This is a partial transcript from "Your World with Neil Cavuto", February 25, 2004, that was edited for clarity.

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NEIL CAVUTO, HOST: So Tiffany is shining; China absolutely gleaming. But at our expense. I took up the issue of our massive trade deficit with Treasury Secretary John Snow yesterday, and the Chinese reluctance to do anything about it.

(BEGIN VIDEOTAPE)

CAVUTO: How do you politely tell them, like in my Italian family, hey "Gavone" stop it? What do you do?

JOHN SNOW, TREASURY SECRETARY: Well, we've engaged on that subject. I've engaged ...

CAVUTO: I assume not with the "Gavone" comment.

SNOW: Not quite "Gavone". But, you know, we have had some terrifically productive conversations with this Chinese on this subject in which they have committed to move towards flexibility in their currency.

CAVUTO: Letting it freely flow, or at least making it less rigid?

SNOW: They have said they would go to a float. Before they go to a float, they need to fix their financial infrastructure. They need to get their banking industry modernized, they need to get the regulation of their financial sector, and they need to open it up. They need to let capital flow in, capital flow out.

As we speak, there is a delegation of Treasury officials in Beijing talking to their counterparts, working with their counterparts on that whole set of issues.

CAVUTO: But what is the stick, Secretary, that we hold out if they don't change?

SNOW: You know what we hold out? The prospect of their being a much more successful country. Because if they continue to use monetary policy to support the yuan-dollar relationship, they incapacitate monetary policy to deal with inflation in their own country.

CAVUTO: So it is in their own interest to...

SNOW: It is very much in their own interest.

CAVUTO: Let me get a sense of a couple of quick things, sir, and I will let you go. One thing is the deficit. Now, you have argued that as a percentage of GDP its not like it was during the Reagan years. Nevertheless, it is high.

I think you told The Associated Press not too long ago we can afford this deficit. But the Democrats are going to make this -- and have already made this -- a huge election issue. Are you concerned now, as a guy who bemoaned deficits in your corporate past, that you are overseeing one of the biggest now?

SNOW: Well, let me be clear on the deficit. We're not happy with it. It's unwelcome. It's too big. And the president's indicated that he is going to cut it in half over the course of the next five years.

Only two ways to do that. One is grow the economy, and the other is tight control on spending.

This deficit is manageable if we take the right steps on spending. I'm confident that the revenues will be there as the economy grows. What we have to really be careful about now is watching spending.

CAVUTO: But Republicans are not. In fact, there is a bit of a mutiny in the Republican Party, as I'm sure you are aware, Secretary, that some Republicans are spending like drunken sailors. And I'm probably doing a disservice to drunken sailors. That they are spending way beyond the amount of moneys that are there, and whatever revenues you're getting rightly from the tax cuts won't be enough with all the extra spending that is going.

SNOW: Well, Neil ...

CAVUTO: Do you think Republicans have become hypocrites on this issue?

SNOW: No, no. I think -- I saw the speaker last night commenting on this. He said, I recognize the need for us to show fiscal discipline.

CAVUTO: But do you know if the president plans to veto any spending measure in the next few months?

SNOW: Well, I'll tell you this: I have sent two letters to the Congress indicating that a veto would be my recommendation, unless spending levels were kept under control, on a highway bill and on a pension bill.

CAVUTO: Can we expect the president to veto that highway bill?

SNOW: Well, I think it depends on what the Congress does. The president has been very firm.

CAVUTO: But he's not vetoed anything yet. Is this -- are you saying he is very close to doing so?

SNOW: Well, what I have said is the president has authorized my letter with Secretary Mineta from Transportation to go to the Congress to say, here are the parameters on the highway bill. And allowed us to say that we would -- the senior policy advisors to the president would recommend a veto.

(END VIDEOTAPE)

CAVUTO: All right. John Snow, the Treasury secretary.

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