Fed Head Frowns On Trade Barriers

Federal Reserve Chairman Alan Greenspan said ballooning trade deficits have not hurt the U.S. economy so far, but he warned that "creeping protectionism" could jeopardize the nation's ability to narrow the deficits without adverse consequences.

Greenspan, who has often warned about the potential threat soaring trade deficits pose, took a more positive view in a speech Thursday. He said that rising globalization had made the United States and other economies more flexible and thus more able to correct economic imbalances such as trade deficits when they occur.

"Spreading globalization has fostered a degree of international flexibility that has raised the possibility of a benign resolution to the U.S. current account imbalance," Greenspan said in remarks to a monetary conference sponsored by the Cato Institute.

But Greenspan said this needed flexibility could be jeopardized by pressure to erect trade barriers to protect U.S. industries from foreign competition.

"Some clouds of emerging protectionism have become increasingly evident on today's horizon," Greenspan said.

Greenspan did not single out the protectionist moves that concerned him. But the Bush administration has been criticized by open trade supporters for imposing high tariffs on foreign steel to protect the U.S. industry and by this week imposing quotas on certain types of Chinese textiles and clothing in response to pleas from the U.S. textile industry.

Greenspan said that throughout history domestic industries have sought government help to fight off foreign competition, only to find that these efforts were eventually overwhelmed by free market forces.

"The costs of any new such protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy," Greenspan said.

"Consequently, it is imperative that creeping protectionism be thwarted and reversed," he said.

Greenspan said nothing in his remarks about the current state of the economy. The Fed has pushed interest rates to a 45-year low and most analysts believe the central bank will leave rates at low levels perhaps into next fall, in an effort to assure a sustained economic rebound.

Greenspan said that the current account deficit, the country's broadest measure of trade, is running at a level equivalent to 5 percent of total U.S. economic output. That is far above the previous record level of 3.5 percent set in 1986. In dollar terms, the current account trade deficit hit a record of $480 billion last year and is on track to be well above that mark this year.

Despite this increase, Greenspan said there was "little evidence of stress in funding" the deficit by borrowing from foreigners.

He said while the value of the dollar has fallen by about 20 percent against a market-basket of major currencies since early 2002, that decline has not triggered any problems with rising inflation.

"Inflation, the typical symptom of a weak currency, appears quiescent," Greenspan said. "To date, the widening to record levels of the U.S. ratio of current account deficit to GDP has been seemingly uneventful."

Greenspan said there would come a point when economic forces would be triggered that would require a narrowing of that deficit, but that it was hard to forecast when that would occur.

He said as long as the U.S. economy remained flexible, it reduced the risk that a reversal of foreigners' interest in loaning the United States money to finance its current account deficit would trigger an economic crisis.

"In domestic economies that approach full flexibility, (trade) imbalances are likely to be adjusted well before they become potentially destabilizing," Greenspan said.