Dealing With China

By Henry M. Paulson, Jr.

CCAFHXbWIAA9KCDHank Paulson, chairman of the Paulson Institute, has dealt with China unlike any other non-Chinese. As head of Goldman Sachs, Paulson had a pivotal role in opening up China to private enterprise. Then, as Treasury secretary, he created the Strategic Economic Dialogue with what is now the world’s second-largest economy. While negotiating with China on needed economic reforms, he safeguarded the teetering US financial system. And now, at the Paulson Institute, he is working with China to tackle sustainable development, environmental protection and climate change.

In his new book, Paulson argues that the world’s greatest challenges, from climate change to nuclear proliferation and global financial stability, will be easier to tackle if the United States and China work in complementary fashion—and much more difficult if the two countries are at cross purposes.

Paulson reveals the stunning—and often messy—story of the new superpower’s rise and reveals how China’s most senior leaders make the decisions that will shape the future. Over his career, Paulson has worked with scores of top Chinese leaders, including Xi Jinping, China’s most powerful man in decades. Dealing with China draws on his unprecedented access to modern China’s political and business elite, including its three most recent heads of state.

In the book, Paulson presents the following recommendations for how to deal with China:

  1. Help those who help ourselves. When the U.S. advances a constructive, affirmative economic agenda and negotiates hard for greater market liberalization and openness to competition, we help reformers, led by President Xi Jinping, achieve their economic goals—to China’s benefit and our own. Today’s Chinese leaders seek to use outside pressure to force domestic change: China rejoined negotiations for a Bilateral Investment Treaty with the U.S. in 2013, in part to accelerate the stalled process of reform. A successful BIT would require the Chinese to open many more sectors of their economy to our companies. Doing so would help China shift its economy toward consumer-led growth. We would benefit from our strengths in financial services, telecommunications, accounting, health care and consulting as those sectors opened to competition in China’s vast and rapidly growing market.
  2. Shine a light; nothing good happens in the dark. Supporting reform in China means pushing for greater transparency and improved adherence to universal standards in the widest possible range of products and systems. Transparency is the best way to fight corruption and to strengthen the confidence of Chinese citizens—and foreign companies and investors—in their government and in the rule of law. We should encourage the Chinese to disseminate reliable, accurate information across the board—from air- and water-quality data and the enforcement of environmental regulations to property sales and the finances of local governments.
  3. Speak with one voice. We need to define, prioritize, and coordinate our many issues to speak to the Chinese with one voice. When I was Treasury Secretary, we devised the Strategic Economic Dialogue to engage China on short- and long-term matters across the governments and at the right levels. This arrangement allowed us to deliver a clear, consistent message to to those with direct responsibility for a particular economic issue as well as to the many others who would inevitably be involved in making any decision. Without one go-to person for the U.S., the Chinese often wonder who speaks for our president. I can’t count the number of times since leaving government I have been asked by Chinese officials who President Barack Obama is relying on to manage the China relationship or who the right person to talk to about a given issue is. In the U.S., that person should probably be the vice president; in China, it could be the premier.
  4. Find China a better seat at the table. We should want China to play a bigger, more responsible leadership role in international groups like the World Trade Organization and in supporting the global economic system that it has benefited so much from. We should be pragmatic and prepared to make makes concessions or compromises to encourage the Chinese to take a more prominent role.
  5. Demonstrate economic leadership abroad. The U.S. must step up its game and compete with China from a position of strength. We should reassert our status as a Pacific power, reinforcing our longstanding economic ties with countries in that region. Closer to home, we should build on the success of North American Free Trade Agreement to work with reform-minded governments like those of Mexico, Colombia, Chile and Peru to free up trade, create greater economic integration and enhance regional stability. All except Colombia are among the 12 nations currently negotiating the Trans-Pacific Partnership (TPP) trade pact. Nothing will get Beijing’s attention and cooperation more than progress on the TPP. But the TPP agreements will be difficult to complete unless the U.S. makes them a top priority on which the president is prepared to expend domestic political capital.
  6. Find more ways to say yes. Rather than trying to persuade the Chinese to adopt our approach to everything, we might be better off devising new policies together—or recasting older policies in new, fresh terms. The U.S. cannot “fix” China’s growth model any more than the Chinese can “fix” our fiscal problems. But separate U.S. and Chinese efforts to reform and rebalance our respective economies would put us on a more complementary footing.
  7. Avoid surprises. I can’t recall a single Chinese business executive or government leader right up to the top who didn’t come to meetings thoroughly prepared. Combining thorough preparation with a consensus-driven system of decision making leaves the Chinese more uncomfortable than most with last-minute changes or operating on the fly, particularly in areas that involve difficult or complex issues or clear differences. It makes sense not only to avoid surprises in negotiations but also to cooperate on contingency planning for events beyond our control that could put us at odds with each other. North Korea is a case in point.
  8. Act in ways that reflect Chinese realities. Facts, not wishes or dreams, should direct our dealings. China is very different from the U.S., and we cannot be guided only by the understandable desire that it become more like us. We need to know as much as possible about what is going on inside China and be self-confident and realistic enough to focus on what is doable.

Click here to learn more about the book.