Paulson Warns US Not To Turn Its Back on China in "Delusions of Decoupling"


Former Treasury secretary, Henry Paulson Jr., warns even if China and US call a truce, their relationship will be worse.

Mr. Paulson has spent a career trying to work with China, first at Goldman Sachs, and later as Treasury secretary. The Paulson Institute, is a think tank focused on China and he has ties to senior officials in both countries and is often consulted by both sides.

The danger, Mr. Paulson said, is that the animosity between the two countries has merged “military prisms and ideas into economic policies.”

“It should concern every one of us who cares about the state of the global economy that the positive-sum metaphors of healthy economic competition are giving way to the zero-sum metaphors of military competition,” he says.

“The very idea of tariffs has been relegitimated after taking a wallop from the dismal failures of the 1930s.” He added, “We are now living in a world where tariffs have become normalized and even applauded.”

Most worrisome to Mr. Paulson is the prospect that the US could lose Chinese investments in the markets the financial markets.

“Decoupling China from U.S. markets in this way would, of course, harm China,” he said. “But it would not be in America’s interest. It would eventually threaten U.S. leadership in finance, as well as New York City’s role as the world’s financial center. And it would help other financial centers like Tokyo, London and Singapore. And, over time, Shanghai.”

“When the next crisis comes — and a crisis will come, because financial crises are inevitable — we will regret it if we lack mechanisms for the world’s first- and second-largest economies to coordinate,” he said.

Mr. Paulson raised a worst-case scenario that is often dismissed by policymakers.

“Let’s not forget that China is a very large purchaser and holder of U.S. Treasuries,” he said, referring to China ownership of over $1 trillion in United States debt. “This helps support U.S. monetary policy, enabling lower interest rates and supporting our spending and lack of saving.”

If China decided to sell, or at least stop buying, as many Treasury bonds, their value would go down and push interest rates much higher. That could be tremendously damaging to the US.

“That’s why the unilateral, reciprocal and retaliatory steps on both sides concern me so much,” Mr. Paulson said.

Even if the United States isn’t able to accomplish all it wants in leveling the playing field with China, Mr. Paulson said, the very idea of walking away from the country is a worse outcome.

“It is not in our interest to isolate ourselves when the rest of the world is not going to decouple from China,” he said.

Perhaps most provocatively, Mr. Paulson said the United States and China were creating divisions on technology standards in the name of national security.

“I take my nation’s national security as the highest priority of all,” he said. “But when technologies also have the potential for widespread and beneficial commercial use, sequestration risks ceding economic leadership to a rival company and country.”

He added: “A decision, after all, to protect too much of a country’s technology will ultimately undermine both economic competitiveness and national security.” He said he believed there was a middle ground that would allow for tech systems to work in both countries.

Mr. Paulson told me that he titled his speech “Delusions of Decoupling.” But he was quick to point out that the title “doesn’t mean decoupling is a delusion.”

“The delusion,” he said, “is that it will be easy or beneficial.”

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Economics, Finance and Investing