Fratto: Clinton's Mis-Step In China

In Beijing last week, Secretary of State Clinton targeted for change the Bush Administration's stewardship of our economic relationship with China.

While Secretary Clinton should be applauded for recognizing the importance of the U.S.-China bilateral relationship, her view that this relationship "was very heavily dominated by economic concerns and by traditional Treasury priorities" is far from accurate.

Worse, her turf fight to wrest control of the economic dialogue from Treasury leadership is a mistake that will only compromise our economic relationship. This is a policy solution in search of a problem.

Taking a long-term view, America's economic relationship with China is the single-most important bilateral economic relationship in the world. It was with that long-term view that Bush Administration Treasury Secretary Hank Paulson established a mechanism for strengthening the relationship in the form of the U.S.-China Strategic Economic Dialogue (SED).

While dialogue and cooperation between the nations on issues like North Korea were working, Paulson, a longtime China veteran from his work at Goldman Sachs, understood that our economic relationship with China lacked coordination and coherence. The economic portfolio was broad, encompassing trade, finance and investment, development, health, product safety, labor, energy and climate change. And responsibility for policy direction was dispersed among many U.S. agencies, including the Treasury Department, the U.S. Trade Representative, the Commerce Department, the Food and Drug Administration, the Energy Department, and others.

The economic relationship also suffered from a structural asymmetry between the two countries that made economic negotiations cumbersome and frequently ineffectual. In most countries the finance minister is a senior minister with the full authority for economic policymaking. China's finance minister is a relatively junior minister, with a narrow portfolio responsible largely for banking issues - something equivalent to the U.S. Treasury's Under Secretary for Domestic Finance. To change policy in China would require attracting higher-level officials to the table.

Paulson's remedy was to create the Strategic Economic Dialogue - a forum that would address all issues across the breadth of the economic relationship. And by guaranteeing the participation of U.S. cabinet-level officials, the SED had the credibility to lure the active participation of the senior-most Chinese policymakers.

The SED coordinated and appropriately raised the level of our economic engagement with China, but despite Secretary Clinton's misperception, this did not come at the expense of our already deep and rich engagement on foreign policy. Our foreign policy challenges with China are serious and they would fill the plate of a Secretary of State: North Korea's nuclear ambitions, Tibet, human rights and religious freedom, and Sudan, to name just a few.

Secretary Clinton's unfortunate foray into economic policy in Beijing last week only served to highlight the weakness of her approach.

First, she exposed her limited understanding of the complex U.S.-China financial relationship - in particular, capital flows and the context for China's continued interest in dollar-denominated assets like U.S. Treasury securities.

Second, the new arrangement will disrupt and confuse a now well-established protocol for economic discussions between the nations. In addition to the already bifurcated arrangement for economic policy — in the form of Treasury Secretary Tim Geithner sharing space with National Economic Council Director Larry Summers — adding a new voice can only leave the Chinese wondering who, exactly, is in charge.

But most dangerous for America's interests is the prospect of negotiated tradeoffs between foreign policy aims and economic aims. The risk is that a State Department-dominated process will always suborn our economic interests to the achievement of foreign policy aims.

How will U.S. insurance firms, banks and other firms fare if their goals are fodder for negotiated cooperation with China on North Korea or Iran?

The elegance of the SED is that it kept economic concerns on one side of the ledger with negotiated tradeoffs made wholly among the range of other economic concerns. This is appropriate. Our most important foreign policy challenges with China, like cooperation on nuclear proliferation, are largely non-negotiable, but China will be only too happy to require the U.S. to pay an economic price if we give them the opportunity.

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Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.