International Herald Tribune
It's not just China, Mr. Paulson
Tuesday, December 12, 2006

The current American obsession with China, reflected in the size and weight of the U.S. team being led to Beijing this week by Treasury Secretary Henry Paulson, may be the economic equivalent of an earlier one with Iraq. It is worrying that the United States is once again focusing on a single country while ignoring the regional — and global — context.

There are major bilateral issues between the United States and China, of course — trade, market access and intellectual property, as well as the currency. And of course, China is the big new player on the block. But given that trade and payments imbalances are the major threat to global economic stability, Paulson and his team should extend their tour to other East Asian capitals — and maybe drop in on a major Middle Eastern oil exporter as well.

Paulson could have started by going to Seoul, where he could have noted, for China's benefit, how South Korea is still registering strong export growth and satisfactory domestic demand growth despite have see its currency rise by 20 percent against the dollar in two years and 30 percent since 2003.

He could have visited Southeast Asia, the other focus of the Asian financial crisis, and congratulated countries such as Thailand and Singapore on their flexible currency policies, and their belief that a strong currency reflects a strong economy rather than a threat. Anyone remember how proud Germany was of the mark's gains through the 1960s and 1970s?

Indeed so far it is South Korea and the small Southeast Asian economies that have carried most of the burden of currency appreciations. All of their currencies could easily stand appreciating at least as fast as the euro has done — if only Japan and China did the same.

Paulson could then have carried that lesson to Tokyo. Despite years of failure to stimulate domestic demand via negligible interest rates and an ultra-cheap currency, Japan clings to the notion that a weak yen rather than global demand for quality products is behind its export success.

The Treasury secretary could have gone to Taiwan with the same message. Following Japan down the path of very low interest rates and an undervalued, manipulated currency did nothing for domestic demand and made a nonsense of Taiwan's claims to be a fully open economy and candidate for financial center status.

Or perhaps Paulson could have stayed at home and studied some numbers on how much of China's accumulation of foreign exchange reserves — now more than $1 trillion — was the result not of its trade surplus but the inflow of capital. That, in turn, has been the result of the very liberalization that China has been urged to adopt, and the huge sums that banks — not least Paulson's old firm Goldman Sachs — have been prepared to pay for positions in China.

Paulson could equally have asked the Federal Reserve chairman, Ben Bernanke, who is also traveling to Beijing this week, to explain why they should be so fussed about China when the biggest surplus countries by far are now the oil exporters, such as Saudi Arabia and Russia.

Or he could ask another member of the team, Commerce Secretary Carlos Gutierrez, why he is so concerned about China's current account surplus when it is of roughly the same magnitude as those of its Asian neighbors who mostly enjoy big trade surpluses with China — which is often just an assembler of their products.

The U.S. trade representative, Susan Schwab, could explain why she is so keen on signing up bilateral trade deals that undercut the nonpreferential basis of the World Trade Organization at the same time that China is being accused of failing to live up to its WTO obligations. Or why getting some help from China on saving the current global trade negotiations does not seem high on the list of U.S. trade priorities.

Paulson could ask Labor Secretary Elaine Chao, also going on the trip, why economies that had far more job losses to China than the United States has suffered — such as Taiwan and South Korea — still have healthy trade balances. Or he could ask almost any corporate analyst for a breakdown of the profits made by non-Chinese companies from their manufacturing or buying operations in China.

In Beijing — or Tokyo, Seoul or Singapore — Paulson would find a ready audience for a good old-fashioned U.S. moralistic lecture on carbon emissions and environmental concerns. But Asia is not going to hear it — yet.

Good can only come out of this bilateral economic summit if both parties recognize that the major issues they both face are multilateral ones. The bilateral issues are side- shows — just as Iraq should have been.