A Better Tool to Counter China's Unfair Trade Practices

Abstract

The United States runs a large and persistent current-account deficit with China—meaning, roughly, that it imports far more goods and services from that country than it exports. As a necessary mirror image of that deficit, it also runs a capital-account surplus with China—meaning that it imports more capital than it exports.  Although it is widely understood that the United States would necessarily import less Chinese capital if it imported less Chinese stuff, it is generally not understood that the reverse is equally true. So if the U.S. tax subsidy for the import of foreign capital were eliminated, Chinese investors would have less motivation to outbid Americans for U.S. assets and, in consequence, less incentive to dump goods in this country in return for dollars. We propose a series of tax reforms that would significantly reduce the returns on U.S. portfolio investments by the Chinese government, its sovereign wealth fund, and China's other major investors. If implemented, these reforms may lead to a 16 percent decrease in China’s goods-trade surplus with the United States without the drawbacks of tariffs and while raising foreign revenue, supporting U.S. production, and helping to keep American assets in American hands.