By Paul Hannon

Governments will have to "work hard" to fix economic imbalances and roll back the spread of subsidies that have fueled challenges to the free-trade system, Bank of England Governor Andrew Bailey said.

In a speech in Dublin on Thursday, Bailey will say that strains in the global trading system that have most recently been manifested in higher U.S. tariffs make life difficult for central bankers.

"Our jobs are much harder if we face more inflexible and uncertain supply-side conditions in our economies, as we appear to do today," he said.

Bailey said the strains in the system partly reflect big economic forces, such as the gap between the level of savings and the level of investment in a country.

But he said they also reflect the industrial policies pursued by a growing number of countries over recent years, particularly China.

To move back toward freer trade, both sources of tension will have to be addressed, he said.

"I do accept that the system has come under too much strain, we have to work hard now to rebuild it, and it is incorrect to dismiss those who argue for restrictions on trade as just wrong-headed," he said.

While defending free trade, Bailey said Trump's tariff hikes may reflect understandable frustration with the failures of alternative ways of addressing trade imbalances and the spread of subsidies.

"If it is believed that tariff action is needed to create the shock and awe to get these issues on to the table and dealt with, then something has gone wrong with the multilateral system, and we need to deal with that," he said.

Bodies such as the International Monetary Fund have long argued that China should take action to boost consumer spending and reduce its reliance on exports, while the U.S. should narrow its budget deficit, which boosts demand for imports. But little progress has been made on either front.

As Bailey noted in his speech, China implemented around 5,400 subsidy policies between 2009 and 2022. But it has proved difficult for other countries to secure redress for any harm caused to their exporters through established arbitration systems.

"We must also look at the micro-level--the rules based world trade system--and work out what we need to do to solve this problem and make it more effective again," Bailey said.

While the U.S. Court of International Trade Wednesday ruled that President Trump didn't have the authority to impose sweeping tariffs on virtually every nation, sectoral duties on automobiles, steel and aluminum were not covered by the judgement.

The court's decision may be overturned on appeal, while trade experts say there are other ways for Trump to raise tariffs, although they require a more lengthy process.

The BOE has said that U.K. growth will suffer from higher barriers to trade around the world, but it has indicated that it will remain cautious when it considers further cuts to its key interest rate.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

May 29, 2025 12:22 ET (16:22 GMT)

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