"America First" ≠ American Isolation: Treasury Secretary Basant Reconstructs the New Narrative of the Bretton Woods System

Original author: rick awsb ($people, $people)

Reprint: Daisy, Mars Finance

"We hope to help... China... shift its economy from export surplus capacity to supporting its own consumers and domestic demand."

U.S. Treasury Secretary Mnuchin's speech today at the International Institute of Finance (IIF) (full text) defended Trump's tariffs and urged the IMF to shift towards addressing China:

It is an honor to speak here. Before the end of World War II, Western leaders gathered the most outstanding economists of the time, with the task of constructing a new financial system. In a tranquil resort in the mountains of New Hampshire, they laid the foundation for peace in the United States. The designers of the Bretton Woods system recognized that the global economy required global coordination, and to promote this coordination, they established the International Monetary Fund (IMF) and the World Bank.

These two institutions were born during a time of extreme geopolitical and economic turmoil. The purpose of the IMF and the World Bank is to better align national interests with the international order, thereby bringing stability to an unstable world. In short, their aim is to restore and maintain balance.

This is still the purpose of the Bretton Woods institutions; however, today we see imbalances everywhere in the international system. The good news is that it doesn't have to be this way. My goal today is to outline a blueprint for restoring balance to the global financial system and the institutions designed to maintain this system.

Most of my professional career has been spent observing the financial policy circle from the outside, and now I am looking out from the inside. I am eager to collaborate with all of you to restore order to the international system. However, to achieve this goal, we must first reconnect the IMF and the World Bank with their founding missions.

The IMF and the World Bank have enduring value, but the expansion of their missions has led these institutions off track. We must implement key reforms to ensure that the Bretton Woods institutions serve their stakeholders, rather than the other way around. Restoring global financial balance will require sober leadership from the IMF and the World Bank. This morning, I will explain how they can provide this leadership to build safer, stronger, and more prosperous economies around the world.

I invite my international partners to join us in working together to achieve these goals. At this point, I want to make it clear: America First does not mean America acting alone. On the contrary, it is a call for deeper cooperation and mutual respect among trading partners. America First is not retreating, but rather seeking to expand America's leadership in international institutions such as the IMF and the World Bank. By accepting a stronger leadership role, America First seeks to restore fairness to the international economic system.

The imbalance I mentioned is most evident in the trade sector, which is why the United States is now taking action to rebalance global commerce. For decades, successive administrations have relied on flawed assumptions that our trading partners would implement policies to promote a balanced global economy. Instead, we face the harsh reality of a persistent large deficit in the U.S. caused by an unfair trade system. Deliberate policy choices by other countries have hollowed out America's manufacturing sector, disrupted our critical supply chains, and jeopardized our national and economic security.

President Trump has taken strong action to address these imbalances and their negative impact on Americans. The current state of persistent large imbalances is unsustainable, unsustainable for the United States, and ultimately unsustainable for other economies as well.

I know that "sustainability" is a buzzword here, but I'm not talking about climate change or carbon footprints; I'm talking about the kind of sustainability that pertains to economic and financial stability, improving living standards, and keeping markets functioning. International financial institutions must focus on maintaining this type of sustainability in order to successfully fulfill their missions.

In response to President Trump's tariff announcement, over 100 countries have reached out to us, hoping to help rebalance global trade. These countries have responded positively to the President's actions to create a more balanced international system. We are having meaningful discussions and look forward to engaging with other nations. In particular, China needs to rebalance. Recent data shows that China's economy is further deviating from consumption and shifting towards manufacturing. If the current situation continues, China's manufacturing-export-driven economic system will continue to create more severe imbalances with its trading partners. China's current economic model is based on solving economic difficulties through exports, which is an unsustainable model that harms not only China but the entire world.

China needs to change, this country knows it needs to change, everyone knows it needs to change, and we hope to help it change because we also need to rebalance. China can first shift its economy from excess export capacity to supporting its own consumers and domestic demand. This shift will help the global rebalancing that the world desperately needs.

Of course, trade is not the only factor in the broader global economic imbalance. The continued excessive dependence on U.S. demand is leading to an increasingly unbalanced global economy. Policies in some countries encourage excessive savings, hindering private sector-led growth; other countries artificially suppress wages, which also restrains growth. These practices have resulted in a global dependence on U.S. demand to stimulate growth, leading to a global economy that is weaker and more fragile than it should be.

In Europe, former European Central Bank President Mario Draghi has identified several sources of stagnation and outlined several recommendations to get the European economy back on track. European countries would do well to adopt his suggestions. Europe has taken some initial measures that I appreciate, which have long been overdue. These measures create new sources of global demand and involve strengthening Europe in terms of security.

I believe that global economic relations should reflect security partnerships. Security partners are more likely to have compatible economies that provide a framework for mutually beneficial trade. If the United States continues to provide security guarantees and open markets, then our allies must strengthen their commitment to collective defense. Europe's initial actions to increase fiscal and defense spending prove that the Trump administration's policies are indeed having an effect.

The Trump administration and the U.S. Department of the Treasury are committed to maintaining and expanding America's economic leadership in the world, especially in international financial institutions. The IMF and the World Bank play a key role in the international system, and the Trump administration is eager to collaborate with them, as long as they remain true to their mission. However, under the current circumstances, they are failing.

The Bretton Woods institutions must step back from their large and decentralized agendas, which have stifled their vitality. We must bring the IMF back to being the IMF. The mission of the IMF is to promote international monetary cooperation, facilitate balanced growth of international trade, encourage economic growth, and prevent harmful policies such as competitive devaluation of currencies. These are extremely important functions that support both the US and global economy.

On the contrary, the IMF has suffered from mission creep. The IMF has steadfastly committed itself to promoting global monetary cooperation and financial stability. In the United States, we know that we need to get our fiscal house in order. The last administration created the largest deficit in peacetime in our history. The current administration is committed to addressing this issue. We welcome criticism, but we will not tolerate the IMF failing to criticize the countries that most need it, primarily surplus countries. According to its core responsibilities, the IMF needs to point out countries like China. When markets fail, the IMF intervenes and provides resources, in exchange for which countries implement economic reforms to address their balance of payments issues and support economic growth. The reforms undertaken during these programs are one of the IMF's most important contributions to a strong, sustainable, and balanced global economy. Argentina is a fitting example.

Earlier this month, I was in Argentina, showcasing the United States' commitment to the IMF. The success of the IMF is not about how much money it lends, but the reforms that countries implement under its programs.

Like the IMF, the World Bank must again adapt its purpose. The World Bank Group helps developing countries grow their economies, reduce poverty, increase private investment, support private sector job creation, and decrease reliance on foreign aid. It provides countries with transparent and affordable long-term financing to invest in their own development priorities. The World Bank, along with the IMF, offers a wide range of technical support.

As the World Bank returns to its core mission, it must use its resources as efficiently and effectively as possible, and it must do so in a way that demonstrates tangible value to all member countries. The Bank can now use its resources more effectively by focusing on increasing energy access. Business leaders around the world identify unreliable electricity supply as one of the main obstacles to investment. We encourage the World Bank to further enable countries to access all technologies that can provide affordable baseload power generation.

The World Bank must be technically neutral and prioritize affordability in energy investments. In most cases, this means investing in natural gas and other fossil fuel-based energy production. In other cases, it may mean investing in renewable energy, along with systems to help manage the intermittency of wind and solar power.

Human history teaches us a simple truth: countries with low creditworthiness are precisely where the World Bank's support has the greatest impact on poverty reduction and growth. In contrast, the World Bank continues to provide loans each year to countries that have already met the graduation criteria for borrowing from the World Bank. This ongoing lending is unjustified, as it siphons resources away from higher priorities and crowds out the development of private markets. It also hinders countries' efforts to free themselves from dependence on the World Bank.

The World Bank should also implement a transparent procurement policy based on best value. It must help countries move away from procurement methods that prioritize only the lowest cost bids. Such procurement policies reward distorted and subsidized industrial policies that undermine development. They may also stifle the private sector, incentivize corruption and collusion, and lead to greater long-term costs. Procurement policies based on best value are better from both efficiency and outcome perspectives.

America First means that we are doubling down on our engagement in the international economic system, including the IMF and the World Bank. A more sustainable economic system will better serve the interests of the United States and all other participants in the system. We look forward to collaborating with everyone. Thank you.