Transcript: Henry Paulson on "Face the Nation," May 12, 2019

The following is a transcript of the interview with former Treasury Secretary Henry Paulson that aired Sunday, May 12, 2019, on "Face the Nation."

MARGARET BRENNAN: We're now joined by Henry Paulson, treasury secretary for George W. Bush. He was the administration's point person on the 2008 financial crisis and also led previous U.S. trade talks with China. It's great to have you here in studio. You know China's leadership very well both from your time as treasury secretary and building out business for Goldman Sachs there for many many years. How do you expect China to retaliate against the U.S. since these talks seem to have stalled?

FORMER SECRETARY HENRY PAULSON: Well, Margaret let me begin by saying Happy Mother's Day--

MARGARET BRENNAN: Oh, thank you.

FMR. SEC. PAULSON: And- and- and to my mom Mariana and my wife Wendi. Now I- I'm not going to predict how China is going to respond. They've been very restrained to date. They clearly want a deal and need a deal as does the United States. No one wins a trade war. So I- I'm expecting you know a- a- a fairly restrained response.

MARGARET BRENNAN: You had one of the president's top economic advisers, Larry Kudlow, on air today saying that the Chinese came to talks this week and then backslid on some of the things they'd previously agreed to. Why the miscalculation?

FMR. SEC. PAULSON: Well there- there- there's often miscalculations, right? People misunderstand China. They've got a different political system than ours but they've got politics, they've got vested interests. But you know the bigger picture here is this is a deal that's- can be very good for the United States and very good for China. The Trump Administration has been working very hard to do something which I think would make a big difference for American workers for the American people in terms of getting more balanced trade in terms of protecting IPR in terms of breaking down some big structural barriers to competition and China's got plenty of problems themselves. They've got an inefficient financial system, inefficient state owned enterprises, massive misallocations of capital. So their reformers know that if they're going to grow at an acceptable level they need some structural changes. So this, I think, is a, you know, been a missed opportunity for both- both countries, but I- I believe, and I think the overriding point here, the big picture is if and when this deal is done, and I'm an optimist I think it will get done, the- the underlying tensions are still going to be there because this is the stakes are much bigger than a trade war. The you know the- the- the basic economic problem is still going to exist.

MARGARET BRENNAN: You've put up a huge warning signs around this. You said you fear an economic cold war an economic Iron Wall.

FMR. SEC. PAULSON: Yeah, I- I said- I talked about an economic Iron Curtain. And the reason I did is this, Margaret: that the, as I said, the stakes are much bigger than- than- than- than it- than a trade war. This is a battle between two countries to drive to set the standards for the technologies of the future, the technologies which are going bolster economic growth and competitiveness around the world. And so the fundamental issue is technology, okay? That's where the battleground is and technology has blurred the lines between national security and economic competitiveness. And so, you know, I think it's vitally important we protect our national security, but in growing, an important part of trade is technology related. And so the real risk is that both countries through their actions will throw up or create an economic iron wall which means we'll be decoupling global supply chains, right? We'll be having two systems with- with incompatible standards in- in rules. And so as I look at it the defining strength of America is innovation and we need to protect our technology, need to protect our innovation. But if we close ourselves off from other, you know, other innovative economies and entrepreneurs, we jeopardize our leadership position in the world and we're much less attractive as a destination for foreign investment.

MARGARET BRENNAN: So you seem to be saying the moment is ripe for this deal. You're optimistic, but you don't like tariffs. That's the president's main tool here. Is this going to damage the U.S. economy?

FMR. SEC. PAULSON: Well, so, you're darn right I don't like tariffs. Why don't I like them? Because they're a tax on the American consumer. But I see an even more perverse effect with tariffs. Those who do us the great honor of investing in America, of doing business with our companies and suppliers, do so because we've always had predictable reliable economic policies. Tariffs jeopardize it. But now we see a situation where Republicans and Democrats and many, and- and many international companies are applauding for tariffs if they're used to- to get concessions from China. And why is that? The reason is- is because we're in a tough spot in negotiations. Our- our tariffs are either nonexistent or very low. So how do you put pressure on other countries to act? How do you put pressure on China. We don't have very many good tools. So that's why they- they- they prefer tariffs. Now--

MARGARET BRENNAN: Is it going to hurt us--

FMR. SEC. PAULSON: Not really.

MARGARET BRENNAN: --economically?

FMR. SEC. PAULSON: Yeah- but- but I would- I'll say this: I would prefer, I would- I would prefer the tactic of working with our allies to put pressure. But I gotta admit that's an imperfect tool, right? Because our allies aren't very tough when it comes to negotiating with China. But will it hurt us? I tell you if this persists too long, it will. Okay? There will be a cost to it. We're- we're- we're- we're trying to accomplish something that's very important in terms of opening up the Chinese economy, but there is a cost and as strong as our economy is right now, and it is--

MARGARET BRENNAN: Yeah.

FMR. SEC. PAULSON: --very, very strong, as strong as it is. I'll tell you if there's--

MARGARET BRENNAN: Mr. Secretary, we have to leave it there--

FMR. SEC. PAULSON: Okay.

MARGARET BRENNAN: I am so sorry we're running up against a hard break. We will be right back.