Mr Greenspan's statement on trade, technology and economic progress  (Central Bank Articles and Speeches, 2 Jun 1999)
Central bank: fed | Type: speech | Date: 1999-06-02

## Mr Greenspan's statement on trade, technology and economic progressSpeech

by the Chairman of the US Federal Reserve System, Mr Alan Greenspan, at Conference on International Business, organised by the Alliance for the Commonweal Boston, Massachusetts on 2 June 1999.I am pleased to join the Alliance for the Commonwealth today for its annual Confer International Business.

I should also like to thank my good friends John LaWare, Cha the Alliance, and Cathy Minehan, President of the Boston Federal Reserve Bank, encouraged me to participate in this daylong educational symposium.There are few better examples of the benefits of trade and investment than here i where the roots of international trade go back to our nation's origins.

Massachusett England in general, are today, as in the past, actively engaged in the global trade and are currently home to many of the firms that are the recipients or the source border direct investment.The evidence is overwhelmingly persuasive that the massive increase in world competit consequence of broadening trade flows - has fostered markedly higher standards of li almost all countries who have participated in cross-border trade.

I include most esp United States.

And yet, as I have indicated in recent speeches and intend to outli there are reasons to be concerned that the benefits of increasingly open trade m allowed to be as readily forthcoming in the future as they have been in the past halfAlthough many forces have been at play, the post World War II surge in trade has owed, in large part, to significant advances in technological innovation.Since the dawn of the industrial revolution, there has been an inexorable drive t physical brawn and material resources into ever greater value added or output.

New into the laws of nature brought steam and later electric power.

The developmen production quality level that facilitated interchangeable parts brought assem production.

And the development of railroads facilitated the evolution of mass marketAlmost all of the leverage of the physical to higher value added has reflected the of ideas - new insights - for material bulk and brute human effort.The resulting more effective organization of material has, of course, inevitably mea of it was needed per unit of output.

The insights of metallurgy and architect engineering design, for example, enabled the construction of buildings that use physical material per unit of space than, say, a half century ago.

The insights that heating, as well as synthetic fiber, facilitated reduced clothing weight, while the of the jet engine brought far greater annual passenger miles per unit of aircraft sizBut doubtless it has been the advent in recent decades of the synergies of the micro lasers, and fiber optics that has fostered a distinct quickening in the displacemen weight of output with concepts.

The ability to miniaturize transistor electronic displaced huge tonnages of copper and enhanced the speed of calculation tha miniaturization of circuitry facilitated.As high tech became an increasing part of our national product, the relative phys dimensions of our value added fell dramatically.

The per capita physical weight of our domestic product is evidently only scarcely higher today than it was fifty or one hundred ago.By far the largest contributor to growth of our price-adjusted GDP, or value added, has ideas - insights that leveraged physical reality.

The consequent downsizing of output course, meant that products were easier, and hence less costly, to move, and most espec across national borders.It is thus not surprising that the price-adjusted level of international trade, as I earlier, has expanded at a far faster pace than gains in real domestic demand.

Imports of and services as a percent of gross domestic products worldwide, on average, have risen f approximately 14 percent twenty-five years ago to 24 percent today.The growth in physical weight of such trade, as with the national product generally, has far less.

For example, United States data on both exports and imports indicates that the adjusted value of our trade per pound has risen by approximately 4 percent per year average over those same three decades.But technology has augmented international trade for reasons beyond the downsizing o material output.

New telecommunications technologies made it very difficult for the autar societies of the former Soviet Union to sustain their isolation in the face of the relative affluence of the West.

News could no longer be bottled up.

Even in the West, stultification of protectionism became increasingly evident as new consumer products ente the world markets en masse.

The political pressures to deregulate moribund industries open up borders to trade soon became irresistible.

The international trading system evolved has enhanced competition and fostered the continuous scrapping of old technologi to make way for the new.

Standards of living rise because the depreciation and other flows of industries employing older, increasingly obsolescent, technologies are marshall finance the newly produced capital assets that almost always embody the cutting ed technologies.

This is the process by which wealth is created incremental step by increme step.

It presupposes a continuous churning of an economy in which the new displaces the oBut there is also little doubt that this transition to the new high-tech economy, of whic trade is a part, is proving difficult for a large segment of our workforce that interface rapidly changing capital stock day-by-day.Moreover, while major advances in standards of living are evident among virtually all nat that have opened their borders to increased competition, the adjustment trauma has a distressed those who once thrived in companies that were then at the cutting edge technology, but which have since become increasingly less competitive in both domestic a foreign markets.

Economists will say that workers should move from the steel district western Pennsylvania to a vibrant Silicon Valley.

And eventually they, or more likely children, will.

But the adjustment process is wrenching to an existing workforce ma redundant largely through no fault of their own.

It may be argued that all workers should the foresight to recognize long-term job opportunity shifts and move in advance obsolescence.

This regrettably is a skill not in great abundance - among business manager the economists who counsel them, as well as among workers.Yet the protectionist propensity to thwart the process of the competitive flow of ca failing technologies to the more productive, is unwise and surely self-defeating.

H us that not only is it unwise to try to hold back innovations, it is also not pos longer run.

Generation after generation has experienced episodes in which the techno obsolescent endeavored to undermine progress, often appealing to the very real sh costs of adjusting to a changing economic environment.

From the Luddites to the Smoo the Hawleys, competitive forces were under attack.

In the end they did not prevail term advances in standards of living resumed.Nonetheless, the campaign to expand free trade is never won.

Legislation to furth trade barriers, for example, is becoming increasingly more difficult to pass in our is a continuing battle.

Further, while tariffs in industrial countries have come d over the past half century, other barriers have become more prevalent.

Admini protection in the form of antidumping suits and countervailing duties is a case in p these forms of protection have often been imposed under the label of promoting 'fai oftentimes they are just simple guises for inhibiting competition.

Typically, an duties are levied when foreign average prices are below average cost of production. also describes a practice that often emerges as a wholly appropriate response to a s demand.

It is the rare case that prices fall below marginal cost, which would b relevant standard.

Antidumping initiatives should be reserved, in the view o economists, for those cases where anticompetitive behavior is involved.

Contrary to notions about antidumping suits, under U.S. and WTO law, it is not required to show of predatory behavior, or intention to monopolize, or of any other intentional effo competitors out of business.In the end it is clear that all economic progress rests on competition.

It would tragedy were we to stop the wheels of progress because of an incapacity to assist t of progress.Our efforts should be directed at job skills enhancement and retraining - a process the private market is already engaged.

Thwarting competition, by placing barriers to will prevent the needed transitions of the productive capital stock of the United other nations that enable it to continuously concentrate on producing those goods an most desired by consumers.

Protectionism will also slow the inevitable transitio workforce to more productive endeavors.

To be sure, an added few years may enable workers to reach retirement with dignity, but it will also keep frozen in place youn whose better job opportunities decline with time.I regret that trade policy has been inextricably linked with job creation.

We try to trade on the mistaken ground that it will create jobs.

The reason should be that standards of living through the effects of competition on productivity.It is difficult to find credible evidence that trade has impacted the level of total this country over the long run.

Indeed, we are currently experiencing the widest trad history with a level of unemployment close to record lows.Certainly, the distribution of jobs by industry is affected by international trade, affected by domestic trade.

It is the relative balance of supply and demand in a cmarket economy that determines the mix of employment.

When exports fall or imports rise domestic demand and relative prices have invariably adjusted in the long run to leave employment relatively unaffected.

As economists like to say, all imports are eventually for with exports.I also regret that, despite the remarkable success over a near half century of GATT, General Agreement on Trade and Tariffs, and its successor, the World Trade Organization, reducing trade barriers, our trade laws and negotiating practices are essentially adve They presume that a trade concession extracted from us by our trading partners is to advantage at our expense, and must be countered.Few economists see the world that way.

And I am rash enough to suggest that we economist are correct, at least in this regard: trade is not a zero sum game.If trade barriers are lowered by both parties, each clearly benefits.

But if one lowers and the other does not, the country that lowered barriers unilaterally would still be b having done so.

Raising barriers to achieve protectionist equality with reluctant t partners would be neither to our benefit, nor to theirs.

The best of all possible wor competition is for both parties to lower trade barriers.

The worst is for both to keep thFor these reasons, I am concerned about the recent evident weakening of support for free in this country.

Should we endeavor to freeze competitive progress in place, we will al certainly slow economic growth overall, and impart substantial harm to those workers w would otherwise seek more effective longer-term job opportunities.

Protecting markets fr new technologies has never succeeded.

Adjustments to newer technologies have been delayed but only at significant cost.Even should our trading partners not retaliate in the face of increased American trade ba an unlikely event, we do ourselves great harm by lessening the vigor of America competitiveness.

The United States has been in the forefront of the postwar opening up international markets, much to our, and the rest of the world's, benefit.It would be a great tragedy were that process reversed.

I do not believe that will be all happen.

There is too much at stake for us and our trading partners.