A Tough Trek Toward Common Ground in China
Paulson Sets Out to Ease Tension By Sticking to Areas of Agreement

By Ariana Eunjung Cha
Washington Post Foreign Service
Thursday, August 2, 2007

QINGHAI LAKE, China -- The mightiest financial officer of the U.S. government squinted at a pile of manure as Chinese villagers explained how they used a metal contraption to capture gas from the waste for use as cooking fuel.

Henry M. Paulson Jr., secretary of the Treasury, nodded as he grasped the details of the energy project. He told the villagers that he grew up on a farm where manure was used as fertilizer. "So what did you use to cook?" they asked.

Paulson was in China trying to salvage an increasingly fragile relationship between the two countries after months of clashes over trade and the safety of China's exports. He paid attention to every nuance of a Chinese tour this week, manure included, as he sought to salve his hosts' wounded pride.

Paulson is the point man as the Bush administration seeks to avert a tit-for-tat trade war with China. Paulson, who began his four-day trip Sunday in a remote province of western China, said in an interview that his goal was to focus on areas where the two countries can agree.

Hence the visit to homes in rural China participating in biogas experiments. Paulson also watched birds on the shore of a lake that is disappearing because of climate change, and he hiked sand dunes on the Tibetan Plateau that a half-century ago was prime grazing land for sheep.

The environment is an area that is "easier to cooperate on," Paulson said. "It's something the Chinese have common ground with members of Congress on."

At least three U.S. government teams are in Beijing this week talking about cooperation with their counterparts.

In addition to Paulson, representatives of the Food and Drug Administration are conducting high-level talks about food and drug safety, and the U.S. Federal Deposit Insurance Corp. is to announce today in Beijing that it will advise the People's Bank of China on insuring deposits.

The trips come at a delicate moment in U.S.-Chinese relations.

Earlier this year, the United States took legal action against China by imposing sanctions on high-gloss paper and filing complaints about steel subsidies and pirated DVDs; China said these issues should be resolved through dialogue.

Then came recalls of imported Chinese pet food, toothpaste and toys. Although China admitted that a handful of its companies may have been at fault, it said the problems were exaggerated.

In June, the United States imposed a partial ban on farmed shrimp, catfish and other seafood. China emphasized that it wasn't the only country with food-safety issues, blocking ostensibly contaminated meat imports from some of the largest U.S. food producers as well as some vitamin supplements.

The product safety concerns have only served to further anger some members of Congress, who were already threatening punitive trade action against China if it did not revalue its currency. They argue that China keeps its currency, the yuan, artificially low, hurting U.S. businesses. The Senate Banking Committee yesterday approved a measure aimed at forcing the Treasury to crack down on China over this issue.

China has repeatedly said that it agrees that the yuan -- which has risen about 9 percent in the past two years -- should increase in value but that the country will move at its own pace.

Paulson said that during meetings this week with financial leaders, including the head of the People's Bank of China and banking and securities regulators, he continued to push China to revalue the currency. While he said he had no breakthrough deal to announce to Congress, Paulson made the case to the Chinese that the upward movement has not hurt the Chinese economy.

The Chinese "are too polite to say they are frustrated, but I do believe they are asking themselves: Will they ever be able to satisfy us?" he said.

The increasing tensions come as China's trade surplus with the United States has jumped to the highest ever -- up 85 percent from a year ago, providing more ammunition for anti-China legislation. China said that in the first six months of 2007, it exported $112.5 billion more than it imported.

Since March, food safety concerns have dominated phone conversations and meetings between the two countries, making it difficult to discuss anything else, U.S. government officials said.

"There's been a lot of dialogue," Paulson said. "People have been able to deal with this, not emotionally but professionally." The Chinese have announced a broad series of steps to try to improve product safety.

Paulson, who traveled repeatedly to China when he headed the Goldman Sachs investment bank, has clashed with Congress over how to deal with China, advocating dialogue rather than legislation. President Hu Jintao welcomed him to Beijing yesterday as an "old friend."

During Paulson's meeting with Chinese Vice Premier Wu Yi, she said she hoped his visit to the countryside would help inform Paulson's testimony to Congress. "China still has 23 million people living in poverty," she said. "Who could we threaten? We don't have the ability. China does not and will never threaten anyone."