Fed Reserve chairman warns against protectionism

Friday, August 25th 2006, 2:15 pm

By: News On 6

JACKSON, Wyo. (AP) _ Federal Reserve Chairman Ben Bernanke cautioned lawmakers on Friday to avoid the temptation to impose protectionist trade policies as the United States grapples with fierce competition from a powerful wave of globalization.

Globalization has shrunk the world and made countries increasingly connected through economic ties. The opportunities for companies to sell their goods to more and more countries can generate wealth and boost living standards. That has benefited some workers, but has hurt those left behind in the changing worldwide economic landscape.

``Further progress in global economic integration should not be taken for granted,'' Bernanke told an economics conference that explored the forces of globalization.

``Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future,'' he told the gathering organized by the Federal Reserve Bank of Kansas City.

Bernanke's remarks came amid higher trade tensions between the U.S. and China, and as trade talks between the two countries have stalled. Americans also are increasingly anxious about the potential to lose their jobs to workers in China and India, two emerging economic giants.

Against that backdrop, U.S. lawmakers _ as they have through the centuries _ may be tempted to enact protectionist measures to try to slow globalization.

Bernanke said that would be unwise.

``The natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures,'' he said.

``The challenge for policy-makers is to ensure that the benefits of global economic integration are sufficiently widely shared _ for example, by helping displaced workers get the necessary training to take advantage of new opportunities,'' he said.

New technologies and faster communications make it easier for companies to look beyond national borders for cheaper workers. In the United States, factory jobs have been lost to overseas competition or moved offshore, and some service-sector jobs have moved overseas.

President Bush wants to sharpen America's competitive edge by bolstering math and science education, and encouraging research and development.

The United States racked up a record $716.7 billion trade deficit last year, the fourth year running in which the deficit swelled to an all-time high. Last year's imbalance with China alone mushroomed to $202 billion, the largest ever with a single country.

Lawmakers in Congress have suggested hefty tariffs on Chinese goods, among other measures, to clamp down on China and its currency practices. Critics contend that China is keeping its currency artificially low, giving it an unfair trade advantage, hurting U.S. exports and contributing to the loss of U.S. factory jobs.

Bernanke didn't cite any specific protectionist measures in his speech but rather spoke in general terms.

The Bush administration says free trade is good for the country and that lowering barriers for U.S. companies to compete abroad gives them more opportunities to sell their products. Democratic critics say soaring U.S. trade deficits show that Bush's policies aren't working.

To be certain, there are challenges, Bernanke said.

``The emergence of China, India and the former communist-bloc countries implies that the greater part of the earth's population is now engaged, at least potentially, in the global economy,'' Bernanke said. ``There are no historical antecedents for this development. ``

Bernanke said Christopher Columbus's voyage to the New World ultimately led to enormous economic change, but it took centuries for the New and Old Worlds to economically integrate.

``In contrast, the economic opening of China which began in earnest less than three decades ago, is proceeding rapidly and, if anything, seems to be accelerating,'' he said.

Bernanke's speech marked his first address to a high-profile economics conference as chairman of the central bank. A well-respected economist, longtime professor and a former Fed member, Bernanke succeeded longtime Fed chairman Alan Greenspan.

He did not answer questions after the speech.

In his remarks, Bernanke avoided discussion of the future course of interest rates in the United States. With his guidance, the Fed this month halted the longest, unbroken stretch of interest rate increases in recent history. The Fed had steadily boosted rates since June 2004 to fend off inflation.

But with the economy losing steam, the housing market cooling, job growth slowing and consumers turning cautious, the Fed decided to take a breather to assess how its previous rate increases _ which take time to work their way through the economy _ are affecting economic activity.

The Fed's goal is to raise rates enough to thwart inflation, but not so much that the economy is crippled. The Fed's next meeting on interest rates is Sept. 20.