Economic control is a powerful tool, according to Jacob Lew, former U.S. Treasury Secretary. The United States is in a unique position to incentivize other countries to change policy through sanctions and tariffs, when used responsibly. But when economic powers are implemented in “aggressive and counterproductive ways” Lew warns, the stability of American respect and power is at risk. He and a fellow former U.S. State Department colleague, Richard Nephew, wrote about the importance of using economic policy judiciously in an article for Foreign Affairs.
Lew spoke with host David Brancaccio about his fears of receding American influence and the unintentional impact of President Donald Trump’s trade war. Below is an edited transcript of their conversation.
David Brancaccio: So I was looking at the Foreign Affairs piece and I was struck with how being a Treasury Secretary is not totally unlike being Secretary of State. There’s a lot of diplomacy, international affairs, not always just the economic stuff.
Jacob Lew: Economic diplomacy is an enormous part of being Treasury Secretary. Certainly in the modern era [and] arguably for a very long time. And it took a lot of my attention when I was in office: things like sanctions, how we handled trade policy. And I actually gave it a fair amount of thought and wrote a piece while I was secretary, a speech I gave on the issue of sanctions and wrote this article to try and pull together the thinking and make it up to date.
Brancaccio: Now in the title of the piece you assert that Washington is now abusing its financial might. I mean, what are we doing burning bridges?
Lew: Well, I think that you know, first of all, using your economic power as an effective tool is extremely important and its ability to project influence, it needs to be protected. What the piece argues is that we have to be careful and not treat the use of economic power as if it’s limitless and that if we act too much unilaterally, if we violate rules that we helped to design, if we don’t build international support for our actions, there can be a backlash. Even if it works in the short term, it can reduce U.S. influence over time.
Brancaccio: You write about what you call “secondary sanctions.” If I can explain it, that’s a bit when the U.S. not only bars its own citizens or our companies from doing business with say Iran but the secondary ones kick in barring Americans from doing business with anyone else that does business with the target nation. And you think that’s particularly thorny when you drill down to that new level?
Lew: I think secondary sanctions are a powerful tool and a tool that need to be protected. I do think that it is something that we have to do very carefully. A secondary sanction essentially says that you will reach beyond the boundaries of the United States and impose sanctions on anyone who does business with anyone in the world who is doing something that would be sanctioned. Now if you’re the world’s reserve currency, any provision of dollars anywhere in the world can become subject to secondary sanctions. That’s enormous power. That is something that has given us the ability, in the case of Iran, to really tighten the economic vice and get Iran to the table and to negotiate. What I’m arguing, what we are arguing in the piece, is that it’s something that has to be used carefully because if you do it when you’re, in the case of withdrawing from the Iran deal, breaking a commitment the United States made in spite of the fact that by all evidence Iran complied with the nuclear deal that raises many questions. One, will the rest of the world cooperate with you? And two, will the country you’re sanctioning change its behavior because of the sanctions? If sanctions don’t change behavior, they don’t accomplish their real goal which is to change the policy of another country. And if we don’t keep our word then it’s hard to expect others to make concessions knowing that sanctions will be lifted which is not to say that Iran doesn’t do a lot of terrible things. It’s was a nuclear deal and the secondary sanctions that are going to be reimposed in a few days are being done notwithstanding the fact that all of the other signatories to the agreement oppose that action.
Brancaccio: There’s that wrinkle that the Europeans are on the record as wanting to get around the new U.S. sanctions on Iran and the U.S. could retaliate through secondary sanctions.
Lew: That’s right. They’re not only on the record that they want to but they’re developing approaches to work around the sanctions. For example, exploring the possibility of developing payment mechanisms that don’t go through and touch the U.S. in any way, that don’t deal with dollars. I don’t think that in the short term it’s going to be easy to escape the reach of the United States. What we are you in the piece is that over a long period of time and you know, 10, 20, 30 years is a long time but it’s not a long time, these kinds of changes will reduce the ability of the U.S. to project its influence and that would be a loss of power, not an increase of power. So the question is how do you use these tools effectively and how do you balance what they cost with the benefit that they bring? In a sense if you think about the use of military force, everyone understands that there’s a price you pay when you use military force. Well, there’s a price you pay when you use economic force as well.
Brancaccio: But if you hearken back to an earlier era when perhaps the notion of statecraft and respecting these international relationships was more front and center, there were still problems with the international trading community. We ended up with what many on the left and many on the right argue is a broken trading system with China. Maybe playing according to the rules and making more nice wasn’t working for people?
Lew: You know I think it’s very fair to say that the international trade agreements and rules required fixing. We certainly took the view for example, when we negotiated the Trans-Pacific Partnership, TPP, that we had to do better than had been done in the past and frankly we did do a lot better. I think the idea that, take steel and aluminum tariffs for example. The United States would assert a national security interest in imposing steel and aluminium tariffs on countries like Canada and Australia and you know Europe, our closest allies. That doesn’t add to the U.S. standing in the world. We may well have problems with China. I spent a lot of time as secretary taking these issues directly to the Chinese. But the way to deal with that is by making the point that you need to have structural changes in China and you need to do it with the moral leadership of having been both the creator of the rules and complying with the rules of international engagement. If it looks like we’re breaking the rules, where’s our standing to get them to live by the rules that we have designed? Now I think you know there is a lot that needs to be taken to China for China to address. I think that the current tariff policy is not an effective way to do it. It’s hurting U.S. businesses, it’s hurting U.S. jobs and it’s making for the world the impression that the United States is disregarding the rules that we helped to write.
Brancaccio: There’s a view that what’s going on with the tariffs and counter tariffs, U.S., China, is a negotiation and eventually, sort of like the overhaul of NAFTA, they’ll draw back together and they’ll come to an agreement and this is sort of the ugliness of negotiation. But we’ve also heard from a couple of China sources that this tough negotiation may be poisoning the wider political relationship between the U.S. and China. I mean this is part of what your article discusses in a sense. There are even some voices in China who are worried that the U.S. is not just trying to fix the trading system but they’re starting to say this aloud, they’re worried about what if the U.S. is pursuing a policy of regime change in Beijing? That could harden hearts politically in Beijing.
Lew: So, I think if you look at the U.S.-China relationship, it’s the most important bilateral relationship in the world. There are a lot of things that we need to be able to do together to promote geopolitical stability and international economic stability. We’re together 40 percent of the global economy. Now you look at an issue like sanctioning North Korea. It is very important to have China’s cooperation for any sanctions there to be effective. You put that in the context of concerns that the U.S. is waging a trade war and possibly going beyond that in terms of raising the level of hostility. It does not bode well for ongoing cooperation on other key strategic interests. If China’s economy suffers and the U.S. economy suffers because of a trade war, there are no winners in the global economy. So I think that the question you know, from a perspective in China, you know I’ve not believed and I still don’t believe that conflict between the United States and China is inevitable in terms of it ratcheting up. I do think that it takes a respectful approach where we engage constructively, where we take issues to them and press for change. And I don’t see that happening now in an effective way. For example, the idea that the snapshot of the trade deficit has gotten as much focus as it has. Personally, I would focus more on the theft of intellectual property. I would focus more on barriers to foreign goods coming in and to foreign investment in China. Structural kinds of things where you can make progress, it’s hard but you need to have a relationship where you’re communicating to do that. I don’t think a trade war gets you that. My own view is that we didn’t get a lot out of the saber rattling with Europe and Canada and Mexico. The new NAFTA agreement, you know in many ways, adopted principles that were in TPP that the president tore up. And I think the idea that somehow just imposing unilateral sanctions on China without regard to whether or not they’re well-founded is going to be a problem in terms of having a constructive engagement and making real progress. And the question you ask, “will it lead to increasing levels of tension and hostility?” That would be an unfortunate outcome.
Brancaccio: And we could alas get a test of your concerns if there is an international crisis of some sort, a big international crisis, financial, political, national security , where nations need to draw together. And we haven’t quite had that level of test.
Lew: No, look during the financial crisis and the Great Recession, we were in a challenging position. The United States was the epicenter of the financial crisis and we went to the world, including to China, and said “you need to step in and do more to stimulate growth.” And we went to the world and said “we need to get together and have a more effective system of regulation.” In order to have that kind of influence, you have to have a lot of respect. We could do it through the financial crisis because of the built up role of the United States. You start to chip away at the leadership role of the United States, it makes it very hard to project our leadership, our influence, at a time of crisis, or to project our values in the normal course of global affairs.
Jacob Lew was U.S. Treasury Secretary from 2013-2017. He’s now a visiting professor of International and Public affairs at Columbia University and a partner at Lindsay Goldberg.