William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

On March 7, Treasury Secretary Henry Paulson gave a major speech in Shanghai, China.  He has traveled there several times since assuming his post in the Bush Administration, but he made frequent trips when he was CEO of Goldman Sachs seeking to bring foreign investment to China. Unfortunately, his message and behavior have not changed much in his new role. He still acts as if his mission is to help his banking colleagues profit from building China into a great world power.  There was nothing in his Shanghai speech to reflect his duty as a government official to advance the interests of the United States.

Paulson’s talk was filled with lines like these: “We welcome China's growth and integration into the world economy – it benefits the Chinese people, and the people of the world,” and “China's continued economic success is not only vitally important to the people of China, but also to the rest of the world.” Beijing’s best Communist Party propagandists could not have said it better.  

Yet, since the world runs on the basis of competition, Beijing’s aggressive economic expansion is pulling industrial capacity, capital, and technology from other parts of the world, beating out producers elsewhere.  China has amassed over $1 trillion in hard currency reserves from an expanding trade surplus.  Most of the money has been supplied by American consumers. The U.S. trade deficit with China was $232.7 billion in 2006, another new record in red ink.  

Two days before Paulson’s talk, the annual meeting of the National People's Congress opened.  The Communist regime announced  a 17.8 percent increase in China’s public military budget for next year.  Deputy Secretary of State John Negroponte had just finished two days of talks in Beijing, and expressed concern that much of China's military spending is still hidden from view, disguised in other departments and state enterprises. In addition, the People's Liberation Army owns all sorts of profit-making businesses.

Since Hu Jintao became the country's supreme leader in November 2002, China's defense budget has increased by 9.6 percent in 2003, 11.6 percent in 2004, 12.6 percent in 2005 and 14.7 percent last year.  Pentagon and other defense analysts think China's actual military spending may be three or four times higher than the public figures.  The defense funding is going primarily into the modernization and creation of weapon systems designed to attack American and allied forces.  Some of these weapons have been exported to rogue states, and even find their way into the hands of terrorists, as was demonstrated in Lebanon.  

A story in USA Today on March 12 recounted how Chinese hackers attacked the computer system at the U.S. Naval War College last November, disabling the system for several weeks.  The cyber assault is thought to have been aimed at learning about recent Navy wargames, some of which have dealt with how the U.S. would react to a real-world Chinese attack in Asia.

It is China’s rapid economic growth that is making these advances in technology and military capabilities possible.  And it is America’s multinational businesses that are helping Beijing gain the resources it needs to pursue its anti-American foreign policy around the world.   Two days after Paulson’s speech, Beijing blasted Washington for its alleged  “flagrant record of violating the Geneva Convention in systematically abusing prisoners during the Iraqi War and the War in Afghanistan.” China has provided strong diplomatic support for Iran in its confrontation with the United States over nuclear proliferation and terrorism.  

“We think it's important in our dialogue that we understand what China's plans and intentions are,” said Negroponte.  It would also be nice to know what U.S. plans and intentions are in response to Beijing’s challenges.  But “dialogue” does not imply any action will be taken, just the opposite.  Dialogue has become the term of art, replacing “negotiations” which is considered too confrontational.  It’s now all about chit-chat diplomacy, with no expectations that anything will be done to resolve problems, or even to acknowledge that there are problems.

Paulson conducted the first session of the Strategic Economic Dialogue (SED) in Beijing last December, with the next session set for Washington in May.  In Shanghai, Pauslon claimed, “The U.S. and China share many strategic economic interests.” But on examination, the shared interests are only with Wall Street, whose monied elite think increasingly of themselves as above or beyond national loyalties.  Thus Paulson devoted most of his talk to trying to persuade Beijing to give his Wall Street chums a bigger slice of China’s financial markets, so they could help China grow faster.

Paulso told his audience, “You have recapitalized four of your top five state-owned banks and, even more importantly, invited in strategic investors and completed IPOs”— actions which Goldman Sachs, Morgan Stanley, and other U.S. investment banks helped Beijing carry out.  He went on to urge a change in policy to allow foreign banks to own a larger share, even a majority share, of Chinese banks.  “Allowing Chinese banks to sell controlling stakes to foreign investors – currently capped at 25 percent – can promote China's efforts to strengthen risk management and internal controls in small and medium-sized banks.” he argued, adding, “Opening to international competition does not mean compromising your own rules or identity.  If China opens its markets to foreign participants, those participants will be subject to Chinese regulation and supervision.  While undoubtedly international companies will have some foreign managers, the bulk of the people employed in China's financial services industry will be Chinese and the benefits generated will largely stay in China.”

Paulson also argued that “to develop stronger capital markets, China needs a larger and more accessible government bond market, a more liquid and transparent corporate bond market, and a legal construct in which private equity can flourish.....establishing a deeper government bond market.” In other words, better ways to draw private funds into government programs, including military programs and other initiatives that will further project Chinese power in the world.  

Paulson does not seem to understand what was apparent to Louis XIV’s Finance Minister, Jean Baptiste Colbert, over 300 years ago.  Colbert wrote, “Trade is the source of finance, and finance is the vital nerve of war.” Or perhaps, given the box office success of the film “300, whose subject is warfare in ancient Greece, the words of the Athenian historian Thucydides should be recalled: “War is not so much a matter of weapons as of money, for money furnishes the material for war.”

Paulson knows nothing about these larger strategic issues (he even subverts the term by its use in the SED), and cares nothing about them either.  He has made a considerable personal fortune helping China without any regard for the larger consequences of his self-serving actions.  Because of these crippling limitations on his outlook, he is completely unsuited to hold the responsible position he was given by President George W. Bush.   It is not just that he cannot do the job of protecting U.S. national interests and American security in his dealings with China, he does not even understand what that job is.  Thus his failure as the Bush administration’s “China Czar” and an “international statesman” is inevitable.

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