(Agencies)
Updated: 2007-09-11 13:52

US Treasury Secretary Henry Paulson warned Monday that enacting legislation aimed at punishing China over its economic policies could jeopardize future growth and unsettle markets already on edge over the severe difficulties in the American housing and mortgage sector.

"I really do believe we are at an inflection point here," Paulson said in an interview. "When we look at taking unilateral actions aimed at another nation, this can have enormous repercussions to our economic well-being. You know, we're playing with fire."

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Paulson said he remained confident that the American economy was resilient enough to survive recent market turmoil. But he said he feared Chinese retaliation and a loss of China as an engine of global growth and a market for American exports.

Exports to China grew at the rate of 32 percent last year, and the Treasury Department says that total exports contributed nearly a percentage point of the 4 percent growth of the second quarter of 2007.

Paulson's office arranged for the interview to underscore his concerns after discussions with leading business officials, particularly in the financial services, manufacturing and automotive sectors, all of whom he said are depending on exports to help them get through current economic difficulties.

According to Paulson, all these leaders were concerned about legislation that would impose duties or other punishment on China if the country did not allow its currency, the yuan, to appreciate against the dollar, a move that would make Chinese exports more expensive and goods imported by China cheaper. The business people feared that such legislation could lead to retaliation by China, Paulson said.

"There was a concern that given what's going on in the global economy and the emerging protectionist sentiment in many parts of the world," he said, "how dangerous it is to take a unilateral punitive action that could lead to a trade war or that would be unsettling to the markets."

Paulson declined to specify which bills were worrisome, but Treasury officials have been most concerned recently about a bill supported by Senator Max Baucus, who leads the Senate Finance Committee, and Senator Charles E. Grassley of Iowa, the panel's ranking Republican.

In addition to penalizing China for its refusal to let the yuan float against the dollar, it might require increased tariffs and a ban on US federal agencies purchasing Chinese products.

Paulson, who took office as Treasury chief in the summer of 2006 after running Goldman Sachs and doing many deals in China, has made improving relations with China his highest international priority.

He said that there had been "many positive developments" in relations with China, including recent steps to open up China’s markets to American banks and financial services. And he noted that as of Monday, China had allowed its currency to appreciate 10 percent against the dollar since mid-2005.

But he also remained impatient with China's pace of change - both on currency and opening its markets to American goods, services and investments. "I'm not an apologist for the fact that China is not moving quickly," he said.

Still, Paulson said what progress had been made could be jeopardized by "sticking our thumb in the eye" of China or other trading partners.

The larger problem, he said, was an American fear that "somehow China's economic growth and success hurts us." He said he and others in the Bush administration needed to convince Americans and members of Congress of the benefits of China as a source of affordable consumer products and a marketplace for American exports.