The Art of War

Why is Secretary Geithner threatening the Chinese?

Last week Tim Geithner said he is considering trade restrictions on Chinese products in response to the undervalued Yuan. He told the Senate that the Chinese are distorting global trade.

The question is, why now? In April he postponed naming China as a currency manipulator. Never mind that the Yuan’s value is set by the government, not the market. Since April the Euro has fallen, appreciating the Yuan and helping to adjust some imbalances

The reason for Secretary Geithner’s rhetoric can be found in Sun Tzu. The ancient Chinese sage begins by asserting that all war is based on deception. But who is Geithner deceiving? Certainly not the Chinese. They’ve been studying Sun Tzu for millennia. The Europeans? They know that their troubles are helping them export more to the Chinese and reduce China’s surplus. No, the object of the Secretary’s deception is Congress.

Although Congress is of the same party as the administration, they have given the Secretary little leeway. From questioning AIG’s payments to counterparties to implying that there is a revolving door between Treasury and Goldman Sachs, Congress gives Geithner no respect.

Now, by feinting toward protection, he can satisfy his critics while making no credible threat. The Chinese know Sun Tzu, and they know we know they know. The Sage also says that a true leader wins his battles without ever fighting. Let’s hope that this trade battle never even starts.

Douglas R. Tengdin, CFA
Chief Investment Officer
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