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.
In June, with growth slowing, China also ended a brief experiment in letting its currency rise in value against the dollar.
Before that, the currency had risen 20 percent against the dollar in the last two years as the Chinese central bank stopped intervening in the currency market.
With Chinese factories shutting down and the government worried about rising unemployment and social unrest, experts said it was unrealistic to expect China to show flexibility on its currency now. Besides, some noted, China’s currency, by maintaining its peg to the dollar, has risen in relation to the currencies of other trading partners because the financial crisis has driven up the dollar.
Paulson said he was disappointed that the US had not been able to push China further on its currency. But he said it was only the strategic economic dialogue that prevented Congress from passing legislation that would have deepened the tensions between the countries.
“When we started this, I was told we weren’t going to be able to avoid currency legislation in Congress,” he said. “We never got as much as we would have liked” from the Chinese, he added, “but people recognize we got a lot more than we would have without the dialogue.”
Paulson said the dialogue had also been useful on difficult issues like product and food safety, as well as the environment. China had rolled back some energy subsidies after the last meeting in June.
Paulson demurred on the question of how the Obama administration should handle China relations, though he noted that Geithner, whom he knows well from the government’s rescue effort, speaks Mandarin.
For his part, Paulson said he expected China to play a part in his life after the Treasury, though he draws the line at learning Mandarin.
“I’ve got a very poor ear for languages,” he said.
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