The quotable, often controversial former US Treasury Secretary Larry Summers has made recent and noteworthy comments before the Senate Finance Committee on protectionist legislation. His testimony is timely for there are so many pending trade bills with protectionist leanings that I've lost count. Baucus-Grassley-Schumer-Graham (which waters down the now-defunct Schumer-Graham bill's 27.5% tariffs on China) and Stabenow-Bunning (which aims to impose countervailing duties on China) are but two proposals which aim to reverse the ever-growing bilateral deficit with China. A whole slew of other bilateral trade deals with Colombia, Peru, and Panama are being held up since the Democratically-controlled Congress wants to incorporate minimum labor standards into these deals.In his inimitable way, Summers said that "changes in details of trade agreements are not likely to have significant impact on U.S. inequality" for such efforts are akin to "trying to inflate a tire by blowing it up through the place it leaked." He suggested that creating unemployment insurance and closing loopholes on transfer pricing used by MNCs to avoid taxes would work better in reducing US inequality. In particular, gains from enhanced tax collection through reduced transfer pricing "could potentially be devoted to ameliorating the dislocating effects of technological change and globalization," though he was not specific about what measures he had in mind. Summers further noted "that truculence over exchange rates ... can do substantial damage to financial stability, with very serious consequences for American interest rates, for the American stock market." He added that "we need to act with very great care given the magnitudes of the capital flows in China on which our economy has come to rely." In other words, do not bite the (Red) hand that feeds.
Addendum: Summers' prepared remarks are posted on the Finance Committee website.