Protectionist measures, even short-term, impose costs on an economy that outweigh any benefits, said St. Louis Federal Reserve president William Poole.
Poole's remarks come a day after the US said it plans to restrict some Chinese imports following complaints from domestic textile producers that competition is costing jobs in states such as North Carolina.
"Trade restriction imposes net costs on society," Poole told the Louisville Society of Financial Analysts in Kentucky. "Protection produces gains for some and costs for others, but the net of gains and costs is negative."
Responding to questions on the economy, Poole said corporations appear poised to take more risks, and "that gives us good prospects for growth over the next few years," he said.
The St. Louis Fed chief executive blamed a lack of economic understanding, the political power of special interest groups, and a "reasoned preference" to protect some industries for pressure against free-trade policies in the US.
He argued that trade results in a better use of labor and capital resources as countries, and even individual states in the US, focus on the advantages they may have in producing particular goods and services.
One advantage the US has, Poole noted, is an efficient capital market, which makes it reasonable that foreign investors invest the dollars they earn on trade back into US markets.
"The general public is also concerned about the large and increasing US trade deficit," said Poole. "This view fails to appreciate that a country's trade balance and its capital account are very closely related." That means "current trade deficits are not a cause for alarm because on the whole they reflect extremely positive forces driving the US capital account," he said.
Poole said protectionism concentrates gains in specific industries, while the losers, which include workers in other industries and consumers as a whole, are a loose and disorganized group. As a result, potential winners can organize pressure and win protection, while losers end up bearing the incremental costs.
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