Secretary Paulson’s Last Hope
Poor Mr. Paulson. He must have known what he was in for when he agreed to take the job of US Treasury Secretary in June 2006. He must have felt compelled to accept the challenge, and in doing so, follow in a long line of Goldman Sachs executives who left the firm for prominent positions in government (including Jon Corzine, Robert Rubin, and John Whitehead, among others). Paulson’s mandate upon assuming his new role was to solidify the United States’ economic relations with China. That increasingly looks like mission impossible.
A note of dire warning has crept into the Secretary’s speeches. At the Petersen Institute in Washington on Wednesday, Paulson argued that “time is of the essence” for Chinese economic and currency reform (via the FT). The point he was making, that China is throughly integrated into the world’s goods and services markets but way behind in terms of integration into global currency and and capital markets, is a fundamentally sound one.
The problem is that Paulson’s sense of urgency is wholly political, not economic. “Clearly there is not just the possibility but the likelihood of legislation” on Capitol Hill, he said. This is not an idle threat. Paulson has no interest in seeing legislation come to pass. It’s simply political reality.
Here’s Morgan Stanley Chief Economist Stephen Roach discussing Congressional attitudes towards China at a recent World Economic Update panel of the Council on Foreign Relations:
…Congress believes that you look at a huge trade deficit like the U.S. has and you connect the trade deficit to the pressures on the workforce, and then you take the biggest piece of the trade deficit–34 percent of the which late last year went to China–and so you point the finger at China and say ‘All we’ve got to do to help American workers is bash China.’
So it would seem that Congress can hardly wait to pull the trigger on legislation to punish China. Remember, it was Congressional Democrats who last year proposed a 27.5 percent tariff on Chinese imports.
Ultimately, Paulson’s biggest problem is that currency reform will not solve the US trade deficit with China. China knows it; the Bush administration knows it; even the Congress even knows it. Paulson said it himself Wednesday. “I don’t think there is much they can do with the currency that would make a big difference in the trade balance,” he stated.
But that’s just not the point. This is about forcing China to play by America’s rules. It’s about reminding (or teaching) Chinese officials that US political will and whim is as great a global force as F-16 fighter jets. It’s about looking every which way but in the mirror.
And it makes Secretary Paulson’s job much, much harder. He now must find a way to convince China to act swiftly — not for economic reasons — but as a goodwill gesture to American legislatures who prefer pointing the finger at China to actually devising proposals to grow America’s savings.
It’s not a desirable position for a policymaker to be in.
With the next major meeting of the US-China Strategic Economic Dialogue coming up, this may be Paulson’s last chance to beat back Congress and keep US-China economic relations on track.
May 8, 2007 at 2:57 am
For better or worse, the currency issue seems to be working itself out. My US bank account is steadily shrinking from a Chinese perspective, and I don’t see that slide changing anytime soon.
I’ve heard arguments that revaluing currency could help China cool its economy a bit. Is that line still being used? There doesn’t seem much in Paulson’s current pleading that benefits Beijing outright, and asking China to do us a favor out of the goodness of it’s self-interested heart doesn’t sound like a winning strategy.
May 8, 2007 at 4:07 am
Let me quote Sage of Omaha, from his annual dispense of wisdom to the mortal masses:
“I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual
“tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking. ”
(Berkshire Hathaway Annual Report, last paragraph page 16).
The most lucid argument against protectionism was delivered by Fed Chairman Bernanke in his speech on May 1st, http://tinyurl.com/389v9x
and in the Q&A session, he admitted without hesitation that the root cause of trade deficit is saving deficit in the U.S., but as Roach pointed out, Congress surely won’t heed Bernanke’s advice.
May 8, 2007 at 4:32 am
“But that’s just not the point. This is about forcing China to play by America’s rules. It’s about reminding (or teaching) Chinese officials that US political will and whim is as great a global force as F-16 fighter jets.”
Funny you put this way. As Chomsky pointed out, “the danger China poses is that it won’t be easily bullied.” Guess the Congress will learn the lesson (again!) the hard way.
It also reminded me of the latest Economic Dialogue in Beijing last December. Vice Premier Wu Yi opened the forum with a twenty minutes history lesson of China, starting from Opium War, with illustrative power points and video clips. And Chairman Bernanke supposedly changed the words “currency manipulator” on the podium. Now let’s wait and see what tricks Vice Premier pulls this time.
May 8, 2007 at 3:25 pm
Xueleifung -
I can only agree with Buffett’s words of wisdom. As noted above, one of the big problems is that Americans are feeling very little short-term repercussions from our current position. I wish we could this trade-off put into a little sharper relief — shipping production abroad to service cost of debt. What does/will that actually mean for Americans’ daily lives?
It’s hard not to see the currency battle as a swagger issue. As I suggested, virtually everyone recognizes that currency reform won’t alter the trade deficit.
And no, I don’t think China will be bullied. When all is said and done, I think Chinese officials would rather risk screwing something up themselves (the economy, social unrest, etc) than trust someone else who might end up screwing them. That attitude, as much as anything else, seems to define this resurgent China. And it’s fitting that you note Wu’s historical presentation dating back to the Opium War. Time and time again, we see these lessons are fresh in the minds of Chinese leadership; Lord Macartney in 1793 as a kind of original sin.
In that sense, Chomsky is right that this is the real danger. Those who are so concerned about being bullied are often less likely to compromise.
There is a difference between standing firm, strong, and proud, and acting in your own best interests by managing risk optimally. I am not sure Chinese leaders have completely figured out the difference. Paulson, I believe, has been trying to take them there. Because even though currency reform will not change the deficit, and could have some minor adverse effects on the Chinese economy, it is looking more and more like the smart decision to make.
May 8, 2007 at 4:42 pm
Chris,
Currency reform could help cool the Chinese economy. But as you say that’s not much of a selling point for Chinese leaders.
No, there’s no winning strategy here, which is why Congress is growing more threatening.
May 8, 2007 at 5:08 pm
To put Chomsky’s quote in context, here’s the link of the video he had with Robert Trivers, ( http://en.wikipedia.org/wiki/Robert_Trivers ). The quote on China appears in the last ten minutes of the video.
http://tinyurl.com/37me86
And Chomsky being Chomsky, the “danger” China poses is to the hegemony of U.S. empire, that is, “China is not a wimp like those in Europe or Japan.”
May 8, 2007 at 5:57 pm
I had figured as much for the Chomsky quote you cited; as in, China is most dangerous because it will not allow the US to bully it into submission.
I chose to spin it differently; I think Chomsky makes the right point made but to the wrong effect.