US, China economies risk entering long winter: Ex-Treasury chief

SINGAPORE (The Straits Times/ANN) - Former US Treasury Secretary Henry Paulson paints sombre picture of an "economic iron curtain" if the US and China rift continues.

The world's two biggest economies could be entering "a long winter" if their paths continue to diverge, warned one of the foremost advocates of strong US-China ties.

Former US Treasury Secretary Henry Paulson painted a sombre picture of an "economic iron curtain", in which the two major powers put up walls and divide not just themselves but other countries too.

With goods, capital, technology, and people increasingly intertwined, a drastic decision by the United States and China to cut each other off will have serious ramifications for Asia, he said yesterday (Nov 7).

From his years of experience in Asia, he said, he does not think any country in the region can afford to exclude China. Neither would they want to."So in its effort to isolate China, the United States risks isolating itself," he said in a speech on the second and final day of the Bloomberg New Economy Forum.

China's refusal to allow foreign competition in its own market even after being a member of the World Trade Organisation (WTO) for nearly 20 years, has led to both Democrats and Republicans uniting in pushing for a "decoupling" of the two economies, especially over technology-related trade.

Even US businesses that have made money in China and promoted greater engagement previously have changed their tune and are asking their government to take a stronger stand against China.

"China is viewed by a growing consensus not just as a strategic challenge to the US, but also as a country whose rise has come at America's expense," said Mr Paulson, a former chairman of Goldman Sachs who went on to found the Paulson Institute think-tank.

He acknowledged that Chinese officials will have their own complaints about US policy and he agreed, for instance, that the administration should not be thwarting Chinese investments in the US if there are no national security risks.

But China, too, needs to reflect on its policies if it does not want relations with the US to fall off the cliff.

He advocated competition reforms to level the playing field for foreign companies, and even for private Chinese firms against state-owned enterprises. The Chinese government should also let its private and state-owned firms have a free hand in running their businesses, rather than act as "agents of the state". And China should cultivate and protect innovation and end the practice of forced technology transfer, he said.

His advice for US policymakers: Dial down the rhetoric and accept strategic competition as a fact.

Recruit other countries and institutions that will encourage China to engage more readily in improving multilateral establishments like the WTO, he said. And negotiate with China while, at the same time, continuing to invest in the US to make it more competitive in the future.

"So the questions are, how long will this winter last and how much unnecessary dysfunction and pain will be inflicted along the way? The answer will be determined by the capacity and willingness of leaders in Washington and Beijing to think creatively - and sometimes, even disruptively," he added.

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