China, Wall Street, and the financial crisis: Francis Fukuyama talks with Henry Paulson

We also focused on very high levels of corporate savings in China, particularly in the state-owned enterprises. So yes, I was mindful of the imbalances.

Fukuyama: We’ve been talking until we’re blue in the face about the kind of liberalization you’ve just mentioned, and of course about revising the value of the renminbi. The results have been uneven, have they not?

Paulson: Yes, they have. While I was Treasury secretary, we saw substantial movement in the renminbi. That shows, I think, that the right way to deal with the Chinese is directly and in private, recognizing that they place a huge priority on economic development and reform. We need to continue to make a broad case for reform that includes several dimensions.

There’s a lot of emphasis placed on currency, because that’s easy for people to understand. But the currency issue is just one of a number of significant factors. I continue to believe that it’s in China’s interest, as well as our own, that it continues toward a full transition to a market economy. We need to privately, continuously, and forcefully make the arguments as to why it is in China’s best interest, however, and avoid finger-wagging and lecturing them in public.

Fukuyama: Let me play devil’s advocate on this. It seems to me that no American policymaker has taken a hardball option with them very seriously. One way of thinking about Chinese currency policy is to liken it to a form of industrial policy. But unlike the Koreans and the Japanese, the Chinese aren’t subsidizing one particular sector, like petro-chemicals.

They’re basically giving their whole coastal manufacturing region a big advantage over the rest of the world by keeping their currency pegged to the dollar at its current, unreasonably low rate.

If it’s harming us, it’s absolutely killing the Europeans and everyone else in Asia. In a certain sense, China has been in effect de-industrializing much of the rest of the world. I’ve been to maquilas in Latin America since the end of the microfiber agreement and seen firsthand how manufacturing capacity is now being sucked out of these developing countries and into China.

If one were to regard China’s de facto export subsidy via its currency policy as theoretically no different from a direct subsidy to its manufacturing/export industries, the normal way to deal with this would be with a tariff or some other kind of sanction. That might lead to a series of threats and counter-threats, but eventually they would discover an incentive to change their policy.

An analogy might be the Plaza Agreements with Japan in the 1980s, when the Japanese similarly built up a huge imbalance. Because Japan was an ally of the United States, and because the Japanese worried precisely about a protectionist backlash, they agreed to a major revaluation of the yen. But we’ve treated China, which is not an ally and whose imbalances are even larger than Japan’s were, much more gingerly. Why?

Previous

1 | 2 | 3

Next