In August 2007, a few days after returning from my meetings with President Hu in China, I traveled to the American West on a relationship-building trip of another sort. My destination was Billings, Montana, whose dramatic mountain ranges and sweeping blue sky bore a notable resemblance to the high plateau surrounding Qinghai Lake. I was to meet with Democrat Max Baucus, chairman of the Senate Finance Committee, at his invitation.
The soft-spoken, silver-haired senator was home for the late-summer recess, and I hoped that by meeting with him on his turf I could ward off the anti–Chinese currency legislation that he had drafted along with New York Democrat Chuck Schumer, Iowa Republican Chuck Grassley, and South Carolina Republican Lindsey Graham. Their bill sharpened the U.S. response to currency manipulators, allowing the government to impose restrictions ranging from initiating World Trade Organization consultations, which could open a path to International Monetary Fund penalties, to imposing steep antidumping duties on the imports of offending countries. It had been introduced in June, and the markup passed out of Senate Finance in late July.
I did not want this bill to get to the Senate floor, because it would surely pass. If it did, President Bush would use his veto, but his action would likely get overridden. I was beginning to worry that unlike some legislators who did not really want to vote on anti-China legislation, Schumer and Graham sincerely wanted to pass the bill. I hoped that during my visit to Billings I could persuade Baucus not to let the genie out of the bottle.
The Baucus-Grassley-Schumer-Graham bill was one of four—two each in the House and Senate—that had been introduced in 2007 to punish countries that manipulated their currencies to gain an unfair competitive advantage. A second Senate bill, introduced by Banking, Housing, and Urban Affairs Committee head Chris Dodd and ranking Republican Richard Shelby, proposed to eliminate the need to prove that a country intentionally manipulated its currency before the U.S. was required to take action. The clear target in all of the legislation was China. Both Senate bills allowed a presidential waiver on national security or economic grounds, which gave an administration some leeway. But the two House bills were tougher. One did not allow the president to waive the sanctions and gave the Commerce Department the ability to impose duties on imports of goods that had benefited from an artificially weakened exchange rate.
I was encouraged to make the trip to Montana by Kevin Fromer, assistant secretary of Treasury for legislative affairs, and Ambassador Alan Holmer, SED special envoy, who were working on the Hill to keep the anti-China bills from becoming law. Why travel all the way to Montana when I could have called on the senator at his Capitol Hill office? The answer is simple: people appreciate special efforts. I had never before made a pilgrimage to visit any member of Congress in his home district, and I would not make another one, but I knew that if I visited Max Baucus during summer recess, outside of the glare and pressure of the capital, I would strengthen our working relationship, and I just might influence his thinking. And, no small thing, Baucus was up for reelection in November 2008, a Democrat running in a red state. It couldn’t hurt for President Bush’s Treasury secretary to make a special trip to see him.
I wanted the senator to know I valued his opinion and to make clear my stance: the markets were shaky, and the last thing we needed was a trade war sparked by protectionist legislation. Baucus, a onetime SEC lawyer, understood my arguments well, but his constituents, a mix of ranchers, small-business owners, and Westerners with strong independent streaks, were mostly concerned about jobs in Montana.
I made my points at a steakhouse dinner with Max my first night there (the steak was a helluva lot tastier than the yak knuckle I’d feasted on the week before). The next day we made the rounds together: a joint interview with the Billings Gazette; a hardhat-and-goggles tour of a Billings factory floor; and a town hall meeting with the senator’s constituents. Max didn’t make any promises, but I knew he understood trade issues well; in the early 1990s he had brought the Senate’s “grains caucus” together to sustain President George H. W. Bush’s veto of legislation that would have overturned most favored nation status for China. I left Billings convinced that at a minimum, he wouldn’t make a move on currency without first talking to me.
As I had explained to Max, I understood that Congress was responding to the frustration of Americans, but knee-jerk protectionism would be self-defeating. Legislation that made Chinese goods more expensive would only hurt American consumers, who might suddenly find products like televisions beyond their means. Moreover, China was our country’s fastest-growing export market, buying products that benefited U.S. companies and their workers. Max wanted to add beef from his state to the Chinese shopping list, but China had been closed to U.S. beef since mad cow disease had been detected in a U.S. herd in December 2003. The Chinese did not respond well to public threats. They were more likely to retaliate than back down, which would hurt key export sectors such as computers, aircraft, agricultural goods, and machinery. Further legislation might trigger similar protectionist measures by other countries.
China’s trade surpluses were enormous and had spiked since the country joined the WTO, but they were as troublesome for Europe and Japan as they were for us, and I didn’t think we should have to bear the burden of leading the push on the currency issue. I’d been working behind the scenes for some time, pressing the International Monetary Fund to take action. As part of its mandate, the Fund monitors its members’ currency policies. In June 2007 the IMF had announced that it was revising its 30-year-old framework for exchange rate surveillance, giving itself broader powers to determine what constituted currency manipulation, with a new focus on outcomes rather than intent. China had opposed this change as an infringement of its national sovereignty.
In any case, having spent my career working in capital markets and not on Capitol Hill, I saw the currency issue as something of a red herring. It might have sounded good to portray the U.S.-China economic differences in strictly us-versus-them terms, but both sides shared the blame. The central problem was one of economic imbalances. The cautious Chinese saved too much, while Americans, incentivized by the U.S. tax system and government policies, piled on debt and gorged on low-cost Chinese goods. If China hadn’t provided cheap goods, we would have bought them elsewhere. But there was no question we needed to clean up our excesses, and China needed to alter aspects of its model to assure sustainable growth. The vast sums of money being accumulated by China and recirculated to the West had helped create a world strewn with the tinder of cheap money fueling speculative excesses. Our profligate ways would set it alight.
Late in August Jin Renqing resigned as China’s Finance minister. The government gave no official reason, but rumors quickly circulated that he had been swept up in a sex scandal. (Later it would be reported that he had been romantically involved with a Taiwanese spy.) To be honest, we weren’t going to miss Jin much; apart from an unnerving tendency to belch in meetings and fall asleep with his mouth hanging open, he had lacked influence within the government. He was replaced by Xie Xuren, director of the State Administration of Taxation, a much more likable man, who supported the SED but reflected the conservative nature of his ministry.
I had little time to savor the latest political gossip from Beijing, however. The financial crisis that would engulf the U.S. and the rest of the world had erupted. It started in France, on August 9, when the Paris-based bank BNP Paribas halted redemptions on three investment funds that held mortgage-backed bonds, citing “a complete evaporation of liquidity.” Europe’s credit markets tightened severely. The next day the Dow Jones Industrial Average fell almost 400 points, its second-biggest one-day drop in five years. After swelling for years, the housing bubble had burst—though the word “bubble” does not do justice to the scale and misery of the disaster that would unfold.
Problems that had originated in the subprime mortgage market spread through the housing sector to banks and other lenders, as well as to investors the world over who had bought mortgage securities. They soon affected the quasi-governmental entities Fannie Mae and Freddie Mac, which packaged and guaranteed mortgages in the U.S., as well as a variety of nonbanking institutions, from investment houses to specialized insurers active in the market. At Treasury we believed that the housing correction would likely extend into 2008. With housing and associated sectors like construction in a slump, economists began to revise downward their estimates for economic activity. Market turbulence and lower growth estimates weakened the dollar; in the 12 months through mid-November, it dropped 14 percent against the euro. Oil prices rose quickly, putting pressure on major oil importers like China. Volatility wracked the global markets.
As financial pressures intensified in the United States, I traveled in November to Cape Town, South Africa, for the gathering of finance ministers and heads of central banks from the world’s leading economic powers, known as the Group of 20. The G20 was a relatively new organization, established in 1999 after the Asian financial crisis to coordinate policy responses. Like the G7, which represented the world’s biggest economies, the G20 was made up of finance ministers, but it included major emerging markets countries, which had grown rapidly but had previously lacked a voice in international decision-making bodies. The G20 included the “BRIC” members—Brazil, Russia, India, and China—and countries like Saudi Arabia and Mexico as well as big Western economies like Germany and France. (In 2011 BRICS was formed, including South Africa.)
I was looking forward to a private meeting I had set up with China’s top central banker, Zhou Xiaochuan, at Hôtel Le Vendôme, a lovely resort outside of Cape Town where I was staying. Among other things, I was hoping to get his read on the recent changes in China’s hierarchy. The month before, the Communist Party had held its once-every-five-years leadership conclave that revealed who was in, who was out, and who was rising in China’s circles of power. The culmination of each Congress—this was the 17th—took place when members of the newly elected Standing Committee strode onto the giant stage in the Great Hall of the People by order of rank, one through nine. For China watchers this was an important moment. Because the country’s political processes are so secretive and opaque, every public event becomes more meaningful and closely scrutinized, and few more so than this.
To no one’s surprise, Hu Jintao and Wen Jiabao had retained their first and third rankings in the Party (Wu Bangguo, the head of the Standing Committee of the National People’s Congress, remained second in rank). Significantly, Xi Jinping had been promoted to the Communist Party’s Standing Committee, cementing his political future. I was pleased because Xi was now clearly in line to succeed Hu as China’s top leader. I believed that he would be good for both China and the U.S., because he knew that the development of free markets and the private sector were keys to China’s future economic success. (He would be named vice president of the country in March 2008.)
Another rising star, Li Keqiang—a protégé of Hu Jintao’s credited with turning around the northeast rust-belt province of Liaoning while he was its Party secretary—was also promoted to the Standing Committee (he would be named executive vice premier in March 2008). Also joining the all-important Standing Committee was Zhou Yongkang, the head of Public Security, who had carried my idea for the SED to China’s president back in 2006.
During the weeklong Party gathering, Hu and Wen had said all the right things, pushing back against emerging protectionist tendencies and pledging to adjust the country’s growth model by providing more social welfare programs, encouraging energy conservation, and strengthening environmental protections. But changes in the Standing Committee also appeared to reduce the influence of former general secretary Jiang Zemin’s Shanghai faction, which favored reform, while confirming the control of Hu, a more cautious leader. We would get another glimpse at the prospects for Hu’s next five years in March, when government responsibilities were shuffled. Wu Yi was retiring, and we did not know who would take her place as our interlocutor, for example.
My forebodings about the diminished prospects for reform were confirmed during the breakfast I shared with Zhou Xiaochuan. As we looked out over the glittering South Atlantic from my oceanfront balcony, he told me he had some bad news. With U.S. markets in upheaval, he said, China was not going to move ahead with capital markets reforms as we had hoped. Though I was disappointed, I was not entirely surprised.
We knew from many sources that antireform forces had gained traction, and the global financial turmoil had only strengthened their cause. Why imitate what was wrong in the West? Opponents of change had tapped a rich vein of paranoia and xenophobia exemplified by the extraordinary success of a book called Currency Wars published in China that year. The book was written by a fellow named Song Hongbin. It was an odd mix of economics and Da Vinci Code–style “sleuthing” that purported to show how Western nations, acting on the orders of rich private banks tied to the Rothschild family, were using the capital markets to subjugate developing nations and, specifically, to contain a rising China. No one in the West took Currency Wars seriously—part of the conspiracy, no doubt!—but it was hugely popular in China and was said to have a readership among the members of the State Council.
Zhou Xiaochuan was nevertheless upbeat on the path to reform in general, indicating the Chinese were likely to show more flexibility with their currency. But he noted that given the unsettled climate, it was important that the U.S. avoid anti-Chinese legislation. China-bashing was in full cry in the States: at a campaign event in mid-August, Democratic presidential candidate Chris Dodd had called on President Bush to suspend all imports of food and toys from China. I reminded Zhou Xiaochuan that President Bush opposed protectionism and retaliation, and I recounted my trip to Montana to discuss the issue with Max Baucus. I would do the best I could to stave off anti-China laws, I said.
As our meeting wound down, I turned the conversation to my concerns about Chinese bank financing for Iran. Working with Stuart Levey, Treasury’s undersecretary for terrorism and financial intelligence, I had been trying to alert all major global banks to the risks of doing business in Iran. It was not illegal for foreign banks to finance legitimate business activity there, but it was dangerous to do so, because the Iranians were known to disguise their illicit activities. I had made clear we would sanction any bank aiding and abetting Iran’s terrorist activities or its efforts to build nuclear weapons. The last thing the Chinese wanted was for one of their major banks to be stigmatized by a U.S. sanction that would undermine its ability to do business in the U.S. and Europe.
Zhou said, “I have looked at it carefully, and I don’t believe our banks are doing any unlawful or inappropriate business with Iran.”
“They should be very careful because we will be watching,” I cautioned. I know he got the message.
At the Cape Town gathering, and with side trips to examine the solid economic progress under way in Ghana and Tanzania, I was reminded of how quickly China had become central to the global economy. The Chinese were everywhere in Africa, making big investments in local infrastructure and nailing down deals to secure vital resources like oil. It was good, I thought, that the G20 gave China and other emerging nations a voice—they deserved to be heard. And the G20 was much more representative of the modern world economy than the G7, which consisted of developed nations and dated back to the mid-1970s, when countries like China barely registered economically. As a result, at Cape Town, finance ministers and central bankers representing much of the global economy could examine the challenges we all confronted. It was an ideal venue for Fed chairman Ben Bernanke and me to explain our nation’s problems and policy responses.
The Cape Town experience would help convince me less than a year later to recommend that President Bush take the G20 one key step further and expand it from a ministerial to a leaders’ group, with heads of state from a broad range of developed and emerging countries addressing the world’s issues. The idea dovetailed with one key goal of the SED: to bring China more into the global community. Though the third-biggest economy, on track to become the second-biggest, China was not adequately represented in global leaders’ forums. Its views weren’t being properly heard, but, just as important, it was not taking on its fair share of the responsibilities and burdens that accompanied its position in the global order.
At a minimum, we required greater international coordination, because the financial crisis was spreading. Major banks in the U.S. had announced big losses, there had been an outright run on the British bank Northern Rock, and consumer confidence was plummeting along with home sales. Inside the administration we had begun to consider stimulus spending to jump-start the languishing economy. As the problems in housing spread through the credit markets, the dollar continued to lose value, fueling protectionist sentiment in Congress. The renminbi had appreciated recently, rising a full percentage point over the course of November, but no one in Congress seemed to notice.
I warned Wu Yi on a call before SED III, scheduled for December 12 and 13, 2007, in Beijing, about the hostile mood among lawmakers. I would do all I could to steer Congress away from that. But, I added, I needed some help from her side.
“I’m trying my hardest,” I said. “But I wouldn’t rule out the possibility of the currency bills moving before the end of the year.”
Wu Yi was agreeable on the phone, but when I had dinner with her in Beijing the night before the first session, her attitude was anything but conciliatory.
The Chinese hosted SED III at Grand Epoch City, about 30 miles outside of Beijing. This tourist attraction combined a faithful re-creation of the Forbidden City with a 27-hole golf course and was known as Top City to the Chinese. Taiya Smith and I met with Wu Yi and Zhu Guangyao at the vice premier’s traditional-style quarters in the center of the complex. An odd Chinese cross between Disneyland and Colonial Williamsburg, Grand Epoch City vividly illustrated the rapid changes brought about by China’s economic development. Just a few years before, I had walked through Beijing’s historic alleyways. Now they and the neighborhoods they helped define had been torn down to accommodate a helter-skelter urbanization, and I was having dinner in a facsimile created for a tourist fantasy world.
Wu Yi used this intimate gathering to reverse roles and give me a hard time about our currency. The dollar’s weakness was causing problems for the Chinese. Their trading partners in Europe and Japan were complaining as the already undervalued renminbi sank further against the euro and the yen. The Chinese faced sharply rising costs for imported commodities, like oil, that were priced in dollars. Wu Yi also expressed her concern for China’s investments in the U.S. By December 2007 China’s foreign exchange reserves had reached a stunning $1.5 trillion, up from $212 billion in the six years since it had joined the WTO. Approximately $900 billion, or 60 percent, of that was invested in U.S. government notes and bonds or in the securities of agencies like Fannie Mae and Freddie Mac, the two mortgage giants.
“You want us to move our currency, but you need to control the value of yours,” she told me. “You’re getting us in real trouble because you’re letting the dollar fall, and the Chinese people are being hurt because they have invested in your dollars.”
“We are committed to maintaining a strong dollar, but its value is determined by free markets,” I responded. “We need to pursue policies to keep our economy strong. And we are doing just that.”
Wu Yi then asked me for specifics on the currency adjustment we wanted. “How much would you like the renminbi to move? Give me a number.”
I resisted. We both knew that the Chinese would appreciate the renminbi because they now believed that doing so was in their best interest, so there was no point in my making a suggestion. Instead, I repeated my pitch for China to embrace a market-determined currency. Until China let the market determine what the renminbi was worth, it should at least base its value more on economic reality.
“Today you are a long way from that point,” I told Wu Yi. “You should move your currency a lot.”
I then returned to the more important and, to my mind, higher-priority topic: Why were the Chinese backing off financial markets reform?
The next night, after a celebratory banquet, the Chinese thought it would be amusing if I played Wu Yi at Ping-Pong. I’m not good at the game, and I would have had no problem letting the vice premier beat me—no shame in that. Wendy beat me all the time. I thought the game would be good for U.S.-China relations. I started to feel the adrenaline pumping, and I was looking forward to playing her, but my staff disagreed and wouldn’t let me.
“It wouldn’t look good for you to be beaten by Wu Yi,” said Michele Davis, Treasury’s assistant secretary for public affairs and director of policy planning.
There was another reason for my staff’s reluctance to have me play. Our Treasury team in Beijing included an IT specialist, Ron Lilly, a nationally ranked player in the U.S. The SED team had included Ron, who had brought his own paddles, just so we could beat the Chinese at their own game. So we suggested that instead of Wu Yi and me, we would pick a staffer from Treasury to play someone on the Chinese SED team. They nominated Zhu Guangyao, then head of the international department at the Ministry of Finance, whom Ron proceeded to beat, albeit in a hard-fought match. The Chinese were great sports, clapping and cheering on the match, and then razzing us for months afterward for bringing in a ringer.
The Ping-Pong game gave me a chance to witness the close working relationship that had formed between the U.S. and Chinese SED teams. Their weeks-long joint preparations for each meeting created a bond of respect and trust between our officials that would prove very important as the financial crisis deepened in the year to come. The SED was characterized by intense personal interaction. Over the course of the first five SEDs, there were 30 face-to-face meetings among Chinese state leaders and U.S. officials. I spoke on the phone two dozen times with my direct counterparts; Taiya Smith and Zhu Guangyao oversaw some 200 consultations and preparatory meetings.
With SED III we were able to announce several sweeping agreements. Foremost, we reached a detailed, far-reaching accord on product safety meant to improve manufacturing standards and government oversight of eight areas that ranged from foodstuffs and animal feed to drugs and medical products, and from alcohol and tobacco to toys and electrical products. Although the problems were primarily on the Chinese side, the protocols we developed represented best practices for a modern marketplace that relied on global manufacturing networks and supply chains.
Health and Human Services Secretary Mike Leavitt was an enthusiastic participant, eager to take advantage of the SED. He built a strong relationship with his counterpart at the Chinese Ministry of Health. At the third SED Leavitt ventured a proposal that might very well have been rejected out of hand by the Chinese as offensive before we’d launched the dialogue: he asked that we be allowed to put U.S. food safety and product quality inspectors on site in China. In the negotiations that followed, China demanded reciprocity. That may have seemed ridiculous to many Americans, but fair was fair, and the fact was, China was very accommodating on this issue—at SED IV we were able to announce that U.S. FDA personnel would be in China and that Chinese inspectors would be working in the U.S. Our improved dialogue would pay off even before then: in early 2008 a blood-thinning drug containing key ingredients from China turned out to be contaminated, and our two countries’ agencies worked together to quickly track down the source of the problem.
By late 2007 I started to wonder what would happen after the Bush administration left office, and I began to think about a joint U.S.-Chinese effort with even longer-term aims. The Chinese were strategic thinkers, rolling their long-term economic goals through successive five-year plans whose progress they meticulously tracked. U.S. policies often veered from election to election. What if a new president allowed the SED to be pushed aside? I concluded that it would benefit us to find some subject that addressed the shared objectives of China and the U.S. that Republicans and Democrats alike could sign on to—something that wouldn’t be so easily dropped by a new administration from either party.
I wasn’t the only one thinking this way; Wu Yi had suggested that we find an important subject to jointly work on for the long term. I started asking people in Washington for input. My former colleague John Thornton—who was now dividing his time between China, where he was a professor and director of the global leadership program at Tsinghua University, and the United States, where he was chairman of the Brookings Institution—pointed out that both sides could work productively on energy issues. I agreed, and thinking back to my July trip to the Qinghai-Tibetan Plateau, which had dramatically underscored the importance of collaboration by the U.S. and China to mitigate the effects of climate change, I decided that environmental and conservation issues should be part of any such discussion.
I proposed to Wu Yi that we put together a ten-year framework for our two countries to address the paramount issues of energy and the environment. She immediately said she thought it was a good idea, and we were off to the races. We announced the establishment of a working group on the Ten-Year Framework for Cooperation on Energy and Environment at SED III, and a U.S. team spent the next six months crafting with their Chinese counterparts at the National Development and Reform Commission what would be one of the most important achievements of the U.S.-China dialogue.
Given the enormity and sensitivity of issues like climate change and energy security, we would need the participation of top decision makers throughout the governments of both countries. On the U.S. side, this would mean coordinating the EPA, Commerce, State, Energy, Treasury, and later the U.S. Trade and Development Agency. The inextricable interrelationship between energy and the environment would be reflected in task forces focused on six key areas: clean water; clean air; clean and efficient transportation; clean, efficient, and secure electricity production; energy efficiency; and the conservation of forests and wetlands. Among other issues, we would explore how to reduce both countries’ dependency on foreign oil and how to meet growing energy needs while providing clean air and safe water for our citizens. I hoped that our best laboratories would talk to one another and conduct joint research for everyone’s benefit.
In time we would pursue together a new concept we called EcoPartnerships. Where the Ten-Year Framework addressed sweeping issues of strategic importance, the EcoPartnerships were meant to encourage innovation at the university or local level—for example, a city-to-city partnership to develop electric cars, or a utility-to-utility partnership on environmentally friendly business models. Seattle and Dalian would work together on energy-efficient ports, Wichita and Wuxi on clean water. We would unveil the program at SED V, in December 2008, with seven partnerships.
For SED III the Chinese officials had, as usual, planned lavish entertainment. Wu Yi personally oversaw the preparations, right down to the elaborate carvings made from vegetables that decorated the tables. The festivities included fireworks that were spectacular even by Chinese standards—what we in the U.S. would consider a thrilling finale exploded for an hour over Grand Epoch City. I had forgotten to bring my overcoat, and I felt my teeth chattering by the time the display got under way. As gifts for this cold-weather gathering, the Chinese had given our delegation thickly padded and belted Red Army coats with fur collars and star-stamped brass buttons. I craved the warmth but didn’t dare put mine on. What a photo that would have made: the U.S. Treasury secretary dressed like a Red Army soldier! Talk about the Manchurian candidate. (I did keep the coat and wear it today when I walk in wintertime on the prairie near our Illinois home, where the only paparazzi are deer and coyotes.)
Because Wu Yi was retiring in the spring, this would be her last SED, which made the meeting bittersweet for me. Despite my initial misgivings about the vice premier, I’d grown to respect her and the efforts she’d made. There’s a Chinese saying that people sometimes have to fight before they can become friends. And while I’d had my differences with Wu Yi, I came to really like her. I hope she felt as fondly about me—in any case, she gave me a beautiful gift, a bronze horse and chariot sculpture that was a miniature reproduction of a piece discovered in the mausoleum of China’s first emperor; I kept it in my office at Treasury. After Wu Yi retired, I sent her a set of golf clubs, custom-sized to her small stature, hoping to give her some fun in retirement.
Though the third SED meeting produced some noteworthy policy achievements, I remember it just as much for a drama that took place away from the meeting room that few in my delegation ever knew about. We were in the midst of discussions at a long, dark wood table in a huge ballroom in the Top City hotel when Ambassador Sandy Randt, who was sitting next to me, leaned over and told me that he’d just gotten a message from the embassy that the destroyer USS Mustin would cross the Taiwan Strait, which China claims as its waters, that night.
A couple of weeks before, the Chinese—with no explanation but apparently miffed about planned U.S. arms sales to Taiwan and President Bush’s recent public appearance with the Dalai Lama—had annoyed the U.S. Navy and Department of Defense by refusing to let the U.S. aircraft carrier Kitty Hawk and accompanying ships dock in Hong Kong, where thousands of airmen and sailors had planned to spend Thanksgiving with their families. The authorities relented within a day, for “humanitarian considerations only,” but by then the Kitty Hawk had been rerouted to its home port in Japan. The Kitty Hawk and its five-ship support flotilla had sailed home through the Taiwan Strait, heightening tensions further.
Now there I was, hearing that a U.S. ship was going to pass through the strait again. This would not only irritate the Chinese but undermine my credibility and that of the SED itself.
“That can’t happen,” I whispered to Sandy.
“Hank, the decision’s been made. There’s nothing you can do to stop it.”
“The Navy wouldn’t do it if Bob Gates was over here,” I said. “They wouldn’t do it if Condi was over here. And they should not be doing it when I’m over here.”
In fact, Defense Secretary Robert Gates had visited Beijing the month before and addressed the arms-sale issue directly, saying that the U.S. would continue to sell Taiwan weapons to defend itself. But he’d also called for better communications between the U.S. and China on other matters. As I waited impatiently for a break in the proceedings, I reflected that a U.S. destroyer crossing the Taiwan Strait the night before I was to meet with President Hu seemed inconsistent with Gates’s objective.
When the break finally came, I quickly called National Security Adviser Steve Hadley. Because of the 13-hour time difference, it was the middle of the night in Washington. A groggy Hadley confirmed that the operation had been approved.
“Then I guess I’m going to need to wake the president up,” I said. “Because it’s not acceptable.”
“Don’t do that,” Hadley said. “Wake Bob Gates up instead.”
I knew the Defense secretary from National Security Council meetings, and I greatly respected him. But it took too much time to get through to him that night. First I had to deal with a bevy of very senior military aides, as well as officers from the Pacific Command. When one aide asked me—rather superciliously—exactly why I was making this call, I pulled rank in a way I never had before and never would again: “This is the secretary of the Treasury,” I said. “Wake up Secretary Gates.”
Bob eventually got on the phone to ask, sleepily, “What’s this all about, Hank?”
I told him point-blank that I didn’t want the Navy ship to cross the strait when I was in Beijing.
Bob quickly did what I expected him to do and what I would have done had the situation been reversed. “If this is important to you, Hank, we will call it off,” he said.
I could hear murmuring among the other people on the phone—huge consternation, in fact—and decided to get off the line before there could be any debate or backsliding. I just said, “Thank you very much, I appreciate it. This is important.”
I went back to the SED session and told Sandy: “It’s done. The ship isn’t going there.”
I’ll admit my nose felt a little out of joint, but I didn’t make a fuss over the Navy’s plans out of any exaggerated sense of self-importance. I did it because I knew as well as anyone on the U.S. side of the table that the Chinese would not view any such episode as an accident. In a culture that places such a high value on signs and symbols, everything big or small, every action and event becomes freighted with significance, a tendency that gets magnified by a cloistered decision-making process that lacks transparency. If the destroyer had passed through the Taiwan Strait while I was in Beijing, it would have been viewed not only as a rebuke of the Chinese over the Kitty Hawk incident but also as a denigration of the SED and of my position as the dialogue’s American leader. The irony was that Gates himself was looking to improve communications with the Chinese, but the Defense Department risked undermining the important dialogue we’d been building through the SED.
When I got back to Washington, I was still quite put out, but President Bush was amused by my predictably aggressive behavior. He greeted me with a wide grin and a chuckle at a Cabinet meeting the day after my return. “Why did it take you so long to ask for Gates?” he quipped, knowing I had demanded to speak to the Defense secretary immediately. The president had a sense of humor, and he liked tough guys. Both of those characteristics would come in handy when the full force of the financial crisis descended on us.