Thursday, April 18, 2024

Hank Paulson says the U.S.-China relationship is ‘on the brink’ and calls it a ‘dangerous situation’

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The U.S. and China’s feud shows no signs of abating. It’s starting to worry international organizations such as the World Bank, which recently predicted that the rift between the two superpowers could hurt the growth of other economies.

Now, former Treasury Secretary Henry “Hank” Paulson is echoing similar concerns about intensifying geopolitical tensions.

“The U.S.-China relationship is on the brink. Communications have ground to a halt,” Paulson said in an interview with the Financial Times published Friday. “There’s a lot going on in the world that’s troubling, but to me it’s the U.S.-China relationship that is the most worrying.” 

The two countries have gone head-to-head in trade, foreign policy, and the race for technology in recent years. While tariffs and trade restrictions are already in place, a complete “decoupling” scenario, where the economies work separately from each other, could have a significant impact. China is still among the U.S.’s top trading partners and the world’s second largest economy. 

The economic importance of the two nations raises the stakes of them clashing, and Paulson thinks America may be underestimating what China can do. 

“This is a dangerous situation,” he said. “I strongly believe that [President Joe] Biden would like to stabilize the China relationship, but both Republicans and Democrats in Congress have staked out a very strong line which complicates things for Biden. I have a concern that Congress is underestimating the relative power of China, the permanence of China, and China’s relationship with so many other countries.” 

According to Paulson, China is boosting its presence around the world, and putting out a clear message that “China is open for business again.” So, if the U.S. responds with further curbs on trade and investment, even as other nations deepen ties with Beijing, the U.S. could become more isolated.

Taiwan in the middle

One of the flash points in the relationship is Taiwan, which China has historically claimed as its territory. The U.S. has had an “unofficial relationship” with Taiwan, which has strengthened in recent years even though China has repeatedly warned against it. 

Earlier this month, U.S. House Speaker Kevin McCarthy hosted Taiwanese President Tsai Ing-wen in California—the first meeting between a Taiwanese leader and a House speaker on American soil since the U.S. and Taiwan cut diplomatic relations in 1979.

“I believe our bond is stronger now than at any time or point in my lifetime,” McCarthy told reporters after the meeting. 

In response to the growing closeness between the U.S. and Taiwan, China said after McCarthy’s meeting that it would take “forceful measures to defend national sovereignty and territorial integrity” and warned that the U.S. should not tread the “wrong” path. 

Paulson thinks that America’s rhetoric on Taiwan needs to change to keep the country’s China situation at bay. 

“Great powers don’t look to go to war: They stumble into it through some combination of miscalculation or misjudgment or accident. So I think it’s important that we tone down the rhetoric on Taiwan,” Paulson said. “Despite what you read, the last thing that [Chinese President Xi Jinping] needs is a war for Taiwan.” 

This isn’t the first time Paulson has warned about U.S.-China relations. In 2021, just days after Biden and Xi had their first virtual meeting, Paulson warned that the countries needed to know where they were headed diplomatically.

“We need more certainty around how the U.S. and China are going to compete, where we’re going to cooperate, and how we’re going to manage conflict. Otherwise the world is heading for a very dangerous place,” Paulson said at the time

In January, Paulson wrote a piece for Foreign Affairs titled “America’s China Policy Is Not Working,” in which he highlighted the resemblance of the global situation now to what it was in 2008, when Russia invaded Georgia and tensions with Iran and North Korea were high. The key difference? Back then, he worked with China to address the 2008 financial crisis to “restore macroeconomic stability,” but he went on to say how that was unthinkable now, with U.S.-China relations at a historic low. 

Paulson noted that the policies of both countries had a part to play in the state of their diplomatic relations, but he said that a “wholesale decoupling” (rather than targeting a few industries like tech) would not help either of them. Instead, he suggested the countries should come up with a way to manage targeted decoupling in such a way that essential trade continues. 

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