Greater protectionism will not ameliorate the costs and dislocations of globalization and would instead hinder economic progress, New York Federal Reserve Bank President William Dudley said at an event in Brazil.
"If support for liberalized 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," Dudley said in the March 1 speech.
"Although protectionism can have a siren-like appeal because of its potential to provide short-term benefits to particular segments of the economy, in the longer term it would almost certainly be destructive," he added.
His remarks came on the same day that President Donald Trump said his administration would impose 25% tariffs on steel and 10% on aluminum imports. "We'll be signing it next week," Trump said at a gathering of industry executives. "And you'll have protection for a long time in a while. You'll have to regrow your industries, that's all I'm asking."
For his part, Dudley warned that higher tariffs might set off trade wars, "which could damage economic growth prospects around the world."
The central banker acknowledged, however, that policymakers needed to address the costs of globalization, especially for workers with outdated skills, whose industries have become less competitive or who live in regions without adequate safety nets.
"We need additional mechanisms that allow us to more fully capture the benefits from liberalized trade and to more proactively mitigate its costs," Dudley said. "Ideally, policy should also better address job losses and income inequality from automation and other technological advances."
Federal Reserve Chairman Jerome Powell, testifying before the Senate Banking Committee on March 1, during the Fed's semiannual Monetary Policy Report, echoed Dudley's comments.
"The record is clear that over long periods of time for many countries, trade is a net positive," he said.
While Powell also said the benefits of free trade did not affect everyone equally, "a tariff is not the best approach; it's best to support those who are affected."
In his remarks in Brazil, Dudley also noted that the U.S. had a "special responsibility" to be watchful of the effect of its monetary policy on the flow of international capital given the large size of its financial markets and the U.S. dollar's role as reserve currency.
"While the Federal Reserve has a domestic mandate set for it by the U.S. Congress, it needs to be mindful of the international effects of its actions, which can have important potential consequences for the global economy and financial market," he said.
