Isolationism, trade wars will fail, says William Dudley

Says trade barriers an expensive way to preserve jobs in less competitive or declining industries

Despite the protectionist rhetoric of Donald Trump regime, William C Dudley, the president and chief executive of the Federal Reserve Bank of New York, said open markets and expanded trade policies had helped the global economy more than they have hurt the displaced workers.

“Efforts to suppress open markets and globalisation through protectionism will not work,” said Dudley.

He was delivering the keynote address at a function organised by the US-India Business Council, industry lobby CII and the BSE, on ‘Benefits and Challenges from Globalisation’.

Dudley, an influential voice on the US central bank’s policy direction, offered a strong defence of open trade borders and said, “Countries need to compete better, not compete less. Trade barriers are a very expensive way to preserve jobs in less competitive or declining industries.

“While the gains from a liberalised 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,” he said. “Open trade has played a key role in nearly all of the high-growth success stories since the middle of the last century.” Protectionism, he warned, can have “a siren-like appeal”. “Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short-term but viewed more broadly, it’d almost certainly be destructive to an economy overall in the long-term. 

“Though there are many approaches to dealing with the costs of globalisation, protectionism is a dead end, as it blunts opportunities in export industries and reduce the affordability of goods and services to households. Indeed, such measures often backfire, resulting in harm to workers and diminished growth.”

“If support for liberalised 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,” he said.

Reeling out numbers to show that global economic integration has increased dramatically in recent decades, he said trade has grown from nearly 40 per cent of global GDP in 1990 to 57 per cent in 2015, and FDI has increased from roughly 10 per cent of global GDP to 34 per cent.

About the Indo-US trade, he said bilateral trade has risen 10-fold from $11 billion in 1995 to almost $110 billion in 2015. Today half of US imports of computer services are sourced from India and bilateral FDI rose to $37 billion in 2015 from $four billion in 2002.

Though Trump has softened his protectionist rhetoric to some extent, concerns still remain over his threat to slap a border trade tax and the potential for costly trade wars, especially with China with which the US has a gaping trade deficit, Dudley said, adding “while much of Asia has benefited from more open trade relationships, the gains also reflect back to US shores.”

“Although the debate about globalisation is not new, I believe we are at a particularly important juncture. If support for liberalised 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.

“Consumers can benefit from lower prices, higher real incomes and greater variety and quality of goods and services,” he said, adding protectionism won’t secure these.

What is needed is not protectionism but stronger programmes to help displaced workers, Dudley said, adding that putting up trade barriers to protect jobs will only result in global trade wars that will hurt the global economy more.

Admitting that increased openness to trade is not a panacea, Dudley 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.

“We also need to do better in preparing workers to deal with the challenges of globalisation and technological change,” he said.

From US perspective, he said access of American companies to some foreign markets and protection of intellectual property rights (IPRs) deserve closer attention.

“But, in addressing these issues, we should take care to preserve the vital benefits of trade to higher standards of living in both advanced and emerging market economies. The focus should be on further strengthening an open trade regime,” he said.