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Greenspan Warns on Trade Barriers

Fed chief's comments come amid growing international tension over Bush administration policies.
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Federal Reserve

chairman Alan Greenspan warned against "creeping protectionism" at a monetary conference Thursday, saying it could have a negative impact on globalization.

In a speech before the Cato Institute, Greenspan said the widening trade deficit, which has been blamed for recent dollar weakness, has not hurt the economy so far. But the Fed chief cautioned that trade barriers to protect U.S. industries could be very harmful in the future.

"Some clouds of emerging protectionism have become increasingly visible on today's horizon," Greenspan said. "The costs of any new such protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy."

Although he did not mention any specific actions, Greenspan may be referring to President Bush's decision to impose steel tariffs over the past year, as well as various quotas on Chinese textile and clothing imports announced this week. Both of these moves have been criticized by free trade proponents.

The Bush administration has also been pressuring China to devalue its currency to help slow the country's ballooning trade surplus with the U.S.

Meanwhile, retailers -- including

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-- have seen their shares affected by the news. The baby clothes maker's stock fell 5% Wednesday, a day after the Bush administration said it would curtail imports of knitted fabrics and sleepwear to the U.S. Carter's was lately down another 90 cents, or 3.6%, to $24.20.

More broadly, the current account deficit soared to a record 5% of gross domestic product earlier this year. That compares to the previous record of 3.5% in 1986.

"Our persistent current account deficit is a growing concern because it adds to the stock of outstanding external debt that could become increasingly more difficult to finance," he said.

On a positive note, Greenspan said globalization has created "a degree of international flexibility" that has raised the possibility -- as long as it continues -- of a "benign resolution" to the deficit.

"There is, for the moment, little evidence of stress in funding U.S. current account deficits," Greenspan said. "The real exchange rate for the dollar has declined roughly 20% against the major foreign currencies since 2002. Yet inflation, the typical symptom of a weak currency, appears quiescent."