Bernanke Warns Against Trade Protectionism

Federal Reserve Chairman Ben Bernanke cautioned against protectionism in a speech Tuesday in Montana; says there are gains to be made from export-oriented U.S. manufacturing industries.

BUTTE, Mont. - Federal Reserve Chairman Ben Bernanke cautioned against protectionism in a speech Tuesday at an economic conference in Montana.

“I will argue that one possible response to the dislocations that may result from trade - a retreat into protectionism and isolationism - would be self-defeating and, in the long run, probably not even feasible,” Bernanke said. “Instead, our continued prosperity depends on our embracing the many opportunities provided by trade, even as we provide a helping hand to individuals and communities that may have suffered adverse consequences.”

Bernanke cited a recent study that used four approaches to measuring the gains from trade. The increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household. The same study found that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household.

Bernanke noted some top export-oriented U.S. manufacturing industries, including aircraft production, construction equipment, plastics and chemicals. On a state-level, he noted Montana’s ability to produce high-tech materials for semiconductor production.

“Among U.S. manufacturers, for example, exporters pay higher wages and add jobs more rapidly than non-exporters,” Bernanke said, noting a 1999 Bernard and Jensen study.

The Federal Reserve Chairman also called the U.S. manufacturing sector the “most exposed” to international competition, and its ability to achieve huge increases in productivity over the last decade.

“In addition, international supply chains, made possible by advances in communication and transportation, reduce costs and increase the competitiveness of U.S. firms,” Bernanke said. “Trade also promotes the transfer of technologies, as when multinational firms or transplanted firms bring advanced production methods to new markets.”

Bernanke then went on to warn against protectionism and resistance to a freer open trade market and acknowledged work displacement as a “legitimate economic and social issue.”

“Although many readily accept that balanced trade does not reduce aggregate employment, some might argue that the United States' current large trade deficit must mean that the number of U.S. jobs has been reduced on net,” Bernanke said. “However, the existence of a trade deficit or surplus, by itself, does not have any evident effect on the level of employment.”

The U.S. trade deficit rose to $765.27 billion in 2006, which is at an all-time high for a fifth consecutive year. The trade imbalance with China has risen to $232.55 billion, the highest ever registered with a single country.

To review the entire speech, click here.

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