Economic relationship has long been the drive and anchor of U.S.-China relationship. Bilateral cooperation not only benefits the people but also adds new momentum to the recovery of global economy. However, in the last year we have seen increasing frictions because of geopolitical reasons and the economic strength changes. Recently, Henry M. Paulson, former U.S. Treasury Secretary and Chairman of Paulson Institute, shares his observations on this issue in an interview with People’s Daily.

People’s Daily: Since the beginning of this year, we saw more disputes in the political relationship of China-U.S. relationship, at the same time, we have seen frictions in the economic and trade side. In the context of increasing tension in bilateral political and security relation and given the recent global geopolitical changes, what do you think of the interaction between political/security tension and the economic frictions in U.S.-China bilateral relationship?

Henry M. Paulson: We have growing security tensions in our relationship, and that is of considerable concern to me. So it is essential that we try to relieve these in several ways—first, through candid dialogue about our respective interests and views; we should not attempt to paper over our differences; second, by ensuring that our differences do not preclude cooperation in the areas where we agree; and third by working to resolve differences, where we can. But it is also important that we see productive relations among major Asian countries, and it is increasingly clear to me that security tensions in Asia stand in the way of efforts to consolidate and build on the extraordinary economic gains that have been made in the region since the 1960s. Make no mistake -- the quality of China’s relations with its neighbors will affect U.S.-China relations too. These security tensions make it all the more important to thicken our economic relationship. For instance, if we are able to successfully negotiate a Bilateral Investment Treaty (BIT) and make progress working together to meet the environmental and climate change challenge, this will enhance the relationship and provide a positive context that makes it easier to handle security tensions. Yes, we have trade tensions, but these are normal, even between mature partners. In the 1980s, Japan and the United States had trade tensions yet were close allies. The United States and Europe are also close allies and partners yet have had their share of trade tensions. These are easier to manage, a normal part of the trading system, and can be handled bilaterally or through dispute resolution mechanisms in the World Trade Organization. I do not believe we can easily wish away our security differences, so we need an affirmative agenda on the economic track more than ever.

People’s Daily: Economic relationship has long been the drive and anchor of U.S-China relationship. Do you think it is still true today? Some commentary says the bilateral economic tie is becoming more and more complex. How do you think of the complexity? Can you summarize some of the new characteristics which are emerging in the bilateral economic relationship?

Henry M. Paulson: I certainly think it remains true and, as I said in reply to your first question, it is more important than ever that we develop an affirmative bilateral economic agenda. There are a number of changes worth noting, but the most important is the degree to which structural adjustment and economic rebalancing has become a priority in both countries. As China changes its growth model, this will create new opportunities for U.S. exporters to China, as well as new opportunities for investment. But it is essential, therefore, that U.S. firms face a level competitive playing field—one characterized not just by economic reform but by the introduction of genuine competition conducted according to transparent, market-based rules. Likewise, the growth of outbound direct investment from China has introduced a new dynamic to our relations. I believe investment from China in the U.S. economy, especially greenfield investment as opposed to simply purchasing U.S. Treasury securities, can have a salutary effect on our relations by supporting jobs and growth, while helping China and its firms diversify their portfolio into higher-margin industries. The U.S. needs to be transparent about the investment process and ensure that it is conducted fairly. I believe the growth of investment in both directions would introduce an especially positive new dynamic into our economic relations. And that is why I am in China this week attending events and working to promote early conclusion of a strong Bilateral Investment Treaty between our two countries.

People’s Daily: A statistics program by World Bank released in April predicted China is going to surpass the U.S. to be the biggest economy this year using PPP calculation. Though it is not yet a reality, many believe this represent a trend in the long term and China will overtake the U.S. in the future. How will such a tendency of China rising and finally overtaking U.S. impact trade and economic bilateral relationship? There is always cooperation and competition between the U.S. and China. But what changes do you foresee in the two aspects of cooperation and competition?

Henry M. Paulson: PPP is one method of measuring economic strength and activity by computing the value of products and services consumed. But so is nominal GDP—and by that latter measure, the U.S. is and will remain a larger economy for some time. But this methodological question of GDP size is less relevant, in any case, than the more important question of whether and how the world’s largest economies cooperate in the face of pressing challenges. There are significant headwinds facing the world economy, so it is essential that the United States, China, Japan, Europe, and other leading economies work together to support and sustain global growth, forestall future financial crises, promote trade while avoiding a slide into protectionism, and promote investment. China’s growth is a fact, but it brings with it new responsibilities. China should rise to that responsibility by helping to craft solutions to these global economic challenges in partnership with the United States and others. It is essential that a rising China also rise to the expectations of its new global status.