Thu, Dec 04, 2008 - Page 9 News List

With Paulson gone, who will take the lead on China policy?

Regardless of the expertise and diplomatic skills of the US Treasury secretary’s replacement, the Chinese government will prove to be one tough nut to crack


When US Treasury Secretary Henry Paulson leaves office next month, Washington will lose its No. 1 China hand. Paulson, who spent years cultivating Chinese leaders as a Wall Street banker, has spearheaded US policy toward Beijing since 2006.

That raises some big questions, including who will pick up Paulson’s baton in the Obama administration, and whether the Treasury Department will continue to be the lead agency in steering a relationship increasingly defined by China’s yawning trade gap with the US.

On Tuesday, Paulson led a delegation of Cabinet officials to China to hold economic talks, the fifth and, for him, final round of semi-annual meetings known as the “strategic economic dialogue.”

A range of issues are likely to be on the table, including energy, the environment and the economic crisis. Experts said the global downturn could fray US-Chinese ties, as China increases exports to fuel its rapidly slowing economy at the same time that the US is limping.

In an interview, Paulson said he worried that the crisis could set off a wave of protectionism on both sides of the Pacific. He said he planned to press the Chinese on recent measures like their increased tax rebates for exporters, which make Chinese goods cheaper in Europe and the US.

“Hank Paulson has a tremendous fervor for these issues that I don’t know if Tim Geithner has or not,” said Kenneth Lieberthal, a China specialist now at the Brookings Institution, referring to president-elect Barack Obama’s choice for Treasury secretary, Timothy Geithner.

“One possibility is that the strategic economic dialogue continues, but moves to another venue in the government,” said Lieberthal, who worked on China policy in the Clinton administration.

As possible coordinators of China policy, he mentioned Lawrence Summers, newly named chairman of the National Economic Council, or vice president-elect Joe Biden. Then there is Democratic Senator Hillary Clinton, Obama’s choice for secretary of state.

What none of these people has is the lengthy China experience that Paulson brought with him from Goldman Sachs. Geithner comes closest, having studied in China and served as a diplomat in Tokyo, as well as undersecretary of the Treasury for international affairs.

A spokeswoman for Obama, Brooke Anderson, declined to comment on the president-elect’s plans for China policy, except to point to a recent essay by Obama, in which he called for “fresh thinking and a change from the US policy approach of the past eight years.”

China could pose a thorny challenge to Obama, experts said, because its trade surplus with the US — already a record, at US$35.2 billion, in October — is likely to swell further in the next few months.

That is partly because of the tax rebates. The rebates apply to more than half the Chinese goods covered by trade tariffs, and while they do not violate WTO provisions, experts view them as a form of protectionism.

“We’ve always thought China’s export rebates are a bigger driver of their trade relationship than the exchange rate,” said John Frisbie, the president of the US-China Business Council.

With a recession biting in the US, experts say, these new Chinese measures could reignite calls in Congress to punish China over its trade practices.

“If we’re heading toward 9 percent or 10 percent unemployment, and people look around and see China running larger and larger surpluses, they’re going to say, ‘What’s going on here?’” said Nicholas Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics.

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