Treasury's Hank Paulson Fixes China
Henry M. "Hank" Paulson, Jr. seems almost like superman these days. The ex-Wall Streeter and Secretary of the Treasury flies around the globe trying to fix dysfunctional financial regulation, heroically attempting to avoid economic recession. He's a super-diplomat playing striped-pants roles that, frankly, others should be playing, such as Secretary of State Condoleeza Rice.
Now, just in time for the Olympics, Paulson has an article in the upcoming issue of Foreign Affairs. It's worthy reading since Paulson lays out the good and bad of Washington's relations with Beijing and what should be done to engage the fastest growing economy today. In some ways, Paulson's treatise is a blueprint for the next administration since he has made it plain he doesn't want to stay in his job past next February.
In "A Strategic Economic Engagement," Paulson argues that the U.S. must stay engaged with China and help it integrate into the world economy. Much of the work that Paulson claims has been done is the result of the U.S.-China Strategic Economic Dialogue (SED) set up in 2006. Of course, this is about the time that Paulson, never a blushing violet, has been in office, so you get the idea that any of SED's successes are his.
"Americans who worry that China might overtake the United States are worrying about the wrong thing," Paulson writes. "They should instead be concerned that Beijing may not make key reforms or that it will face economic difficulties down the road. Serious troubles in China's economy could threaten the stability of the U.S. and global economies."
At the moment, there seems to be little evidence that China's growth will be derailed. Most of the Chinese officials over 50 remember the bloody Great Leap Forward and Cultural Revolution periods and want stability. They still are reaching outward, with the Olympics being Exhibit A. Thanks to SED (and, of course, Paulson) U.S. passenger flights to and from China will double by 2012. Air cargo will be liberalized.
Paulson is also sunny about the dark, polluted skies over China. Thanks again to SED, he believes that China will take serious measures to crack down on sulfur dioxide and other pollutants.
Areas for more work include pushing China for a more balanced approach to economic growth and more flexibility on prices and its currency exchange rates. Doing so, Paulson argues correctly, would help China mitigate rising fuel prices and encourage Chinese individuals to start spending their tremendous and seriously imbalanced personal savings. That could mean greater export markets for the U.S. But more needs to be done to clear up China's one-sided and opaque laws restricting foreign investment and protecting the intellectual property rights of foreigners.
Paulson claims that the SED has facilitated dialogue and defused issues that were on their way to the U.S. Congress for possible protectionist legislation. He may have a point here but what happens, of course, depends on the U.S. presidential elections.
To Paulson's list, I might add one more. Given the Russian government's trashing of Georgia's sovereignty in recent days, Washington might do well to consider reviving the old Henry Kissinger strategy of using good relations with Beijing to squeeze Moscow. I'm not sure where the assault on Georgia will end, but I am afraid it could erupt into something a great deal more threatening than anything Iran presents. Putting Vladimir Putin in his place helps, and engaging more with China is one way to do so.