- The Washington Times - Thursday, November 20, 2003

Federal Reserve Chairman Alan Greenspan warned yesterday that “creeping protectionism” in the United States and elsewhere threatens the world economy and will make it harder for the United States to finance its massive trade deficits.

His comments came as China announced it might impose tariffs on imports from the United States in retaliation for U.S. tariffs on steel imports that have been ruled illegal by the World Trade Organization. The mini-trade war with China was sparked Tuesday by President Bush’s decision to slap quotas on some Chinese clothing imports.

The 15-nation European Union also is threatening to retaliate against the steel tariffs, while a dispute over more than $600 billion of agricultural subsidies in the European Union, United States and Japan led to the collapse of world-trade talks in September.

“Some clouds of emerging protectionism have become increasingly visible on today’s horizon,” said Mr. Greenspan in remarks to a Cato Institute conference. “Over the years, protected interests have often endeavored to stop in its tracks the process of unsettling economic change.

“It is imperative that creeping protectionism be thwarted and reversed,” he said. “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.”

Mr. Greenspan expressed hope that the “powerful forces of market competition” will win out over protectionism, while Mr. Bush, in London, defended his administration’s record on trade. He said the moves to protect textiles, steel and farm trade are justified by the unfair practices of trading partners.

“My administration is committed to free trade,” the president said. “We believe strongly in free trade, but you want to make sure that free trade is also trade in which all parties are treated fairly.”

The outbreak of a global trade war particularly would hurt the United States, Mr. Greenspan said, because of its bloated trade deficits with China, Japan and the rest of the world, which cumulatively have hit a record $450 billion a year.

To finance those deficits, which are unprecedented in size for any nation, the United States must attract more than $1.5 billion a day in investment from abroad. Much of the financing for the U.S. trade and budget deficits in the past few years has come from China and Japan re-investing their export earnings in U.S. Treasury bonds, mortgage-backed bonds and other securities.

A sign of how critical those purchases are to the stability of the financial markets came Tuesday, when a report that foreign investment suddenly plunged in September caused the dollar to drop to a record low against the euro. Each drop in the dollar makes American assets less attractive to foreign investors and makes it harder for the United States to maintain its deficits.

“Our persistent current account deficit is a growing concern because it adds to the stock of outstanding external debt that could become increasingly more difficult to finance,” Mr. Greenspan said. “Unlike financing of payments from exports and income receipts, reliance on borrowed funds may not be sustainable.”

Nevertheless, despite a 20 percent drop in the dollar against other currencies since 2002, the United States so far has been able to keep attracting enough funds to run deficits. The ease with which the United States has financed its deficits is owed, in part, to the willingness of foreign central banks, such as those in China and Japan, to hold U.S. dollars and bonds as reserves, Mr. Greenspan said.

The free flow of trade and rapid globalization of the financial markets also has facilitated cross-border flows of money and created a growing class of private foreign investors willing to hold U.S. debts and assets, he said.

“Spreading globalization has fostered a degree of international flexibility that has raised the probability of a benign resolution to the U.S. current account imbalance,” he said.

But whether the United States can continue to finance its debts without a major financial crisis like the one that shook the world economy in 1997 and 1998 depends on the continued expansion of global trade and willingness of foreigners to keep accumulating U.S. dollars and debts, he said.

“In the end, it will likely be the reluctance of foreign country residents to accumulate additional debt and equity claims against U.S. residents that will serve as the restraint on the size of tolerable U.S. imbalances,” he said.


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