The 'Old Friend' and the Sea

A perfect storm is brewing in the U.S.-Chinese trade relationship, and Beijing is looking to Hank Paulson for help.

A perfect storm is brewing in the U.S.-Chinese trade relationship, and Beijing is hoping that Secretary of the Treasury Hank Paulson is the helmsman who can steer the relationship into a safe harbor.

Paulson is highly respected in China. His much publicized "73 trips" earn him "old friend" status, as well as recognition that he "appreciated" the importance of China long before others. He just returned from a three-day trip to China, where he was received by his counterpart, Vice Premier Wu Yi, as well as President Hu Jintao. His access to the senior-most leader, in addition to the most important financial executives, such as Minister of the National Reform Commission Ma Kai, indicate how concerned China is about getting the financial relationship with the U.S. on track.

His visit comes as U.S.-China trade relations-arguably the backbone of the bilateral relationship-are at a critical juncture. With a White House obsessed with the Middle East, election season politicking and a growing chorus on Capitol Hill challenging the administration to "do something" about China, the political landscape is complex and tense. A seemingly never ending stream of consumer product recalls and "import alerts" is thrusting China-trade issue into American kitchens, bathrooms and play rooms, forcing normally content discount shoppers to contemplate the nature of globalization and China's ability to regulate its own manufacturers

While juggling these challenges, Paulson is holding a course designed to engage his interlocutors in pursuit of incremental accomplishments, simultaneously building trust in expectation of landing some bigger fish. He seems to have achieved an unexpected victory by obtaining a commitment from the head of the Chinese Securities Regulatory Commission to approve foreign joint-ventures in securities brokerages this fall, earlier than originally expected.

Part of this trust-building process involves field trips to provinces to better understand China beyond Beijing's ring roads. This week's visit began with a trip to the impoverished Qinghai Province to highlight China's environmental challenges. Energy security, efficiency and low-carbon technologies are a critical part of bilateral-in addition to regional and multilateral-cooperation. Encouragingly, at the last SED this May, energy issues had ten minutes on the agenda, revealing no fundamental barriers to enlarging talks, opening the door to expanding the discourse to other government fora and track II dialogues. According to Dr. Yuan Peng, director of American Studies at the China Institute of Contemporary International Relations, "In so far as China is concerned, the country should face up squarely to the stark reality of the deteriorating environment and, therefore, cooperate earnestly with advanced nations, including the United States."

The Chinese preference for a step-by-step, mutually beneficial, dialogue-driven approach rules out breakthroughs on contentious issues. Current congressional approaches to currency valuation have little chance of coercing a change in China's perception or policies on bank notes that bear Chairman Mao's visage. Encouragingly, there are some efforts on Capitol Hill that demonstrate a more practical strategy to effectively engage China and work together on mutually beneficial terms. The U.S.-China Working Group, chaired by Representatives Rick Larsen (D-WA) and Mark Kirk (R-IL), released four bills that seek to build America's capacity to balance trade with China through diplomacy, education and dialogue. Focusing on "Energy Cooperation", one of the group's bills seeks to provide grants for "joint venture" bilateral dialogues on energy and climate change issues. Fudan University professor Dr. Wang Yiwei's assessment is that the bills are a "pragmatic move on the part of the U.S. to change its image and promote public diplomacy."

The U.S. should not focus entirely on assuaging Chinese fears. China is sending regular messages about the fragile nature of its socio-economic system, even if it cannot always articulate its insecurities to outsiders. Vice Premier Wu Yi made a valiant effort to allay concerns over China's growing military and economic might, acknowledging to Paulson on his trip to Qinghai that he now appreciates that China's vast rural population is still poor and "backwards", thereby negating any potential external threat that China might pose to the world.

But with growing defense budgets, a trillion dollars in surplus and individual savings rates that make Citibank blush, Wu Yi might be more convincing if she opened Chinese markets wider to U.S. goods and services, reducing the trade gap and alleviating U.S. anxieties. Representatives Kirk and Larsen have put forward a proposal that Wu Yi and her colleagues can champion by throwing their political weight behind bilateral dialogues on energy and climate change-which might calm the rough seas.

Drew Thompson is the Director of China Studies and Starr Senior Fellow at The Nixon Center.