5 Smart Reasons to Tax Foreign Capital

August 02, 2019

Editors note: Professor Michael Pettis wrote the book called "The Great Rebalancing" and is a core expert on global trade and balances. He is supportive of the Competitive Dollar for Jobs and Prosperity Act recently introduced by senators Baldwin and Hawley.

A bipartisan bill that would create a trade-balancing exchange rate for the dollar also aims to reduce foreign purchases of certain U.S. assets.

[Michael Pettis | August 1, 2019 | Bloomberg]

Senators Tammy Baldwin and Josh Hawley have introduced a bill that would require the Federal Reserve to manage the foreign-exchange value of the U.S. dollar to achieve balance in the U.S. capital account. Whether the bill is passed, it nonetheless marks the beginning of a necessary reappraisal by Washington of the forces driving international trade and American trade imbalances.

The bill would task the Fed with implementing a variable tax on foreign purchases of U.S. dollar assets whenever foreigners direct substantially more capital into the U.S. than Americans direct abroad, something they have been doing for more than four decades. The tax would aim to reduce capital inflows until they broadly match outflows. Because a country’s capital account must always and exactly match its current account, if the American capital account is balanced, then its current account must also balance, and the U.S. trade deficit would effectively disappear.

currency Currency Misalignment