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Treasury Chief Paulson Focuses on China But Warns Against Protectionism

Treasury Secretary Henry Paulson said Wednesday that he will urge the Chinese to move more quickly to adopt economic reforms, including a more flexible currency.

But in his first speech on the international economy since joining the Bush Cabinet in July, Paulson stressed that the administration will oppose efforts in Congress to punish China for a soaring trade gap with the United States.

"Protectionist policies do not work and the collateral damage from these policies is high," he said. "We will not heed the siren songs of protectionism and isolationism."

Paulson sought to lower expectations that he will achieve any major breakthroughs when he visits Beijing for two days of talks with Chinese officials next week. He stressed, instead, that he would discuss economic reforms that the Chinese need to pursue that would benefit the Chinese economy.

Paulson's first extended remarks on China signaled an apparent shift in an administration strategy away from applying extensive pressure on the Chinese to do more to allow their currency — the yuan — to rise in value against the dollar as a way of dealing with a huge and rising U.S. trade deficit with China. Last year, that red-ink figure was $202 billion, the biggest imbalance ever recorded with a single country.

While former Treasury Secretary John Snow, Paulson's predecessor, pursued an increasingly tough line that China needed to move more quickly on the currency issue, Paulson adopted a less confrontational approach in his speech.

He mentioned the currency issue only as one of a number of economic reforms that China needed to pursue. He said that China also needed to modernize its rural economy, overhaul its capital markets and promote more domestic-led growth by getting Chinese families to reduce extremely high savings rates by spending more.

And Paulson specifically said that the administration would oppose any efforts to erect trade barriers in this country to deal with America's soaring trade deficit, which is on track to set a fifth consecutive record this year.

Democratic critics have charged the administration has not done enough to deal with the soaring deficits, leveling much of their criticism at China, the country with the largest trade gap with the United States.

One bill being pushed by Sen. Charles Schumer, D-N.Y., would impose 27.5 percent tariffs on all Chinese imports unless China does more to allow its currency to rise in value against the dollar as a way of boosting U.S. exports to China and reducing Chinese imports to this country.

"When I spoke to Hank Paulson last night, we discussed how important his trip is in the fight to get China to play fair," Schumer said in a statement issued after Paulson's speech. Schumer has said he will push for a vote on his legislation by the end of this month unless he sees significant movement on the part of the Chinese.

To underscore the importance of the Beijing talks, Paulson will be accompanied by Allan Hubbard, chairman of President Bush's National Economic Council.

Treasury officials said that Paulson spent the past several weeks working on the speech, including receiving briefings from China experts from both parties and holding a number of staff meetings at his home.

In the remarks, Paulson said both the United States and China needed to guard against policies that would backtrack on globalization.

"Both in China and in the United States, we must not allow ourselves to be captured by harmful political rhetoric or those who engage in political demagoguery," Paulson said.

He said the United States has nothing to fear from China's emergence as a global economic power, one that is expected to overtake the United States as the world's largest economy at some point in the coming decades.

Paulson, who made more than 70 trips to China as head of investment giant Goldman Sachs and developed close relationships with many Chinese leaders, said the message he will deliver next week will be, "We want you to succeed."

"The tasks faced by Beijing are so daunting that the biggest risk we face is not that China will overtake the U.S., 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 said.

He will travel to Beijing next week after first attending the annual meetings of the 184-nation International Monetary Fund and World Bank in Singapore.