MarketWatch.- St. Louis Fed President James Bullard on Monday said the U.S. economy is at risk because the 75-year old era of free trade, which has helped domestic companies prosper globally, is ending.
The global economy is “going to have to transition to this new reality that trade won’t be as free as it was,” Bullard told reporters after a speech in Effingham, Ill.
Many economists think U.S. gross domestic product — considered the official report card of U.S. economic health — will be able to withstand any shock from the trade uncertainty and the weak global outlook that it has caused.
Bullard was less sanguine, saying the consequences of the shift from a free-trade regime “are unclear at a minimum.”
Earlier, he said the economy faces downside risks that may cause the slowdown to be sharper than expected.
In the spring, investors had thought there was a deal “just around the corner” that would settle the U.S. and China trade dispute, but have come to realize “the trade war was going to linger for quite a while,” the St. Louis Fed president said.
With the Chinese now holding an incentive to wait until after the 2020 presidential election to come back to the negotiating table, punitive trade tariffs will likely go into effect and last, he added.
With the U.S. pulling back from its role as the global champion of free trade, there is no other country waiting in the wings to champion the current global free-trade arrangements built up since the end of World War II. Most of our major trading partners tend to be more mercantilistic, meaning they are open to use state power to protect their markets from other imports from other countries.
So the U.S. economy must prepare for a future of higher import duties and non-tariff barriers than we have seen historically, Bullard said.
This might hit the U.S. consumers directly because they own shares in many Fortune 500 companies which earn the bulk of their profits overseas, he said.
Bullard dissented last Wednesday from the Fed’s decision to cut interest rates by a quarter-of-percentage point to a 1.75%-2% range. He wanted a more aggressive half-point reduction, in part due to his concerns of a more severe economic slowdown looming.
As things stand now, Bullard said he would back another quarter-point rate cut at the Fed’s October meeting.
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