Tariffs or capital controls? Trump may try both
Plus, 41 million Canadians is not nearly enough Canadians
We have previously noted the implications of the impossible trinity for the viability of a weak US dollar policy, pointing out its incompatibility with an independent, inflation targeting Federal Reserve. This points to the risk that a second Trump administration might compromise the independence of the Fed in pursuit of weak dollar designed to achieve the mercantilist goal of more balanced trade.
An alternative approach to securing a weaker dollar is through capital controls. Democrat Senator Tammy Baldwin and Republican Senator Josh Hawley have previously put forward legislation that would see the Fed impose a ‘market access charge’ (MAC) on foreign purchases of US assets in order to target a US trade balance ‘near zero.’ As they describe it:
The MAC would make U.S. exports more competitive and gradually reduce our trade deficit until it is within an acceptable range (plus or minus half a percent of GDP). Going forward the Federal Reserve is charged with keeping the dollar at its trade balancing price.
The MAC is viewed by its advocates as an alternative approach to imposing tariffs on imports. It proceeds from recognition that the US trade deficit with the rest of the world is ultimately a function of US investment exceeding domestic saving, with foreign capital inflows making up the difference. The idea is to tax the foreign capital inflows to maintain balance in the capital and financial accounts and therefore the current account balance. The tax on foreign capital inflows would manage the exchange rate by suppressing demand for US dollar assets.
What makes this proposal particularly dangerous is that it finds support not only from the mercantilist right, best represented by Trump trade adviser Robert Lighthizer, but also the mercantilist left. In particular, Michael Pettis has promoted capital controls as a means to balance the US current account.