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Fed chief Bernanke warns that economic isolationism would harm U.S. economy

Fed chief Bernanke warns that economic isolationism would harm U.S. economy

A move to protect threatened American industries and workers from foreign competition would be a serious mistake that would jeopardize the sizable benefits of free trade, Federal Reserve Chairman Ben Bernanke said Tuesday.
"Restricting trade by imposing tariffs, quotas and other barriers is exactly the wrong thing to do," Bernanke said in remarks to an audience at Montana Tech in Butte, Montana.
"In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers," Bernanke said.
As America's trade deficits have soared, Congress and the Bush administration have come under increased political pressure to erect trade barriers against a flood of imports that critics contend have contributed to the loss of more than 3 million manufacturing jobs since 2001.
Bernanke traveled to Montana, the home state of Democratic Sen. Max Baucus, chairman of the Senate Finance Committee, the panel that oversees trade issues in the Senate. Copies of Bernanke's remarks, in which he mounted a strong defense of free trade, were distributed in Washington.
The Fed chairman said that restricting imports might temporarily slow job losses in affected industries, but those benefits would be outweighed "many times over by the costs, which would include higher prices for consumers and increased costs, and thus reduced competitiveness, for U.S. firms."
He said that a number of economic studies have found that those costs to the rest of society almost invariably far exceeded the benefits received by the industry being protected.
The better approach to dealing with job losses in such industries as textiles, which have been hurt by foreign imports, is to improve government retraining programs, Bernanke said. He said it was important to also improve the quality of education that future workers receive so they will be prepared for the jobs of tomorrow.
"If we resist protectionism and isolationism while working to increase the skills and adaptability of our labor force, the forces of globalization and trade will continue to make our economy stronger and our citizens more prosperous," Bernanke said.
The debate on trade has intensified this year with Democrats taking control of both the House and Senate after the 2006 elections in which many Democrats attacked President George W. Bush's free trade policies. They contended the administration has failed to protect American workers from unfair foreign competition from low-wage nations such as China.
The U.S. trade deficit hit $765.3 billion (euro562.5 billion) in 2006, the fifth consecutive record, with the imbalance with China rising to $232.5 billion (euro170.9 billion), the largest imbalance ever recorded with a single country.
Bernanke made no comments during his appearance about the current state of the economy. Fed officials will meet next week and are expected to keep interest rates unchanged.
Responding to questions from Sen. Max Baucus, a Montana Democrat, Bernanke said the real reason for the U.S. trade deficit was that Americans save less and spend more in contrast to a country like China with a high savings rate which depends on export-led growth.
Bernanke said that interest rates remain very low in the United States because of the continued flood of foreign investment into the country. But he said this will not always be the case and "that is why it is important to work on increasing our savings rate."
In his remarks, Bernanke sought to allay fears that service sector jobs, where more than 80 percent of Americans work, could be "outsourced" to other nations, causing massive job losses in this country. He said those concerns were not justified because closeness to customers and knowledge of local conditions would remain critical factors for many service jobs.
The Bush administration, hoping to ward off a protectionist backlash in Congress, has increased pressure on China, imposing tariffs in a dispute involving glossy paper and filing two trade cases against China before the World Trade Organization.
Treasury Secretary Henry Paulson will host the second meeting of his new "Strategic Economic Dialogue" with top Chinese officials in Washington on May 23-24, a forum he is hoping will convince Beijing to move more quickly to allow its currency to rise in value against the dollar. American manufacturers say this is needed to boost their sales in China.
Trade Adjustment Assistance, the federal program to help workers who lose jobs to foreign competition, is up for renewal in Congress this year. Bernanke said that some of the proposals being discussed in renewing the program include providing wage insurance to offset pay cuts when displaced workers change jobs. He said some are also recommending making health insurance more portable between jobs.
Bernanke said it would be inappropriate for him to endorse any particular changes being considered, saying that should be left to the Congress to decide.


Updated : 2021-04-15 13:24 GMT+08:00