Alan Greenspan: 'A US trade backlash would harm the global economy'

From a speech on China's trade and exchange rate policies, by the Chairman of the Federal Reserve Bank, to the US Senate's finance committee

I am pleased to be here today to offer my views on China's trade and exchange rate regime. Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi [yuan] relative to the US dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion.

I am pleased to be here today to offer my views on China's trade and exchange rate regime. Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi [yuan] relative to the US dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion.

A revaluation of the [yuan] would have limited consequences for overall US imports as well as for US exports that compete with Chinese products in third markets. Such a revaluation would affect Chinese value added but not the dollar cost of intermediate goods imported into China from the rest of Asia, which represents a significant share of the gross value of Chinese exports to the United States and elsewhere.

A return to protectionism would threaten the continuation of much of the extraordinary growth in living standards worldwide, but especially in the United States, that is due importantly to the opening of global markets. Such an initiative would send the adverse message to our trading partners that the United States, while accepting the benefits of world trade, is not willing to absorb the structural adjustments that are often necessary.

To maintain a rising standard of living, a dynamic economy such as ours requires a continual shifting of resources toward the most up-to-date technologies, financed not only by savings but by the depreciation of increasingly obsolescent facilities. A policy to dismantle the global trading system in a misguided effort to protect jobs would rebound to the eventual detriment of all US job seekers.

In the decades ahead, it is in our interest and that of the global economy that China continue to progress toward becoming a more market-based, productive, and dynamic economy in which individual initiative, not government decisionmaking, is the fundamental strength behind economic activity. It is essential that we not put that outcome, or our future, at risk with a step back into protectionism.