Why US speaks softly with China on trade

America's economic point man is taking the tack of cooperation rather than confrontation on a visit to China this week, despite a widening trade deficit and disputes over everything from pirated movies to barriers that hinder US exports of auto parts.

It's a softer tone driven by China's rising economic power, by the interdependence of the two nations, and by a pragmatic approach to financial diplomacy.

But for Henry Paulson, America's new Treasury secretary, it also reflects an assessment of risk that may come as a surprise to many Americans.

For all its rapid strides, China is in some ways a fragile economy. That, trade experts say, is a danger not just to leaders in Beijing but to the world economy.

"If reform stalls, the Chinese economy will stall, and that is in nobody's interest," says Daniel Griswold, an economist at the Cato Institute, a libertarian think tank in Washington. Paulson "understands that our interest is in a thriving, liberalizing China."

China has committed itself down the road to an increasingly market-based economy. Its surging output of electronics and other goods has been stunning – and unsettling to rival manufacturers in other nations.

But this doesn't mean China's path of progress will necessarily remain smooth. Among the challenges: an outdated financial system heavy on bad loans, state-owned businesses in distress, a volatile social rift between prosperous urbanites and the rural poor, and the looming burden of a rising elderly population.

Secretary Paulson pointed to many of these challenges in a major speech before heading overseas.

"The biggest risk we face is not that China will overtake the US," he said, "but that China won't move ahead with the reforms necessary to sustain its growth and to address the very serious problems facing the nation."

Paulson's stated goals for the US-China economic relationship have much in common with those of his predecessor, John Snow. Both put the issue of a more flexible Chinese currency high on their list – a move that could bolster the exports of struggling US manufacturers.

But Paulson's tone appears at once softer and more ambitious. He is not simply calling for change from Beijing officials. He expects to work with them regularly, building on the ties he established there in his career as a globe-trotting investment banker.

Wednesday, Paulson and a Chinese official announced the creation of a new high-level dialogue designed to deal with long-term issues between the two nations. At the same time, he has dampened expectations for any quick victories on issues such as the yuan-dollar exchange rate.

All this reflects a tempered approach to China at a time when critics continue to press the Bush administration for punitive measures if China is not responsive.

"Time is running out. I hope that Hank returns with tangible results," Sen. Charles Schumer (D) of New York said in a statement last week. He and Republican Sen. Lindsey Graham of South Carolina say they may have "no choice" but to call for a vote on their proposal that China face a 27.5 percent tariff in the US if Beijing fails to act on the currency issue.

His sentiment is backed up by many small- and medium-size manufacturing companies. Kevin Kearns, president of the US Business and Industry Council, said this week that America needs a get-tough approach. Use China's reliance on exports to the US and the threat that those sales could be lost, he suggested, to leverage concessions from Beijing.

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