U.S. Treasury Secretary Henry Paulson warned on Tuesday it was a mistake for U.S. lawmakers to blame American job losses on global competition and use it as an excuse for passing protectionist trade laws aimed at China.

But a key senator rebuffed his advice that the United States should stick with a strategy of negotiation and dialogue to persuade Beijing to let its yuan currency strengthen, saying a firmer hand was needed.

Treasury Secretary Henry Paulson speaks during an interview with Reuters in Washington, July 2, 2007. [Reuters]

"China needs, at the very least, a nudge," Senate Finance Committee Chairman Max Baucus told reporters at a jobs forum in Billings, Montana.

Baucus said Congress would pass currency legislation to allow duties against goods from countries with "fundamentally misaligned" currencies regardless of any progress that Paulson makes in negotiating with Beijing.

"No country out of the goodness of its heart ever lowers a trade barrier, ever," Baucus said, saying that the Senate Finance Committee's bill would help Beijing more quickly "do what it knows it should do" by letting open markets set the value of its currency.

Baucus, a Montana Democrat, and many other lawmakers believe that China deliberately undervalues its currency to make Chinese goods cheaper in U.S. consumer markets, hurting American competitors.

Paulson, who completed a four-day trip to China late last week, joined Baucus in his home state to discuss the importance of open markets and free trade to encourage competition -- an area where the two agree.

To illustrate their common ground, Baucus and Paulson visited the MRL Equipment Co. factory in Billings, which produces spray equipment used to stripe roads. The company hopes to increase exports to countries like China that are building new highway networks.

Baucus and Paulson acknowledged, however, that while they share a goal of a more flexible yuan, they disagree on the best way to achieve it.

"I feel quite strongly that the right way to deal with a sovereign nation like China on a currency issue is through negotiation," Paulson said.

PROTECTIONIST WORRIES

Paulson also decried what he called an increasing trend of protectionist sentiment in the United States and elsewhere.

"This increase in protectionism is a worrying trend," the Treasury secretary said in remarks to the jobs forum at Montana State University-Billings.

He said a rapidly changing economy would lead to some job losses and dislocations, but that can in turn open the way for more job creation in other sectors.

"But making trade a scapegoat and enacting protectionist legislation would make us worse off," Paulson said.

The Treasury chief said he was doing all he could to ensure that America's trade partners keep their markets open and play fair.

Paulson said he had pressed Chinese leaders last week "to move more quickly to adopt market-oriented reforms which would reduce their trade imbalance with the United States."

Paulson also reiterated his belief that a strong dollar was in the interest of the United States, and he said the economy was "amazing" despite the cost of the war in Iraq, producing strong tax revenues.

Paulson said the U.S. economy was "healthy and we have low unemployment," but stressed that it was important not to discourage foreign investors.

"To keep America competitive in a global economy, we must also welcome foreign investment," he said.

Paulson also suggested the U.S. taxation system was working against the country's best interest because corporate taxes were "above average" when compared with other countries. He said that was hurting job creation and damaging the United States' ability to compete globally.

Paulson said, however, that there were many areas in which he agreed with Baucus on trade policy, such as the need for free and open markets that allow U.S. exports to compete in global markets and on environmental issues, such as the need to for China to adopt clean coal technology.

He also urged U.S. lawmakers to approve four free trade agreements -- with Peru, Colombia, Panama and South Korea -- that have been awaiting action for weeks.