William C Dudley: Making globalization work
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve
Bank of New York, at the Central Bank of Brazil, São Paulo, 1 March 2018.
* * *
Thank you, Ilan, and thanks to the Central Bank of Brazil for organizing this event. It is a pleasure
to have the opportunity today to talk about the issue of globalization. As always, what I have to
say today reflects my own views and not necessarily those of the Federal Open Market
1
Committee or the Federal Reserve System.
Although the debate about the benefits and challenges of globalization is not new, it has recently
come into sharper focus. This debate is important to all of us, and I think it is particularly relevant
to Brazil given its importance in the global economy.
Globalization means different things to different people. In my remarks today, I will focus on the
role of globalization as a force for international economic integration and economic development.
I will highlight three themes:
First, the important role that trade plays in promoting higher standards of living globally.
Second, how changes in trade can create challenges for industries and their workers when they
lose competitiveness. Insufficient attention has been given to this issue. We must do better in
addressing the very large costs that can be imposed on particular communities and households.
Third, the answer to those challenges is not greater protectionism. Instead, we need to provide
greater support to displaced workers so they can obtain the skills needed to find new well-paying
jobs. We also need to ensure that there are strong global institutions and international
cooperation to help manage the effects of globalization. This includes responding to the
challenges stemming from financial globalization-the flow of capital across national borders.
These issues are important to me as a central banker, as they affect the long-term health and
productivity of the U.S. economy, the economic opportunities available to our people, and the
efficiency and stability of the global financial system.
The debate around globalization, particularly in advanced economies, reflects many factors.
Undoubtedly, the global financial crisis and subsequent slow recovery have been significant. But,
just as important have been longer-term trends, such as growing income inequality, the loss of
middle-income jobs, and the rise of large emerging market economies such as China and India.
Although the debate about globalization is not new, I believe we are at a particularly important
juncture. 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.
While considerable effort has gone into liberalizing trade and developing the existing set of trade
agreements, that does not mean they cannot be improved upon. I have no doubt some trade
agreements could be enhanced or updated. Some may not adequately address recent changes
in the global economy-such as the rise of digital trade-and may need to be refreshed. And,
important trade barriers still remain that should be addressed. In particular, from a U.S.
perspective, the access of U.S. firms to some foreign markets and the protection of intellectual
property rights are issues that deserve close attention. But, in addressing these issues, we
should take care to preserve the vital benefits of trade to higher standards of living in both
advanced and emerging market economies. Our focus should be on further strengthening an
open trade regime, and, as appropriate, amending and improving these agreements.
The Pace of Globalization
To begin, let me briefly describe the pace of globalization as a reminder of what is at stake.
Global economic integration has increased dramatically in recent decades. Trade in goods and
services, for example, has grown from nearly 40 percent of global GDP in 1990 to 54 percent in
2016. Over the same period, the stock of foreign direct investment has increased from roughly
10 percent of global GDP to 36 percent. Put simply, national economies and financial systems
2
have become more integrated and interdependent.
This rapid growth in trade reflects falling trade barriers, declining transport costs, and improved
information and communication technology. These trends have enabled the development of
complex global supply chains that allow companies to manage their production more efficiently.
Emerging market economies now make up a much larger share of global trade, the global
economy, and global growth. As an illustration, emerging market economies have accounted for
70 percent of global economic growth since the crisis-double their share from two decades
3
ago. This growth has provided much-needed support to world economic activity, as advanced
economies have recovered slowly from the crisis.
Rising economic integration is also evident when we examine the trade relationship between
Brazil and the United States. Bilateral trade flows in goods have risen from $17 billion in 1994 to
nearly $57 billion in 2016. The United States is Brazil's second-largest export market, and an
important destination for manufactured goods. In 2016, the stock of U.S. direct investment in
4
Brazil was $64 billion, up from $18 billion in 1994. Recent initiatives announced by the Brazilian
authorities-including a large and transparent infrastructure concession program and greater
foreign participation in the oil and gas and aviation industries-underscore the potential for further
increases in foreign direct investment.
The Benefits of Open Trade
Increased trade, through its longer-term impact on productivity, has been a key contributor to
global growth and prosperity since the Second World War. Openness to trade brings many
benefits to the supply side of the economy, including:
larger markets, greater specialization opportunities, and the increased ability to exploit
economies of scale and scope;
faster transmission of technology and innovation; and
greater competitive pressure on domestic firms to increase their productivity.
Collectively, these forces lead to a more efficient allocation of a country's scarce resources-
one that is more closely aligned to its international comparative advantage.
As a consequence, consumers can benefit from lower prices, higher real incomes, and greater
variety and quality of goods and services. Increased openness may also reduce wasteful
rentseeking behavior on the part of protected industries and the related costs of corruption.
Openness to trade has certainly played a large role in the economic ascent of Asia. Following
the rise of Japan, Korea, Taiwan, and others, fast growth in China and India has lifted hundreds
of millions of people out of extreme poverty-an unprecedented feat in human history. Reflecting
these gains, a number of emerging market countries have become strong supporters of open
trade, a sign of how much the world has changed in recent years.
5
Benefits from open trade are evident in Brazil. Following its dramatic trade reforms in the
1990s, productivity growth in Brazil increased. Brazil also has leveraged its ample and diverse
natural resource endowments to become a leading exporter of iron ore and a number of
agricultural products. And, the country has benefitted from the rise of China-total export
volumes more than doubled between 2000 and 2010, and have now nearly tripled. Brazilian
multinational companies are also important global players in industries such as mining and
metals, food, paper products, and transportation equipment.
But, increased openness to trade is not a panacea in and of itself. Actual benefits depend on a
range of other critical factors. These include macroeconomic policy, the business and regulatory
environment, the legal and tax regime, labor and product market flexibility, and the quality of
infrastructure and public services, such as education. While the gains from a liberalized trade
regime are not guaranteed, the alternative of trying to achieve a high standard of living by
following a policy of economic isolationism will fail. Trade has played a key role in nearly all of the
high-growth success stories since the middle of the last century.
The Challenges of Open Trade
It is important to recognize that while trade and international integration tend to increase the
overall economic pie, the distribution of the larger pie may be very uneven. In fact, slices for
some particular groups may even shrink. Some workers-particularly those in industries that
are less competitive and whose skills may have become less relevant-can be hurt and can find
adjustment difficult. Successful adjustment often requires individuals to change industries and to
relocate to different regions. So, while trade is almost always a win for a country's economy, not
everyone within that economy will be a winner. This is especially the case where the policies to
cushion the negative consequences of trade and to facilitate adjustment are lacking or
inadequate.
Effects are country- and industry-specific, and depend on initial endowments and conditions.
Low-income workers in emerging markets, for example, may find it more difficult to adapt, given
weaker safety nets and fewer financial resources available to deal with adverse economic
shocks. The bigger the adjustment process, the more the gains from trade will tend to be
eroded.
While the rise in the skill premium from trade liberalization has been well established for both
developed and developing countries, determining the aggregate impact of trade on jobs has been
more challenging. To date, the evidence has been mixed. We need further research in this area
to determine with more confidence a reasonable range of estimates for these employment
effects.
Although evidence of the extent to which jobs have been lost due to global trade is inconclusive,
job losses that are attributed to trade tend to be viewed differently. That is, they are seen as
having been "lost to foreigners" and are often viewed as a consequence of the policy decision to
liberalize trade in the first place.
The challenge of adjusting to open trade is a serious issue that has not received the degree of
attention it fully deserves. This may partly reflect the fact that the burden has been borne
unequally and spread out over a long time period. It also may reflect the fact that the winners
from trade have often tended to have a stronger voice than those who have been the losers.
Research has documented that the effects on individuals of job dislocation-including those
resulting from trade-can be significant and long lasting. Older workers tend to suffer larger
earnings losses, and often face more difficult transitions. Displaced workers may not have the
appropriate skills to find good jobs in other areas of the economy, including in growing export
sectors.
When the affected industry represents a large share of the local economy, the damage is often
magnified. In this case, the burden can become more widespread as the level of wages across
the community is negatively affected. And, this doesn't begin to capture the full human toll-
including the impact on workers who have lost confidence in the future and the poorer health
outcomes that occur because of increased stress.
Research on Brazil has found that workers employed in regions facing larger tariff cuts
6
experienced declines in formal sector employment. They also generally did not migrate to
more favorable regions. Instead, they either became unemployed, moved into the informal
sector of the economy, or-when more fortunate-moved into another sector within the same
region.
We should find better ways to help communities that are struggling because of the effects of free
trade. In the United States, we have historically experienced a high degree of geographic labor
mobility-much higher than in other advanced economies. The ability to move in search of better
opportunities, when possible, has helped to mitigate some of the adverse effects of trade. But,
mobility has declined in the United States in recent years, implying that the adjustment costs to
trade may have increased.
Protectionism Is Not the Answer
Given these costs of global integration and more liberalized trade, what is the best path forward?
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.
Countries need to compete better, not compete less. Trade barriers are a very expensive way to
preserve jobs in less competitive or declining industries. They blunt opportunities in export
industries and they reduce the affordability of goods and services to households. Indeed, such
measures often backfire, resulting in harm to workers and diminished growth.
A better course is to learn from our experience. From a U.S. standpoint, we should work to
reduce remaining foreign trade restrictions that impair our ability to capitalize on our comparative
advantages. For example, market access restrictions can mean that certain U.S. industries
cannot realize their full potential. Similarly, weaknesses in the protection of intellectual property
rights limit the ability of U.S. producers to realize the full returns from their investments. This
lowers profits and diminishes incentives to grow the business and employ more workers.
If we are going to enhance the benefits of free trade and better manage its costs, it is critical that
we continue to strengthen the global rules-based system. On the positive side, I would point to
the World Trade Organization's Trade Facilitation Agreement, which addresses customs
procedures and could reduce global trade costs significantly. But, at a broader level, the
momentum behind global trade reform has clearly waned in recent years. This has occurred
even though there are a number of areas that would benefit from further reform, such as
agriculture and services. That momentum needs to be rekindled and reaffirmed. Although
advanced economies historically have tended to lead the way, it is important that large emerging
market countries now play a greater role. This is appropriate given their growing prominence in
the global economy.
There are many approaches to dealing with the costs of globalization, but protectionism is a
dead end. Trade restrictions address the symptoms and not the underlying problems, and they
introduce other costs and distortions. While such measures might generate a temporary boost
to growth from greater domestic production and consumption, these would likely be offset by a
range of other costs. Over time, such measures would retard productivity growth and thereby
shrink the economic pie. As an illustration, import substitution models that were pursued by
many emerging market economies following the Second World War eventually led to poorer
economic outcomes. Such was the experience in Brazil, which helped trigger the reforms of the
early 1990s.
In assessing the benefits and costs of trade, it is important to understand that a nation's trade
balance reflects much more than its trade policy. Just as important are the country's saving and
investment spending proclivities, which are affected by many factors, including tax and fiscal
policies. For example, in the United States, we have a chronic trade deficit because domestic
investment spending exceeds our domestic saving. Foreign capital inflows make up the gap. In
this process, the foreign exchange value of the dollar plays an important equilibrating
mechanism. If the domestic saving/investment imbalance is unchanged, then any reduction in
the trade balance from higher trade barriers will need to be offset by lower exports. The
domestic currency will appreciate to cause the trade deficit to widen to accommodate the
desired capital inflows. Thus, trade restrictions affect the composition of trade but not the gap
between exports and imports, which is determined by the difference between domestic savings
and investment. At the end of the day, the protectionist country would produce more goods in
sectors protected by higher trade barriers but also fewer goods for export.
The expectation that higher trade barriers would save jobs ignores these critical second-round
effects. Moreover, the story may not end there. What happens if another country that now faces
higher trade barriers responds by raising its own barriers? That would push production even
further out of high-value-added exports that are now deterred by the higher foreign trade barriers
and into those exports that face lower trade barriers, or into the goods protected by the higher
domestic trade barriers. Raising trade barriers would risk setting off a trade war, which could
damage economic growth prospects around the world.
Measures that raise trade barriers typically would protect lower-wage, import-competing jobs, but
would also weigh on the prospects for jobs in the more efficient export sector, which tend to be
higher-paying. The outcome would be countries producing more where they have a competitive
disadvantage, and less where they have a competitive advantage-the exact opposite of what
we should be aiming for. For example, in the United States, one of our largest manufacturing
exports is aerospace parts (which requires skilled labor) and one of our largest imports is
apparel (which requires less skilled labor).
These second-round effects would also likely hurt productivity growth. Scarce resources would
be used less efficiently and trade protection would likely lessen the level of competitive pressure
that helps drive innovation. Moreover, lower productivity growth would likely lead to a slower
7
improvement in a nation's living standards over time.
Better Approaches to Deal with Globalization
Rather than protectionism, a better policy would be to help domestic workers and companies
compete more effectively, rather than compete less. We need additional mechanisms that allow
us to more fully capture the benefits from liberalized trade and to more proactively mitigate its
costs. Ideally, policy should also better address job losses and income inequality from
automation and other technological advances.
How we respond should depend on regional and industry circumstances. These include the
nature of trade impacts, the skill sets and location of the workers that have been affected, and
the amount of resources that can be mobilized to facilitate adjustment.
Increasing specialization brings real economic benefits, but can also leave workers more
exposed to shifts in demand for their services, potentially on short notice. These issues are not
going away, especially as emerging market economies take on a larger role in the global
economy and automation continues apace. If we are to maintain a more open trade regime,
globalization must be socially and politically sustainable. For that to be the case, we have to
provide greater support to those who are hurt by trade. Policies should include more assistance
8
with job retraining, help with job search and mobility, and broader unemployment support.
We also need to do more research into what measures have been effective in economies
around the world, and we should encourage greater experimentation with new approaches.
Getting the balance right between providing assistance and making sure that individuals hurt by
trade can get back on their feet and achieve their earning potential will be a challenge, and we
need a better understanding of what actually works.
More generally, we need to do a better job positioning our workforce to cope with globalization
and technological change. Improvements across a range of areas-including not only education
and training, but also the business regulatory environment and infrastructure investment-could
support greater worker mobility. These measures would also promote higher productivity
growth. While the scope and scale of issues differ substantially by country, many of these
issues may also be relevant in Brazil.
There are various measures available in current trade agreements, such as antidumping
measures and countervailing duties for dealing with "unfair" trade, as well as escape clauses that
provide safeguards for industries that face a sudden surge of imports. Again, the challenge is to
ensure that such measures are effective, that they help facilitate rather than retard adjustment,
and that they are not abused so as to avoid foreign competition. But, both sanctions and
temporary relief have been provided for in global trade rules. We should be willing to use them
when their use would lead to more equitable outcomes and would help sustain political support
for a more open trade regime.
Financial Globalization Is Also Important
Financial globalization-the flow of capital across national borders-is also an important issue
that must be considered. These flows help to support global economic integration in the trade of
goods and services. This is a large, complex subject-and one the Central Bank of Brazil is well
acquainted with, having successfully managed the pressures of heavy capital inflows as well as
outflows during periods of stress. The tremendous damage of the global financial crisis
underscores the importance of this issue. As with issues related to trade, achieving effective
financial globalization requires robust and mutually supportive measures at both the domestic
and international levels.
First, the high level of cross-border capital flows-and their potentially volatile nature-further
underlines the importance of solid domestic fundamentals, including exchange rate flexibility, a
credible monetary policy framework, sustainable fiscal policy, sufficient foreign exchange
reserves, and a strong financial system.
The United States has a special responsibility to keep its own house in order, given the large size
of its financial markets and the U.S. dollar's status as a reserve currency. Indeed, the U.S.
financial system was the epicenter of the global financial crisis. I believe that promoting
economic growth and financial stability at home is the most important contribution the United
States can make to promoting growth and stability worldwide.
With that in mind, U.S. monetary policy can have a significant impact on global financial
conditions, including exchange rates, and shifts in U.S. monetary policy can lead to
consequential shifts in global capital flows. Therefore, good communication and transparency
from the Federal Reserve is needed. In this respect, I believe we have made a number of
improvements in recent years that have facilitated smoother market adjustments to policy
changes. One example is the process by which the Federal Reserve began the normalization of
its balance sheet last year. We foreshadowed our intentions and initiated a program that was
transparent in its design and ramped up only slowly. 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
9
markets.
A high level of global interdependence also requires robust cooperation and effective international
institutions. To provide one example, I have traveled several times a year for the last decade to
Basel, Switzerland, to discuss economic, monetary, and regulatory policy with foreign central
bankers at the Bank for International Settlements (BIS). This dialogue-supported by ongoing
bilateral discussions between central banks-helps build trust, understanding, and the valuable
relationships that are crucial during periods of stress.
The global financial crisis put the need for a more robust and resilient financial system in stark
relief. Such a regime is necessary if we are to maintain the flow of credit to the real economy-
both domestically and internationally-during times of stress. Over the last decade,
policymakers have implemented a range of reforms that have materially strengthened the
10
banking system, including higher capital and liquidity buffers for the major international banks.
International coordination has been essential to the successful implementation of these reforms.
Banking is a global business that requires a high degree of regulatory consistency and as level a
playing field as possible to avoid distortions and regulatory arbitrage. Under the auspices of the
Basel Committee on Banking Supervision of the BIS, a wide-ranging set of reforms has been
11
introduced progressively, including the recent finalization of the Basel III reforms.
Tighter regulation of international banks must be complemented by effective supervision, and
much progress has been made in improving home/host supervisory cooperation. In a local
context, cross-border supervisory coordination has taken on increased importance as Brazilian
banks have expanded internationally in recent years. Still, greater clarity around how large global
banks will be resolved is required if we are to successfully end "too big to fail."
Finally, it is increasingly clear to me that we also need to develop a better shared understanding
of the proper role of exchange rate policies and reserve accumulation in a healthy and fair global
trading system. To be sure, in a world of volatile capital flows, experience has shown that having
adequate reserve cushions has helped many emerging market economies ward off costly
instability. Indeed, Brazil's large stock of foreign exchange reserves has been a key pillar of
stability through turbulent periods. But, reserves are a relatively expensive form of insurance,
and excessive reserve accumulation can undermine global adjustment, shift burdens onto
trading partners, and erode political support for continued trade openness. As I have said on
other occasions, I think that part of the solution lies in further improving the international safety
12
net, so that countries have more efficient and less costly ways of ensuring resilience.
To conclude, although the benefits from an open trade regime remain compelling, we must also
recognize that such a regime imposes costs, and these need to be forcefully addressed.
Focusing on these costs is necessary if globalization-including its financial dimensions-is to
work for all of us.
Thank you for your time. I would be happy to take some questions.
1
Mary Amiti, John Clark, Gerard Dages, Matthew Higgins, Emily Howard, and Tom Klitgaard assisted in preparing
these remarks.
2
Figures from UN World Investment Report, IMF World Economic Outlook Database, World Bank World
Development Indicators.
3
IMF World Economic Outlook, April 2017, in market exchange rate terms.
4
Figures from U.S. Bureau of Economic Analysis, IMF.
5
Dix-Carneiro, Rafael (2014) "Trade Liberalization and Labor Market Dynamics," Econometrica, Vol 82(3), 825-
885; Dix-Carneiro, Rafael (2018) "Trade and Labor Market Adjustment: Recent evidence from Brazil,"
Proceedings of the IMF Conference "Meeting Globalization's Challenges."
6
Dix-Carneiro, Rafael (2014) "Trade Liberalization and Labor Market Dynamics," Econometrica, Vol 82(3), 825-
885; Dix-Carneiro, Rafael (2018) "Trade and Labor Market Adjustment: Recent evidence from Brazil,"
Proceedings of the IMF Conference "Meeting Globalization's Challenges."
7
This negative consequence of higher trade barriers can be illustrated most starkly by the estimates of the costs
per job saved through protectionist measures. Researchers that have studied this closely estimate that the
costs per job saved from protectionist measures in the United States typically run into the hundreds of
thousands of dollars per year. To illustrate, consider the case of import restrictions on Chinese tires. The cost
of a job saved was estimated at $900,000 per year while the measures were in place, or more than 20 times the
average worker's compensation. Hufbauer and Lowry, "US Tire Tariffs: Saving Few Jobs at High Cost", Peterson
Institute for International Economics, April 2012.
8
The U.S. provides some assistance to workers displaced due to trade through its Trade Adjustment Assistance
(TAA) program. A recent academic paper finds that TAA-trained workers have higher cumulative earnings (after
10 years) than similar workers who didn't receive the training. These higher earnings reflect both higher
incomes and greater labor force participation, with returns concentrated in the most disrupted regions, where
workers are more likely to switch industries and move to labor markets with better opportunities in response to
training. Hyman, Benjamin (2017) "Can Displaced Labor Be Retrained? Evidence from Quasi-Random
Assignment to Trade Adjustment Assistance," University of Pennsylvania.
9
For further discussion, see William C. Dudley, Panel Remarks at Bank for International Settlements' Annual
General Meeting, June 26, 2017.
10
For further discussion, see recent Committee on the Global Financial System (CGFS) report, Structural
Changes in Global Banking after the Crisis.
11
Other committees of the BIS, including the CGFS, which I chair, and the Financial Stability Board, which the BIS
hosts, play an important role in analyzing international financial stability issues and developing related policy
prescriptions.
12
See William C. Dudley, U.S. Monetary Policy and Emerging Market Economies, March 27, 2014.