Protectionism a dead end: US Fed V-C

AT A time when US President Donald Trump is working for greater protectionism with his "America First" platform of revamping trade deals, Federal Reserve Bank of New York President and CEO William C. Dudley cautioned that there are many approaches to dealing with the costs of globalization, but "protectionism is a dead end".

Dudley, who is the Vice Chairman of the US Federal Open Market Committee, said trade restrictions address the symptoms and not the underlying problems. "While such measures might generate temporary boosts to growth from greater domestic production and consumption, these would likely be offset by a range of other costs. Over time, such measures would retard productivity growth and thereby shrink the economic pie," he said without stating the position of the US or Trump on protectionism.

Dudley's comments have come at a time when Trump administration has imposed visa restrictions on tech companies. As a result, companies like Infosys have started hiring from the US in a big way.

"Protectionism can have a siren-like appeal. Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term. Viewed more broadly, it would almost certainly be destructive to the economy overall in the long term," Dudley said while addressing a meeting organised by various industry chambers at the BSE. Lauding globalisation, Dudley said, "although the debate about globalization is not new, I believe 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."

Trade barriers are a very expensive way to preserve jobs in less competitive or declining industries, he said. "They blunt opportunities in export industries and they reduce the affordability of goods and services to households. Indeed, such measures often backfire, resulting in harm to workers and diminished growth. Countries need to compete better, not compete less," said Dudley who has a PHD from University of California.

However, increased openness to trade is not a panacea in and of itself, he said. Actual benefits depend on a range of other critical factors, including macroeconomic policy, the business and regulatory environment, the legal regime, the quality of infrastructure, and the quality of public services, including education. "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. Trade has played a key role in nearly all of the high-growth success stories since the middle of the last century," he said.

According to Dudley, openness to trade has certainly played a large role in the economic ascent of Asia. Following the rise of Japan, Korea, Taiwan and others, fast growth in China and India has lifted millions out of extreme poverty. "The benefits of economic integration and other reforms are exemplified in India’s higher growth rate since the introduction of market reforms in 1991," he said.

"Growth has averaged 6.5 per cent annually in the post-reform period, compared to about 4 percent annually over the prior 40 years. Indeed, India is the fastestgrowing major economy in the world today. Reflecting these gains,anumberofemergingmarket countries have been strong supporters of open trade, a sign of howmuchtheworldhaschanged in recent years," he said.

Nirmal Harindran William C Dudley, President of Federal Reserve Bank of New York during his visit to BSE on Thursday.