South-Western College Publishing - Economics  
Greenspan Warns Against Protectionism
Subject Protectionism
Topic International Trade
Key Words Global Economy, Imports, and Free Trade
News Story

On November 19, 2003, the Commerce Department announced plans to impose new import quotas on several textiles from China. Just two days later, in a speech to a conference organized by the Cato Institute and the Economist Magazine, Alan Greenspan, Chairman of the Federal Reserve, warned the Bush Administration that the repercussions of the import quotas could fall squarely on the shoulders of those industries the plan intends to protect.

Greenspan stated, "Over the years, protected interests have often endeavored to stop in its tracks the process of unsettling economic change." To which he added, "Virtually all such efforts have failed. Consequently, it is imperative that creeping protectionism be thwarted and reversed."

The major point of his message was that the global economy has become more flexible and open to financial flows between nations, and that flexible economies like the United States should be expected to adjust to financial imbalances without any great disruption. He further contended that the U.S. economy is open and flexible enough that the inevitable adjustments, like a continuation of this year's decline in the foreign exchange value of the dollar, are most likely to be gradual.

Mr. Trent Duffy, a spokesman for the Bush administration, declined to comment on Chairman Greenspan's arguments, but he did say, "The Bush administration will remain committed to free and open trade, but trade on a level playing field." Duffy's remarks suggested that China, as a trading partner, could operate more in line with "free trade" than she currently does.

Calling for more flexibility and fewer quotas, Mr. Greenspan said, "History suggests that greater flexibility allows economies to adjust more smoothly to changing economic circumstances and with less risk of destabilizing outcomes."

(Updated January, 2004)

Questions
1.

Define import quotas. How do they differ from other protectionist trade policies?

2. Analyze the long-run effects of import quotas.
3. Discuss Greenspan's stance on import quotas in relation to classical economic theory.
Source Edmund L. Andrews, "Greenspan Voices Concerns on U.S. Efforts to Limit Imports," The New York Times Online, November 21, 2003.

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