Would Trump break the capital controls taboo with a Tobin tax?

Sub: Eco

Sec: External sector

Context:

The topic of investment barriers has long been avoided by U.S. policymakers, primarily due to concerns that even mentioning such barriers could cause panic in the global financial market.
However, under Donald Trump’s economic agenda, the discussion about imposing restrictions on inward investment has become more open.

Investment barriers:

Investment barriers are obstacles that prevent individuals or organizations from making investments or accessing certain markets.
Financial Barriers: High costs, large capital requirements, and illiquidity.
Regulatory Barriers: Government restrictions, high taxes, and legal limitations.
Psychological Barriers: Risk aversion, lack of knowledge, and behavioural biases.

Zero-Sum Trade Rivalry:

President Trump’s economic strategy is grounded in a worldview that views international trade through a zero-sum lens.
A zero-sum trade refers to a situation in which one participant’s gain or loss is exactly balanced by the losses or gains of other participants.
This view suggests that U.S. trade deficits in goods are due to trading partners undervaluing their currencies. Countries with trade surpluses then invest their savings in U.S. assets, pushing up the value of the U.S. dollar. The rising dollar increases U.S. consumption of foreign goods and reduces U.S. competitiveness in manufacturing.

U.S. Trade Deficit:

The U.S. has a large current account deficit. To balance the national accounts, a corresponding surplus in the capital account (foreign investment in U.S. assets) is required.
The U.S. has experienced capital surpluses for years, leading to a higher dollar. These surpluses have benefited American investors, contributing to rising stock portfolios and lowering capital costs for U.S. businesses. However, it has also lead to widening of trade deficit.

Tariffs as an Economic Weapon:

Tariffs on imports are one way President Trump attempts to address the trade deficit.
However, tariffs have raised the value of the U.S. dollar, worsening the trade competitiveness issue.
Tariffs do not address the core issue: the relentless global demand for U.S. assets, which keeps pushing up the value of the dollar.

Tobin Tax:

In response to the issue of capital inflows, some experts propose controlling cross-border capital flows.
This idea comes from James Tobin’s proposal in the 1970s for a “Tobin tax” on currency transactions to regulate international capital movements.
Yale economist and Nobel Laureate James Tobin proposed a tax on currency transactions to slow down excessive cross-border capital flows.
Some economists argue that taxing inward investment could be a more effective tool than tariffs if the goal is to raise revenue.
A Tobin tax on currency transactions could generate substantial revenue without significantly reducing global capital flows.

Potential Negative Impacts:

Impact on the Dollar: The mere possibility of the U.S. imposing barriers on foreign investment could lead to a sharp decline in the value of the dollar, causing instability in both U.S. financial markets and the broader global economy.
Impact on U.S. Markets: If foreign investment were restricted, it could lead to a massive downturn in U.S. stock and bond markets, causing significant economic disruption.