Greenspan Warns That U.S. Shouldn’t Erect Barriers to Free Trade

Federal Reserve Chairman Alan Greenspan expressed concern Friday that Americans are losing faith in the benefits of free trade. He warned that efforts to erect protectionist barriers were “unwise and surely self-defeating.”

Greenspan called the expansion of international trade one of the most impressive developments of the last half-century and one that has greatly benefited the United States.

“The evidence is overwhelmingly persuasive that the massive increase in world competition--a consequence of broadening trade flows--has fostered markedly higher standards of living for almost all countries who have participated,” Greenspan said in a speech to foreign ambassadors at a conference in Dallas. Copies of his remarks were made available in Washington.

America’s swelling trade deficit hit a record $169 billion last year and is expected to rise even higher this year as American manufacturers and farmers continue to suffer from a loss of export markets because of the global financial crisis that began in Asia in 1997.

Those soaring deficits have triggered calls for the Clinton administration and Congress to do more to protect domestic industries. American steel companies have filed a number of cases seeking higher tariffs to protect their industry from a flood of cheap foreign steel pouring into the United States because of slumping global demand.

Greenspan did not mention any particular industry, but he said he was concerned “about the recent evident weakening of support for free trade in this country.”

“Protecting markets from new technologies has never succeeded,” Greenspan said. “Even should our trading partners not retaliate in the face of increased American trade barriers . . . we do ourselves great harm by lessening the vigor of American competitiveness.”

Greenspan said increased competition from a global marketplace has forced companies to develop better goods and services at lower costs, thus improving living standards.

He said he strongly held to the traditional view that protectionism is the wrong approach to take because while it may protect some jobs in uncompetitive industries temporarily, it does so at high costs to consumers.

“In the end it is clear that all economic progress rests on competition. It would be a great tragedy were we to stop the wheels of progress because of an incapacity to assist the victims of progress.”

Greenspan said the better approach for government is to provide retraining programs for workers who lose their jobs in uncompetitive industries. “The protectionist propensity to thwart the process of the competitive flow of capital, from failing technologies to the more productive, is unwise and surely self-defeating.”

Greenspan said that it is a widely accepted view among economists that increased competition from trade may alter the employment in particular industries but does not affect a country’s overall employment level, which depends on other factors such as the conduct of monetary policy to spur or slow overall economic growth.

“It is difficult to find credible evidence that trade has impacted the level of total employment in this country over the long run,” Greenspan said. “Indeed, we are currently experiencing the widest trade deficit in history with a level of unemployment close to record lows.”