MUCH HAS BEEN WRITTEN about the Treasury Department's role in making economic policy under the Bush administration. Many have argued that Treasury's influence has been shrinking. As a senior Treasury official from 2001 until 2005, I did not share that view, but whatever your opinion on the matter, there is little doubt that new Treasury Secretary Henry M. Paulson is breathing new life into 1500 Pennsylvania Avenue.

From a policy perspective, Paulson's approach to China is perhaps the clearest case-study in how the new secretary is asserting the role of the Treasury Department. The announcement last month of a new high-level Strategic Economic Dialogue between the United States and China was a solid early achievement for Secretary Paulson that promises to yield great dividends for the U.S. trade agenda vis-à-vis China.

Paulson knows that to achieve success, you need to surround yourself with top-notch personnel. Accordingly, he has added respected veterans to his team. Jim Wilkinson, a former top aide to Condoleezza Rice, is known for his ability to manage complex projects and has helped build a strong Treasury team. Deborah Lehr, an experienced China expert who, as president of Stonebridge China, helped global businesses navigate the challenging Chinese market, has been recruited to assist in managing the new China dialogue. Wilkinson and Lehr compliment a number of existing well-respected Treasury hands Paulson inherited who work on the China portfolio--namely, Undersecretary of International Affairs (and former policy director of President Bush's 2004 campaign) Tim Adams; Deputy Assistant Secretary for Asia Bob Dohner; and David Loevinger, Treasury's attaché in Beijing.

Over the past year, I enjoyed the privilege of working with Secretary Paulson, both in his role as chairman of the Financial Services Forum, where he made China a top priority, and now as secretary of the Treasury. Indeed, I had the occasion to meet with him just days before his trip to China and immediately following his return. In both meetings, he was direct about his approach. Like his predecessor, John W. Snow, Paulson strongly opposes protectionist measures and believes that while we must speak frankly with China about our differences, active engagement is the best way to resolve them.

Threats of retaliatory tariffs and protectionists measures are rarely productive tools for achieving trade objectives and this is doubly-true for China, a country historically resistant to outside pressure. Diplomacy of the kind that Secretary Paulson is pursuing has consistently proved the most effective tool for a successful relationship with the Chinese. From the opening of China's economy beginning in the late '70s, to China's 2001 accession as a member of the World Trade Organization, to the currency reforms enacted last year, to the recent announcement of the U.S.-China Strategic Economic Dialogue, engagement has proven to be most effective.

Secretary Paulson has been able to earn the trust of leaders in both Washington and Beijing because he speaks from experience. By his own tally, Paulson has traveled to China some 70 times. He has developed deep personal and professional relationships with the political and economic leadership in Beijing, but has spent considerable time in the provinces as well. The rural provinces, especially those in the west, contain China's 800 million poor and are key to understanding China's greatest economic challenge--spreading the country's urban prosperity to those who have not yet shared in its economic success. Upon his return to Washington, and following the announcement of the Strategic Economic Dialogue, Senators Chuck Schumer and Lindsey Graham decided not to pursue a vote on their bill which would have mandated stiff tariffs on China-produced goods.

Paulson's approach to China is rooted in the close relationships he has developed with leading Chinese officials over the years--relationships that have given him a unique insight into how to approach America's relationship with the world's fastest growing economy. Over the years, Paulson has made it a point to get to know the rising stars in the Chinese government early in their career, before they assume the mantle of senior leadership. His most recent trip was no exception.

Before arriving in Beijing, Paulson made a stop in Hangzhou to meet with Xi Jinping, the party secretary of Zhejiang Province. While Xi Jinping is not yet a household name in the United States, he has been identified by China-watchers as a probable member of China's future senior leadership. Xi Jinping's experience leading Zhejiang Province, which has become one of China's three wealthiest (due in large part to the success of its highly developed private sector economy) makes him a natural ally of the United States.

Considering the array of issues on the U.S.-China economic agenda--from China's economic development, to financial sector reform, to protection of intellectual property rights, to increased market access for U.S. companies--Paulson's extensive experience comes at a is vital time. His handling of America's economic relationship with Beijing and his drafting of creative high-level talent into the Treasury is cementing the Treasury's position as the center of economic policymaking.

Rob Nichols is president of the Financial Services Forum ( and a former assistant secretary of the Treasury.

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