Paulson takes warning on trade to Asia

By Glenn Somerville - Analysis

WASHINGTON (Reuters) - With lawmakers nipping at his heels over U.S. trade deficits, Treasury Secretary Henry Paulson will try to persuade key Asian nations during a visit this week that they must act quickly to help tamp down protectionist pressures.

Paulson's visit to Japan, South Korea and China comes against a backdrop of roiled global financial markets blamed initially on turbulent stock markets in China -- the country stirring deepest protectionist passions in the U.S. Congress.

"My sense is that what Paulson wants, right now, is a stronger (Japanese) yen and (Chinese) yuan before pressures build to such a degree for protectionist measures that they cause bad policy to be made," said economist Mark Zandi of Moody's Economy.com in West Chester, Pennsylvania.

Paulson, still less than a year into the job, warned on Thursday about "a worrisome trend" on Capitol Hill toward acceptance of the idea of erecting barriers to trade to try to slow a flood of imports from China and elsewhere.

He also said the Bush administration was "dissatisfied" with China's dragging its feet over letting the value of its yuan currency rise. A stronger yuan could help shrink what has become the United States' biggest bilateral deficit by pushing up the cost of Chinese goods imported into the United States.

PUSH FOR GROWTH

Paulson begins his four-day Asia visit in Tokyo on Monday.

U.S. Treasury officials said during his two days in Japan, the world's second-largest economy, Paulson would encourage Prime Minister Shinzo Abe and other top officials, including Finance Minister Koji Omi and Bank of Japan Governor Toshihiko Fukui, to do all they can to speed up growth.

Paulson said on Thursday that Japan and Europe need to "continue to pursue pro-growth economic and labor reforms" to create more demand for U.S. goods and better balance trade.

U.S. Treasury officials say any Asian trip with China on the roster means "currency is an issue," and in this case Paulson may highlight the fact that Japan and South Korea have not been intervening to keep their currencies' values down.

The yen's value has risen during the recent global market turbulence as "carry trades," in which a currency in a low-interest-rate country like Japan is borrowed to invest in higher-yielding assets elsewhere, were unwound as traders sought to cut their risks.

From Tokyo, Paulson heads to the South Korean capital Seoul where he is scheduled to meet President Roh Moo-hyun on Wednesday, as well as Kwon O-kyu, the deputy prime minister and finance minister.

CITE KOREAN MODEL

Treasury officials say South Korea has adopted many reforms that help make it an example of how an economy can be transformed into one that is market-driven.

Paulson stops for a few hours in Beijing on Wednesday afternoon, where he will meet Vice Premier Wu Yi before heading for Shanghai to deliver a Thursday morning address that will touch upon the importance of financial-market reform for China, including allowing more access for U.S. companies.

"We are really pressing to have China move forward with reforms so that they could have a market-determined currency rate," Paulson said in a radio interview on Friday, an approach that some analysts question.

"The approach he should be trying is to line up allies in the region and outside to apply pressure on China to do the right thing on currency appreciation," said Morris Goldstein, an analyst at Peterson Institute for International Economics.

Goldstein noted that that the yuan has appreciated in nominal terms by about 5 percent since China freed the currency from a peg to the dollar in July 2005. But when adjusted for inflation, "it is going backwards" instead of rising, he said.

The public highlight of Paulson's visit will be his Shanghai address on the need for better-developed capital markets, but Goldstein said that will not win the necessary faster yuan appreciation that is needed.

"The problem now is that Treasury hasn't really produced anything on the bottom line while Congress is getting less and less patient," Goldstein said.

The risk is that lawmakers will get increasingly angry if they think Paulson's main interest is in opening up China's financial sector to U.S. companies, especially given his background as a former chief executive of investment bank Goldman Sachs.

"For him, that could be seen as looking under the lamp post for the key where he left it," Goldstein said.