In a speech delivered Wednesday in Singapore, Mr. Paulson warns China its behavior has alienated American friends and unified the American public against it. He is less critical of the U.S. but nonetheless believes it has unrealistic expectations of China and of its own allies. If neither changes course, the result will be “a long winter in U.S.-China relations” and “systemic risk of monumental proportions.”

Mr. Paulson is best remembered for tackling the financial crisis in 2008, yet his contribution to U.S. and Chinese economic relations may be just as consequential. He first went to China in the early 1990s in search of investment-banking business for Goldman, eventually helping several major Chinese state-owned enterprises restructure and list on stock exchanges. In 2006 he became President George W. Bush’s Treasury secretary and launched the “strategic economic dialogue” between top American and Chinese officials to manage the bilateral relationship.

Along the way, he cultivated bonds with top Chinese leaders. He remains friends with Chinese Vice President Wang Qishan, a lieutenant of President Xi Jinping.

Nonetheless, Mr. Paulson is unsparing in his criticism of China’s current direction. Seventeen years after joining the World Trade Organization, he says, it still “has not opened its economy to foreign competition in so many areas,” using joint-venture requirements, ownership limits, technical standards, subsidies, licensing procedures and regulation to block foreign competition. “This is simply unacceptable.”

China’s reformist zeal peaked shortly after it joined the WTO under then-President Jiang Zemin. Enthusiasm then waned under his successor, Hu Jintao. When Mr. Xi took over in 2013, Mr. Paulson took him at his word that markets and private enterprise would drive Chinese development. They haven’t, which Mr. Paulson attributes to the Communist Party’s tightening grip.

“Jiang Zemin talked about the party being a big tent,” Mr. Paulson said in an interview last week. “His view was, ’We need to bring the elites into the party’: business leaders, academics, and others. Xi Jinping views the party itself as the elite, and the party, not the bureaucracy, would be the organization through which he governed.”

In his speech at the Bloomberg New Economy Forum, Mr. Paulson says the centralization of power in the Communist Party and continued discrimination against foreign companies has unified American leaders across the political spectrum in the belief that China is a strategic rival whose rise “has come at America’s expense.” Trade in technology goods arouses national-security concerns and, thus, stokes rather than damps geopolitical rivalry, he says.

Meanwhile, China has managed to alienate those in the U.S. most disposed to defend it, especially business, Mr. Paulson argues. “How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?” True, some have accepted the “Faustian bargain” of profits today over competitiveness tomorrow, “but that does not mean they are happy about it,” he says.

President Trump is surrounded by China hawks who will doubtless see some irony that Mr. Paulson is echoing their complaints. They see the engagement he advocated as having enabled China’s economic and strategic transgressions.

Still, Mr. Paulson has acted as an intermediary between Chinese and Trump administration officials, in particular Treasury Secretary Steven Mnuchin, who worked for him at Goldman. And in his speech, Mr. Paulson signals support for Mr. Trump’s get-tough approach with China, and with the WTO for failing to alter China’s discriminatory behavior. Yet the notion now gaining currency among China hawks that the two countries must decouple is, he believes, dangerously naive.

“The U.S. and China are not, in fact, a couple,” he says. “There are more than two players here. What if others, especially in Asia don’t want to follow suit?”

No country, he says, will cut itself off from such a large and rapidly growing economy as China, especially in Asia, by virtue of “their geography, of economic gravity, and of the strategic reality they live with each and every day.”

In other words, if forced to choose, many countries will choose China, leaving the U.S. as the isolated one, Mr. Paulson is saying.

Nor should U.S. officials see their deep ideological differences with China as an existential threat or a barrier to cooperation, he says. Both need functioning global institutions and rules to deal with cross-border environmental, economic and strategic challenges.

“There’s this revisionist myth that some of us who worked to engage China thought it would become a Jeffersonian democracy, or espouse a liberal Western order,” Mr. Paulson said in his interview. “We never thought that. We always knew the Communist Party would play an important, dominant role.“

The problem now, he says, is that some in the U.S. believe that a clash is inevitable unless China liberalizes politically: “If we make this about their political system, we are really going to be bumping up against a hard place because we are not the ones who are going to change their political system.”

Write to Greg Ip at greg.ip@wsj.com