Dollar Diplomacy Runs Into a Roadblock in China

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You have to feel a little sorry for U.S. Treasury Secretary Hank Paulson. The former Goldman Sachs CEO's China experience and contacts — he had visited no less than 72 times — was touted as a major asset when he was appointed to the job five months ago. Now, he's in Beijing at the head of a high-powered U.S. economic delegation that includes six cabinet ministers, the U.S. Trade Representative and Federal Reserve Chairman Ben Bernanke — and he's under pressure to deliver. The U.S. urgently needs Beijing to allow its currency to appreciate in value against the dollar, to put a dent in Washington's $200 billion-plus annual trade deficit with China. And Beijing is not inclined to comply.

Before leaving Washington, Paulson did his best to downplay expectations from the grandly named "Strategic Economic Dialogue" his delegation will conduct with the Chinese. There would be no big announcement after the two days of talks, Paulson told one interviewer, stressing that this was the start of a "long-term dialogue." His downbeat spin is hardly surprising: Beijing has been fending off U.S. demands for years on the issue of currency exchange rates, and also intellectual property rights (meaning pirated movies and brand-name goods). In 1996 this correspondent was told by a White House economist who had just returned from talks with Beijing about closing down the dozens of factories churning out pirated movies: "This time they are really going to do something about it!" Strangely enough it's still possible to buy beautifully boxed sets of the first three seasons of Lost at stores all over Beijing for about one dollar a DVD. And Chinese negotiators like to point out to their U.S. counterparts that during the 19th century when American was going through its own period of economic adolescence, Washington spent decades ignoring pleas from Britain that it pass copyright laws.

Paulson's problem is compounded by the fact that the clock is ticking. With a new Democrat-run Congress due to open for business in January, he may not even have months. One of the most powerful Democratic voices in the Senate will be that of Charles Schumer, co-sponsor of a temporarily postponed bill that would impose heavy tariffs on Chinese products if Beijing doesn't allow the renminbi to rise from what Schumer and others say is its current artificially low level against the dollar. Paulson may remind the Chinese, also, that the new Speaker of the House of Representatives, Nancy Pelosi, is not exactly known for her sympathetic stance towards Beijing.

The Chinese will no doubt point out in response that they have already let their currency rise almost 6% against the dollar in the year since it was unpegged. Being historically minded, they could also note that when the U.S. forced Tokyo to allow the yen to rise sharply against the dollar in 1985, Japan was plunged into a recession from which it is still struggling to emerge. Given the social unrest already plaguing an economically booming China, they might add, the chaos such a prolonged economic downturn could engender is frightening to contemplate. These arguments are of course all too familiar to both sides. Which means that Paulson's 73rd trip to China is likely to end the same way that those of his less Sino-centric predecessors did: lots of talk but no action.