a middle-income country with growth driven increasingly by domestic consumption and innovation, of shifting from closed capital markets and a fixed exchange rate to a currency that will be increasingly used in international transactions with increasingly open financial markets. The course it steers, the choices it makes will affect greatly the opportunities and constraints faced by American innovators, producers, workers and farmers in its markets.

China's rise has been enabled, to a very significant extent, by open trade and the investment system that was nurtured for decades and supported by America throughout that period. And China's ability to successfully navigate the transition challenges it currently faces while maintaining its strong growth will depend in no small part on continued access to America's markets and investment opportunities, and continued American support for that open investment and trade system.

So a lot was at stake for the two leaders on the economic agenda. And President Obama advanced our four priority objectives. First, to just review progress very quickly, China made a very important commitment to level the playing field by agreeing not to link the provision of government procurement preferences to its innovation policies. We, along with U.S. industry, have long been concerned about the possibility that that linkage would used to discriminate unfairly against innovative U.S. products and services, especially given the size of the Chinese procurement market.

With innovation at the heart of American competitive advantage, we pursued intensive and consistent engagement at the highest levels with China on this issue, and this was a major step forward. China also committed to submit a revised offer to the WTO on government procurement, which would extend well beyond the central government, which is extremely important given the size of China's government procurement market at local and provincial levels.

Second, we secured concrete progress on intellectual property rights enforcement, particularly in the area of software where China agreed to put in place audit and budget mechanisms to ensure that government agencies use legitimate software and publish the audit results.

Third, China affirmed its commitment to enhance exchange rate flexibility, and for the first time dropped previous references to maintaining basic civility and equilibrium rate, while noting the connection of the exchange rate flexibility to their broader goals of transforming their economic development market.

This is very consistent with the thrust of their new five-year plan, which is very much oriented towards promoting the role of domestic consumption, rebalancing the economy. It's very consistent with our global goals. And if you look over the past six months, China's exchange rate has appreciated against the U.S. dollar by 3.5 percent in nominal terms. If you take into account the much faster rate of inflation in China relative to the U.S., this amounts to roughly a 10 percent rate of appreciation on an annual basis.

Of course, we're going to stay very closely and intensively engaged with China on this critical issue.

Finally, commercial deals for U.S. firms amounting to about $45 billion in exports were announced across a range of industries, which will support roughly a quarter million of U.S. jobs. This is a critical priority item for the U.S., and we were pleased to move forward on this.

Generally speaking, we were pleased with the progress that was made, but we can't be complacent as a country. China's economic dynamism, much as it poses a challenge, should be viewed, I think, as an opportunity to remind us to tend to the core foundations of our economic security, our capacity to save and invest, to innovate and to learn.

So let's turn back, Faryar, to you, and if you want to talk further about that or turn to other subjects.

SHIRZAD: Lael, thank you. That was very helpful. You know, if we could drill down on one aspect of what you were talking about, which is currency policy, I think among the most complicated items in your portfolio is negotiating as a currency issue, not only with the Chinese, but also managing the domestic political dimension of that with the U.S. Congress.

Can you talk a little bit about that, and when people see the issue rise and fall in terms of the public aspects of your comments and Secretary Geithner's comments on this issue, how should we interpret that? Do we interpret that as a loss of interest or a lack of interest or what's the dynamic there?

BRAINARD: We, in the administration, have viewed the currency issue as a key priority in our economic engagement with China since the first day of the administration. We've maintained very consistent and very detailed, intensive discussions with the Chinese government as they have themselves been debating internally how to move on this very important issue and as they have, indeed, moved forward, as you know, with the commitment on June 19th and then the subsequent 3.5 percent nominal appreciation since then.

The president stood next to President Hu. He was very clear that this was extremely important to Americans that we need to see more progress on this. But it's important also to recognize that there is progress and that China's leadership at the very highest levels has been clear that they do not intend to reverse course, that they are committed to this course, and that increasingly they do see it as part of their own economic restructuring policies.

So we will continue to engage on it. We will continue to see it among our top priorities, but we cannot be a -- focused only on one issue. We have a very broad set of interests with China, and that's why we are also pleased that after a very long period of intensive engagement, we have made material progress on the issues of indigenous innovation, on intellectual property, on government procurement. And we're just going to stay on a tight set of very important issues.

SHIRZAD: Let me turn to the G-20, another issue or item in your portfolio. The G-20 was launched two years ago now with really four big issues: the reform of the international financial institutions, the development of Basel-based prudential requirements, a regulatory agenda and then economic coordination to deal with the depths of the financial crisis. You could argue that all four of those agenda items have run their course.

What is the future of the G-20? Will it continue to have a central role in your work and the administration's international economic agenda?

BRAINARD: Well, first, Faryar, I appreciate the notion that we got everything done we needed to get done in the G-20. But, in fact, we still feel like we've got a lot of heavy lifting to do in the G-20. We made some progress.

G-20 was very effective, very important to us in cooperating with the most important economies in the world, both the established economic powers and the rising powers, through the crisis, and really made a, I think, very important contribution to pulling us out of the depths of the crisis and ensuring the continued functioning of the international financial system and coordination of individual governments' response -- very much consistent with the thrust of our priorities during the crisis.

But we have a lot of work to do going forward. If you think across some of the issues that you mentioned on financial regulatory reform, we're just at the beginning of that agenda. We now have broad agreement at the international level which very much is consistent with the Dodd-Frank act that passed here. So having moved quickly on that I think put us in a good position to really drive the agenda internationally both through the G-20 and through the G-20's relationship to the Financial Stability Board.

But now we need to go through the very complicated process of implementation and, of course, continuing to coordinate. The work has just begun. What we learned through the crisis is that supervisors need to be much more intensively engaged in their work and they need to work together much more closely to be seeing around corners in terms of risks and to be managing those. So if you look at the agenda for the year ahead, I think we've made progress on the capital framework, on most elements. We still have a few things that need to be really worked through.

But the resolution area, extremely important. We have a strong resolution law in place here. We need to implement it. But other -- many other jurisdictions do not, and so we need to work through specifically what needs to be done at the national level, at the resolution -- sort of legal issues, as well as who has authority, and then to construct above that mechanisms for cross-border cooperation.

On the issue of coordination, the hard work just is beginning. We are in a world with a two-speed recovery. The advanced economies are still repairing their balance sheets. Consumers are still deleveraging here in the United States. We are not going to be the place that supplies the command for the rest of the world for some time to come.

Emerging markets: very different set of problems, moving very quickly, contending, if anything, with potential concerns about overheating. And so trying to navigate the interface between that and make sure we grow in ways that are mutually reinforcing is a very important agenda item for the G-20 that's here.

SHIRZAD: You know, one of the legacies, you could argue, of the G-20 is the creation of a number of international bodies that now have very powerful and important roles in setting regulations and standards. A common feature of these international institutions, the FSB, the Basel Committee, the IMF and so on is the degree to which public participation is limited, let's say.

Is that a fair assessment that I'm making? Is that a fair characterization of the process? And is that an issue that you are focused on and the administration's focused?

BRAINARD: We're very focused on both making sure that we have effective mechanisms for setting rules and making sure people, countries abide by the rules and making sure that the countries -- again, there's a whole set of players in the system that really just were not at that table 20 years ago. We need to make sure those players are sitting with us as the system continues to evolve.

But it's very important that the -- that the authority still resides at the national level, and so a lot of the governance mechanisms, the accountability mechanisms are still going to reside here with us, in the -- in the U.S. executive branch and through the accountability that Congress ensures is there. We are looking for mechanisms for these bodies to increase their outreach. And we have had a major reform of the IMF's governance system over the course of the last G-20, which will make it a much more representative body in terms of the various nations at the table. But we will continue to pay a lot of attention to this issue, and make sure that the actual implementation and the rules setting takes place at the national level here in the United States.

SHIRZAD: And when you talk about the international agenda, you know, you talk about the prudential rules, the Basel process, the regulatory agenda, Dodd-Frank. Where does an economic growth agenda figure in it? Is that implicit in getting the rules right, that growth will emanate from that? Or is that a separate track that somehow needs to be balanced in the broader portfolio that you manage?

BRAINARD: We actually very much think about our regular regulatory agenda being about providing much more secure and stable foundations for more sustainable growth going forward. So the regulatory agenda -- the financial regulatory agenda, which is really more about reform of the system in the wake of the most devastating financial crisis that we've seen in a century, creating much more strong foundations for that system, making sure that banks are well capitalized, perform the functions that they are supported publicly to do, we think will provide very robust foundations to nurture our growth going into the future.

But of course we are also working on the growth agenda through rebalancing, where, again, we're really putting the onus a bit on countries that have traditionally relied on other countries for -- to power their own growth, countries that have consistently run very large surpluses, to start to rebalance their own economy so that they can contribute more to the world economy in terms of domestic demand at a time when the U.S. needs to export more to grow.

SHIRZAD: You know, if we could sort of take that last point and kind of put a finer point on it, you know, one of the big issues that you personally negotiated in the context of the Seoul G-20 summit was an agreement among the G-20, including, notably, China, Germany and others, on developing a mechanism for dialogue among countries with persistent and large deficits or surpluses. Could you talk about that process? What should we look for in the weeks and months ahead coming out of that Seoul summit?

BRAINARD: Yeah, so I think this issue of rebalancing really does need to be viewed in the context of a broader system where the U.S., which really was the consumer of last resort going into the crisis, and which we saw is not a good model -- it's just not a good model for us. It's not a sustainable model. It's not a good model for countries like China, because that makes their own growth very vulnerable to the demand that comes from outside their borders, rather than unleashing the capacity of their vast potential consumer market.

And so that conversation I think has gotten some very important sort of benchmarks of progress in it, among which is just to recognize -- it's long been known that large and sustained deficits are not good for the system. For the first time, we really have a dialogue that treats large, sustained surpluses also as issues that are legitimate for international debate and negotiation. And what we'll expect to see is a set of indicators, very clear indicators of where unsustainable imbalances are building up in the system, and a policy dialogue around the underlying policies that are contributing to that.

The reason we think that's so important is because the U.S. can't address its savings deficit, its need to grow by exporting more, unless other countries are willing to shift their own growth models. And so that's why this give-and-take is going to be very important in the G-20.

SHIRZAD: You know, this may be too early to be able to really answer this question, but let's sort of play it -- play it out. We're at -- this -- these indicative guidelines, or these indicators, are developed. You're at the negotiating table. You're having a discussion with a country with which we have a persistent surplus or deficit. And the issue of U.S. -- a lack of U.S. savings comes up. How does that play itself out? Is this an issue that will then be negotiated in an international setting? Or -- and then you bring that policy back? Or what's the -- what's the exact kind of next step that occurs?

BRAINARD: We're very clear that over the medium term, the U.S. needs to save more. The U.S. needs to grow more based on its productive capacity and its innovative capacity and its ability to export.

And so it's actually very consistent with our own domestic economic-policy agenda, which is to get the economy back on track, to get the jobs engine cranked up again. We have unacceptably high levels of unemployment in our system still. So we need to get companies back hiring. We're starting to see signs of that.

And as we do that, our savings rate needs to improve. As we do that, we're going to need to take on the deficit very strongly and put that onto a sustainable path. And right now, the administration's plans do that. The tax package that was negotiated is broadly viewed as leading to a slightly higher deficit in the initial year, but in a way that will ultimately put us on a faster deficit-reduction path because it will be materially contributing to the rate of recovery in 2011.

So absolutely we're having that conversation with other countries about our own plans to increase savings, to be fiscally responsible in this country and what that means for them, which is, again, they can't be depending on the U.S. consumer to power their growth.

SHIRZAD: Let me switch to Europe for a second. You know, obviously the stresses in the European system are in all the headlines. What is your assessment of the -- what's going in Europe? Is this a fundamental deficiency in the European model that if not addressed is fatal to the future of Europe as a political entity?

BRAINARD: Well, Europe, of course, is very important to the overall outlook for the global economy at the moment, very important to us. As we saw back in the spring, European risks can spill over and affect our recovery here as it can the broader tone of the global recovery.

Our sense is that the European leaders have put in place an array of mechanisms that they simply didn't have back in the spring in response to financial-market strains and they are now in a much better position to manage through the set of difficult challenges that the periphery economies -- some of the periphery economies are facing.

The politics are complex. There's no -- there's no getting around that, but we see both the will and the capacity to grapple with these problems; and again, in a stronger position than they were back in the spring when they really had to invent some of these mechanisms from scratch.

SHIRZAD: You know, if we could go back to Asia and just to broaden the conversation a little bit -- you talked about China. There's a -- there's a school of thought that we are about to enter the decade, the century of China -- of Asia generally, for a lot of reasons, including the aftermath of the financial crisis in some ways shifting the capital market centers more to Asia, the Asians stepping up and becoming more ascendant in terms of becoming an economic power.

One of the issues that administrations have to deal with -- the Bush administration had to deal with, you're confronting -- is the role of the United States in the Asia-Pacific and particularly in the Asia theater. Could you talk about that in terms of how you see Asia broadly, the role of economic and financial diplomacy, your particular role? How do you strategically view that region?

BRAINARD: The president, I think, has strategically from the very earliest days made a very clear commitment that the U.S. was going to engage deeply and broadly in Asia. His first international trip, not coincidentally, was to Asia. And, you know, we saw a very strong visit to India as well as to Korea and most recently, of course, with the state visit of President Hu.

So we are strengthening our relationships around the region -- extremely important to us -- and we think the U.S. is actually very well positioned. Our -- the strength of our economy are very complementary with many of the growing Asian markets. And so we, of course, are intensively engaged throughout the region in making sure that our financial services firms, that our exporters, that our farmers are well-positioned to take advantage of that growth.

And, of course, at a policy level, we want to make sure that we are at the table. And so, of course, for the first time we'll be participating in the East Asia Summit. We are hosting APEC this year, which is -- which will be quite a big event. And we were delighted that Korea was the first non-G-7 country to host the G-20.

So we're going to continue to use a variety of mechanisms to deepen engagement in the region, and again, I think we've had some good successes on that front so far.

SHIRZAD: Let me ask you one more question regarding the -- kind of the international mechanisms. You know the G-7 has -- it seems to have largely given away that the G-7 and the G-8 have largely given away to the G-20. You yourself have worked very actively in terms of making the IMF and World Bank boards more representative of the global community.

Does the democratization, if we can use that term, of these international economic fora -- will that necessarily lead to what's happened, at least on the trade side, which, as you know, the WTO, for example, seems paralyzed, seems too large, seems too cumbersome in terms of an ability to take hard decisions and you know, for example, see the Doha negotiations through.

Is that future the future that we'll -- that we should expect in terms of the international financial policy platforms that you're engaged in?

BRAINARD: Well, just on -- when I work backwards from -- you mentioned trade. I think that is a good analogy. Of course, we're working hard to try to deliver results in the WTO that is good for America. We're not there yet. But that's not the only thing we're doing. So we're able, even as we continue to make progress in this universal forum, to move forward with a subset of countries in the Asian Pacific region through the trans-Pacific partnerships. And we think, you know, we'll probably be able to move quite quickly there because a smaller group of countries more aligned in terms of what we're trying to achieve, and similar -- true of the Korea-U.S. free trade agreement.

So, you know, we'll continue to engaging -- to engage, of course, in the broader platforms, but also where there are particular issues that we can get done with a smaller group of countries will do that.

Now, turning to the international financial and the international economic realm, the G-20 is a very important umbrella organization where we have, for the first time, a lot of the right countries in the room to actually move some of these issues. But we also continue to meet in smaller groupings, and so I think we'll continue to use flexibility in terms of how we achieve our goals. I don't think we, you know, we don't need to have every member of the G-20 agree with us on every issue to get what we think is important for America done. We can get some of these issues done with smaller groupings and we've been pretty effective at doing that.

They're less high profile; some of them are -- you know, we don't necessarily need to have big communiques for every event, but we can actually make a lot of progress in those smaller groupings.

SHIRZAD: You know, at this time, I want to turn to -- invite our members to have an opportunity to ask Lael questions. There are people with microphones. If you want to ask a question, raise your hand, I'll recognize you. And if you can state your name, your affiliation and then ask a concise question just so that we give everyone a chance to participate.

QUESTIONER: Hello. You expressed some confidence -- I'm -- (name inaudible) -- you expressed some confidence in making some progress on intellectual property issues with China. What's the basis for that confidence? How have the other countries who share our concern about it moved in beside us or behind us in acting on that problem?

BRAINARD: Well, the very concrete issue that we got an agreement around at the visit was in the area of software, which is a huge issue for our software companies, as you know. The use of pirated software in China is really quite a sizeable loss to our software producers. And so, for the first time, we got a very concrete commitment that state entities' use of software would be using legal licensed software. That it would be subject to audits. Those audits would be subject to publication, software asset management programs and that there would be clear budget allocated for the purchase of that legal software.

So that was a very concrete step forward that we believe will be meaningful for our software producers and software producers more generally around the world.

The intellectual property issues with China are large and we will continue to work to move forward. The Chinese government at the highest levels increasingly, I believe, internalizes this agenda, because again, as they move from being a country that is mostly absorbing foreign technology to a country that is putting an emphasis on innovating, which they'll need to do as they move up the value chain, increasingly you will get domestic constituencies in China, as you did in places like South Korea or Japan, who themselves have an interest in a stronger intellectual property regime.

But of course, we're not counting on that process. It may take some time. What we're doing is we're working very hard to identify concrete mechanisms to ensure that the laws that are in place actually get enforced, and they get enforced down to the local level, where a lot of the problems occur.

In terms of the question you asked about working with other countries, we try to build coalitions of common interests across groups of countries. We've worked a lot with the European Union and with the Japanese to advance these goals, and we have very common interests, as you know, in these areas.

QUESTIONER: Thanks. Hi, Lael. Dan Rosen, Rhodium Group and the Peterson Institute.

So it's been somewhat described as a a turning point, the Hu visit, the software breakthroughs, you just talked about, the 45 billion (dollars) in increased exports over the existing level of 100 billion (dollars), apparently, it is now. So did the Chinese have a change of heart, or did they ask us for something that we had to put on the table? And was that ask for us not to do something negative, like let trade policy go wild over the next couple years, or was it something positive -- market economy status, something like that?

I'm curious what the asks were on the Chinese side that greased the way for the what appear to be breakthroughs, to some extent, that you guys achieved. Thanks.

And good work on the whole visit.

BRAINARD: So I think what is important to China is to broaden and deepen the cooperation between our two economies. Increasingly, they would like to deepen cooperation in key technologies, critically in areas such as green energy. Increasingly, they're going to have, as you know, Dan, better than anybody, not only interests in having foreign companies come and invest in their market, but also in having their companies invest abroad and invest in America's very vibrant market.

And so they have a set of interests that I think they would like to see advanced. And of course, at the base is a very critical issue in -- interest in making sure that our investment and trade relationship remains open and stable. So I think their interests were advanced during this visit and it did give us the ability to move forward on our priority areas, where we think we had some concrete results that will show up concretely in increased exports and opportunities for U.S. producers.

QUESTIONER: Good morning. Brian O'Neill with Lazard Freres. Lael, could you share with us the hurdles that you face, the executive branch faces, Treasury, perhaps you and the team you lead in particular, with getting congressional approval and congressional appropriation for the funding of our capital commitments to IFIs and to MDBs? And what's the status now? And what are the indicators we could look for that show signs of progress or setbacks in that regard?

BRAINARD: I'm glad you asked the question, because it's not an area that is really ever on the sort of front burner for most Americans and for most members of Congress, is very important in terms of U.S. leadership and U.S. ability to advance its goals in the developing world and more broadly.

This year is very unusual. This is the first time that any of us can remember when we have engaged in negotiations to recapitalize every single one of the multilateral development banks -- Asia, Latin America, Europe, the World Bank, the African Development Bank, very importantly, as well as negotiations to increase the concessional financing at several of those banks.

Those recapitalizations are extremely important to the U.S. for advancing our goals. First of all, with respect to the banks, we pushed very strong reform agendas in each of these banks and were very successful in terms of improving the governance, transparency, accountability, and the result of which is these banks will be working with developing countries in places like Africa, Latin America, China, elsewhere, to ensure that when they do infrastructure investing, which they need to do to grow and to become richer, more vibrant markets, they'll do so in ways that meet U.S. standards of transparency and accountability.

So this set of reforms was very good for us. It'll push these banks much more in the direction of doing green energy. So it's serving a lot of our goals -- food security, addressing the needs of the poorest. And it only happens once every 10, 20 years. And it's actually very cheap. These are highly leveraged institutions, so that for every $1 we put into them, we multiply the effect of that, because these are lending institutions, and because other countries come in on top of that.

So this is some of the highest -- the best leveraged U.S. contributions to development that we have. But they are not as well-known to many congressional members as some of our bilateral programs are. And so we really need a lot of help in bringing alive the differences that these investments make in the lives of ordinary people in developing countries, the differences they make to our national security goals in places like Afghanistan and Pakistan, where they are making the big investments in the railroad systems, the road systems, the energy systems that are going to make those more stable economies. So we need a lot of help in sort of making that story more compelling.

QUESTIONER: Hi. (Name and affiliation off mic.) I wonder if you could comment on the extent to which you see GSE reform as a topic that's fair game on the international policy agenda, and in particular, have you or will you seek the input of China as a major holder of that debt on the options in that discussion?

BRAINARD: So generally speaking, we understand that the U.S. financial market, U.S. securities, that the GSEs -- we are a big player in the system. We have a very attractive financial system, deep and liquid market. There are a lot of foreign investors, both official and private, around the world who have a great interest in investing in agency securities, Treasury securities and our market more generally. So we make sure that our communication channels are very open, and that we are communicating as policy changes on these issues, very clearly and frequently, with all of the stakeholders in our financial system. We think that's in our interest. And we certainly believe that, you know, we see loads of evidence of continued investor interest here in the United States, in part because of the transparency of that process.

SHIRZAD: Bob.

QUESTIONER: Thank you. Hi, Lael. Bob Bestani. Just going to back to the IFIs for -- and the multinationals for a second, every few years the pendulum seems to come back to the issue of removing the nationality requirement for the leadership of these institutions, as well as a whole slew of jobs below the presidency level. I'm wondering where that issue stands and whether that's going to be revisited at this point.

BRAINARD: So -- you know, I think it's an issue, as you said, that comes up at sort of various times in the discussions. And you know, it is important for these institutions to be viewed as legitimate and to have the membership well represented.

It is not an issue that has actually been joined in any way in the discussions at ministerials or at the summit. So there's no real change of course that has been discussed, certainly not agreed at this juncture, but it's an issue that I think merits continued discussion.

QUESTIONER: I'm Mike Moran. I work -- Mike Moran, Roubini Global Economics. Neither the president of -- the leader of the Senate, a Democrat, nor the leader of the House, a Republican, attended the state dinner. How -- in your rounds, how do our foreign partners view the political risk in Congress this year with regard to trade? And do you think that there's still a plurality in either or both houses of Congress that believes in free trade?

BRAINARD: On the question of trade, and particularly the new Congress, you know, I think that at a time when America's own recovery, the strength of our recovery, the strength of our jobs creation, is going to necessarily be more oriented towards being able to engage in export-driven growth, just given the need to continue to repair balance sheets here for consumers to improve their household savings, it's inevitable that, you know, we're going to put a bigger emphasis on the need to export, the need to trade.

The president has made a very clear and explicit goal to help orient that conversation, which is to double exports in five years. It's a very ambitious goal, by the way. But we are on the way to achieving it. And there are a whole host of mechanisms that undergird that goal, including supporting our companies as they go and seek contracts around the world; helping small businesses, which are really very under-represented in trade, to get a foothold in the system; and importantly, passage of the Korean-U.S. free trade agreement.

A lot of members coming to Congress are going to start thinking about some of these issues -- for some of them, for the first time. And so I think it's incumbent on all of us to be very clear about the critical need to create more sources of demand, to be able to create more of a momentum on job creation. And so we'll be spending a lot of time on those issues and, you know, I think generally it's a conversation that will pick up in the coming weeks.

SHIRZAD: Barbara.

QUESTIONER: Barbara Matthews, BCM International Regulatory Analytics. I've got a question about the IMF. The current president of the G-20, President Sarkozy, has expressed an interest in continued work on reform of the IMF, in particular. And in addition, at the end of the year, the beginning of this year, the IMF board approved an expansion of the IMF's activities on regulatory policies. I'm wondering if you could give us a sense of how you see the IMF's role evolving. And the context here is macroprudential policy is very important, has economic policy implications. Obviously, the IMF has a role to play, but there are other organizations out there: the FSB, the Basel Committee. How do you see the system evolving over the course of the next couple of years, and what do you think is important for the United States?

BRAINARD: Well, the -- as you said, the architecture there has evolved very quickly, in a very short period of time. And, you know, the role of the standard-setting bodies continues, still is really the anchor of that system. But there is now much greater need for coordination across a much greater number of countries, among the G-20 and then a few additional important financial centers. And the FSB is performing some of that coordination role.

The IMF also has a very important role to play in terms of surveillance, and has a lot of capacity in the area of surveillance. And so as you, I'm sure, are aware, they do financial-sector assessment programs every few years. The G-20 members have committed to subject themselves to that process on a much more frequent basis. Having just gone through it in the U.S., it's quite a rigorous process. It's quite a time-consuming process. But it's an important one, because we think it's increasingly important that surveillance of the financial system be joined with macrosurveillance, so that we don't miss the buildup of risks in the financial system that may have hugely important implications for macroeconomic stability and hugely important spillovers to other countries. So that is going to be a continued priority area.

It's going to -- there is still a lot of improvement needed, both within the IMF and between the IMF and some of the other supervisory and standard-setting bodies, between the FSB and the set of Basel and standard-setting bodies. So that's something that is a priority. I think we're focused on it. But it's a work in progress.

SHIRZAD: Donna.

QUESTIONER: Donna Milrod, Deutsche Bank. I'd like to go back to your comments around foreign direct investment. And I'd be interested in your comments, if you have any concerns around the CFIUS process, especially as Chinese companies come to the United States and look to invest.

BRAINARD: Yeah, well, I am somebody that was in government and, you know, an observer of the CFIUS process in -- during my earlier period in government; left when the new law was enacted, and I inherited this new process. It's a very good process. It is a very good example where, you know, good legislation leads to a very strong and clean process.

And so it is transparent, it's predictable, it's very clear what the criteria are. And the criteria are very clearly and narrowly related to national security, full stop. And you know, I observed the system; it works. And we would be very happy if other countries adopted similarly clear, narrow, predictable regimes. It would serve us in good stead rather than the host of much more opaque investment barriers that we -- that our companies encounter in a lot of other parts of the world.

QUESTIONER: If I could ask to follow up on that, Lael, you know, with regard to that bilateral, the model bilateral investment treaty, as you know, your administration has been undertaking essentially a two-year review of the model BIT. And it doesn't seem as though that process is going to be winding down anytime soon. Where we should look at in terms of investment policy, the development and negotiation of new investment treaties, and the kinds of protections that American industry needs in terms of being able to invest in foreign markets?

BRAINARD: Well, we are engaged with several countries, but in particular China, because they were just here. And this issue of improving investment in both directions is so important to both of us. You know, we are engaging with China on the possibility for a bilateral investment treaty, even as we're also working on what our model BIT will look like. And you know, there's a lot of -- there's actually a lot of differences between the way China approaches investment treaties traditionally and our model BIT traditionally. So it will take some time to work through those issues.

But we're also committed more broadly to maintaining a strong and open investment regime. And so we engage with China through additional mechanisms, the strategic and economic dialogue, which will take place now in the spring and brings together all of the economic authorities across both governments to try to address barriers. And then we'll also host a -- well, actually, China this year will host -- we do a(n) annual investment forum where officials from both countries sit and go through the -- any concerns about access that, you know, companies have raised. And we're going to increasingly try to include local officials, state-level officials in those dialogues because they are so important in the investment process, and in both countries, actually.

SHIRZAD: Over in the back.

QUESTIONER: Hi, Lael. Laurie Garrett from the council. A quick question about various elements. We've had quite a scare this year, this last 12 months recognizing that China has a virtual monopoly over REEs, and then Germany saying that China was trying to cut them off, and then -- going to WTO and then, indeed, China announcing a 40 percent reduction in export. And Evo Morales is kind of threatening the same thing with lithium. Where are we going on this? And is there any kind of mechanism for creating an even playing field on the trade in REEs? Or are we doomed to have only Chinese batteries?

BRAINARD: Well, I think we have expressed concerns about China's reducing its export quota on rare earths. And also the predictability of supply is very important because this is a critical input into a host of various commercial areas. China has given us assurances. As you know, last year, the secretary of State had a discussion on this where we were given some assurances. But I think the -- this is an issue that we and other trade partners have engaged on. It's a matter of concern. And there are a variety of different fora, including the WTO, where it's relevant. So we'll continue to work to improve the predictability of supply on this issue, and of course, we'll have a sort of vigilance about other potential cases of the same kind of issues cropping up.

QUESTIONER: I'm Win Neuger from PineBridge Investments. I wonder if you could comment on Africa, because clearly it would appear that China has been much more aggressive than the U.S. there.

BRAINARD: Well, I guess with regard to many countries in Africa -- (laughs) -- in particular there are a variety of places where we're seeing really very encouraging growth and very impressive and now increasingly sustained policy records. And so, you know, generally speaking, we're very encouraged that we're starting to see the kind of growth that we're going to need to materially catapult some of these economies onto much improved trajectories, per capita income, and much better human-development indicators as well. Not -- there are other places where there's obviously governance issues, but are -- trends are going the other direction.

The U.S. is actually very engaged in Africa. I think perhaps you're referring to the infrastructure area, where China has taken a lead in terms of private infrastructure. And it's an area that we've actually started to talk to China about engaging together through the multilateral development banks, in part because we think that the standards that we've developed through the multilateral development banks and the platform they provide for public-private partnerships in infrastructure could raise the standards of investment and, you know, improve the sort of -- the social benefits of a lot of these investments as well. So we think that their investments, to some degree, present us an opportunity to partner and to raise standards. And so we're working on that. It's -- you know, it's not going to happen overnight. It will take some time.

QUESTIONER: My name is Andrew Gundlach, Arnhold and S. Bleichroeder. Could you comment on food security? It says that -- in your bio that you're responsible for it. Specifically, obviously, we're the Saudi Arabia of corn, so exports for agriculture a huge, huge opportunity, but more importantly, perhaps, the prices for agricultural products around the world have skyrocketed. Some of that is Bernanke's policies, but some of it is also real scarcity and real demand. And I wonder if it's a risk to the global recovery.

How do you see it?

BRAINARD: Well, certainly we are following the food prices very closely. We want to avoid a repeat of 2007. You're right. What we're seeing, I think, although I don't have a complete analysis, is a combination of picking up demand, as -- which is a good thing, as countries are moving, you know, sort of along their income trajectories. And so we're beginning to see that as the recovery goes at a faster pace, the emerging markets are starting to see those demands picking up again. But we've also had some supplies disruptions.

And the -- you know, the -- President Obama's been committed since the first year, where he announced in L'Aquila a very kind of ambitious joint food security initiative, very committed to this area. We have programs that are through the -- AID and the programs that we focus on at Treasury on the multilateral development banks. I have -- that's where we do our development work.

And so we worked with a variety of countries in Africa, in Europe, Canada, to put together a multilateral fund that is a kind of platform that sits at the World Bank, it's administered by, but it actually uses all of the multilaterals. And it awards grants on a competitive basis, and it's doing fantastic work. It's badly underfunded because of our own budget situation, the U.S. in part. So we're working hard with members of Congress to fund our piece of it. But it's a terrific new initiative. And we've spent a lot of time on it, because it's a very high priority for the president.

SHIRZAD: Let's do one last question.

Carol (sp).

QUESTIONER: Thanks very much. The small elephant or whatever you want to call it in the room is called Tunisia, Middle East, North Africa. Our -- I'm sure that you're doing work in Treasury with the -- both the African Bank and the World Bank.

Is there anything you can share with us in terms of the potential for this shock to reverberate much more through the region and to reassess policies there? Thank you.

BRAINARD: Well, it's obviously a situation that the secretary of State in particular is very focused on. You know, Treasury, as you know well, comes in in support when countries are undergoing complicated political transitions and helps to mobilize the capacity of both the IMF and the multilateral development banks in support of democratizing countries. And, you know, we also look at debt burdens and lead the negotiations on addressing debt in the wake of major political transitions.

So that's -- the particulars of Tunisia are obviously a kind of very fluid situation, but those set of tools are the ones that we would generally deploy in support of a successful transition to democracy.

SHIRZAD: Well, Lael, thank you so much for that. We really appreciate it. Thank you to all the members for participating.

BRAINARD: Thank you. Thank you, everybody. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

ARYAR SHIRZAD: Okay, ladies and gentlemen. Welcome to today's CFR -- welcome to today's CFR meeting with Lael Brainard, the undersecretary of international affairs at the Department of Treasury. This meeting is part of the C. Peter McColough Series on International Economics. Our next meeting in the series will take place on March 2nd and will feature Thomas Hoenig, the president and CEO of the Federal Reserve Bank of Kansas City.

Please completely turn off, not just put on vibrate, your cell phones, BlackBerrys and all wireless devices to avoid interference with the sound system. And I'd like to remind the members that this meeting is on the record. As everyone knows, Lael is the undersecretary for international affairs with Treasury. She's had a distinguished service both in the private sector and the public sector, previously serving in government as the deputy assistant to the president for international economic affairs with the Clinton administration.

She was vice president of the Brookings Institution, worked at McKinsey and was a professor at MIT. We're going to start off with a few minutes of remarks by Lael to discuss the Hu visit. I'll ask her a series of questions, and then we'll turn to all of you in the audience for an opportunity to ask your questions. And we will stay on schedule to close the meeting at nine o'clock.

So Lael.

LAEL BRAINARD: Thank you. Well, it's nice to be here. Thank you for the kind welcome, Faryar, and it is good to see many long-time friends in the audience.

All eyes were on the meeting between President Obama and President Hu of China this week, and understandably so at a time when the strength of America's jobs engine depends more than ever on demand from outside our borders. Whether we achieve our ambitious export goals will depend in great measure on improving access to China's market given the sheer scale and velocity of its growth.

U.S. exports grew twice as fast to China as to the rest of the world this past year and are on track to reach a hundred billion dollars. If you think back to just one decade ago, China was not even in the top 10 of our export destination markets. It is now the third largest market for our exports and growing quickly.

On the other side, China is wrestling with economic transition challenges of its own. China is facing the challenge of shifting from a developing country dependent on foreign consumption and technology to a middle-income country with growth driven increasingly by domestic consumption and innovation, of shifting from closed capital markets and a fixed exchange rate to a currency that will be increasingly used in international transactions with increasingly open financial markets. The course it steers, the choices it makes will affect greatly the opportunities and constraints faced by American innovators, producers, workers and farmers in its markets.

China's rise has been enabled, to a very significant extent, by open trade and the investment system that was nurtured for decades and supported by America throughout that period. And China's ability to successfully navigate the transition challenges it currently faces while maintaining its strong growth will depend in no small part on continued access to America's markets and investment opportunities, and continued American support for that open investment and trade system.

So a lot was at stake for the two leaders on the economic agenda. And President Obama advanced our four priority objectives. First, to just review progress very quickly, China made a very important commitment to level the playing field by agreeing not to link the provision of government procurement preferences to its innovation policies. We, along with U.S. industry, have long been concerned about the possibility that that linkage would used to discriminate unfairly against innovative U.S. products and services, especially given the size of the Chinese procurement market.

With innovation at the heart of American competitive advantage, we pursued intensive and consistent engagement at the highest levels with China on this issue, and this was a major step forward. China also committed to submit a revised offer to the WTO on government procurement, which would extend well beyond the central government, which is extremely important given the size of China's government procurement market at local and provincial levels.

Second, we secured concrete progress on intellectual property rights enforcement, particularly in the area of software where China agreed to put in place audit and budget mechanisms to ensure that government agencies use legitimate software and publish the audit results.

Third, China affirmed its commitment to enhance exchange rate flexibility, and for the first time dropped previous references to maintaining basic civility and equilibrium rate, while noting the connection of the exchange rate flexibility to their broader goals of transforming their economic development market.

This is very consistent with the thrust of their new five-year plan, which is very much oriented towards promoting the role of domestic consumption, rebalancing the economy. It's very consistent with our global goals. And if you look over the past six months, China's exchange rate has appreciated against the U.S. dollar by 3.5 percent in nominal terms. If you take into account the much faster rate of inflation in China relative to the U.S., this amounts to roughly a 10 percent rate of appreciation on an annual basis.

Of course, we're going to stay very closely and intensively engaged with China on this critical issue.

Finally, commercial deals for U.S. firms amounting to about $45 billion in exports were announced across a range of industries, which will support roughly a quarter million of U.S. jobs. This is a critical priority item for the U.S., and we were pleased to move forward on this.

Generally speaking, we were pleased with the progress that was made, but we can't be complacent as a country. China's economic dynamism, much as it poses a challenge, should be viewed, I think, as an opportunity to remind us to tend to the core foundations of our economic security, our capacity to save and invest, to innovate and to learn.

So let's turn back, Faryar, to you, and if you want to talk further about that or turn to other subjects.

SHIRZAD: Lael, thank you. That was very helpful. You know, if we could drill down on one aspect of what you were talking about, which is currency policy, I think among the most complicated items in your portfolio is negotiating as a currency issue, not only with the Chinese, but also managing the domestic political dimension of that with the U.S. Congress.

Can you talk a little bit about that, and when people see the issue rise and fall in terms of the public aspects of your comments and Secretary Geithner's comments on this issue, how should we interpret that? Do we interpret that as a loss of interest or a lack of interest or what's the dynamic there?

BRAINARD: We, in the administration, have viewed the currency issue as a key priority in our economic engagement with China since the first day of the administration. We've maintained very consistent and very detailed, intensive discussions with the Chinese government as they have themselves been debating internally how to move on this very important issue and as they have, indeed, moved forward, as you know, with the commitment on June 19th and then the subsequent 3.5 percent nominal appreciation since then.

The president stood next to President Hu. He was very clear that this was extremely important to Americans that we need to see more progress on this. But it's important also to recognize that there is progress and that China's leadership at the very highest levels has been clear that they do not intend to reverse course, that they are committed to this course, and that increasingly they do see it as part of their own economic restructuring policies.

So we will continue to engage on it. We will continue to see it among our top priorities, but we cannot be a -- focused only on one issue. We have a very broad set of interests with China, and that's why we are also pleased that after a very long period of intensive engagement, we have made material progress on the issues of indigenous innovation, on intellectual property, on government procurement. And we're just going to stay on a tight set of very important issues.

SHIRZAD: Let me turn to the G-20, another issue or item in your portfolio. The G-20 was launched two years ago now with really four big issues: the reform of the international financial institutions, the development of Basel-based prudential requirements, a regulatory agenda and then economic coordination to deal with the depths of the financial crisis. You could argue that all four of those agenda items have run their course.

What is the future of the G-20? Will it continue to have a central role in your work and the administration's international economic agenda?

BRAINARD: Well, first, Faryar, I appreciate the notion that we got everything done we needed to get done in the G-20. But, in fact, we still feel like we've got a lot of heavy lifting to do in the G-20. We made some progress.

G-20 was very effective, very important to us in cooperating with the most important economies in the world, both the established economic powers and the rising powers, through the crisis, and really made a, I think, very important contribution to pulling us out of the depths of the crisis and ensuring the continued functioning of the international financial system and coordination of individual governments' response -- very much consistent with the thrust of our priorities during the crisis.

But we have a lot of work to do going forward. If you think across some of the issues that you mentioned on financial regulatory reform, we're just at the beginning of that agenda. We now have broad agreement at the international level which very much is consistent with the Dodd-Frank act that passed here. So having moved quickly on that I think put us in a good position to really drive the agenda internationally both through the G-20 and through the G-20's relationship to the Financial Stability Board.

But now we need to go through the very complicated process of implementation and, of course, continuing to coordinate. The work has just begun. What we learned through the crisis is that supervisors need to be much more intensively engaged in their work and they need to work together much more closely to be seeing around corners in terms of risks and to be managing those. So if you look at the agenda for the year ahead, I think we've made progress on the capital framework, on most elements. We still have a few things that need to be really worked through.

But the resolution area, extremely important. We have a strong resolution law in place here. We need to implement it. But other -- many other jurisdictions do not, and so we need to work through specifically what needs to be done at the national level, at the resolution -- sort of legal issues, as well as who has authority, and then to construct above that mechanisms for cross-border cooperation.

On the issue of coordination, the hard work just is beginning. We are in a world with a two-speed recovery. The advanced economies are still repairing their balance sheets. Consumers are still deleveraging here in the United States. We are not going to be the place that supplies the command for the rest of the world for some time to come.

Emerging markets: very different set of problems, moving very quickly, contending, if anything, with potential concerns about overheating. And so trying to navigate the interface between that and make sure we grow in ways that are mutually reinforcing is a very important agenda item for the G-20 that's here.

SHIRZAD: You know, one of the legacies, you could argue, of the G-20 is the creation of a number of international bodies that now have very powerful and important roles in setting regulations and standards. A common feature of these international institutions, the FSB, the Basel Committee, the IMF and so on is the degree to which public participation is limited, let's say.

Is that a fair assessment that I'm making? Is that a fair characterization of the process? And is that an issue that you are focused on and the administration's focused?

BRAINARD: We're very focused on both making sure that we have effective mechanisms for setting rules and making sure people, countries abide by the rules and making sure that the countries -- again, there's a whole set of players in the system that really just were not at that table 20 years ago. We need to make sure those players are sitting with us as the system continues to evolve.

But it's very important that the -- that the authority still resides at the national level, and so a lot of the governance mechanisms, the accountability mechanisms are still going to reside here with us, in the -- in the U.S. executive branch and through the accountability that Congress ensures is there. We are looking for mechanisms for these bodies to increase their outreach. And we have had a major reform of the IMF's governance system over the course of the last G-20, which will make it a much more representative body in terms of the various nations at the table. But we will continue to pay a lot of attention to this issue, and make sure that the actual implementation and the rules setting takes place at the national level here in the United States.

SHIRZAD: And when you talk about the international agenda, you know, you talk about the prudential rules, the Basel process, the regulatory agenda, Dodd-Frank. Where does an economic growth agenda figure in it? Is that implicit in getting the rules right, that growth will emanate from that? Or is that a separate track that somehow needs to be balanced in the broader portfolio that you manage?

BRAINARD: We actually very much think about our regular regulatory agenda being about providing much more secure and stable foundations for more sustainable growth going forward. So the regulatory agenda -- the financial regulatory agenda, which is really more about reform of the system in the wake of the most devastating financial crisis that we've seen in a century, creating much more strong foundations for that system, making sure that banks are well capitalized, perform the functions that they are supported publicly to do, we think will provide very robust foundations to nurture our growth going into the future.

But of course we are also working on the growth agenda through rebalancing, where, again, we're really putting the onus a bit on countries that have traditionally relied on other countries for -- to power their own growth, countries that have consistently run very large surpluses, to start to rebalance their own economy so that they can contribute more to the world economy in terms of domestic demand at a time when the U.S. needs to export more to grow.

SHIRZAD: You know, if we could sort of take that last point and kind of put a finer point on it, you know, one of the big issues that you personally negotiated in the context of the Seoul G-20 summit was an agreement among the G-20, including, notably, China, Germany and others, on developing a mechanism for dialogue among countries with persistent and large deficits or surpluses. Could you talk about that process? What should we look for in the weeks and months ahead coming out of that Seoul summit?

BRAINARD: Yeah, so I think this issue of rebalancing really does need to be viewed in the context of a broader system where the U.S., which really was the consumer of last resort going into the crisis, and which we saw is not a good model -- it's just not a good model for us. It's not a sustainable model. It's not a good model for countries like China, because that makes their own growth very vulnerable to the demand that comes from outside their borders, rather than unleashing the capacity of their vast potential consumer market.

And so that conversation I think has gotten some very important sort of benchmarks of progress in it, among which is just to recognize -- it's long been known that large and sustained deficits are not good for the system. For the first time, we really have a dialogue that treats large, sustained surpluses also as issues that are legitimate for international debate and negotiation. And what we'll expect to see is a set of indicators, very clear indicators of where unsustainable imbalances are building up in the system, and a policy dialogue around the underlying policies that are contributing to that.

The reason we think that's so important is because the U.S. can't address its savings deficit, its need to grow by exporting more, unless other countries are willing to shift their own growth models. And so that's why this give-and-take is going to be very important in the G-20.

SHIRZAD: You know, this may be too early to be able to really answer this question, but let's sort of play it -- play it out. We're at -- this -- these indicative guidelines, or these indicators, are developed. You're at the negotiating table. You're having a discussion with a country with which we have a persistent surplus or deficit. And the issue of U.S. -- a lack of U.S. savings comes up. How does that play itself out? Is this an issue that will then be negotiated in an international setting? Or -- and then you bring that policy back? Or what's the -- what's the exact kind of next step that occurs?

BRAINARD: We're very clear that over the medium term, the U.S. needs to save more. The U.S. needs to grow more based on its productive capacity and its innovative capacity and its ability to export.

And so it's actually very consistent with our own domestic economic-policy agenda, which is to get the economy back on track, to get the jobs engine cranked up again. We have unacceptably high levels of unemployment in our system still. So we need to get companies back hiring. We're starting to see signs of that.

And as we do that, our savings rate needs to improve. As we do that, we're going to need to take on the deficit very strongly and put that onto a sustainable path. And right now, the administration's plans do that. The tax package that was negotiated is broadly viewed as leading to a slightly higher deficit in the initial year, but in a way that will ultimately put us on a faster deficit-reduction path because it will be materially contributing to the rate of recovery in 2011.

So absolutely we're having that conversation with other countries about our own plans to increase savings, to be fiscally responsible in this country and what that means for them, which is, again, they can't be depending on the U.S. consumer to power their growth.

SHIRZAD: Let me switch to Europe for a second. You know, obviously the stresses in the European system are in all the headlines. What is your assessment of the -- what's going in Europe? Is this a fundamental deficiency in the European model that if not addressed is fatal to the future of Europe as a political entity?

BRAINARD: Well, Europe, of course, is very important to the overall outlook for the global economy at the moment, very important to us. As we saw back in the spring, European risks can spill over and affect our recovery here as it can the broader tone of the global recovery.

Our sense is that the European leaders have put in place an array of mechanisms that they simply didn't have back in the spring in response to financial-market strains and they are now in a much better position to manage through the set of difficult challenges that the periphery economies -- some of the periphery economies are facing.

The politics are complex. There's no -- there's no getting around that, but we see both the will and the capacity to grapple with these problems; and again, in a stronger position than they were back in the spring when they really had to invent some of these mechanisms from scratch.

SHIRZAD: You know, if we could go back to Asia and just to broaden the conversation a little bit -- you talked about China. There's a -- there's a school of thought that we are about to enter the decade, the century of China -- of Asia generally, for a lot of reasons, including the aftermath of the financial crisis in some ways shifting the capital market centers more to Asia, the Asians stepping up and becoming more ascendant in terms of becoming an economic power.

One of the issues that administrations have to deal with -- the Bush administration had to deal with, you're confronting -- is the role of the United States in the Asia-Pacific and particularly in the Asia theater. Could you talk about that in terms of how you see Asia broadly, the role of economic and financial diplomacy, your particular role? How do you strategically view that region?

BRAINARD: The president, I think, has strategically from the very earliest days made a very clear commitment that the U.S. was going to engage deeply and broadly in Asia. His first international trip, not coincidentally, was to Asia. And, you know, we saw a very strong visit to India as well as to Korea and most recently, of course, with the state visit of President Hu.

So we are strengthening our relationships around the region -- extremely important to us -- and we think the U.S. is actually very well positioned. Our -- the strength of our economy are very complementary with many of the growing Asian markets. And so we, of course, are intensively engaged throughout the region in making sure that our financial services firms, that our exporters, that our farmers are well-positioned to take advantage of that growth.

And, of course, at a policy level, we want to make sure that we are at the table. And so, of course, for the first time we'll be participating in the East Asia Summit. We are hosting APEC this year, which is -- which will be quite a big event. And we were delighted that Korea was the first non-G-7 country to host the G-20.

So we're going to continue to use a variety of mechanisms to deepen engagement in the region, and again, I think we've had some good successes on that front so far.

SHIRZAD: Let me ask you one more question regarding the -- kind of the international mechanisms. You know the G-7 has -- it seems to have largely given away that the G-7 and the G-8 have largely given away to the G-20. You yourself have worked very actively in terms of making the IMF and World Bank boards more representative of the global community.

Does the democratization, if we can use that term, of these international economic fora -- will that necessarily lead to what's happened, at least on the trade side, which, as you know, the WTO, for example, seems paralyzed, seems too large, seems too cumbersome in terms of an ability to take hard decisions and you know, for example, see the Doha negotiations through.

Is that future the future that we'll -- that we should expect in terms of the international financial policy platforms that you're engaged in?

BRAINARD: Well, just on -- when I work backwards from -- you mentioned trade. I think that is a good analogy. Of course, we're working hard to try to deliver results in the WTO that is good for America. We're not there yet. But that's not the only thing we're doing. So we're able, even as we continue to make progress in this universal forum, to move forward with a subset of countries in the Asian Pacific region through the trans-Pacific partnerships. And we think, you know, we'll probably be able to move quite quickly there because a smaller group of countries more aligned in terms of what we're trying to achieve, and similar -- true of the Korea-U.S. free trade agreement.

So, you know, we'll continue to engaging -- to engage, of course, in the broader platforms, but also where there are particular issues that we can get done with a smaller group of countries will do that.

Now, turning to the international financial and the international economic realm, the G-20 is a very important umbrella organization where we have, for the first time, a lot of the right countries in the room to actually move some of these issues. But we also continue to meet in smaller groupings, and so I think we'll continue to use flexibility in terms of how we achieve our goals. I don't think we, you know, we don't need to have every member of the G-20 agree with us on every issue to get what we think is important for America done. We can get some of these issues done with smaller groupings and we've been pretty effective at doing that.

They're less high profile; some of them are -- you know, we don't necessarily need to have big communiques for every event, but we can actually make a lot of progress in those smaller groupings.

SHIRZAD: You know, at this time, I want to turn to -- invite our members to have an opportunity to ask Lael questions. There are people with microphones. If you want to ask a question, raise your hand, I'll recognize you. And if you can state your name, your affiliation and then ask a concise question just so that we give everyone a chance to participate.

QUESTIONER: Hello. You expressed some confidence -- I'm -- (name inaudible) -- you expressed some confidence in making some progress on intellectual property issues with China. What's the basis for that confidence? How have the other countries who share our concern about it moved in beside us or behind us in acting on that problem?

BRAINARD: Well, the very concrete issue that we got an agreement around at the visit was in the area of software, which is a huge issue for our software companies, as you know. The use of pirated software in China is really quite a sizeable loss to our software producers. And so, for the first time, we got a very concrete commitment that state entities' use of software would be using legal licensed software. That it would be subject to audits. Those audits would be subject to publication, software asset management programs and that there would be clear budget allocated for the purchase of that legal software.

So that was a very concrete step forward that we believe will be meaningful for our software producers and software producers more generally around the world.

The intellectual property issues with China are large and we will continue to work to move forward. The Chinese government at the highest levels increasingly, I believe, internalizes this agenda, because again, as they move from being a country that is mostly absorbing foreign technology to a country that is putting an emphasis on innovating, which they'll need to do as they move up the value chain, increasingly you will get domestic constituencies in China, as you did in places like South Korea or Japan, who themselves have an interest in a stronger intellectual property regime.

But of course, we're not counting on that process. It may take some time. What we're doing is we're working very hard to identify concrete mechanisms to ensure that the laws that are in place actually get enforced, and they get enforced down to the local level, where a lot of the problems occur.

In terms of the question you asked about working with other countries, we try to build coalitions of common interests across groups of countries. We've worked a lot with the European Union and with the Japanese to advance these goals, and we have very common interests, as you know, in these areas.

QUESTIONER: Thanks. Hi, Lael. Dan Rosen, Rhodium Group and the Peterson Institute.

So it's been somewhat described as a a turning point, the Hu visit, the software breakthroughs, you just talked about, the 45 billion (dollars) in increased exports over the existing level of 100 billion (dollars), apparently, it is now. So did the Chinese have a change of heart, or did they ask us for something that we had to put on the table? And was that ask for us not to do something negative, like let trade policy go wild over the next couple years, or was it something positive -- market economy status, something like that?

I'm curious what the asks were on the Chinese side that greased the way for the what appear to be breakthroughs, to some extent, that you guys achieved. Thanks.

And good work on the whole visit.

BRAINARD: So I think what is important to China is to broaden and deepen the cooperation between our two economies. Increasingly, they would like to deepen cooperation in key technologies, critically in areas such as green energy. Increasingly, they're going to have, as you know, Dan, better than anybody, not only interests in having foreign companies come and invest in their market, but also in having their companies invest abroad and invest in America's very vibrant market.

And so they have a set of interests that I think they would like to see advanced. And of course, at the base is a very critical issue in -- interest in making sure that our investment and trade relationship remains open and stable. So I think their interests were advanced during this visit and it did give us the ability to move forward on our priority areas, where we think we had some concrete results that will show up concretely in increased exports and opportunities for U.S. producers.

QUESTIONER: Good morning. Brian O'Neill with Lazard Freres. Lael, could you share with us the hurdles that you face, the executive branch faces, Treasury, perhaps you and the team you lead in particular, with getting congressional approval and congressional appropriation for the funding of our capital commitments to IFIs and to MDBs? And what's the status now? And what are the indicators we could look for that show signs of progress or setbacks in that regard?

BRAINARD: I'm glad you asked the question, because it's not an area that is really ever on the sort of front burner for most Americans and for most members of Congress, is very important in terms of U.S. leadership and U.S. ability to advance its goals in the developing world and more broadly.

This year is very unusual. This is the first time that any of us can remember when we have engaged in negotiations to recapitalize every single one of the multilateral development banks -- Asia, Latin America, Europe, the World Bank, the African Development Bank, very importantly, as well as negotiations to increase the concessional financing at several of those banks.

Those recapitalizations are extremely important to the U.S. for advancing our goals. First of all, with respect to the banks, we pushed very strong reform agendas in each of these banks and were very successful in terms of improving the governance, transparency, accountability, and the result of which is these banks will be working with developing countries in places like Africa, Latin America, China, elsewhere, to ensure that when they do infrastructure investing, which they need to do to grow and to become richer, more vibrant markets, they'll do so in ways that meet U.S. standards of transparency and accountability.

So this set of reforms was very good for us. It'll push these banks much more in the direction of doing green energy. So it's serving a lot of our goals -- food security, addressing the needs of the poorest. And it only happens once every 10, 20 years. And it's actually very cheap. These are highly leveraged institutions, so that for every $1 we put into them, we multiply the effect of that, because these are lending institutions, and because other countries come in on top of that.

So this is some of the highest -- the best leveraged U.S. contributions to development that we have. But they are not as well-known to many congressional members as some of our bilateral programs are. And so we really need a lot of help in bringing alive the differences that these investments make in the lives of ordinary people in developing countries, the differences they make to our national security goals in places like Afghanistan and Pakistan, where they are making the big investments in the railroad systems, the road systems, the energy systems that are going to make those more stable economies. So we need a lot of help in sort of making that story more compelling.

QUESTIONER: Hi. (Name and affiliation off mic.) I wonder if you could comment on the extent to which you see GSE reform as a topic that's fair game on the international policy agenda, and in particular, have you or will you seek the input of China as a major holder of that debt on the options in that discussion?

BRAINARD: So generally speaking, we understand that the U.S. financial market, U.S. securities, that the GSEs -- we are a big player in the system. We have a very attractive financial system, deep and liquid market. There are a lot of foreign investors, both official and private, around the world who have a great interest in investing in agency securities, Treasury securities and our market more generally. So we make sure that our communication channels are very open, and that we are communicating as policy changes on these issues, very clearly and frequently, with all of the stakeholders in our financial system. We think that's in our interest. And we certainly believe that, you know, we see loads of evidence of continued investor interest here in the United States, in part because of the transparency of that process.

SHIRZAD: Bob.

QUESTIONER: Thank you. Hi, Lael. Bob Bestani. Just going to back to the IFIs for -- and the multinationals for a second, every few years the pendulum seems to come back to the issue of removing the nationality requirement for the leadership of these institutions, as well as a whole slew of jobs below the presidency level. I'm wondering where that issue stands and whether that's going to be revisited at this point.

BRAINARD: So -- you know, I think it's an issue, as you said, that comes up at sort of various times in the discussions. And you know, it is important for these institutions to be viewed as legitimate and to have the membership well represented.

It is not an issue that has actually been joined in any way in the discussions at ministerials or at the summit. So there's no real change of course that has been discussed, certainly not agreed at this juncture, but it's an issue that I think merits continued discussion.

QUESTIONER: I'm Mike Moran. I work -- Mike Moran, Roubini Global Economics. Neither the president of -- the leader of the Senate, a Democrat, nor the leader of the House, a Republican, attended the state dinner. How -- in your rounds, how do our foreign partners view the political risk in Congress this year with regard to trade? And do you think that there's still a plurality in either or both houses of Congress that believes in free trade?

BRAINARD: On the question of trade, and particularly the new Congress, you know, I think that at a time when America's own recovery, the strength of our recovery, the strength of our jobs creation, is going to necessarily be more oriented towards being able to engage in export-driven growth, just given the need to continue to repair balance sheets here for consumers to improve their household savings, it's inevitable that, you know, we're going to put a bigger emphasis on the need to export, the need to trade.

The president has made a very clear and explicit goal to help orient that conversation, which is to double exports in five years. It's a very ambitious goal, by the way. But we are on the way to achieving it. And there are a whole host of mechanisms that undergird that goal, including supporting our companies as they go and seek contracts around the world; helping small businesses, which are really very under-represented in trade, to get a foothold in the system; and importantly, passage of the Korean-U.S. free trade agreement.

A lot of members coming to Congress are going to start thinking about some of these issues -- for some of them, for the first time. And so I think it's incumbent on all of us to be very clear about the critical need to create more sources of demand, to be able to create more of a momentum on job creation. And so we'll be spending a lot of time on those issues and, you know, I think generally it's a conversation that will pick up in the coming weeks.

SHIRZAD: Barbara.

QUESTIONER: Barbara Matthews, BCM International Regulatory Analytics. I've got a question about the IMF. The current president of the G-20, President Sarkozy, has expressed an interest in continued work on reform of the IMF, in particular. And in addition, at the end of the year, the beginning of this year, the IMF board approved an expansion of the IMF's activities on regulatory policies. I'm wondering if you could give us a sense of how you see the IMF's role evolving. And the context here is macroprudential policy is very important, has economic policy implications. Obviously, the IMF has a role to play, but there are other organizations out there: the FSB, the Basel Committee. How do you see the system evolving over the course of the next couple of years, and what do you think is important for the United States?

BRAINARD: Well, the -- as you said, the architecture there has evolved very quickly, in a very short period of time. And, you know, the role of the standard-setting bodies continues, still is really the anchor of that system. But there is now much greater need for coordination across a much greater number of countries, among the G-20 and then a few additional important financial centers. And the FSB is performing some of that coordination role.

The IMF also has a very important role to play in terms of surveillance, and has a lot of capacity in the area of surveillance. And so as you, I'm sure, are aware, they do financial-sector assessment programs every few years. The G-20 members have committed to subject themselves to that process on a much more frequent basis. Having just gone through it in the U.S., it's quite a rigorous process. It's quite a time-consuming process. But it's an important one, because we think it's increasingly important that surveillance of the financial system be joined with macrosurveillance, so that we don't miss the buildup of risks in the financial system that may have hugely important implications for macroeconomic stability and hugely important spillovers to other countries. So that is going to be a continued priority area.

It's going to -- there is still a lot of improvement needed, both within the IMF and between the IMF and some of the other supervisory and standard-setting bodies, between the FSB and the set of Basel and standard-setting bodies. So that's something that is a priority. I think we're focused on it. But it's a work in progress.

SHIRZAD: Donna.

QUESTIONER: Donna Milrod, Deutsche Bank. I'd like to go back to your comments around foreign direct investment. And I'd be interested in your comments, if you have any concerns around the CFIUS process, especially as Chinese companies come to the United States and look to invest.

BRAINARD: Yeah, well, I am somebody that was in government and, you know, an observer of the CFIUS process in -- during my earlier period in government; left when the new law was enacted, and I inherited this new process. It's a very good process. It is a very good example where, you know, good legislation leads to a very strong and clean process.

And so it is transparent, it's predictable, it's very clear what the criteria are. And the criteria are very clearly and narrowly related to national security, full stop. And you know, I observed the system; it works. And we would be very happy if other countries adopted similarly clear, narrow, predictable regimes. It would serve us in good stead rather than the host of much more opaque investment barriers that we -- that our companies encounter in a lot of other parts of the world.

QUESTIONER: If I could ask to follow up on that, Lael, you know, with regard to that bilateral, the model bilateral investment treaty, as you know, your administration has been undertaking essentially a two-year review of the model BIT. And it doesn't seem as though that process is going to be winding down anytime soon. Where we should look at in terms of investment policy, the development and negotiation of new investment treaties, and the kinds of protections that American industry needs in terms of being able to invest in foreign markets?

BRAINARD: Well, we are engaged with several countries, but in particular China, because they were just here. And this issue of improving investment in both directions is so important to both of us. You know, we are engaging with China on the possibility for a bilateral investment treaty, even as we're also working on what our model BIT will look like. And you know, there's a lot of -- there's actually a lot of differences between the way China approaches investment treaties traditionally and our model BIT traditionally. So it will take some time to work through those issues.

But we're also committed more broadly to maintaining a strong and open investment regime. And so we engage with China through additional mechanisms, the strategic and economic dialogue, which will take place now in the spring and brings together all of the economic authorities across both governments to try to address barriers. And then we'll also host a -- well, actually, China this year will host -- we do a(n) annual investment forum where officials from both countries sit and go through the -- any concerns about access that, you know, companies have raised. And we're going to increasingly try to include local officials, state-level officials in those dialogues because they are so important in the investment process, and in both countries, actually.

SHIRZAD: Over in the back.

QUESTIONER: Hi, Lael. Laurie Garrett from the council. A quick question about various elements. We've had quite a scare this year, this last 12 months recognizing that China has a virtual monopoly over REEs, and then Germany saying that China was trying to cut them off, and then -- going to WTO and then, indeed, China announcing a 40 percent reduction in export. And Evo Morales is kind of threatening the same thing with lithium. Where are we going on this? And is there any kind of mechanism for creating an even playing field on the trade in REEs? Or are we doomed to have only Chinese batteries?

BRAINARD: Well, I think we have expressed concerns about China's reducing its export quota on rare earths. And also the predictability of supply is very important because this is a critical input into a host of various commercial areas. China has given us assurances. As you know, last year, the secretary of State had a discussion on this where we were given some assurances. But I think the -- this is an issue that we and other trade partners have engaged on. It's a matter of concern. And there are a variety of different fora, including the WTO, where it's relevant. So we'll continue to work to improve the predictability of supply on this issue, and of course, we'll have a sort of vigilance about other potential cases of the same kind of issues cropping up.

QUESTIONER: I'm Win Neuger from PineBridge Investments. I wonder if you could comment on Africa, because clearly it would appear that China has been much more aggressive than the U.S. there.

BRAINARD: Well, I guess with regard to many countries in Africa -- (laughs) -- in particular there are a variety of places where we're seeing really very encouraging growth and very impressive and now increasingly sustained policy records. And so, you know, generally speaking, we're very encouraged that we're starting to see the kind of growth that we're going to need to materially catapult some of these economies onto much improved trajectories, per capita income, and much better human-development indicators as well. Not -- there are other places where there's obviously governance issues, but are -- trends are going the other direction.

The U.S. is actually very engaged in Africa. I think perhaps you're referring to the infrastructure area, where China has taken a lead in terms of private infrastructure. And it's an area that we've actually started to talk to China about engaging together through the multilateral development banks, in part because we think that the standards that we've developed through the multilateral development banks and the platform they provide for public-private partnerships in infrastructure could raise the standards of investment and, you know, improve the sort of -- the social benefits of a lot of these investments as well. So we think that their investments, to some degree, present us an opportunity to partner and to raise standards. And so we're working on that. It's -- you know, it's not going to happen overnight. It will take some time.

QUESTIONER: My name is Andrew Gundlach, Arnhold and S. Bleichroeder. Could you comment on food security? It says that -- in your bio that you're responsible for it. Specifically, obviously, we're the Saudi Arabia of corn, so exports for agriculture a huge, huge opportunity, but more importantly, perhaps, the prices for agricultural products around the world have skyrocketed. Some of that is Bernanke's policies, but some of it is also real scarcity and real demand. And I wonder if it's a risk to the global recovery.

How do you see it?

BRAINARD: Well, certainly we are following the food prices very closely. We want to avoid a repeat of 2007. You're right. What we're seeing, I think, although I don't have a complete analysis, is a combination of picking up demand, as -- which is a good thing, as countries are moving, you know, sort of along their income trajectories. And so we're beginning to see that as the recovery goes at a faster pace, the emerging markets are starting to see those demands picking up again. But we've also had some supplies disruptions.

And the -- you know, the -- President Obama's been committed since the first year, where he announced in L'Aquila a very kind of ambitious joint food security initiative, very committed to this area. We have programs that are through the -- AID and the programs that we focus on at Treasury on the multilateral development banks. I have -- that's where we do our development work.

And so we worked with a variety of countries in Africa, in Europe, Canada, to put together a multilateral fund that is a kind of platform that sits at the World Bank, it's administered by, but it actually uses all of the multilaterals. And it awards grants on a competitive basis, and it's doing fantastic work. It's badly underfunded because of our own budget situation, the U.S. in part. So we're working hard with members of Congress to fund our piece of it. But it's a terrific new initiative. And we've spent a lot of time on it, because it's a very high priority for the president.

SHIRZAD: Let's do one last question.

Carol (sp).

QUESTIONER: Thanks very much. The small elephant or whatever you want to call it in the room is called Tunisia, Middle East, North Africa. Our -- I'm sure that you're doing work in Treasury with the -- both the African Bank and the World Bank.

Is there anything you can share with us in terms of the potential for this shock to reverberate much more through the region and to reassess policies there? Thank you.

BRAINARD: Well, it's obviously a situation that the secretary of State in particular is very focused on. You know, Treasury, as you know well, comes in in support when countries are undergoing complicated political transitions and helps to mobilize the capacity of both the IMF and the multilateral development banks in support of democratizing countries. And, you know, we also look at debt burdens and lead the negotiations on addressing debt in the wake of major political transitions.

So that's -- the particulars of Tunisia are obviously a kind of very fluid situation, but those set of tools are the ones that we would generally deploy in support of a successful transition to democracy.

SHIRZAD: Well, Lael, thank you so much for that. We really appreciate it. Thank you to all the members for participating.

BRAINARD: Thank you. Thank you, everybody. (Applause.)

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