Inside Hillary Clinton’s economic foreign policy plan

October 21, 2011, 6:43 PM UTC

By Tory Newmyer, writer

Secretary of State Hillary Rodham Clinton and Afghan President Hamid Karzai

FORTUNE — The death of Muammar Gaddafi has international attention fixed on Libya and the world asking what’s next for the troubled country. For the State Department, it will be an early test of a new diplomacy that Secretary of State Hillary Clinton has termed “economic statecraft” — an approach that gives more weight to the economic factors shaping world events. Clinton laid out the strategy in a speech to the Economic Club of New York last Friday.

To get a better understanding of the initiative, Fortune talked to Jake Sullivan, director of the State Department’s policy planning office, who is travelling with Clinton this week through Libya, Afghanistan and Pakistan. Sullivan talked to us first by phone from Kabul, then over email from Islamabad. 

How will we see this approach at work as the U.S. helps Libya rebuild?

We have just finished a NATO operation in Libya where we applied traditional political and military tools — but also economic tools, imposing sanctions, freezing tens of billions of dollars of assets, and setting up a temporary financial mechanism to help the rebels provide for the Libyan people. It was this effective combination of tools that helped liberate Libya. Now we need to follow up with a similar coalition effort tailored to Libya’s unique context. We need to help Libya rebuild and grow to satisfy the desire for opportunity and dignity that brought the people out into the streets in the first place. To be effective in today’s world, we need to use economic tools alongside our military and political efforts.

Why are you rolling this out now?

This has been a focus of [Secretary Clinton’s] from the beginning, but the events of the past year — in the Middle East, in Europe, and elsewhere — have really brought it home. In her travels, she has seen first-hand the centrality of economic power in how states measure and exercise influence around the world. As she said in her speech, we see emerging powers gaining influence less because of the strength of their armies than because of the growth of their economies. And we

see countries making economic growth at home and economic influence abroad organizing principles of their foreign policy. She sees this everywhere — from Chinese infrastructure projects in sub-Saharan Africa to Turkey’s investments across the Middle East.

Also, as Secretary Clinton looks to her legacy, she sees economic statecraft as an important piece of it. Not because it’s new, but because it is in some ways newly important.

Can you point to a specific example?

Whenever we travel in Asia, America’s economic engagement is top of mind for the leaders and people the Secretary meets. So too is the state of our economy at home. They ask about trade agreements, about the APEC agenda, about the role America will play in helping shape and sustain the economic rules of the road for the Asia-Pacific region. They also ask about our legislative debates, on issues like the debt ceiling. Ultimately, they want reassurance that the United States

will not just be a resident military and diplomatic power — but a resident economic power as well.

The Secretary in her speech called for a more economically literate diplomatic corps. What are you doing to foster that?

Just as one example: Secretary Clinton is putting a call out to embassies to identify specific, non-tariff barriers — what she calls “barriers behind borders” — and then we intend to target three or four as models for concerted diplomatic strategies to level the playing field for our companies — a proof-of-concept kind of approach.

Another concrete example is Secretary Clinton’s plan to gather the heads of every American Chamber of commerce around the world to talk with our regional experts and the State Department’s leadership about government can align our efforts with American Chambers of Commerce just as many other countries do.

And then there are the wide variety of ways that we engage with like-minded countries to begin to build a set of norms around challenges to global competition that right now aren’t covered under the WTO — to address the types of activities that require new rules and new mechanisms.

Is the idea here that the WTO has shown a lack of force, and we need to forge some work-arounds?

Not at all. This is about a different set of challenges. As the Secretary said, just as the WTO eliminated harmful tariffs in the 1990s, today we need institutions that can provide solutions to the variety of market distortions that go beyond tariffs. That means creating and enforcing new agreements and mechanisms to guarantee fair competition — the shape and scope of these is something we have to work through.

How will this lead to job growth here?

First, these efforts are directly connected to the President’s goal of doubling exports over five years. Second, to the extent we can use diplomacy to put in place on new rules of the road for global competition, that will have an impact on everything from currency to non-tariff barriers to restrictions on investment, all of which have an impact on our companies’ ability to compete around the world. And that translates directly into American jobs. Third, we’re looking for

new, creative opportunities to enhance the capacity of American companies to find different types of business opportunities.

The political environment’s not very friendly to foreign aid right now. Is part of the idea here that she needs to make the case publicly, while this budget’s on the chopping block in Congress?

We do want to show people this matters to the top priority that Americans have right now, which is economic recovery, job creation and growth. She definitely wants to make that connection. She wants to show people why there’s a benefit to investing in the tools of diplomacy and development. But she also recognizes that tough budgetary times increase the need for us to be more sophisticated in the tools we use, to ensure we are getting maximum bang for our buck. We’re not spending $10 billion on some huge plan for Egypt and Tunisia. We’re using tools that, over the long run, will be more effective: trade and investment partnerships to help integrate those economies with their neighbors and then with Europe and the United States.

As part of this new approach, the State Department has announced plans to bring on a full-time economist. Have you hired anyone yet?

Not yet. We’re in the process of compiling a short list of candidates.

Is there a profile that you have in mind? Are you looking for an academic or are you looking for more of a Wall Street type?

We want to talk to people from a broad range of backgrounds, and in the course of those conversations shape the right profile. But I think it’s less likely to be a Wall Street type, and more likely to be someone with more of an international economic academic background. But I don’t want to put the cart before the horse in saying that.