Raising the Stakes on China
A high-powered U.S. economic delegation visits Beijing at a critical time
When Treasury Secretary Henry Paulson went to China in September, he faced criticism for not having brought back more results. This time, he is taking along helpers to make sure the same thing doesn't happen again.
Paulson returns to China this week, but in an unprecedented move, he is bringing with him not only Federal Reserve Chairman Ben Bernanke and U.S. Trade Representative Susan Schwab but also the secretaries of commerce, energy, labor, and health and human services and the administrator of the Environmental Protection Agency. Inaugurating the "strategic economic dialogue" with China, which Paulson announced during his previous trip, the visit aims at no less than what one senior administration official calls "the re-creation of the Chinese economy, from export led to consumer led."
"This is exactly the kind of approach China understands," says Michael Green, a former director of Asian policy at the National Security Council. "It's top down, high profile, and big on symbolism."
But the higher the profile, the higher the stakes. Paulson faces huge pressure to get concessions from China on issues that have long plagued U.S.-China relations. The most prominent of these is the value of China's currency, the yuan, which many in the West believe has been kept artificially low to give China an unfair advantage in global trade. Because China's exports far outweigh its imports, it has amassed nearly $1 trillion worth of foreign reserves. Its ownership of $339 billion in U.S. treasury bills means that it now plays a major role in the American economy.
In preparation for the visit, the delegation met with U.S. manufacturers, who blame Beijing for fueling the record American trade deficit with China. "We hope we will see faster movement from China on appreciating its currency," says Frank Vargo of the National Association of Manufacturers, members of which met with Paulson. "Otherwise, we will almost certainly see protectionism grow, both here and in Europe."
A higher value for the yuan, which is currently pegged to the dollar, would make exports to the United States more expensive, presumably reducing the trade deficit. China posted a trade surplus of $23.4 billion in November, just shy of October's record $23.8 billion, ballooning its year-to-date surplus to $157 billion.
The delegation will also discuss matters like the piracy of U.S. software and designer goods in China. In addition, it hopes to win permission for American companies to sell financial services to the Chinese and technologies for China's energy sector.
Showtime. How quickly will China move? Most observers do not expect any immediate deals to come from the trip. Usually, top-level announcements would come during a bilateral summit meeting; however, one is not expected until next summer's G-8 meeting, at the earliest. Some think that if China fails to make substantial changes before Treasury issues its semiannual currency report in the spring, it could be a trigger point for action on Capitol Hill, where a Democratic Congress is about to take center stage.
Though this trip was planned months before the midterm elections, the new realities of domestic politics put pressure on the Bush administration to accomplish its goals before year-end. The Congress that comes to power in January will by most accounts be tougher on China than the current lineup. California Democrat Nancy Pelosi, who will become House speaker, has for decades been a vocal critic of China's human-rights record and economic policies. Sens. Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, withdrew a bill this year that would have slapped stiff tariffs on China if it did not let the value of the yuan rise. At the time, they were responding to pressure by Paulson, but they have said they will reintroduce the bill next year if China does not act.
Paulson, who became treasury secretary this past summer, comes with a new mandate from President Bush to lead the charge on China policy for the administration. He has extensive experience and interest in China from his time as chairman of the investment bank Goldman Sachs.
So if China knows what's good for itself, it will roll out the red carpet. Although Vice Premier Wu Yi is Paulson's official counterpart, the visitors will have access to President Hu Jintao and Premier Wen Jiabao. "The Chinese side knows it can't afford to dis Paulson," says Green. "It sees the administration as its last line of defense against the new Congress."
This story appears in the December 18, 2006 print edition of U.S. News & World Report.