Communication is Paulson’s stock in trade

Treasury Secretary Henry Paulson is rapidly becoming the Bush administration’s China Hand, the old pro with boots-on-the-ground experience who mediates between two nations engaged economically, politically and imperfectly, which was underscored again Tuesday with disclosure of a trade imbalance only slightly smaller than the universe but expanding about as rapidly.

The 2006 total was another record, $764 billion, with one-third of that credited to China. Although outsourcing and an alleged flow of jobs into Asia foments most of the chest-thumping over the U.S. relationship with China, it’s the flow of capital that should be the greater concern. The Chinese are putting their American dollars to work all over the world to secure the energy and material they will need to sustain economic growth at the formidable rate of 10 percent or better. The Chinese economy faces many challenges, but lack of money is not one of them.

Paulson, as head of Wall Street investment bank Goldman Sachs, came to know China first-hand. In 2003, he negotiated a deal that gave his company a leg up on competitors angling for a share of that nation’s burgeoning financial services market. The deal reportedly got the personal blessing of Premier Hu Jintao. In a Fortune magazine piece, he said he most admired former Premier Zhu-Rongji for the way he managed China’s rapid emergence as a world economic power.

That growth could propel China past Germany as the world’s third-largest economy within a year.

Paulson knows there’s more to come. In 2003, Goldman Sachs did a forecast that projected China would overtake Japan around 2016, and the United States in 2041. Per capita, Americans will remain the world’s richest citizens, but tens if not hundreds of millions more people will enjoy a standard of living much more like ours than they do today.

So this is an arena Paulson knew well before taking over at Treasury in July. Since then, he has been to China twice and expects to go again before a Chinese delegation reciprocates in May. Earlier this week, he named a former Reagan administration trade official to oversee relationships between the two countries on a day-to-day basis. He will also, quaintly, set up a hotline with his Chinese opposite, Vice Premier Wu Yi. Can’t they just exchange cell-phone numbers?

At least Paulson has decided to own this issue. His predecessor, John Snow, seemed to engage China-related issues only reluctantly, and certainly not successfully. And as far as his domestic responsibilities go, Paulson has the so-far steady Ben Bernanke handling monetary policy at the Federal Reserve, and fiscal policy that is hopelessly unfiscal thanks to President Bush. Had Paulson walked into the Goldman Sachs boardroom with a budget as cockeyed as that presented to Congress last week, the directors would have put him out on the street selling pencils.

Better engage the Chinese, even if they give ground by the millimeter. As the president of the Washington Council on International Trade noted last week in Spokane, China has difficulties with economic dislocation comparable to those of the U.S. as both cope with the rebalancing of the world economy.

Growth in Chinese manufacturing, for example, may be impressive, but the U.S. output is increasing too despite an industrial workforce less than one-sixth the size of China’s, says the council’s Bill Center.

Many in Congress find no cheer in the numbers Center and others use to build a case against retaliatory trade policies. Democrats want some agreements with the Chinese revisited, and they have the House and Senate committee chairmanships that give them the power to focus much more attention to their concerns.

Paulson will be an effective foil, but at the same time an excellent messenger to the Chinese, who have so far talked a better game on currency valuation, for example, than they have played. With the U.S. economy doing well, debate over U.S.-China trade matters has been muted. If there’s a slowdown, Paulson will need a hotline to the Capitol, not Beijing.