A Bridge over Troubled Water

During an economic summit in Beijing last month, U.S. Treasury Secretary Henry Paulson and the rest of a high-powered American delegation, including Federal Reserve Board Chairman Ben Bernanke, had to suffer through a condescending lecture, replete with PowerPoint presentation, from China's Vice Premier Wu Yi. One of the country's top bureaucrats and a woman with a vaunted reputation as a problem solver, Wu enlightened the Americans with a lesson on the 5,000-year history of China. Her essential point: those who criticized China's economic policy did so out of ignorance. "We have had the genuine feeling," said Wu, "that some American friends not only have limited knowledge of, but harbor much misunderstanding about, the reality in China."

Yet the issues that the U.S. delegation had come to discuss are not all figments of uninformed American imaginations. For a start, those pirated DVDs of first-run Hollywood movies available for 75 cents on the streets of Shanghai are all too real—despite repeated pledges from the Chinese government to crack down on rampant intellectual-property theft. And China's trade surplus, which rocketed to $177.5 billion in 2006 and has risen from less than 2% of its total economy to around 7% in five years—surely Beijing has something to do with that. But instead of substance, the Americans got a soliloquy—which may explain why, during Wu's speech, some of the U.S. delegates looked bored, fidgety or downright annoyed. One delegation member later joked that Wu reminded him of his "fifth-grade teacher," adding, "I didn't much like fifth grade."

If Paulson was suffering, though, you wouldn't have known it—even though he was the U.S. official who least needed the lecture. He remained attentive throughout. After all, Paulson made countless trips to Beijing during his investment-banking career at Goldman Sachs and had doubtless sat through many similar monologues. "He's been in a lot of meetings with a lot of Chinese officials, and knows that the last thing you do is get angry at the effective ones," says one former U.S. diplomat. Wu spearheaded China's effort to join the World Trade Organization five years ago and was named Health Minister during the 2003 SARS crisis. "She's been helpful in the past, and she'll be helpful in the future," said the former diplomat.

These days, U.S. officials routinely acknowledge that the Washington-Beijing relationship is the world's most important. Combined, the U.S. and Chinese economies accounted for more than half of global growth over the past four years, and how these nations interact over everything from Iran to North Korea will do much to determine whether peace and prosperity prevail in Asia and beyond. But high-level U.S. talks with China in recent years have been sporadic, at best. The heaviest hitters in President Bush's Administration have been preoccupied with the war on terror and the deepening fiasco in Iraq. Aside from last April's promise by China's President Hu Jintao to try to expand market access for U.S. goods, there has been scant evidence of constructive dialogue on trade issues.

Hank Paulson is trying to rectify that. Since he took over at the Treasury six months ago, the former Goldman Sachs CEO has made China the centerpiece of what will be his two-year run as the Administration's top economic policymaker. The December meeting in Beijing was the first of a series of biannual economic summits that are supposed to increase communication, with a specific focus on intermediate and longer-range economic issues. China's leaders "want to know that this relationship is being managed," explains Paulson during an interview in his ornate office at the Treasury Department. "It's important to them, and it's important to both Presidents."