AMSTERDAM — The international trading system must do more to address “persistent, unsustainable imbalances,” Bank of England Governor Andrew Bailey said, acknowledging that U.S. concerns over trade distortions may have merit.

Speaking exclusively to POLITICO on the fringes of a Foreign Bankers’ Association event in Amsterdam on Tuesday, the incoming chair of the Financial Stability Board said the postwar multilateral trade system “hasn’t necessarily delivered all it needs to deliver” and that a rethink was due.

“We have to have a system which does identify where there are persistent, unsustainable balances,” Bailey said. 

The comments come just days after a surprise détente between China and the U.S. on the tariff war launched by Donald Trump’s administration on April 2 calmed financial markets’ worst fears about outlook for the world economy.

While reiterating his commitment to free trade, Bailey acknowledged that tariffs — long anathema to orthodox central banking — may have served as a necessary wake-up call to reshape the international trading system.

“Obviously the U.S. administration feels it’s had to use tariffs to really get this point out there. I think all of us who believe in free trade and believe in multilateralism are happy to say, ‘Look, okay, we sort of get it.’”

Bailey went on to tell the gathering of bankers that didn’t mean abandoning the WTO but rather working with the body to make it fit for purpose again.

“We’ve got problems in the trade agreements and monitoring of trade agreements,” he said. “What I really hope is that we address these questions in a multinational way, and that we don’t give up on the multilateral system, because that would be a real setback.”

Bailey added that reforms must address both persistent macro imbalances and enforcement weaknesses at the micro level.

“The origin of persistent imbalances is in fundamental economics, so that’s where you need to start: what’s causing these fundamental systems advances?” he said, adding that the International Monetary Fund had a role to play, not least because there was now “an acceptance by countries that they have to take those things seriously and … take action upon them.”

Citing IMF analysis, Bailey also noted that a significant share of new trade restrictions in the past decade had originated in China.

“There has to be a way of dealing with these things, rather than just sort of letting them sit there” while the level of tension rises, he told POLITICO.

Bailey’s remarks reflect an emerging openness among European monetary authorities to the argument — long pushed by Washington — that existing trade governance frameworks have failed to adjust to a more state-driven global economy.

The outgoing chair of the Financial Stability Board, Klaas Knot, echoed Bailey’s points during the panel session.

“Whatever you think about the U.S. administration and their communication, they are dead serious about this global imbalances issue,” Knot told the room. “Not every trade balance needs to be in balance, there’s absolutely no economic reason for it. But, on the other side, there can also be an argument that some of the imbalances actually become excessively large. I do think that there is a sort of upper limit beyond which imbalances become counterproductive.”

Geoeconomics in focus

Asked whether the increasing entanglement of economic and geopolitical objectives such as tariffs or strategic autonomy  — what some have termed “geoeconomics” — poses a threat to central bank independence, Bailey said the trend underlined rather than undermined the case for institutional autonomy.

“I don’t believe [geoeconomics] invalidates independence. It underlines why it was so important to have independent central banks,” he said on the sidelines. “Our job is to take difficult decisions in difficult times … I don’t accept that our independence is politicized in any other sense.”

In that respect, Bailey said recent interventions by the BoE — such as its temporary and targeted bond-buying during the so-called “LDI crisis” in 2022 — had been misunderstood in some quarters as monetary stimulus, when in fact they were narrowly targeted at market functioning and financial stability.

“It was hugely important to say, ‘No, we’re not doing QE.’ This was a limited financial stability intervention. And we sold the gilts as soon as we could.”

Bailey acknowledged that the visibility of central banks during periods of volatility has led to more scrutiny and criticism, but rejected any suggestion that the BoE was pursuing political objectives.

Both Bailey and Knot rejected the idea that geoeconomics or the pursuit of strategic autonomy would impinge on their mandates. “In the core of our mandate, I think we will always continue to be focused on price stability [in] the medium term,” Knot said.

Where such factors would have more of a bearing, however, would be in payments and in addressing supply-side constraints in the global economy.

“Many of these private payment solutions are actually heavily dependent on foreign service providers,” said Knot. “If we develop a digital euro, the payment rails that will come with [it] might also offer an alternative to private initiatives to become less dependent on foreign payment service providers.”

Bailey, meanwhile, highlighted that over the past five years, central bankers have had to realize that the supply side of the world economy has become less predictable. “That’s where I think we have to take it on board, but we’re not trying to influence it,” he said.

Dollar still king

Despite European governments’ growing focus on strategic autonomy, both Bailey and Knot pushed back against the increasingly popular market view that Trump’s tariff agenda had ruptured the supremacy of the U.S. dollar.

“I think there’s a lot more to the dollar’s status as a reserve currency than some of this commentary recognizes, and actually it’s got even more so in recent years,” Bailey said on the sidelines. “I mean, there’s a huge amount of what I call infrastructure that goes with being a reserve currency these days.”

As such, he added, the world was nowhere near de-dollarization. “And by the way, I hope we’re not, because it would be quite destabilizing.” 

Knot agreed in the panel session that “there is simply no alternative yet for the role that the dollar plays in a number of functions that an international reserve currency fulfils,” adding that the euro was unlikely to supersede it for as long as Europe’s markets remained fragmented along national lines.

“If we can’t resolve these issues, then you cannot expect your currency to become an international sort of reserve currency vehicle,” Knot said.