Sept. 14 (Bloomberg) -- Treasury Secretary Henry Paulson warned Congress against approving sanctions on Chinese goods, saying a trade war would cripple growth during a vulnerable time for the U.S. economy.

``Punitive trade legislation could have enormous repercussions, especially when we are working to extend our economic expansion and get through a turbulent time in our markets,'' Paulson said at a factory in Chicago today.

Lawmakers including Senator Charles Schumer, a New York Democrat, argue that China keeps its currency weak to boost exports, and they are threatening to impose tariffs unless the policy is changed. The deficit with China, the nation's second biggest trade partner, swelled to $141.3 billion through July this year, a 16 percent jump from the same period of 2006.

The Bush administration is trying to muster support from Congress to approve free-trade agreements with Peru, Colombia, Panama and South Korea. The growing deficit with China has complicated that effort.

``I am impatient with the pace of change in China, and I know Congress is impatient,'' Paulson said. ``But legislation that would impose unilateral, punitive trade sanctions isn't the answer. I don't want to start a trade war.''

The Treasury chief urged lawmakers to approve agreements that would lower export and import barriers with Peru, Colombia, Panama and South Korea.

``Globalization is here to stay and it's important that we continue to benefit from it rather than retreat into isolationism,'' Paulson said, noting a ``rising protectionist sentiment in the U.S. and around the world.''

Widening Deficit

Trade expansion with developing nations is increasingly unpopular as some members of Congress view it as a threat to U.S. jobs. Legislators this week began considering an accord with Peru, while deals with Panama and Colombia face more congressional opposition and may take longer.

The U.S. trade deficit in July was $59.2 billion, an excess of imports over exports that was 42 percent wider than it was five years earlier, according to Commerce Department figures. China is the biggest source of the imbalance, with a $23.8 billion surplus of exports to the U.S. over American imports.

Paulson said a diplomatic course is the best approach to convince China to take faster action.

``Keeping our economic relationship on an even keel is critical -- maintaining and building trade, and also working to persuade the Chinese to reform their own economy more quickly,'' he said.

`Very Concerned'

Opening markets around the world to U.S. companies was a top agenda item for Paulson when he started at the Treasury in July 2006. In his first speech 13 months ago, even before Democrats won control of the House and Senate in November 2006, Paulson said he was ``very concerned about the anti-trade rhetoric I hear'' from Congress and elsewhere.

``The challenge is how best to convey the benefits of trade to the American people,'' Paulson said in August 2006.

In a January Bloomberg/Los Angeles Times poll, 41 percent of respondents said trade had hurt the economy, while 28 percent said it had helped.

That imbalance is elevating trade into the national debate ahead of the 2008 presidential elections, as Democratic candidate Hillary Clinton and others adopt a more skeptical stance on trade.

Political Sentiment

Slightly more than four in 10 Iowa Democrats said they prefer a candidate who believes trade agreements hurt the economy, while 33 percent said they would like a pro-trade candidate, according to the poll taken Sept. 6-10 of three states that have early presidential contests next year.

Iowa Republicans split evenly over the issue, with 39 percent saying they support trade deals and the same number opposing them.

The number of manufacturing jobs in the U.S. totaled 14 million in August, the lowest level since June 1950.

``Making trade a scapegoat and enacting protectionist policies would make us worse off,'' Paulson said during his visit to Atlas Material Testing Technology LLC, a maker of equipment that simulates weather conditions.

To contact the reporter on this story: John Brinsley in Chicago at jbrinsley@bloomberg.net

Last Updated: September 14, 2007 15:05 EDT