The paper is structured in four sections. The first section presents an introduction and summary, and suggests that recent lost opportunities to integrate environmental and economic objectives in U.S. foreign policy include the Kyoto climate negotiations, the Three Gorges Dam issue, the G-8 process, and the State Department's environmental diplomacy initiative. The second section elaborates five steps of a proposed six-step process for the U.S. government to undertake to achieve integration:

(1) define U.S. environmental objectives;
(2) establish a set of national environmental priorities (NEPs);
(3) determine the impact of private capital flows on U.S. NEPs;
(4) determine what forms of private capital are relevant to U.S. NEPs; and
(5) identify the actors and policy tools to influence private capital flows. The third section assesses the feasibility of these steps, lessons learned from other foreign policy issues, and describes the sixth step,
(6) lead by example and advocacy. The fourth section summarizes specific actions that could be taken by the public interest community to promote integration.

The authors draw the following conclusions:

• While it is in principle possible to integrate national economic and environmental objectives more fully than has been the case, and the United States has enormous assets and prestige that could be used to promote more environmentally-friendly private capital flows, the institutional and political obstacles are considerable. One important obstacle is the vagueness of the U.S. international environmental agenda, particularly in comparison to the relative clarity of the agenda of those promoting U.S. economic interests abroad.

• A second set of obstacles concerns the difficulty of relating international environmental objectives to private capital flows. First, U.S. environmental objectives are too general and ambitious to be of much utility in this analysis. Second, the environmental impacts of private capital flows are complex, disputed, and poorly understood. Third, different kinds of capital flows, including foreign direct investment, commercial bank lending, and portfolio flows are likely to relate to environmental objectives in different ways and to require different policy responses.

• Important barriers to integration within the U.S. Government include the lack of inter-agency coordination, entrenched bureaucratic cultures, the preference for unilateral and bilateral rather than multilateral approaches to problems, and the lack of a common environmental framework –- analogous to that provided by liberal economic theory –- to guide decision-making.

• Lessons from attempts to integrate other issues with economic foreign policy objectives (including drug certification, NAFTA, and human rights) indicate the importance of a clear objective, and suggest that increasing public awareness of an issue does not necessarily contribute to its resolution.

• Recognizing that the U.S. Government has a relatively limited capacity to influence private activity in the marketplace, and that policies promoting overt intervention are likely to be highly contentious, there are two general strategies that the U.S. can employ: creating financial incentives for environmentally friendly investment, and agenda-setting and environmental education. With respect to foreign direct investment, the Overseas Private Investment Corporation (OPIC) and the Export Import (ExIm) Bank should be used to promote environmentally friendly investment, and to set the agenda for upward harmonization of export credit agencies from G-8 countries. For commercial bank lending, the focus should be on incorporating environmental guidelines into domestic banking legislation in the U.S. and abroad, and through the Basel Committee on Banking Regulations and Supervisory Practices. For portfolio investment, the key is promoting national-level legislation to enact and enforce compliance with international environmental agreements.

• Specific recommendations include: promotion of regular interagency and intersectoral dialogue; increased reporting on international environmental activities and objectives; raising of environmental issues at key multilateral economic fora; and increased policy research on the linkage between international private investment and the environment.