Tim Geithner & Protectionism

“We are not going to go down that path,” promised Mr Geithner. “We know that it would make us weaker, not stronger.”

He also said that the administration of President Barack Obama would not seek to curb the investments of US companies overseas, as “Our fortunes are tied with the world.” His comments come as proposals have been put forward to trim the tax privileges of US companies that operate internationally.

“American companies are long in the world,” Mr Geithner told Indian business leaders at a discussion hosted by the Confederation of Indian Industry. “They are good at what much of the world needs. A huge part of the basic economic challenge we face is to give stronger incentive for private investment, help support innovation and try to make sure there is more investment and stronger exports globally.”

Mr Geithner said Mr Obama was “deeply committed” to trying to build a consensus among Americans for more open trade to support the economic recovery.
Source: James Lamont in New Delhi, as reported in the Financial Times.

As long-time readers know, I have been a harsh critic of Tim Geithner, based on some of his issues while he was the president of the Federal Reserve Bank of New York, and on some of the policy issues which we believe represent deficiencies in realistically addressing the financial crisis. Those views are well-known.

But I also believe that he is deserving of and entitled to positive comments on issues when it is earned. In this case Geithner has used his Treasury Secretary hat to bluntly and forthrightly attack the growing and dangerous protectionist sentiment that is creeping into the issues dialogue in the Congress and across the US. Geithner knows the high long-term cost that is paid for protectionist policies. They may yield short-term political benefit to politicians who deceive their constituents with protectionist rhetoric, but protectionism always and everywhere incurs high cost and longer-term detrimental outcomes when they are practiced.

Globalization and world integration are back underway. They have survived what we believe is an American-made global financial crisis. Now the threat of an American-made protectionism looms. It also raises the risk of violence and has encouraged war in the past.

For this reason we applaud Geithner’s statements delivered in India. And we encourage our Treasury Secretary to present the case for trade firmly in the Congress and at his speeches and press events in the United States.

Securities markets benefit from open trade. But market agents also like to take short-term trading positions on the industries that gain with protectionism. We saw that under President Bush, who invoked protectionism with steel. We criticized Bush strongly then and also had a spirited exchange with Jim Cramer on that subject on CNBC’s Squawk on the Street. For those who know Jim Cramer, you realize that a discussion with him on camera can be very spirited. He liked steel stocks at the time because of the protectionism. He was quite right about the short term trade. I liked them too but I disagreed with the policy of protectionism.

Anyway, time will tell how far the present sentiment is blunted by Geithner and the Obama administration. Only time and deeds, not words, will reveal if the commitment to open trade is genuine. Meanwhile, portfolio management has to focus on the short-term arena when there is a protected industry or sector and must also try to determine the longer-term forces that may be detrimental. Let’s hope we do not have to go far down that path.

For now our strategy favors globalization and world financial integration. Our initial bias is for emerging markets and our US position in our Global Multi-Asset Class has a majority of the funds deployed outside the United States. Were there to be a shift to protectionism that became pronounced and embedded into policy, we would make changes in this allocation. We do not expect that to happen but must maintain our vigilance on this issue.

Secretary Tim Geithner, on this issue of fighting protectionism, we applaud your stance articulated in India.


David R. Kotok, Chairman and Chief Investment Officer
April 8, 2010

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