BOE calls for correction of financial imbalances
WASHINGTON: US President Donald Trump’s trade war with the rest of the world is the wrong approach to addressing imbalances in the global economy and will harm households, Bank of England governor Andrew Bailey says.
In his annual Mansion House speech, Bailey called for greater cooperation between countries – particularly the United States and China – to resolve “unsustainable” trade and financial imbalances that are distorting economies and lie behind escalating political tensions.
“How to reconcile an open world economy with national interests is a very old issue,” he said in comments that appeared to be directed primarily at Washington.
“The rules of the process have to be accepted and the imposition of rules by one player, however dominant, isn’t a recipe for sustained stability.”
Bailey’s comments come just days after Trump threatened 30% tariffs on goods imported from Mexico and the European Union.
The President has already imposed 30% tariffs on products from China and a minimum 10% tariff on all imports worldwide with some exceptions. Economists have warned that the levies will be a drag on global growth.
Trump is using tariffs to bring industrial jobs back to America, but Bailey warned his plans are likely to backfire
“Increasing tariffs creates the risk of fragmenting the world economy, and thereby reducing activity,” he said.
“It helps to remember that the key challenge we all face is to increase growth in the world economy: to grow the pie to support living standards for the people we serve, all of the time. It is as simple as that.”
China and the United States are at the heart of the problem, accounting for “almost 40% of the world’s current account imbalances”, Bailey, who was recently made chair of the multi-national Financial Stability Board, said.
The United States runs a current account deficit, importing more than it exports, and runs a large budget deficit supported by capital inflows due to the dollar’s reserve currency status.
China is the reverse, running a trade surplus with excess domestic savings due to weak “social safety nets” that are invested abroad.
America’s trade war is also economically incoherent, the governor suggested.
“The United States does need to explain how it can regard its internal imbalance as sustainable and its external imbalance as not so,” he said.
“And China needs to explain how it will tackle its persistently weak domestic consumption.”
A better approach would be to use the world’s multilateral institutions like the International Monetary Fund and the World Trade Organisation to rebalance the trading and financial systems, he argued.
Stronger global institutions, working hand-in-hand, could help the process of adjustment.
Bailey also said there is an “urgent need for innovation” in payments by the banking sector as he continued to raise doubts over the future role for stablecoins and a digital pound for consumers.
The governor has sounded more wary over the need for a UK central bank digital currency in recent months, and said on Tuesday that he was yet to be convinced that the “natural next step was to create a new form of money rather than put digital technology into retail payments and bank accounts”.
Bailey also reiterated his cautious stance over the emergence of stablecoins as excitement grows in the wake of landmark legislation passed in the US Senate aimed at normalising the technology.
Stablecoins are typically backed by an asset such as the US dollar and are designed to hold a steady value, contrasting with the price volatility seen in other cryptocurrencies such as bitcoin.
“There may well be a role for stablecoins going forward, but I don’t see them as a substitute for commercial bank money,” Bailey said. — Bloomberg
