Paulson's Big Win on Trade

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Treasury Secretary Hank Paulson might be one of the few Bush administration officials who'll leave D.C. with an enhanced reputation. Thursday's Paulson-brokered trade agreement between congressional Democrats and the White House—requiring U.S. trade accords to include enforceable, internationally recognized labor and environmental standards—paves the way for approval of pending pacts with Peru and Panama. It also makes more likely the passage of trade agreements with Colombia and South Korea, as well as congressional approval of new trade authority for President Bush.

What's makes this deal so significant is that it occurs just after the election of the most protectionist Congress in years and happens amid rising public skepticism over the benefits of trade. And don't doubt that many economic nationalists are wary of this deal. David Sirota, a liberal political strategist and popular blogger, just had this posting:

"The bottom line is clear: If this deal sells out the American middle class—as many longtime fair-trade Democrats in Congress seem to fear—it will require a massive grass-roots pressure campaign to demand Democrats respect the 2006 election's fair-trade mandate and back off."

Indeed, many like Sirota want not only a freeze on new trade deals but a reopening of some old ones like the North American Free Trade Agreement. Yet just as congressional Republicans are more sympathetic to immigration reform than the grassroots, the same goes for congressional Democrats and trade. Ultimately, it seems more likely that congressional Democratic leaders and the party's eventual presidential nominee will push for a new social contract with American workers in this age of increasing globalization—more education benefits, wage insurance, healthcare reform—instead of ripping up old trade agreements and slapping tariffs on China.

Part of what Paulson has been doing in his round of conversations with Chinese officials over the yuan and intellectual property rights is to get enough progress on these issues to keep the protectionist elements in Congress as subdued as possible. The same goes for the White House, which has instructed the U.S. trade representative to initiate three formal World Trade Organization complaints against China so far this year after launching just two in the previous five years.

What Paulson knows is that when it comes to China, the key to reducing the huge trade deficit lies with a more free-spending Chinese consumer as the driver of Chinese economic growth rather than a trade war that could cripple both economies. And the former solution will take time. In a way, Paulson reminds me of Gen. David Petraeus. Both are supersmart, capable guys who have to deal with an increasingly impatient American public—one on trade, the other on Iraq. And America could have used both of them four years ago.