Fed’s Dudley Says Trade Protectionism Is a ‘Dead End’
Federal Reserve Bank of New York President William Dudley warned that any move to erect new trade barriers in a bid to spur domestic growth is a “dead end” for those countries that try them.
“While the gains from a liberalized trade regime are not guaranteed, the alternative of trying to achieve a high standard of living by following a policy of economic isolationism will fail,” Mr. Dudley said in a speech before a gathering at Brazil’s central bank.
“Trade has played a key role in nearly all of the high-growth success stories since the middle of the last century,” he added.
Mr. Dudley also said “countries need to compete better, not compete less.” He noted “trade barriers are a very expensive way to preserve jobs in less competitive or declining industries,” and protectionist policies make goods and services more costly while harming a nation’s exporters. Mr. Dudley said restrictionist policies “often backfire, resulting in harm to workers and diminished growth.”
Mr. Dudley, who is set to retire this summer, also noted his rising confidence that a strong economy will allow the Fed to raise interest rates multiple times this year. He spoke as new Fed Chairman Jerome Powell was engaged in a second day of testimony before Congress on economic and interest-rate policy issues. Mr. Powell delivered an upbeat outlook, one rosy enough to reignite questions about whether the Fed might deliver a more aggressive course of interest-rate increases over the course of 2018.
Mr. Dudley’s strong defense of the benefits of open trade came as President Donald Trump continued to rattle the sabers of taking action to blunt what he sees as unfair trading practices. The U.S. is now weighing substantial curbs on steel and aluminum imports even as a broad array of economists say such action is likely to hurt U.S. economic performance.
In a post on Twitter on Thursday, Mr. Trump said “Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!” The White House has summoned executives for those industries to talk about potential restrictions.
Mr. Dudley noted that his comments weren’t aimed at any particular development and that he was inclined to stay out of the political fray. But he noted “we are at a particularly important juncture.”
“If support for liberalized trade and an integrated global economy were to suffer a significant setback, the consequence could be slower economic growth and lower living standards around the world,” he said. He also said trade tariffs can increase inflation, and that could affect the monetary-policy choices officials make down the road.
Setting trade policies isn’t among the Fed’s official responsibilities. But Mr. Dudley noted central bankers have a natural interest in the subject because it bears directly on the health and productive capacity of the economy.
Mr. Dudley does, however, see space for an overhaul. “I have no doubt some trade agreements could be enhanced or updated,” he said. Current agreements might not fully reflect the impact of the rise of the digital economy, and existing trade barriers and foreign restrictions to U.S. industries should be looked at, he said.
“Our focus should be on further strengthening an open trade regime, and, as appropriate, amending and improving these agreements,” Mr. Dudley said.
The veteran policy maker also said more needs to be done to aid those who have been displaced by free trade policies. “We must do better in addressing the very large costs that can be imposed on particular communities and households,” he said.
Mr. Dudley also said an important contribution the U.S. can make to the global economy is a strong financial system.
“The United States has a special responsibility to keep its own house in order, given the large size of its financial markets and the U.S. dollar’s status as a reserve currency,” Mr. Dudley said. He added, the Fed “needs to be mindful of the international effects of its actions, which can have important potential consequences for the global economy and financial markets.”
Source: Dow Jones