MUMBAI/NEW YORK (Reuters) - Trade protectionism is a “dead end” that may score political points but will ultimately hurt the U.S. economy, one of the most influential Federal Reserve officials said on Thursday in the central bank’s strongest defense yet of open borders in the face of a skeptical Trump administration.
William Dudley, head of the New York Fed, did not mention U.S. President Donald Trump by name in a speech at the Bombay Stock Exchange. But he gave a full-throated economic and even political argument for resisting trade barriers that he said would hurt growth and living standards in both the United States and around the world.
“Protectionism can have a siren-like appeal,” said Dudley, a close ally of Fed Chair Janet Yellen and a key decision-maker on U.S. interest-rate policy.
“Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term,” he said in prepared remarks. “Viewed more broadly, it would almost certainly be destructive to the economy overall in the long term.”
The Fed is independent but answerable to Congress, and its governors are appointed by the White House and confirmed by the Senate. While Fed officials usually avoid recommending fiscal policies, several have highlighted the benefits of open borders since Trump was elected on an “America First” platform of revamping or ripping up trade deals.
The White House has said trade deals often do more harm than good for U.S. workers and companies, especially those in the manufacturing sector hard-hit by globalization. Over the last 25 years trade has grown to represent roughly 57 percent of global output, from less than 40 percent.
Dudley said he was speaking out because “we are at a particularly important juncture” in which trade issues could imperil the long-term health and productivity of the economy and “the economic opportunities available to our people.”
Barriers to trade are very costly, he said, because they blunt export opportunities, make everyday goods more expensive, and they can often “backfire” by harming workers who can no longer compete in a global economy.
“There are many approaches to dealing with the costs of globalization, but protectionism is a dead end,” said Dudley, a former Goldman Sachs partner who joined the New York Fed in 2007 and became its president in the depths of the financial crisis in early 2009.
“Trying to achieve a high standard of living by following a policy of economic isolationism will fail,” he said in Mumbai.
The unusually pointed speech comes after the New York Fed published research in recent months that warned against a Republican proposal for a border-adjustment tax and a Trump threat to ditch the North American Free Trade Agreement. Both the Republicans and Trump have since largely backed down from those positions.
The U.S. central bank has hiked interest rates twice since December and expects to tighten policy about two more times this year as the economy carries on a roughly 2-percent growth track, and as unemployment at 4.4 percent remains low.
Dudley has said the Fed would adapt its approach as tax, spending and trade policies emerge from Washington. He does not expect a “dramatic change” in policy, he said on Thursday, repeating his preference to start trimming the Fed’s $4.5 trillion balance sheet as early as this year in such a way that it is “a modest and minor” event.
Additional reporting by Rafael Nam in Mumbai
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