Paulson: Hot on India, cool on China

WASHINGTON (Fortune) -- On Tuesday morning, Treasury Secretary Henry Paulson gave a speech on China. It was called "Managing Complexity and Establishing New Habits of Cooperation" - a title that a therapist might borrow for a parents' lecture on coping with defiant adolescents.

On Wednesday morning, Paulson gave a speech on India. The title practically blushed with fresh love: "The Economic Power and Promise of India." This afternoon, the veteran China hand goes wheels up for his first trip as Treasury Secretary to India, where he will speak to Fortune's Global Forum, peddle private financiers on the idea of investing in infrastructure projects and promote plans for an international financial center in Mumbai.

Let's hope he has better luck with this relationship.

Paulson, who had traveled to China more than 70 times during his long career at Goldman Sachs (Charts, Fortune 500), began his tenure with high hopes that he would help Washington link economic elbows with Beijing - a sentiment embodied in the launch of his biannual Strategic Economic Dialogue, aimed at guiding China toward becoming a "responsible stakeholder" in the global economy.

More than a year later, notes of frustration have crept into Paulson's tone toward the country he has long considered a home away from home. "Whereas trade and investment were largely a source of stability in bilateral relations, they are now increasingly also a source of tension," he told the 2007 George Bush China-U.S. Relations Conference this week. "America's large corporations ... increasingly are concerned about the openness of China's economy, and Chinese counterfeiting of trademarks and pirating of intellectual property," Paulson noted - topping off that complaint with a nod to U.S. worker perceptions of unfair competition and consumer fears over food and product safety.

By contrast, the Treasury Secretary used his India speech to dwell on a budding friendship. "The ties of our governments are, in some sense, catching up to the long history of personal and professional friendships among Indians and Americans," he told the Council on Foreign Relations. With India, he raved about a "strong, growing partnership," adding that "these ties enjoy bipartisan support in both countries." With China, Paulson spoke of "managing our disagreements" and could have added that the administration's friendship with Beijing faces bipartisan opposition-at least in some quarters.

The American bear hug of India, at a time of problematic relations with China, extends through the Bush administration. Writing in the current issue of Foreign Affairs, Ambassador R. Nicholas Burns, under secretary of state for political affairs, writes that "building a close U.S.-India partnership should be one of the United States' highest priorities for the future....Sixty years ago, our countries failed to chart a common course. Sixty years from now, no one will be able to accuse us of making the same mistake twice."

But already there are strains. The landmark U.S.-India nuclear deal - which would give India access to U.S. civilian nuclear technology in return for acceding to international inspections - is in danger of unraveling amid opposition from India's leftist parties. In an interview on National Public Radio this week, Burns - who had described the deal as a "symbolic centerpiece" of U.S.-India friendship-said "we don't think the deal is dead, but the deal has been postponed."

Burns said U.S. officials are now pressing the country's coalition government to "grab this opportunity" while the U.S. Congress is in the mood to grant final approval. "I think the reality is that [with] an agreement like this, which has been controversial in our country but which has current congressional support, it is smart to get it back to the Congress in a time when they will have the time to look at it and not to get it too deep into our election year," he said.

Reports this week of India's renewed interest in an oil and gas pipeline from Iran are further irritating the U.S.-India relationship. And there remain pronounced economic disagreements that are certain to test the friendship-and Paulson's patience. True, India is a political democracy. But the markets, while increasingly liberalized, are a different story, with retail, consumer banking and the media still largely closed to U.S. companies. Paulson noted this week that India needs a more "hospitable investment, regulatory and financial regime." Paulson also needs cooperation from India to break the deadlock in the Doha round of trade talks, the completion of which would be a boon to U.S. companies. "Doha has never been more important," he said, adding than an accord is "still very much within reach."

Despite all that, India looks something like teacher's pet in Paulson's orbit as he struggles with a hard-to-manage China. The twin roles were highlighted this week when Paulson fielded a question about currency rates - a topic that gets China critics steaming with accusations that Beijing is giving itself an artificial competitive advantage in exports. In India "we've seen real exchange rate flexibility," Paulson said, "and that when an exchange rate is set in a competitive marketplace, it makes a difference." China, he added diplomatically, "is in a different stage of development."

As with China, Paulson's modus operandi in India is to keep up public and private pressure to continue market-opening reforms. India may be in a more advanced stage of market development, but, as Paulson noted, there are always "internal pressures" to go backwards.