(Nov 15): Bank of England (BOE) Governor Andrew Bailey warned Chancellor of the Exchequer Rachel Reeves not to raise tariffs in retaliation to an expected wave of US-led protectionism, amid fears that President-elect Donald Trump will kick off a global trade war once he is sworn in next year.
“I will own up to being an old-fashioned free trader at heart,” Bailey said on Thursday in a speech to the finance industry at London’s Mansion House, where Reeves also spoke. “Amidst the important need to be alert to threats to economic security, let’s please remember the importance of openness.”
Bailey also pushed back against the UK’s own retreat from free trade after Brexit, saying the government should “welcome opportunities to rebuild relations” with the EU.
Trump is threatening a new era of protectionism with blanket 20% tariffs on all US goods imports and tougher measures against China, while the European Union has also proposed tariffs of up to 45% on Chinese electric vehicles.
But in a speech focused on tackling the UK’s anaemic growth rate, Bailey urged ministers not to respond to protectionist headwinds in kind. “Openness to trade in goods and services affects productivity by facilitating competition, innovation and specialisation,” he said.
Reeves made a similar point in an interview with Bloomberg TV on Wednesday. Asked about the impact of potential US trade tariffs, the chancellor said: “We will continue to make representations for free and open trade.”
It’s the latest example of the central bank governor and the chancellor striking a similar tone on the economy. In his speech, Bailey again endorsed Reeves’ budget plan to dramatically ramp up borrowing to pay for public investment, and the governor also backed up her complaint about the economic inheritance left by the former Conservative government.
“Chancellor, I welcome the plans you have set out,” Bailey said. “We don’t have a good recent inheritance, so this is a big issue that needs our attention. Investment and capital formation — and how to increase it — matter.”
To illustrate his point, Bailey said Britain’s potential annual growth rate, its economic speed limit, fell to 0.7% between 2020 and 2023 from 1.3% on average between 2009 and 2019 and 2.6% between 1990 and 2008.
Brexit has also damaged potential growth, which “underlines why we must be alert to and welcome opportunities to rebuild relations while respecting the decision of the British people,” Bailey said. The Office for Budget Responsibility estimates leaving the European Union cost the UK 4% in lost GDP, and the Labour government has pledged to improve relations with the bloc.
On a more upbeat note, Bailey said the UK economy may be as much as £60 billion (US$76.1 billion or RM340.48 billion) bigger than thought because statisticians are failing to measure gross domestic product (GDP) correctly. Intangible assets, such as data, are not captured in the official figures but are valuable, he said.
“The economy is probably bigger than we think it is,” he said. “The Office for National Statistics is going to include the value of data as an asset in the overall size of GDP in the next few years. That makes sense. It’s probably worth a percent or two on GDP.”
Still, Bailey also criticised the ONS for failing to produce reliable data on the UK labour force for over a year, calling it a “a substantial problem — and not just for monetary policy — when we don’t know how many people are participating in the economy.”
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