ESC/PC179 JOINT 14 EOriginal: English

NATO Parliamentary Assembly

SUB-COMMITTEE ON TRANSATLANTIC ECONOMIC RELATIONS (ESCTER)

SUB-COMMITTEE ONTRANSATLANTIC RELATIONS (PCTR)

MISSION REPORT

WASHINGTON D.C., UNITED STATES

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VANCOUVER AND VICTORIA, CANADA

28 APRIL – 3 MAY 2014

www.nato-pa.int 19 August 2014

This Mission Report is presented for information only and does not represent the official view of the Assembly. This report was prepared by Paul Cook, Director of the Economics and Security Committee and Steffen Sachs, Director of the Political Committee.

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I. INTRODUCTION

1. 38 Members of the NATO Parliamentary Assembly’s Sub-Committees on Transatlantic Economic Relations (ESCTER) and on Transatlantic Relations (PCTR) visited Washington D.C., United States and Vancouver, Canada from 28 April to 2 May 2014 to discuss a broad range of issues, including transatlantic relations, energy security and Canadian perspectives on the pivot to Asia. The delegation was led by Chairpersons John Dyrby Paulsen (Denmark) and Menno Knip (Netherlands).

II. MEETINGS WITH US GOVERNMENT OFFICIALS

2. The meetings with senior officials of the US Departments of State and Defense and with Members of Congress focused on US-European security relations in the context of the Ukraine crisis, NATO, and energy security, among others.

3. Principal Deputy Assistant Secretary of State for European Affairs Paul Jones affirmed that the US rebalancing to Asia was never supposed to diminish US relations with Europe. There is a close cooperation with Europe on the situation in Ukraine; the United States supports Ukraine politically and economically. The US government pursues an approach which imposes costs on Russia for its annexation of Crimea as well as its military incursion into Ukrainian territory and its support for militants in the east of the country. A diplomatic approach is preferable, Mr Jones said, adding that the Allies are encouraging Russia to take the path toward de-escalation. That said, the United States also wants to reassure and support NATO Allies in Eastern Europe and in the Baltics in particular. Recent US military deployments to the Baltics are designed to reassure. The administration is aware of the changing threat perception and Washington will continue to review its military presence in the region.

4. Russia’s recent actions towards Ukraine constitute a fundamental change of the strategic environment. Even though the United States and the Allies have tried to integrate for more than 20 years Moscow has violated the fundamental integrity of other states. The United States considers Moscow’s policy as a long term challenge. Developments in Ukraine have also led to a renewed recognition that NATO Allies need to invest 2% of their GDP in defence. Although Russia has modernised it armed forces over the last five years and now fields more capable military, especially special forces, it remains behind the military capabilities of NATO members and does not pose a strategic threat; rather, it is a regional power that can take steps in its periphery that is hard for the United States to counter without great costs. However, the United States and the Allies have to confront such behaviour by Russia - or risk seeing more of this. In this context, he mentioned the situation in Moldova as well as the frozen conflict over Nagorno-Karabakh.

5. The upcoming NATO Summit will focus on Ukraine, though Afghanistan will also feature on the summit agenda. NATO’s Strategic Concept, and its emphasis on collective defence, crisis management, and partnerships remains valid. The discussion with the delegation focused on Western coherence towards Russia and possible ways to influence it. Mr Jones commented that the Allies have been unified in their reaction to Russia and that increased pressure will generate political and economic isolation for Russia, which, in turn, could shift events over the longer term. Moreover, people-to-people contacts are important and the United States is looking into ways how they can be increased. At the same time, Moscow is using propaganda to stir up Russian minorities in neighbouring countries. He also expressed concern about corruption which is either intentionally exported by Moscow or it seeps out to some of our partner countries, for example in the Balkans. Corruption is also a big problem in Ukraine and the United States is trying to put in place mechanisms to increase transparency and reign in corruption.

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6. Michael Fuchs, Deputy Assistant Secretary of State for East Asian and Pacific Affairs, Bureau of East Asian Affairs, explained that US policy towards Asia focusses on economic and security issues as well as on the engagement with people. As to the economy, the United States recognises the dynamism and growth taking place in Asia and has spent a lot of energy on achieving a free trade agreement. As the security situation in the region is very complex, the United States. remains committed to its regional allies. President Obama has sought to shore up America’s alliances with Japan, South Korea and other allies. Just recently the United States has signed a historic agreement on defence co-operation with the Philippines, which foresees an enhanced rotational military presence in the country. As to Japan, the United States is reaffirming its commitment to the bilateral defence treaty to dispel security concerns in the country, which has a profound debate about the nature of its own defence posture. The United States encourages Japan to extend a friendly hand to the region, the State Department official added. 7. Washington also wants a positive relationship with China and feels that the rebalancing to Asia-Pacific is not about China; it merely reflects the continuing security commitments of the United States. China has benefitted from these commitments as much as the United States and its regional allies, he added. A positive aspect in the relationship with the People’s Republic of China has been that Beijing demonstrated an increased willingness to talk more openly about North Korea and the concerns it has. However, one should not expect that the issue of North Korea and its role for regional and global security to quickly go away.

8. More generally, Washington’s policy approach towards Asia emphasises a focus on multilateral engagements, Mr Fuchs explained. In its efforts to strengthen ties with the countries of Asia, the United States is looking beyond just governments and engaging with people. In this context, the United States is particularly intent to promote educational exchange. The rebalancing of the United States. focus to Asia is not about moving away from Europe but rather about strengthening US presence and engagement in the region, the delegation was informed. The growing importance of the region for the world economy and the host of security issues make Asia also important for Europe, the speaker noted. He concluded his presentation by encouraging the European Union to send an ambassador to ASEAN.

9. In his exchange with the delegation Jim Townsend, Deputy Assistant Secretary of Defense for Europe and NATO (OSD Policy) covered relations with Russia, defence spending and NATO Ballistic Missile Defence (BMD). He called on Allies to forge a common front in the face of the Russian challenge but noted that allied credibility will hinge upon higher levels of defence spending and the development of 21st century military capabilities. Russia’s annexation of Crimea and its menacing stance towards Ukraine require a clear and unified response by the Allies. Moscow needs to understand that there will be costs if it does not change its attitude, the Defense Department official said. He also underlined the need for NATO Allies to make the necessary investment in defence, particularly as a great majority of the Allies have decreased military spending in previous years. Acknowledging that defence spending is facing tough domestic opposition in times of fiscal austerity, he said that political will and leadership is required to increase defence spending. Mr Townsend continued by arguing that national parliaments play a hugely important role for defence spending as they can put pressure on their governments to invest sufficiently in defence. The United States alone cannot always remind the governments of NATO member states to fulfil their commitment. The United States and NATO are moving ahead with their plans on BMD, Mr Townsend said. With the deployment of the first of four US missile destroyers to Rota, Spain, earlier this year, the initial part of NATO BMD hardware has already been put in place.

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10. Dan Chiu, Deputy Assistant Secretary of Defense for Strategy, provided a general overview of the Quadrennial Defense Review (QDR). The QDR is mandated by Congress every four years and provides a review of US Department of Defense long-term strategy and priorities in response to the threats and challenges that the United States faces. In general terms, the QDR is a “dialogue” between the US Administration and Congress on the overall direction of US defence policy and budgeting. In contrast to previous defence reviews, the 2014 QDR has put a stronger focus on internal budging issues than at any other time in the past. This shift in emphasis reflects the uncertainty about the development of US defence budgets. Although the Obama administration continues to put a premium on military capabilities and readiness the effects of the “sequestration” law that triggers automatic and across-the-board budget cuts for a ten-year period beginning in US Fiscal Year 2013, have hit the military particularly hard. According to the QDR sequestration measures are limiting future capabilities and readiness. If Congress cannot agree on future budget reductions and sequestration continues the United States may have to envisage more drastic force cuts which Deputy Assistant Secretary Chiu considered unwise. As the United States will have to be able to respond to contingencies in the future, it will be important to retain the necessary flexibility in implementing sequestration measures, the delegation learned. The United States wants to prevent and deter conflicts and it is likely that it will have to respond to contingencies. NATO remains a very strong partner for the US.

11. The delegation also received briefings about Afghanistan from Mike Dumont, Deputy Assistant Secretary of Defense for Afghanistan, Pakistan, and Central Asia on Afghanistan. As he pointed out, the outcome of the presidential elections in Afghanistan will be of crucial importance for the future of the country. To that end, providing security to conduct a free and fair election is a key concern for the Allies. The first round of the elections has been conducted successfully on 5 April. According to initial estimates approximately 60% of those eligible voted, 36% of them women. The NATO-led International Security Force (ISAF) has been working closely with the Afghan National Security Forces (ANSF) to prepare for a safe conduct of the elections. There were security incidents but no major ones and some polling stations were closed in more remote areas and where security situation was fragile. The second round of the elections is likely to take place between mid-to end of June. If the last elections were any kind of guide the ANSF are well positioned to take care of security.

12. The overall security situation in Afghanistan has improved over time. The Afghan military has made great strides. However, there will be challenges along the road and one of the important issues that need to be solved is the signing of the Bilateral Security Agreement (BSA) between the United States and Afghanistan. The BSA and the political transition in Afghanistan will define the US military presence in Afghanistan beyond 2014. As the Afghan government has still not signed the BSA no decision has been made by President Obama on the future engagement of the United States in the country. Therefore, US government officials are planning for various contingencies. While Mr Dumont was optimistic for the future of Afghanistan and for the ANSF, he added that much of it will depend on the support that Afghanistan will receive from the international community in the future. The United States is willing to continue supporting Afghanistan, but it will have to insist on the Afghan government meeting standards on matters like corruption and human rights. Moreover, there needs to be progress on the role of women in society. Education plays an important role as women’s rights are less of an issue in an educated society.

13. Afghanistan’s neighbours are also interested in the stability of the country. Iran is interested to maintain the influence it has in the Western part of Afghanistan. Russia, which has been co-operating with NATO in, for example, the Helicopter Maintenance Trust Fund Project, is concerned about a possible deterioration of the security situation. Though NATO-Russia relations have deteriorated after the annexation of Crimea, Russia has not indicated that it plans to thwart the withdrawal of NATO equipment from Afghanistan. China is very much interested in Afghanistan’s natural resources and is buying up licenses for mining although only few investments have taken place so far.

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14. Alice Friend, Principal Director for African Affairs in the Office of the Secretary of Defense, provided a briefing on Africa. She noted that the African Union has the will but not capacity to stabilize countries like the Central African Republic, Mali and South Sudan. Though piracy off the Horn of Africa has declined it has grown in the Gulf of Guinea. More generally, Africa continues to face enormous challenges that include extremism, increasing urbanisation, environmental degradation — which leads to fight for scarce resources — and corruption. At the same time, the capacities of African states to tackle security challenges are limited, she noted. The United States pursues a policy that is geared towards ending existing conflicts and the US Department of Defense pursues a global approach to anti-terrorism, which emphasizes a better co-ordination of collective approaches with countries in Africa. To that end, the United States assists partner countries in military capacity building while leveraging this with the promotion of human rights and civilian control of the military in addition to supporting growth and development. In this, the United States follows a small footprint approach, such as in the Sahel and the Maghreb that includes other actors like the African Union and the UN. As the US presence in Afghanistan will be reduced, US engagement in Africa is likely to increase, preferably also in a multilateral context, especially with the Allies. The United States is very receptive to hearing proposals by its European partners and Allies about ways to improves security in Africa, the Defense Department official underlined. The security challenges emerging from Africa and across the Maghreb have influence the US military posture in Southern Europe, she added.

15. The visit to Washington also provided the Sub-Committee members with the opportunity to meet with their colleagues from US Congress. Congressman Mike Turner, Head of the US delegation to the NATO PA, and Congressman John Shimkus focused their remarks on the recent Russian actions in Ukraine. They reassured the delegation that the United States will stand by its commitment to help defend the territorial integrity of its European Allies. Both criticized the Russian behaviour and warned that the Allies need to be ever more vigilant against future Russian attempts of intimidation. Mr Shimkus expressed concern that Russia is returning to the Cold War by trying to reconstruct a Russia empire that does not respect international law and borders. Noting that the test of a new intermediate nuclear missile by Russia is a violation of the Treaty for Intermediary Nuclear Forces (INF), Mr Turner said that NATO has pursued the false narrative that "NATO does not have adversaries".

16. Mr Turner informed the delegation that the US Congress is preparing legislation that will call upon NATO to continue its Open Door policy by inviting Georgia to participate in the Membership Action Plan (MAP) to Georgia and to offer membership to Montenegro and the former Yugoslav Republic of Macedonia1. Moreover, the legislation currently prepared calls for the development of a “Dayton II” accord for Bosnia and Hercegovina. With regard to NATO enlargement he suggested that the Alliance should not exclude new members solely on the ground that a part of their territory is occupied. Likewise, disputes about the former Yugoslav Republic of Macedonia’s name ought to be set aside in order to consolidate NATO’s presence in South Eastern Europe, he said.

17. On sequestration, and particularly the impact on the defence budget, Mr Turner cautioned that the full effects have yet to be seen. The Republican Party in Congress does not support the application of the sequester mechanism on the defence budget but supports an increase of the defence spending that is envisaged by the Obama administration.

1 Turkey recognises Macedonia by its constitutional name.

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18. Senator Chris Murphy, Chairman of the US Senate’s Committee on Foreign Relations Subcommittee on European Affairs, commented that the recent developments in Ukraine have led the United States to pivot to Europe. Russia’s actions in Ukraine are an important test for the transatlantic relationship, he explained, and Europe’s reluctance to match the US sanctions on Russia has generated frustration with Europe in the Congress. However, while it is not "useless" to apply sanctions against Russia it is important to think of a Russia “post-Putin”. The Ukraine crisis demands a global response, he added, and suggested that Russia’s behaviour reflects its own weakness. At the same time, the actions taken by Russian President Putin advance Europe’s efforts to become more independent from energy imports. NATO Allies have to watch developments in Moldova very carefully and need to strengthen their engagement with the country as Russia is prepared to continue its approach of intimidation.

19. Noting that the Ukraine question has led to a new interest in the Alliance in the US Congress, Vince Morelli and Paul Belkin from the Congressional Research Service (CRS), also said that Congressional concerns over lacking European military capabilities will continue. They added that Congress is watching very closely if European Allies are increasing their defence spending. This point was also made by General James L. Jones (USMC ret.), CSIS Trustee, Former US National Security Advisor and Former Supreme Allied Commander Europe (SACEUR), during a dinner discussion at the Center for Strategic and International Studies (CSIS). In this context he reminded the delegation of the commitment by NATO Allies to spend 2% of their GDP on defence. Without European solidarity on the issue of burden sharing NATO will be in difficulties, he predicted. President Putin has provided the Allies with an opportunity to come together – or not. The Allies, and European Allies in particular, need to develop a long-term strategy on energy in order to reduce dependence on Russian energy deliveries. General Jones also stressed the need for the continued adaptation of the Alliance. Part of this is that NATO and the EU need to clarify their relationship. Anticipating that Africa and the security challenges emanating from this continent will become more relevant for NATO Allies, he said that NATO needs to become less reactive and more proactive in its approach or risk going out of business. Both Europe and the United States need to show presence in Africa, as a means to balance the influence of China on the continent.

20. Amos Hochstein, Deputy Assistant Secretary of State for Energy Affairs, reminded the delegates that energy security is now recognized as an important area for transatlantic co-operation. Since 2009, NATO Allies have been working closely on energy security, putting special emphasis on efforts to reduce energy dependency. While progress has been made to reduce Allies’ dependency from energy imports, NATO member countries are still vulnerable to interruptions of energy deliveries. The established mechanisms of co-operate on energy security have, for example, made it possible to launch reverse flows back of Russia gas to Ukraine via Poland and Hungary. While the amount of gas that Ukraine receives through these flow backs is small for now, this is likely to grow significantly over time.

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21. The US supports building additional energy infrastructure that allows the diversification of energy deliveries to Europe. The creation of a southern gas corridor linking Azerbaijan and Italy via Turkey, Greece, and Albania is another example for such efforts. Building a Liquefied Natural Gas (LNG) terminal in Croatia (Krk island) would allow the Adriatic to supply gas to rest of Europe and additional LNG facilities could be built in Greece. However, even if Europe receives more energy from other sources Russia will remain an important supplier of European energy. In the future Europe may also receive LNG from the United States, which has been transformed from an energy consumer to an energy supplier because of the shale gas revolution. However, US LNG deliveries to Europe are no “silver bullet” as there are no existing LNG export facilities yet. Changing existing structures and necessary legal procedures like export licensing will take several years according to Deputy Assistant Secretary Hochstein. Moreover, as the US energy market is not dominated by the government, future US LNG exports are likely to be directed to where the biggest demand is, i.e. where energy companies obtain the highest prices. Currently, the price for one British thermal unit (Btu) in Asia is around $16, while it is only $10 in Europe and $4 in the United States. However, even if US natural gas would be delivered elsewhere Europe would benefit as higher supply will lead to lower prices.

22. A similar point was made by Congressman John Shimkus who indicated that Congress seems increasingly inclined to sanction US Liquefied Natural Gas exports to help loosen Russia’s grip over critical European energy supplies. Even if these exports ultimately move to Asia, Shimkus told the delegation, the net effect will be to drive down prices globally and reduce Russian leverage.

23. More generally, there is a fundamental shift in the international energy market, Deputy Assistant Secretary Hochstein noted. The world of supply is changing with recent discoveries of large gas and oil fields in different parts of the world, such as in the Eastern Mediterranean around Israel and Greece, and in Mozambique, Tanzania and other countries in Eastern Africa. The days when the Organisation of Petrol Exporting Countries (OPEC) set prices are over. Changes also occur on the demand side as the projections for energy consumption indicate that European demand will remain stable, while demand from non-OECD countries will be very high. As global energy demands and also energy infrastructure will continue to expand new threats and resource conflict is very possible and thus also the need for security energy, the State Department official stressed. NATO has begun to work on energy security and engaged in a number of activities, such as training and education of military leaders.

24. Sanctions on energy are not favoured by the private sector but they can sometimes be a necessary tool, he noted. In this context, he pointed to the example of US and international sanctions against Iran that have played a critical role in engaging Iran in negotiations, which could produce a comprehensive agreement. If sanctions are to be lifted Iran, which also has the world’s largest gas reserves, will put its energy reserves onto the market quickly.

25. Using energy sanctions in response to Moscow’s intimidating policy towards Ukraine and its annexation of Crimea would, however, not be as effective as Russia is integrated into the global economy. In contrast, Allies have an opportunity on the economic front as Russia is also dependent on Europe and it cannot sell gas elsewhere at the moment. Europe needs to review its contradictory positions on shale gas. While European governments are sending envoys to pressure the US Administration to approve gas deliveries to Europe they are, at the same time, deploring the use of shale gas. Europe also should look at its energy mix, i.e. the percentage of energy produced by oil, gas, coal, nuclear, and renewable energy, he suggested. In this context, he noted that the price for coal has fallen, partly to subsidies, and that the use of nuclear energy also raises issues of national security and safety implications. The use of renewable energy and increased energy efficiency should be encouraged, he noted. One reason why Europe’s future energy demand is flat is because Europe is much more energy efficient than, for example, the United States.

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26. Global macro-economic issues and the US trade agenda were on top of the agenda of the discussions at the Peterson Institute of International Economics. Jacob Kirkegaard, Senior Fellow, commented on “United States Perceptions about the EU”, while Jeff Schott, Senior Fellow, provided an overview of the “Prospects for Transatlantic Trade and Investment Partnership (TTIP)”. In addition, Nicolas Veron, Visiting Fellow, spoke on “Global and Transatlantic Financial Regulatory Cooperation”.

27. The delegation heard that Washington D.C. is less focused on Europe than it has been in the past but among the economic policy community there has been some concern about European austerity. The economist Paul Krugman has perhaps been the most vocal critic of European austerity in an era of recession and he, like others, is concerned that what he sees as a dangerously restrictive policy could win backing in the United States. The US defence community, meanwhile, is very concerned about the downward trend in European defense spending. Finally, the onset of populist politics in Europe in response to economic difficulties is worrying although this concern has begun to fade as Europe slowly climbs out of the recession. That said, Europe seems more divided than it has been in the past and this has been particularly evident in the acrimonious discussion about how to respond to Russia’s invasion of Crimea.

28. Tracing the trajectory of the financial crisis in Europe and in the United States illustrates a very different set of policy approaches to recession. Although the crisis struck US financial markets first, the government there also responded with greater alacrity to the liquidity problem. It created the Troubled Assets Relief Program (TARP) and conducted rigorous stress tests on its banks. By 2009 it had essentially addressed the core elements of the problem and the Dodd Frank Act laid out a pathway for regulatory reform. Europe, however, was much slower in its response and this is evident in the depth and duration of the crisis there. Europe is still plagued by systemic fragility although important reforms, like the banking union, should help over the longer term. That said, the United States has had a more rigorous approach to banking reform. The United States also has a more variegated financial system and is less reliant on banks than Europe for financing.

29. Many US monetary specialists believe that the ECB should have responded to the crisis in a more proactive fashion and launched monetary easing at a far earlier point. Structural reforms are one positive outcome of this crisis but Europe needs to go further to address market rigidities, which are leading to persistently high unemployment levels.

30. The TTIP talks are off to a somewhat slower start than anticipated. The grand vision with which the EU and the United States launched those talks has given way to nuts and bolts negotiations that are proving very difficult and protracted. The rationale for a deal remains compelling and has perhaps become even more so as a result of the crisis over Ukraine. The US and European economies remain highly integrated and there is roughly $4 trillion in cross investment. The objective of TTIP is to deepen this integration by lowering unnecessary barrier to trade. This is not easy. Europe has become accustomed to demanding that countries adopt its acquis but it is now dealing with a very large and powerful trade partner that is making similar demands. Real concessions will have to be made on both sides and this is not proving easy. Regulators on both sides of the Atlantic are very reluctant to give up their jurisdiction and the policies that they employ to exercise their oversight functions.

31. Unsurprisingly, agriculture remains a real sticking point in the talks. The core of the problem is not tariffs as much as it is government support programs, which have strong political defenders. Likely forging an agreement on public procurement will be very difficult particularly as the goal is to include state and regional level procurement. Europe wants a deal that will allow European firms full participation in state level tenders but this is constitutionally difficult for the US Federal government to ensure.

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32. It is important to have a broad discussion about regulations on both sides of the Atlantic even if the outcome of the TTIP talks is difficult to predict at this point. More transparency is needed and the talks could help move this forward. There are also problems in the US Congress that have not allowed for the extension of the President Trade Promotion Authority. But this is likely a temporary political problem and by the time that negotiations are completed, the President will likely have this authority. US negotiations with Asian trading countries are more advanced and Congress will need to extend authority for those talks in order to ensure it a realistic chance at ratification. The TTIP talks are far less controversial than the Trans Pacific Partnership (TPP) talks in Washington largely because European wages are relatively high while Asian wages are not and this raises concerns among many groups who worry that a deal with Asia would ultimately lower labor conditions in the United States.

33. The views expressed on the TTIP resonated strongly with those that Julieta Valls Noyes, Deputy Assistant Secretary of State for European Affairs, had expressed to the delegation during the meetings at the State Department. She mentioned that the negotiations on the TTIP are dominating the transatlantic economic relations at the moment. TTIP will be the most important trade deal the United States has ever achieved. In the economic realm, the TTIP could be the equivalent of what NATO is in the security realm, she noted and reminded participants that 50% of world production and 30% of world trade are generated by the United States and the EU. Bilateral trade reaches $2.6 billion each day, US Foreign Direct Investment in Europe and European investments in the United States have created 13 million jobs on each side of the Atlantic have; the United States and the EU most important economic powers. Contrary to fears expressed by some in Europe, TTIP will not lower standards. President Obama had already said that the United States had no interest in lowering standards. The TTIP will hold up high labour, health, and environmental standards. Asked about the possible impact of the TTIP on the TPP, the speaker said that the TTIP and TPP are independent, stand-alone agreements. That said the United States considers these agreements as mutually reinforcing, particularly as they create a global rules-based system that is generating growth.III. MEETINGS AT THE IMF AND WORLD BANK

34. The Delegation discussed the global economic outlook with senior IMF economists. As Gian Maria Milesi-Ferretti, Deputy Director, Research Department, World Bank, informed the participants the world economy will very likely benefit from reduced fiscal drag in 2014 after a year of very tight fiscal conditions, which kept growth in check last year. Interest rates are generally very low today. Emerging markets, which had been an engine of growth at a critical moment during the global financial crisis, are now slowing and growth is more likely to be driven by more advanced economies. The Russian economy has slowed precipitously, for example, as have several other emerging economies. The Crimean crisis has exacerbated the problem and has accelerated an outflow of capital from that country that compelled authorities to tighten monetary conditions. Brazil’s economy seems likely to remain weak. The US economy is expected to recover but monetary policy with tighten. The pattern is similar in the United Kingdom where GDP growth has picked up in earnest—giving the Bank of England some leeway to tighten the money supply. The Euro area, however, will not undergo monetary tightening as long as the recovery seems so fragile, particularly in several Mediterranean states.

35. The signs of US recovery are apparent. Housing and equity prices are rising. Housing price rises will have wealth effects across the board while rising equity prices are more skewed to the well off. The United States has undergone a fall in unemployment, which now stands at 6.5% but there has also been a dramatic decline in labor force participation rates. Economists are debating whether this represents a structural or a temporary change. The aging population could be factors as baby boomers begin to retire.

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36. In the Euro area, German growth remains weak while Italy and Spain, after undergoing significant contractions, should return to growth. It is increasingly evident that access to credit varies considerably across Europe; German corporate lending rates are 3% less than in Italy and Spain despite a sharp fall in sovereign spreads. This suggests that financial fragmentation persists in Europe despite an array of reforms designed to deepen integration.

37. In Japan the Nikkei Index remains strongly correlated to the exchange rate with the dollar. Japan has now adopted a formal 2% inflation target and inflation expectations are drifting upward, which is a good sign in an economy that many feared would remain mired in deflation. Meanwhile growth in China has slowed from 10 to an estimated 7.5%. It will continue to help drive global growth, but only to the same degree as it has in recent years.

38. There are fewer obvious risks to global growth today. There are potential problems linked to monetary tightening in the United States, particularly in emerging countries that could suffer from capital flight as a result. A number of emerging countries took advantage of easy monetary conditions during the crisis and could be vulnerable to any correction the US Federal Reserve orchestrates. Depreciation against the dollar could provide an export vehicle for maintaining growth. Europe and Japan will need to continue with structural reforms in order to better position their respective economies for long-term economic health. There are also potential geopolitical risks that could undermine the global economic environment, but these are difficult to predict.

39. At Bretton Woods international leaders entrusted the IMF with the mission of safeguarding financial stability. That mandate is as relevant today as it was 70 years ago, although the context has changed significantly. The IMF today must cope with three critical trends: mounting global integration, interconnectedness and the diffusion of power.

40. Global Interconnections have dramatically increased. Cross border bank claims, service exports, and the proliferation of global supply chains are among the myriad manifestations of the phenomenon. Interdependence creates surprising linkages. Macro-economic analysis, for example, suggests that the Brazilian economy now moves with that of Asia. Business cycles are correlating along lines that follow the movement of capital and goods. These linkages also are altering the way we look at economic shocks and policy responses to them. Policymakers need to understand potential spillovers or “spill backs” when seeking to remedy economic shocks. Economic shocks also spread more quickly through the international system today and can affect bystanders. All this suggests that new kinds of safety nets are needed including swap lines and special credit facilities etc.

41. There is also a shift of the global distribution of economic power with emerging powers increasing their weight in the global economic system. More countries will invariably shape the international economic order and this will require changes in governance structures. There is strong resistance to these changes as well but adjustment is essential. This dynamic has been apparent in discussions about rebalancing the IMF Board and voting rights, and there are key countries resisting changes in this regard.

42. The delegation also met World Bank President Jim Yong Kim. Dr Kim thanked those members of the delegation who had supported the replenishment of the IDA Fund, which is targeted for the world’s 80 poorest and most fragile countries. These funds helped underwrite critical programs that help lay the foundations for sustainable growth including vital infrastructure and immunization programs. Dr Kim noted that 35% of the world’s poorest people live in fragile states many of which have suffered from civil disturbances and war. He mentioned a recent trip he took with UN Secretary General Ban Ki Moon to the Great Lakes region of Africa. This was the first time the leaders of the UN and the World Bank had travelled together but the trip symbolized the need to forge tighter links among the organizations working in the developing world. Both the Bank and the UN are working for the same ends and it is essential that these efforts be coordinated.

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43. Along these lines, it is also important that peacekeeping and development efforts are closely coordinated and that development specialists deploy quickly into post-conflict region to help launch recovery efforts. This was the case in Mali. The bank has extended a number of loans to those countries accepting Syrian refugees like Lebanon and Jordan but that lending has now reached the Bank’s limits. It is estimated that the influx of refugees into Lebanon has cost that country $ 7.5 billion and 25% of that country’s population today are refugees. Dr Kim noted that he knows the incoming NATO Secretary General Stoltenberg and that he could well imagine working with the UN and NATO in the event of an emergency situation. He added that it is very important to maintain international attention on conflict affected areas.

44. Dr Kim also noted that the Bank has moved quickly to help put together a support package for Ukraine. It will receive $3.5 billion, $1.5 billion of which will provide direct support for the budget. It is in a very vulnerable situation and there is international concern about its economic situation and energy exposure. The current crisis has exacerbated the challenge but it appears to also have had an adverse impact on the Russian economy. The Bank is also working with Greece, Cyprus and Italy in the wake of the recent financial crisis.

45. The Bank is not a first responder in disaster situations but it is very dedicated to investing in health care and it is also very supportive of integrating women and girls into the life of national economies. Failure to do so is a formula for economic underdevelopment. The failure to fully tap into the talent of women could be costing the MENA region as much as 25% of its potential GDP. Dr Kim also discussed the problem of global governance and the mismatch between the growing weight of emerging economies and the old governance structures, which have not evolved sufficiently to reflect these changes. The Bank is unique in that its governing board actually operates in the Bank itself.

IV. VANCOUVER

46. The delegation met with representatives of Transport Canada to discuss the Asia Pacific Gateway Initiative and the commercial and infrastructural dimensions of Canada’s Pacific vocation. The Asia Pacific Gate and Corridor Initiative represent a comprehensive attempt to increase the efficiency of moving goods between Canada and Asia. Much of the effort focuses on generating new private investment and innovation. The project has so far generated roughly 14 billion Canadian dollars in investments both on the private and government sides. Increasing trade traffic with Asia requires constant upgrade of bridges, ports and transit and it also requires 21st century governance and strategic partnerships with international players. Local and provincial officials as well as the business community work together to identify potential choke points blocking the flow of goods across the Pacific. To simplify matters, officials have integrated the three main ports in the Vancouver area into one administrative entity in order to facilitate administration and build synergies. Government and business have also worked together to enhance border security and efficiency.

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47. Vancouver, which is the closet North American port to Asia, is not only serving British Columbia. The port is actually a doorway to the entire North American continent and this has important infrastructural implications. Air, road and rail links are critical to keeping the port of Vancouver at the center of trade with Asia and moving freight to Eastern Canada, Chicago and the Gulf of Mexico. Port Metro Vancouver has undergone a 40% increase in container traffic since 2006 and has embarked on a range of projects that will facilitate future growth. New marine container examination facilities have improved inspection speeds and US customs recognizes and accepts these inspections, which help eliminate a costly redundancy. Canada’s customs, immigration and agricultural departments have merged into a single agency and this too has facilitated the development of an integrated border approach.

48. The Royal Canadian Mounted Police are also critical players and play a leading role in the fight against illegal trafficking, organized crime and terrorism. Canada and the United States have a relatively open border but this requires close cooperation with US officials on border management. The two countries are collaborating on a beyond the border initiative that involves a long-term strategy to build a common perimeter facilitating the movement of goods and people while countering illegal trafficking. Drug and people smuggling are a serious concern and the two coast guards are also working closely together and sharing marine intelligence.

49. Until recently Japan was Canada's leading Asian trade partner. China now occupies that position and trade with South East Asia is growing very rapidly. Canada has a long history of commerce with China, a relationship that has been reinforced by immigration. Chinese immigration to Canada began with the construction of the trans-continental rail system and the profile of Chinese living in Western Canada today is very diverse.

50. Canada is actively engaged in the TPP talks and is also negotiating a bilateral trade pact with Japan. The expectation is that these negotiations will further boost Canadian trade with Asia although there are some leaders who worry that these regional pacts are a poor substitute for global negotiations under the auspices of the WTO and could even strip Canadian officials of certain powers to exercise regulatory authority in Canada itself.

51. One cannot separate Canada’s commercial interests from its geopolitical concerns. Canada has a very close trading relationship with the United States but it does not want to be overly dependent on that relationship and sees Asia as a key to its diversification strategy. But there is a great power game underway in Asia as well characterized by a high degree of strategic mistrust between the United States and China. There are also grave and persistent tensions between North and South Korea and a range of maritime trouble spots in the South China Sea. China’s so-called Nine Dash line carves out a large maritime claim consisting of between 80 and 85% of the South China Sea—a claim that conflicts with the assertions of several other Asian counties.

52. China’s ambitious naval build up is gradually expanding its capacity to project power into blue water. The United States sees this as a direct threat to its naval supremacy and is seeking to counter mounting Chinese capabilities. There is also an increasing tendency to speak of an Indo-Asian theater as so much Pacific maritime traffic is also moving through the Indian Ocean and the Strait of Malacca—the key route linking East Asia to the Middle East and Europe. This is a critical energy highway as well.

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53. Canada’s security interests are that these sea-lanes remain open, and the region itself become more prosperous and stable. It has historical commitments in South Korea and participates in the ASEAN Regional Forum. Its navy has visited a number of ports and its forces have participated in several key disaster relief efforts after tsunami and earthquake events. Canada also has a set of Arctic obligations given its expansive territory in the region but its Arctic fleet is not in the condition that some of its experts believe it needs to be in to carry out these missions. Its ice capable fleet is very limited and reinforcing it will be very expensive. Some experts suggest that Canada’s Artic security vocation is more rhetorical than real but it is of great symbolic importance to Canada, which is currently heading the Arctic Council. It has also taken note of China’s growing interest in the Arctic. China has now gained observer status in the Arctic Council—the culmination of a very clever strategy of engagement with the member countries. Canada’s concerns about terrorism also condition its view of Asia. There is a high level of immigration from South Asia and some of those who have arrived in Canada have extreme views. Some, like the Tamil Tigers have raised funds in Canada. In broad terms, Canada keeps a fairly low profile in Asian security disputes including tensions between Japan and China.

54. The delegation also visited Canadian Forces Base Esquimalt, the homeport to Maritime Forces Pacific and joint Task Force Pacific Headquarters. Maritime Forces Pacific (MARPAC) is responsible for the fleet training and operational readiness of the Royal Canadian Navy in the Pacific Ocean. Joint Task Force Pacific (JTFP) is one of six regional joint task forces located across Canada to conduct continental operations by the Canadian Armed Forces. JTFP is responsible for all Canadian Armed Forces (CAF) operations in the province of British Columbia and its western air and maritime approaches. Commander JTFP commands the Canadian Armed Forces response to any request for military intervention to provide emergency assistance or support in critical incidents throughout the Joint Task Force Atlantic (JTFA) area of responsibility. The Victoria Search and Rescue Region, for which Commander JTFP is also responsible, comprise the northeastern quadrant of the Pacific Ocean and Yukon Territory as well as the Province of British Columbia. The discussions with naval officers and strategists gave the delegation an opportunity to further explore Canada’s Asian perspective, developments in the region and how Canada’s force structure is designed to meet these challenges.

55. Perhaps the most telling strategic shift in the region is China’s growing ambitions and military capacity. They have begun to learn about the strategic opportunities presented by the sea after centuries of seeing it as a barrier. China’s dependence on trade and imported energy has helped precipitate this revolution in China’s strategic perspective and military doctrine.

56. Trans-Pacific trade is now three times greater than Trans-Atlantic trade and nine of the world’s ten largest ports are now in Asia. By next year China will be the world’s greatest shipbuilder. North America has to pay greater attention to developments along the Pacific Littoral. This in turn, prompted the US rebalancing strategy, which should be understood as an adjustment to a new economic and strategic reality involving an important relocation of US naval assets to the region. The US fleet will have to cope with China’s emerging anti-access/area denial capabilities, embodied in the new Dong Feng 21 D ballistic missile, which allegedly could be used to take out a carrier once China manages to perfect the reentry vehicle. It is also developing its cyber and satellite capabilities. China is now working on its force projection capacity and are expanding their horizons to the Indian Ocean. All of this has US strategists worried and the US navy is exploring a range of counter measures. Some think that this could ultimately undermine the value of a carrier fleet although it is premature to jump to such conclusions.

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57. However, the US approach is not simply military and it has dedicated more diplomatic energy to the Pacific in recent years while shoring up its military presence through new basing arrangements, force rotation and exercises. China is not the only concern. North Korea continues to be a great source of worry that is highly unpredictable. There are a range of international disputes in the region involving maritime boundaries, fisheries, island sovereignty and ownership and access to energy. All of this renders the security environment both brittle and uncertain. It is also worth noting that while the United States and Canada are managing sharp reductions in military spending, the Chinese defense budget is increasing roughly at the rate of its GNP growth. It has developed proto-blue water navy while other Asian countries like India and Japan have also increased defense budgets. Many countries in the region including Vietnam, Indonesia, South Korea and Australia have boosted defense investment and there is a proliferation of submarines in these waters.

58. It is important to note that although China has boosted spending, its naval capabilities do not nearly approach those of the United States. It has retrofitted a Russian Carrier but that effort seems more aimed at garnering experience then actually possessing an operational asset. Russia is also deeply worried about the rise of China’s naval capabilities although it is engaged in substantial arms trading with the country. The level of trust is not always high between these two countries, and to Russian chagrin, China reverse engineered several Russian fighters. That said Russia has been delighted that China has been relatively silent on the Crimea crisis.

V. MEETING WITH BRITISH COLUMBIA ENERGY AND ENVIRONMENTAL OFFICIALS

59. The delegation also met with senior officials from the British Columbia to discuss a range of energy and environmental issues linked to the dramatic expansion of the provinces unconventional energy sector. It is important to note that traditional oil and gas production in the West has fallen but unconventional drilling techniques have unleashed a veritable energy boom in Western Canada. The region suffers one serious disadvantage insofar as it is quite distant from the markets it seeks to serve. As the scale and scope of Western Canada’s oil and gas supplies have become evident, there has been growing global interest in its potential and there is growing international participation in developing these fields. British Columbia has a huge endowment in gas and will be among the world’s most important producers. Moreover, some estimates suggest that it could produce gas for as many as 200 years. Developing a capacity to transform this gas into liquefied natural gas will be the key to moving this energy to global markets. Alberta and Saskatchewan have been the centres of oil derived from horizontal fracturing techniques. The rise of the gas industry is only part of a broader expansion of energy production in Western Canada across a range of sectors including shale gas, oil shale, oil sands, coal bed methane, hydroelectric power, geothermal energy and biomass energy. Technological change is making more of these resources economically viable and techniques for more environmentally sound extraction are constantly emerging. These trends are contributing to the expansion of production but there are environmental challenges including the cleaning of tailings ponds in Alberta’s oil sands mines.

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60. Another set of challenges lies in moving this energy to markets. There is resistance to pipeline construction in British Columbia and this has complicated the challenge. Fear of oil and gas spills is the source of some resistance, while by a general aversion to fossil fuels and concerns about global warming also inspires resistance to this kind of energy development. Environmental concerns about these techniques persist and it is essential that the industry develop a strong code of conduct, greater transparency and best environmental practices to protect the environment and particularly potentially vulnerable water sources. Consultation with First Nations communities is also essential as is negotiating equitable royalty sharing arrangements with these communities. Alberta is very interested in moving energy through British Columbia to ports but there are concerns about the treacherous waters off of British Columbia and the potential damage an oil spill might cause to this pristine environment, which is an important fishery. Officials there insist that fracturing wells are compelled to employ very high quality casings and engage in best practices to minimize the possibility of well spills in forestland. British Columbia has looked closely at the experiences in New York and Texas and this has shaped the regulatory environment. The province very closely monitors water use in the industry and has shut down facilities when drought conditions set in. It also demands full exposure of chemical used in the fracturing process to ensure maximum transparency. Finally it is sharing its own experience with other countries with potential to develop these industries and has recently consulted with EU, British and Polish officials.

61. Ultimately Canada sees Asia as the most promising market for its energy exports given burgeoning demand there as well current price differentials. That said there is a potential for developing LNG export facilities on the East coast of Canada from where presumably Canadian firms could move liquid gas to Europe.

62. The visit covered a broad range of issues and provided the delegation with new insights into North American-European relations particularly in the security and political-economic realms. The discussions also underlined the interconnectedness between financial-economic and security issues and the need for Euro-Atlantic partners to work together as closely as possible in order to tackle the security challenges in a changing world.

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