U.S. Treasury Secretary Henry Paulson described agreements made in recent economic talks with China as "small steps" on a "long path" toward greater economic change. VOA's Stephanie Ho reports from Washington.

Treasury Secretary Paulson said newspaper reports saying the United States and China failed to resolve major issues during recent economic talks in Washington were misleading.

Speaking Tuesday at the Heritage Foundation, a conservative public policy organization, he was upbeat about the accomplishments of last month's so-called Strategic Economic Dialogue with China.

"The second SED meeting produced tangible results that have laid the groundwork for greater progress," said Henry Paulson. "In particular, we made notable progress on civil aviation, energy and the environment, and financial services."

He said the biggest trade issues plaguing U.S. - China economic relations are the U.S. belief that China deliberately undervalues its currency and Beijing's lax enforcement of copyright laws.

Paulson urged Beijing to allow its currency to fluctuate, saying that is a fundamental component in China's quest to become a market economy.

"It [freeing the currency] is a proxy for their reform progress." he said. "It is very difficult to have a market-driven economy if you do not have market price signals. It is very difficult to have a financial system that works without those kind of price signals."

The U.S. trade deficit with China, which reached a record $232 billion last year, is creating political problems in Congress where legislators accuse Beijing of manipulating the currency to give China an unfair trade advantage. Some of them are calling for legislation to protect the U.S. markets.

James Baker, who served as Treasury Secretary in the Reagan administration and Secretary of State for President Bush's father, added his warning in a speech to the U.S. - China Business Council. He said he fears a protectionist backlash in the United States if China does not allow its currency to appreciate.

"We [the U.S.] don't have any tools to forestall the protectionist legislation train that may be coming down the track at us," said James Baker. "We need to figure out a way to do that. It would be helpful if the Chinese, consistent with their own interest, would let their currency appreciate a little more than it has."

Baker said revaluing the Chinese currency would be helpful, but acknowledged it would only be a partial solution to evening out the lopsided trade imbalance with China.