U.S. Treasury Secretary Henry Paulson leaves after making closing statements after the 5th U.S.-China Strategic Economic Dialogue in Beijing, December 5, 2008. (Jason Lee/Courtesy Reuters)

With the glaring exception of Japan, Asian economies are recovering earlier and stronger from the crisis than nearly all others. And China has now cemented its place alongside the United States and Europe as a growth engine.

But China faces large—and intensifying—vulnerabilities.

Readers of Asia Unbound will know that I’ve talked here and written here about some of these challenges.

And so I thought I’d flag for interested readers a major speech delivered this morning in Washington by former Treasury Secretary Hank Paulson (full disclosure: my boss).

He has a deep history with the U.S. and Chinese economies—at Goldman Sachs, and then as the Treasury Secretary. As a banker, he worked on historic but thorny issues in China, like privatizations. And at the Treasury, he established the Strategic Economic Dialogue and played a central role in the creation of the Ten Year Energy and Environment Cooperation Framework.

The basic thrust of his speech is twofold:

First, both countries face growing economic challenges and vulnerabilities. And for its part, it is decidedly in the U.S. interest for China to get ahead of these challenges. As Paulson puts it, “China’s success at sustaining growth, fighting inflation, and transitioning from an economic model too dependent on exports and fixed asset investment is closely connected to our own success.”

Second, “the U.S. and China need to take steps—mostly individually, sometimes together—that will have the mutually beneficial effect of supporting and sustaining economic growth.”

That’s a striking formulation because it’s not focused on “cooperation” for its own sake. Rather, as Paulson argues, the U.S. and China “don’t always need to act jointly.” They can take separate and self-interested steps that, in the bargain, put their two economies onto a more complementary footing.

You can read the entire speech here, or watch it delivered here.

But for the central message, here are his five principles—let’s call them, ”Paulson’s Principles”—quoted verbatim from the speech:

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Water Vortex. (Courtesy Creative Commons)

That phrase is of course associated with presidential candidate Ross Perot and what he believed would be the massive loss of jobs to Mexico after the signing of the North American Free Trade Agreement. Now it may best summarize the emerging view of congressional leaders about China and intellectual property.

Last week, in his opening statement, House Permanent Select Committee on Intelligence Chairman Mike Rogers called out Chinese economic cyber espionage: “A massive and sustained intelligence effort by a government to blatantly steal commercial data and intellectual property.”  As Ellen Nakashima pointed out in the Washington Post, that Chinese hackers are behind the massive theft of intellectual property is widely assumed. People just don’t say it so directly very often.

At almost the same time, Senator Jim Webb was introducing legislation that is supposed to stop the transfer of technology funded by the U.S.  government to China and other countries that “by law, practice, or policy require proprietary technology transfers as a matter of doing business.”  These transfers, in Webb’s view, “clearly and unequivocally place the competitive advantage of the American economy at risk.” In his statement, Webb offered the specific examples of Westinghouse and third generation nuclear reactors; General Electric and avionics; and Ford and electric vehicles.

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A worker holds one of scrap mobile phones, at a recycling facility of Re-Tem Corp, in Tokyo on October 15, 2010. Re-Tem Corp researches and develops the recycling of rare earth metals vital to the production of electronics. Japanese high-tech companies face higher input costs for rare earth metals as dominant supplier China curbs exports. (Toru Hanai/Courtesy Reuters)

Nine months after the original brouhaha over China’s plans to decrease dramatically its exports of rare earths, the international community has called foul again on a closely related issue: China’s export curbs on other raw materials, such as magnesium and silicon. On July 5th, the World Trade Organization (WTO) ruled that China had violated WTO rules when it curbed its exports of these and other raw materials. (Thus far, the Chinese response to the first ruling has been muted, but all indications are that Beijing will appeal the ruling.)

Now China is worried that it will face a similar suit on rare earths. Whether it would fare better in such a case is uncertain, but unlikely. The WTO allows for export restrictions when a country is trying to conserve non-renewable natural resources, which China is clearly trying to do. The hitch is that this exception also demands similar restrictions on domestic production and consumption. China can’t offer more favorable policies to its own companies than to the rest of the world. That is going to be a high bar for China to meet. Read more »

Space shuttle Discovery lifts off from the Kennedy Space Center in Cape Canaveral, Florida on February 24, 2011. Six astronauts were aboard on a mission to the International Space Station. (Pierre Ducharme/Courtesy Reuters)

This does not look like a great idea.  According to Science (behind paywall), Representative Frank Wolf (R–VA) inserted two sentences in the bill that averted the federal government shutdown prohibiting “any joint scientific activity between the two nations involving NASA or the White House Office of Science and Technology Policy (OSTP).” It is not clear how sweeping the provision is, and it only extends until the end of fiscal 2011, but the article quotes Wolf as saying he would like to shut down all collaboration: “We don’t want to give [China] the opportunity to take advantage of our technology, and we have nothing to gain from dealing with them.”

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Earlier this month, I sat down with Harry Kreisler of UC Berkeley’s Institute of International Studies to talk about my new book,  Advantage.  Watch as we discuss the state of innovation in the U.S. and Asia, as well as how we can play to our strengths in what I call the “software” of innovation in order to maintain our lead in the global economy.

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The U.S. 2012 fiscal year budget is unveiled in Washington on February 14, 2012. (Jason Reed/courtesy Reuters)

A little house keeping. I was on the road last week, speaking about Advantage in Berkeley and Seattle.  About ten days ago, Foreign Policy published my response to the State of the Union, “The Great Invention Race,” and CFR.org just posted some of my thoughts on the budget and innovation—increased spending is definitely good news (if it does not eventually get slashed in the battle to reduce the budget deficit), but it is not enough.

One of the most interesting exchanges I had on the West Coast involved a serial entrepreneur who was trying to commercialize a dual-use technology but kept running into government bureaucracy. Venture capital was scared away from making an early investment, and hiring foreign-born workers was near impossible because of deemed export control laws—a Chinese engineer, for example, who works with technology that is controlled for export is “deemed” an export, and the company must obtain a license for that worker to use the technology in the lab.

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