Protectionism is not the way to reduce huge U.S. trade deficit

Alan Greenspan, chairman of the U.S. Federal Reserve Board, has implicitly criticised the Bush administration's increasingly combative stance against foreign imports.

Speaking on Thursday, just two days after the U.S. Commerce Department announced plans to impose new import quotas on selected Chinese textiles, Greenspan warned that the "clouds of emerging protectionism" raised new risks for the global economy.

His main message was:

The global economy has become far more flexible and open to cross-border financial flows.

Flexible economies like those of the United States are most likely to adjust to financial imbalances without great disruption.

"Over the years, protected interests have often endeavoured to stop in its tracks the process of unsettling economic change,'' he said. "Virtually all such efforts have failed. Consequently, it is imperative that creeping protectionism be thwarted and reversed."

Greenspan gave one of his most detailed assessments yet of the United States' huge current account deficit, the combined measure of its trade and international capital flows.

That deficit totals about $500 billion this year, a record in absolute terms and as a share of the United State’s total economy.

It has been driven primarily by the continued large trade deficit, including a deficit with China of well over $100 billion this year, as well as by big new borrowing to cover U.S. federal budget deficits.

Also, the current account deficit was at record levels and was unsustainable.

The current account deficit is equal to about 5 percent of the total American economy. Total net foreign claims on United States residents – the United States assets owned by foreigners versus the foreign assets owned by Americans – is equal to about 25 percent of the total economy.

Source: Edmund L. Andrews, Greenspan Voices Concerns on U.S. Efforts to Limit Imports, New York Times, November 21, 2003.

For text http://www.nytimes.com/2003/11/21/business/worldbusiness/21trade.html

For more on Tariffs and Trade Barriers http://www.ncpa.org/iss/int/

FMF Policy Bulletin\25 November 2003