Andrew Bailey sets Donald Trump challenge on tariff plans
Bank of England Governor Andrew Bailey has set President Donald Trump a “constructive challenge” to explain contradictions in fiscal policies that threaten the world economy and financial stability.
In his Mansion House speech delivered to an audience of City leaders, Andrew Bailey defended the principles of free trade and post-war agreements to introduce multilateral systems regulating the global economy.
While the Bank Governor recognised that trade imbalances had “frustrated the global economy” and weakened the United States’ potential, Bailey called out the US president’s apparent contradiction in worrying about financial imbalances when the country’s current account deficit stood at 3.9 per cent of national GDP.
“The US does need to explain how it can regard its internal imbalance as sustainable and its external imbalance as not so, and how it envisages the internal balance responding to an adjustment of the external balance flowing from tariffs taking effect,” he said, adding he made the comments “in the spirit of constructive challenge and engagement”.
Bailey said US trade partners had been willing to “take on its obligations” by buying US assets and help keep the economy afloat, with the country enjoying the perks of the dollar being the world’s leading reserve currency.
Tariffs could destabilise that relative financial stability, Bailey warned.
“Deficit countries have historically faced far more pressure to correct excess current account balances than surplus countries. This typically takes the form of financial market pressure.
“Increasing tariffs creates the risk of fragmenting the world economy, and thereby reducing activity.
“We can go back to Adam Smith and his contemporaries for the insight that trade expands activity by enabling specialisation, knowledge and technology sharing and productivity growth.
“There is therefore a common interest globally in tackling excess imbalances before dangerous levels of trade restrictions come into play, and before we face the prospect of difficult adjustment with macroeconomic volatility and financial instability.”
Andrew Bailey backs IMF
The US has so far raised an extra $47bn in customs revenues, with countries largely not retaliating against Trump over fears domestic economies could be hurt.
The total receipts hit $64bn in the second quarter, with countries planning talks on reducing tariff levels.
But inflation edged up in the US, suggesting trade policies will backfire on the US economy
President Trump’s erratic trade policies come at a time when economists have argued that the ‘Big Beautiful Bill’, which was passed after a vote in the House of Representatives, could deepen the current account deficit and exacerbate its burgeoning national debt.
The US president has taken particular aim at China, which Andrew Bailey said also needs to explain how it would tackle its “persistently weak domestic consumption” that had prevented market corrections from taking place.
Bailey said the International Monetary Fund’s role was more important to cast a “rigorous and independent eye” over global systems and advising countries on economic risks.
He said the IMF should strengthen its assessment of trade imbalances and have more “bite” in its financial reporting.
“Multilateral institutions and processes must have traction. Ruthless truth telling doesn’t win popularity contests, and there is a risk of organ rejection.
“We must allow and encourage the international institutions to be assertive and consistent in calling out unsustainable situations and practices. This is critical for the reputation and legitimacy of the institutions.”