Paulson’s Stride Through Asia

March 12, 2007 • Commentary
This article appeared in the National Interest on March 12, 2007.

With the forced resignation of former Defense Secretary Donald Rumsfeld, President Bush’s cabinet seemed to have lost its alpha male. But not to worry: While Bush may have lost a major and yet controversial political and bureaucratic star, Treasury Secretary Henry Paulson is emerging as the Leading Man in the cabinet—minus that Rumsfeldian tendency to episodically alienate domestic and foreign audiences, but similarly matched in policy‐​setting wherewithal.

Paulson had scheduled his trip to Tokyo, Seoul and Beijing—the capitals of east Asia’s three largest economies—long before the recent slump in the world stock markets, but the timing proved propitious. Against the backdrop of global financial turmoil, the trip highlighted Paulson’s ability to ease investor concern over the American and global economy.

In Tokyo, the first stop in his four‐​day tour of Asia, the former head of Goldman Sachs addressed the bearishness regarding rising defaults at sub‐​prime mortgage companies, insisting the problems would not spill over to banks that have made the less risky loans. “Credit issues are there, but they are contained”, Paulson told reporters, adding that the U.S. financial sector was healthy and most institutions would not feel “a big impact.

During his next stop in Seoul, Paulson said, after meeting South Korea’s Finance Minister Kwon Okyu, that global economic growth was “solid” and stressed that there was low inflation and high levels of liquidity. “I feel very good about the global economy and the fundamentals”, he said.

And in China, where the stock market has lost some of its value, Paulson’s visit and his meeting with Chinese Vice Premier Wu Yi and others—coupled with his expressed confidence in efforts to build linkages between Chinese and U.S. trade and capital markets—appear to have soothed somewhat investor jitters and may have aided somewhat to the recovery in Wall Street and other financial sectors.

Which is not to say there is a direct cause‐​and‐​effect relationship between the spin that Paulson advanced during his tour in Asia and improving sentiment regarding U.S. stocks. Similarly, the recent financial turbulence—which some would describe as a “panic”— was not fueled solely by former Fed Chairman Alan Greenspan’s warnings about a possible economic recession. Rather the Wall Street decline was driven by a confluence of developments, which include the sell‐​off in China and bad news from the U.S. housing market. But if Greenspan’s remark may have served as one of the catalysts for the ensuing distress, Paulson’s Asia tour probably helped to calm the stock markets, at least for a while, as has the testimony before Congress by Greenspan’s successor, Chairman Ben Bernanke, who said that the markets were “working well.”

A Better Spin

Bernanke and Paulson have been more effective in their spinning of geo‐​economic news than was Rumsfeld in spinning geo‐​political news because the former two have not tried to impose their wishful thinking on reality by denying the slowdown in the housing and manufacturing sectors. Instead, both Paulson and Bernanke have accentuated the positive regarding global and American economic fundamentals. After all, even Greenspan stressed that there was a “one‐​third probability” of a U.S. recession this year.

Indeed, one of Paulson’s major tasks in the coming months will be to persuade lawmakers on Capitol Hill that without their support for trade liberalization, these relatively strong economic fundamentals would be at risk. Paulson’s reputation as an investment banker and his close ties to Democratic and Republican lawmakers should certainly help in this task.

The opportunities and the problems facing the U.S. trade agenda were evident during Paulson’s trips to Asia. In Korea, Paulson told President Roh Moo‐​hyun that he was “carefully” optimistic that the two countries would successfully conclude their negotiations for a free trade agreement, just as the eighth round of the talks were starting in Seoul. The administration wants to present a trade accord to Congress in the beginning of next month, a move that would lead to a ninety‐​day congressional review. Since President Bush’s “fast‐​track” authority to negotiate and conclude trade agreements expires in July this year, the president and his aides are trying to finalize the negotiations as soon as possible. While lawmakers are bound to raise major challenges to a U.S.-South Korea trade agreement, officials hope that the need to cement bilateral ties with a leading security ally of the United States would help rally congressional backing.

During Paulson’s visit to China, he tried to convince Chinese officials of the need to open their country’s capital markets to foreign investment and take steps to end currency controls. But his broader message to both Chinese and American politicians is that expanding Sino‐​American trade and investment ties should be seen as the common interest of the two economic powers. That message runs contrary to the view of many U.S. lawmakers who blame Chinese policies, including its currency controls, for the growing trade deficit with Beijing (which reached U.S. $232.5 billion last year) and the loss of American manufacturing jobs—hence, Paulson’s need to conciliate these members of Congress by demonstrating that the relationship between the two countries is producing results.

That Chinese President Hu Jintao is scheduled to meet Bush in Washington in May and economic officials from both countries will soon continue their dialogue, which indicates that the relationship is moving in the right direction. At the same time, the decision by Washington to file a complaint with the World Trade Organization over China’s subsidizing of manufacturers in violation of its WTO commitments should display to lawmakers that the Bush Administration can get “tough” with the Chinese.

But the tensions with China point to the main challenge that Paulson will be facing in his last two years in the Treasury. With rising protectionism on Capitol Hill and around country, Paulson will have to convince Americans that expanding free trade will increase economic growth and prosperity. Indeed, Paulson’s faces a long, hard political slog in the trade arena, where traditional metrics are of little utility. Should he prevail, he will indeed prove his political savior‐​fare and Leading Man credentials.

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