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The Bank of England (BoE) said on Friday, 29 November that higher tariffs and trade barriers are increasing global risk levels, potentially stifling global growth and leading to increased inflation and volatility.
In a twice-yearly report on the soundness of the UK financial system, the BoE said that “a reduction in the degree of international policy cooperation could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks”.
The BoE’s system-wide exploratory scenario (SWES) exercise models how the UK financial system would respond to a shock. For the first time ever, the report includes non-bank institutions, like hedge funds and pension funds, in the model, considering a wider range of impacts than previous exercises.
The report found increased uncertainty around the global economic outlook and a rise in risk, and stressed the need for minimum international standards to counterbalance this.
In a press conference following the report’s publication, Andrew Bailey, governor of the BoE, said that there was an “increased risk in global fragmentation” from various causes. Following the US Election earlier this month, many began to fear a disruption in international trade due to tariffs. Geopolitical developments in Ukraine and the Middle East continue to bring uncertainty regarding both trade routes and the global economy.
While not specifically referring to the recent US election, Bailey said that because of the UK economy’s openness, it was more vulnerable to tariffs and shocks. President-elect Trump has been making headlines since his election for his aggressive tariff strategy, pledging 25% tariffs on Canada and Mexico in retaliation for allowing migrants and fentanyl to cross the border as well as potentially high tariffs on goods from the EU and the UK.
The US is the UK’s largest individual trading partner, so tariff threats could destabilise its economy and spook investors – even though, as many have pointed out, about 70% of trade between the two countries is in services, a sector usually immune from tariffs.
According to the report, the UK’s open economy and reliance on exports make risks “particularly relevant.” An increasingly fragmented and uncertain environment around geopolitics and tariffs could have a wide-ranging impact on the flows of trade, with repercussions on inflation, interest rates, and almost every other aspect of the global economy.
