Overall but not bilateral balance

Talking trade, I find people I speak to like that I'm willing to call out the Trump administration as idiotic for trying to bring every bilateral trade relationship into balance.

But, sotto voce, my interlocutors often don't quite get how I can strongly favor a norm of balanced trade while mocking attempts to balance individual trade relationships. Isn't any country's overall trade deficit or surplus the sum of its "bilateral" balances with individual trade partners? Yes it is!

So if we want to drive the deficit or surplus to zero, doesn't that mean we have to drive each component toward zero? Absolutely not.

Why not? Because negative numbers exist.

Suppose we want to drive the sum x + y to zero.

One way we can do that is to let x and y be positive numbers, and try to make them as small as possible. Another approach is to let x be as big a positive number as we want, and to try to drive y towards negative x!

The second approach is what we want from trade.

Let's consider an example.

Let's imagine there are three countries, Industria, Ironia, and Oceania.

  • The Industrians produce manufactured goods, but they require a lot of iron ore.

  • The Ironians mine lots of iron ore, but they care very little for manufactured goods. They love, love, love sushi though.

  • Oceania has the world's preeminent fisheries, and they really want top-of-the-line trawlers and yachts.

So, the Industrians buy $100B of ore from Ironia. The Ironians buy $100B of fish from Oceania. The Oceanians buy $100B of boats from Industria.

None of the "bilateral" relationships among these countries are balanced:

  • The Industrians have a $100B trade deficit with Ironia! They buy iron ore, but sell nothing to those hippies.

  • The Ironians have a $100B trade deficit with Oceania! They buy fish, but the fisherman have no use for iron ore.

  • The Oceanians have a $100B trade deficit with Industria! They buy so many boats, but the Industrians break out in hives if they ingest even a nibble of seafood.

None of the bilateral relationships are balanced, but all three of these countries stand in "overall" balance!

By convention, we let surpluses be positive numbers and deficits be negative numbers:

  • Industria's deficit with Ironia is offset by a surplus with Oceania. Industria's trade account looks like
       +100 (Oceania) + -100 (Industria) = 0 (Balance!).

  • Ironia's deficit with Oceania is offset by a surplus with Industria. Ironia's trade account looks like
       +100 (Industria) + -100 (Oceania) = 0 (Balance!)

  • Oceania's deficit with Industria is offset by a surplus with Ironia. Oceania's trade account looks like
       +100 (Ironia) + -100 (Industria) = 0 (Balance!)

In the real world, of course, there are hundreds of countries, each one of which can have positive or negative balance with any trading partner.

There is only one way all those countries could be in universal bilateral balance. Each pair would have to buy exactly as much as it sells from each trading partner. This is the international-trade equivalent of barter, there can only be trade when and to the extent there is a "double coincidence of wants" between countries.

There are an infinite number of ways, however, that every country could be in overall balance while individual trade relationships are permitted to be arbitrarily positive or negative.

If we think of markets, at their best, as mechanisms that search for mutual gain, then a universal bilateral balance constraint leaves very little terrain to be searched.

A constraint of overall but not bilateral balance leaves an endless landscape for markets to explore. Even as it rules out an also endless, but I claim dangerous and usually undesirable, terrain of unbalanced overall trade.

Some nitpicks:

  1. I don't, in fact, argue that there should be an absolute and inviolable overall balance constraint. I claim that overall balance should be a norm, countries ought to seek to be near there. But any country's overall balance will never perfectly be zero. And occasionally countries will have good reason to deviate from balance. I don't claim we should forbid that. I claim we should insist that it be justified and limited in time and extent, on both sides of the imbalance. And that countries should have high quality tools they can unilaterally deploy to bring themselves out of overall deficit.

  2. I'm writing in terms of "trade balance", but more technically what I mean is "international balance" or "current account balance". The "trade balance" is sometimes taken to refer only to trade in goods. I'm including services as well in the trade we are trying to balance. And there are other, usually small, items besides trade that contribute to a country's "current account" balance, including net income from international investments, and transfers, like remittances from migrants to their home country.

draft by Steve Randy Waldman
2025-04-30 @ 08:15 PM EDT

How can taxing foreign investors balance trade?

I've been advising — for years but especially over the last few weeks — that countries should use capital controls rather than tariffs to bring their trade with the rest-of-the-world toward balance. In particular I advocate a tax on payouts (interest, dividends, capital gains) to foreign securities holders.

Chatting about this, a lot of people just don't "get it". Why would taxing foreigners' holdings of a country's stocks and bonds help to cure a trade deficit, where a country is importing more value than it exports?

People find it obvious why tariffs might help. Tariffs directly increase the cost of imports. This higher cost passes through, at least in part, to higher prices, reducing the quantity that domestic consumers buy, bringing the value of imports purchased down and closer to the value of exports sold.

But tariffs "help" indiscriminately, and can do a lot of harm rather than good. If trade is already balanced and a country imposes a tariff, it can bring trade with that country out of balance, as fewer goods are imported but exports are unaffected. If a country imposes tariffs and then its trading partners retaliate by doing the same, the effect on balance is indeterminate. But the overall result is a damaging tax on trade, even trade that would otherwise have been in perfect balance.

If we think (as I think) that balanced international trade is generally good — comparative advantage! — but that trade imbalance is dangerous, then tariffs are a crude treatment with terrible side effects. Yes, tariffs can cure the disease of imbalance, but often at the cost of eliminating gains from trade. If your wrist is bleeding, amputating at the elbow could cure that and save your life. It would be better, however, to deploy disinfectants and stitches and save your hand as well.

OK. So why would taxing foreign investors be better? Why would it address the problem at all?

Let's think through what happens when there's unbalanced trade. Let's say the United States purchases $2T worth of imports, but only sells $1T worth of exports. That means the US sends to rest-of-world a net one trillion dollars. (We sent $2T to them, they sent $1T back to us.)1

Rest-of-world has two things they can do with that trillion dollars. They can (1) purchase more goods and services from us, which would eliminate the trade imbalance. Or they can (2) park the dollars in US investments — Treasuries, stocks, bonds, bank deposits, whatever — to earn a market return on the difference.

Those are rest-of-world's only two choices! Our direct trading partner might spend the dollars on goods or investments from a third country, but then the third country — still part of rest-of-world! — faces the same two options.2

If the US taxes foreigners' investments, it reduces the attractiveness of option (2), and so increases the relative attractiveness of option (1). Rest-of-world will devote a greater share of its proceeds from exporting to the US to purchasing goods and services from the US, since its alternative, investing in US securities, is now a much worse deal.

You can also conceive of the effect as similar to a tariff. When foreign suppliers in aggregate set their prices, they do so assuming they'll earn a market return on the net proceeds of their sales. If part of that return is going to be taxed away, that will either eat into their profit margins, or else they will have to raise their prices to cover the tax, reducing US consumers' willingness to buy. Essentially, the dollars they receive are discounted dollars, only worth say 90¢ each, if they plan to hold them for a long period of time. But if they choose to use those dollars to buy US goods and services, that 90¢ of value converts back into a full dollar!

Unlike a tariff, the effect of the tax disappears entirely if trade is balanced. As long as rest-of-world buys as much from the US as it sells to the US, no US dollars have to get parked by foreigners in US investments. Conceptually, the US and rest-of-world exchanges goods for goods. No cross-border investments are provoked, no tax is paid.

Taxing foreign investors does nothing to discourage balanced trade. Even if every country in the world implemented this kind of tax, global comparative advantage could remain fully exploited to help the world prosper. David Ricardo's parable presumed balanced trade. Taxing foreign investment — a residuum of unbalanced trade — does not interfere with the mechanism at all.

Unbalanced trade always implies foreign investment, but not all foreign investment is a result of unbalanced trade. Taxing foreign investment has no effect on balanced trade, but it does have a different side effect. It would discourage cross-investment, where rest-of-world might buy US investments in exchange for Americans investing abroad.

This side effect is, for the most part, desirable. A tax is not a ban. Foreign cross-investment, motivated by investors' desire to diversify or their enthusiasm for particular projects, would still occur. But it would be less remunerative, and so occur less. That's for the best! The way you reconcile global capitalism with vigorous democracy is to ensure that ownership of domestic production is mostly domestic, and let the benefits of globalization take the form of gains from trade.

  1. I've used "United States" and "rest-of-world" to talk this through, but the reasoning does not depend on any sort of American exceptionalism. I initially wrote in terms of "home country" and "rest-of-world", but it seemed awkward. Investment taxes, unlike tariffs, compose. Every country in the world at risk of an undesirable trade deficit could impose this kind of tax, and it would cause no interference to balanced trade.

    ↩

  2. Holding the money in paper cash might be an option in theory, but not really. That would be taxing themselves of all investment returns they would otherwise earn, letting inflation eat away at their wealth, and bearing costs and risks to secure it. Unless investment is very heavily taxed, it will remain superior to cash. Another option would be to purchase rest-of-world securities from the United States. But that option quickly exhausts itself as US investors sell off the rest-of-world securities they are willing to sell at market value, then demand a premium that eventually comes to match the tax for distorting their desired investment portfolio.

    ↩
draft by Steve Randy Waldman
2025-04-27 @ 12:50 PM EDT

Balance as a norm

My previous two pieces — and probably more to come! — have argued in favor of reimposing a strong international norm of balanced trade.

My friend Steve Roth pointed me this morning to a piece by the always excellent Martin Sandbu, which argues the contrary, that the case for trade balance is overstated. I responded with a logorrheic BlueSky thread, which I reproduce for posterity below.

Where I think Sandbu and I agree is that there is nothing magic about the number zero. Many of the benefits attributed to balance can be achieved while running a modest surplus or a modest deficit. Enforcing balance as a never-to-be-violated constraint would be impossible and overly draconian. In any given year, nearly all economies will run at least a small surplus or deficit. Zero is an infinitessimal target.

But what I insist is that a norm of international balance is desirable. Most countries should be very near balance, especially over a several year cycle. The international trading system should encourage the use of tools on the capital side of their balance of payments by which countries can bring their own trade towards balance.

Countries should not resort to tariffs for this purpose. Tariffs may — or may not! — have some role to play with respect to industrial policy, but they are poorly suited to promoting balance. Tariffs discourage balanced and unbalanced trade indiscriminitely, where capital-side interventions can target imbalance directly. Tariffs are costly and complex to enforce, are perceived by trading partners as hostile, and are unusually susceptible to corruption. They are a poor tool, as we observe in real time.

But countries running large, persistent surpluses or deficits should be subject to a rebuttable presumption they are doing something wrong. We've collectively erred by tolerating and frankly encouraging persistent and growing imbalances in the trading system. I hope we survive the error.

The international trading system should be managed under a presumption that ownership of each country's productive capital is domestic, so that domestic governments are free to regulate, rather than forced to cede control to investor-protection mechanisms enshrined in treaties and managed by technocrats whose interests may be at variance with domestic publics'. In a world of balanced trade, a presumption of domestic ownership can mostly be true. In a world of unbalanced trade, it cannot be.

Anyway, what follows is my long BlueSky thread, "rolled-up" and lightly edited, and then a few paragraphs of extra commentary:

I agree with @martinsandbu.ft.com on the jobs case! Manufacturing (like production in general) is not a jobs program. The wealthier we get, the more paid work will migrate to services we value for very human-specific reasons, relationships, care, trust, insight, just the pleasure of interaction.

But I think Sandbu was a bit slippery in migrating from the general case to the weaker jobs case. What we want from manufacturing is not jobs, but capabilities: “We” need to be capable of making and doing things, and the only way to build and sustain and improve that kind of capacity is doing.

Why do “we” need to be capable of doing these things? The obvious shut-down-conversation case is “national security”, but the broader cases are national resilience and technological capability. The last but not least case is conflict avoidance.

The traditional liberal case that interdependence breeds peace has failed spectacularly and famously over and over. Today we live in an era of @himself.bsky.social’s and @abenewman.bsky.social's "weaponized interdependence".

Peace is better served by reducing the vital-national-interest-ness of cross-border entanglements than by magnifying those and hoping the cost of breaking anything overwhelms inevitable strife.

And all of this is before we consider the financial side of unbalanced trade. The US has been a bit of a special case, pre-now, because of the centrality of the dollar and the apparently inexhaustible willingness of trading partners to hold USD assets, even through weakening-dollar periods.

But trade imbalance often presages financial crises, both domestic and international. Or sometimes orderly devaluations. But the more market participants anticipate devaluations, shockingly, the less there is actual trade imbalance. The anticipation disciplines the trade.

The last bit worth considering is who “we” are in this story. Must it be a nation-state? Is the EU one “we” or many countries? Why can Florida run a persistent trade deficit with other states? (I imagine it does, not sure.) Why was that a bigger problem for Greece?

I think the answers here have to be textured. For resilience and national security, “friendshoring” might be sufficient. Indeed, from a resilience perspective, you want to diversify across domestic and foreign supply, as well as among different foreign suppliers.

As @martinsandbu.ft.com suggests in the piece and in a reply, there’s nothing special about balance, the arbitrary zero point, for national security or resilience. Unbalanced friendshoring may be fine, with sufficiently reliable friends.

But to say there’s nothing special about zero doesn’t mean it’s fine to stray arbitrarily negative for indefinite periods of time. If you are going for resilience by diversification, you do want a meaningful domestic component to your portfolio. Too negative too long and you’ll lose that.

The main, most important thing (for a large, diversified economy with geopolitical pretensions) is to maintain generalized capacity, or “metacapacity”, and that requires substantial, continuous doing and improving of things in the world you value and rely upon.

(Hypothetically a trade deficit country whose paper is coveted abroad could use its fiscal flexibility to run a kind of noncommercial industrial university system, maintaining, building, innovating capabilities that could be scaled up should terms of trade shift. Whether this could “work” without the feedback of market discipline is, I think, an open question, but it’d obviously be hard to get right, and hard politically to sustain.)

The place where that zero point of balance is not in fact arbitrary is the financial side.

“Friendshoring” might assist with resilience and national security with sufficiently good friends, but durably unbalanced trade means someone is accumulating promises from a “friend” whose economy may be shifting from the tradables that might repay them.

Again, quantities matter. A country can run a small deficit relative to its growth indefinitely, and the potential burden of accumulated promises will remain modest. Even on the finance side, the zero point isn’t magic, we shouldn’t make a fetish of it.

But if the scale of accumulated promises is growing relative to the deficit economy, that’s going to yield problems if it continues indefinitely, perhaps even do damage to that “friend” assumption in friendshoring.

That’s why I think the “we” ultimately has to be defined by fiscal union. Florida can run its deficits, because we gradually and as a matter of course redistribute to fill in the holes in net worth it would otherwise yield.

("We" in that last meaning other states, the rest of the fiscal union including surplus states.)

The EU can become more relaxed about its internal trade balances if it builds up similar redistributive and mutual insurance mechanisms between states.

If we end up with some persistent deficit countries, but with deficits small enough to be overwhelmed by growth, that’s fine.

But letting zero be the normative attractor serves that cause of “small enough to be overwhelmed by growth”.

Without that norm, we find ourselves untethered, making excuses, eventually in crises — internally due to lost capability, and externally due to accumulating promises that will become one party’s terrible burden or another party’s unfair loss.

Addendum: I want to be very clear that I think Trump’s tariffs are hideously stupid, even though overall balance is a thing the US legitimately should work toward.

I’d propose a foreign payouts tax to help us grope towards balance.

That's it for my thread! A few more comments...

Sandbu suggests

the current level of the US current account — just over 3 per cent of GDP — should not be unsustainable for an economy that can count on nominal growth of 4 per cent over the long term and enjoys global reserve currency status (if it can keep it).

I think this is a lot too sanguine. GDP may not be the right denominator. We want to compare the current account deficit against a measure of the economy's capacity to produce tradables. The US current account deficit is now more than a third of its total exports. Maybe that would be okay if we were sure this fraction would be stable. But since 2014, exports have been growing more slowly than GDP. It seems worthwhile to remedy that going forward.

Sandbu is correct that, by any measure, the US current account deficit was larger during the mid-aughts. In those days, optimists could console themselves with "dark matter", a name given to the discrepancy between the US' very large current account deficit and its stable NIIP ("net international investment position").

Unfortunately, that stability has disappeared in the intervening years. The US NIIP has deteriorated sharply whether measured in absolute terms, as a fraction of GDP, or as a fraction of exports.

This "deterioration" is due in part to the US' persistent current account deficit, but also due to what seemed like good news for America. Since the financial crisis, US assets (and so US assets in foreigners' hands) outperformed foreign assets (and so foreign assets in US hands), causing the net value of assets foreigners hold to grow even faster than the growth suggested by the assets they receive from unbalanced trade. Call this "dark antimatter"!

Whether due to good news or bad, the value foreign holders expect their US asset holdings to deliver has been growing, much much faster than the US tradables economy or the US economy writ large. The probability of disappointing those who've placed a high value on US promises, one way or another, is likely also growing.

We are faced with the fundamental financial-side cost of international imbalance. If a country's persistent current account deficits are not corrected by other means, they will eventually be corrected by some kind of disappointment of foreign assetholders. Those episodes of disappointment can be quite dangerous, to the deficit country, to the human race.

We are in a rather terrifying moment. The right thing to do would be to bring leaders of goodwill together in something like a new Bretton Woods conference, to agree upon a fair path back toward balance that minimizes disruption and supports the growth of all parties.

I wish I had more faith in our current leadership.

draft by Steve Randy Waldman
2025-04-24 @ 06:30 PM EDT

Keynesian compromise

In 2000, Dani Rodrik proposed the "political trilemma of the world economy":

Rodrik argued that the world would have to choose only two out of three between "international economic integration, the nation-state, and mass politics". By mass politics, Rodrik means meaningful and effective democratic control.

We can choose economic integration and mass politics, if we give up political control at the nation-state level. Rodrik calls this "global federalism", effectively global governance in the mold of the United States. Subsidiary states still exist and matter to a degree. But regulation of interstate commerce gets hoovered to the highest level. And in an interconnected world, nearly all commerce, nearly all production and consumption, must be regulated as interstate commerce. Even transactions that are purely local are conditioned by and in turn affect larger markets.

We can choose economic integration and preservation of distinct nation-states, if we give up on meaningful democracy. Under this scenario, which Rodrik — after Thomas Friedman — calls the "golden straitjacket", distinct nation-states continue to exist, but international markets impose ever increasing constraints on their political choices. In Margaret Thatcher's infamous words "There Is No Alternative" to a narrow range of policies, if a country is to participate and compete successfully in global markets. In order to prevent catastrophe, nation-states become compelled to remove ever larger swathes of policy out from democratic contestation, into the remit of unaccountable technocracies like central banks and treaty organzations. As former German finance minister Wolfgang Schäuble famously put it, "Elections cannot be allowed to change economic policy."

Finally, we can choose the nation-state and meaningful democracy, if we give up economic integration. Each nation-state can captain its own ship, regulate its own affairs if those affairs are neither subject to constraints from, nor responsible for dangerous spillovers to, highly integrated trading partners.

Rodrik called this last choice "Bretton Woods compromise", which is a clue that his trilemma is maybe a bit less sharply drawn than "pick two out of three". Economic choices are rarely binary. "International economic integration" is an umbrella term for many dimensions of policy, most of which are subject to lots of choices between all or none. Imports can be forbidden, or they can be permitted with tariffs. In the latter case, very high tariff rates would correspond to isolation, very low rates would be consistent with integration, and levels in between embody a kind of compromise. The postwar Bretton-Woods-era, as Rodrik describes it, was a pick-two-and-a-half out of three scenario. The period from 1945 until the early 1970s was a period of extensive and growing world trade. But it was also a period of fixed exchange rates, capital controls, and insulation of certain industries from global competition by tariff.

Rodrik, writing in optimistic Y2K, predicted eventually we'd find our way to global federalism, under which the whole world could enjoy the prosperity that universal trade and specialization might bring, while an enfranchised global public could ensure that this fantastic global market would remain embedded in society rather than become a monster lording over it. To his credit, he did not predict this would happen very soon, and suggested that twenty years from when he wrote, financial crises might force the world into a "golden straitjacket", or else backlash might provoke global disintegration via a protectionist backlash. Twenty five years later, we can observe that both of these predictions came true, one in quick succession to the other.

And so here we are. The place where we are would have been familiar to John Maynard Keynes. Like those of us of a certain age, he grew up in an era when economic liberalization and trade seemed poised to deliver remarkable prosperity, only to watch it all give way to war and protectionism.

I want to rescue "nation-state ⇔ mass politics" side of the Rodrik's triangle from the historical particulars of Bretton Woods, both the conference and the institutions it wrought. So I'm going to refer to this really two-and-a-half out of three arrangement, with nation-states, meaningful democratic politics, and moderate rather than complete economic integration, as the "Keynesian compromise".

In 1933, Keynes had drawn the lesson that

Ideas, knowledge, science, hospitality, travel these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.

However, by 1944, the system Keynes helped architect at Bretton Woods, and even the system he had more idealistically proposed previously, were quite open to foreign trade. The Bretton Woods order, at its inception at least, did retain some of Keynes' earlier skepticism of globalized finance. Capital controls were explicitly permitted, and countries were permitted to modify their otherwise fixed exchange rates to redress unbalanced trade.

To redress unbalanced trade. That was the fundamental work of the Bretton Woods order, of the Keynesian compromise. Keynes lived from 1883 to 1946, and to me the takeaway from that period of time, and from Keynes' interventions into international economics, is a kind of biohazard symbol, something very creepy. Call it "Econohazard". Affix it to a box secured with seven seals, cabining imbalance of trade, along with international indebtedness by other means.

Trade is supposed to be win-win. Both parties benefit. But persistently unbalanced trade has this strange effect of turning parties on both sides of the imbalance into self-perceived losers, into victims.

Surplus countries — think Germany with respect to Greece during the 2010s Eurocrisis — perceive themselves as prudent and generous, as innocents betrayed and sinned against when, inevitably, deficit countries suffer crises, and seek to devalue or default upon obligations that surplus countries accumulated in exchange for laboriously produced goods and services.

Deficit countries perceive themselves as having been led down a primrose path by eager sellers, then drained of both their financial net worth and their vigor. They are left emasculated, enervated, bereft of lost ability and capability to compete. Angry.

Both parties have a point. But then, of both parties, it is rather an infantile point. No one forces a trade surplus country to sell goods and services for potentially dodgy financial claims. No one forces a trade deficit country to borrow, or to tolerate borrowing by its public, in order to import goods and services.

No one forces these things. But countries may have been, if not forced, then strongly encouraged, to overlook imbalance by Rodrik's "golden handcuffs" regime, under which the price of economic integration becomes accepting free flows of both goods and capital. In my view, after the world abandoned Bretton Woods, it drifted toward an order — pick your pejorative, "neoliberal", "Washington Consensus" — that effectively required countries to abstain from tools by which they might have enforced trade balance.

It is perhaps ironic, perhaps you think it poetic justice, that the country usually seen as cheerleader of this consensus is now blowing up its own economy and hegemony via less-than-deliberate reaction to the consequences of what it advocated. The American partisan I still harbor will object and point out that the architects of the EU were every bit as blind and foolish. One thing you can say for Western elites on both sides of the Atlantic during this period from, say, 1983 until quite recently, is they were sincere in their error. The medicine they prescribed to the global South they also guzzled down themselves. As Nayib Bukele might say, "Oopsie..."

Here is the United States' balance of payments as a share of GDP, from the end of World War II to the present.

Despite the fact that, at the end of the war, the US was the only major industrial power whose factories had not been largely destroyed, by 1950, the US balance of payments is in balance, and it remains in rough balance through the early 1980s. Most of that period was good, economically, for the United States, and for its major trade partners. The institutions of the original "Bretton Woods compromise" are broken between 1971 and 1973 but the US endures and escapes its 1970s inflation while maintaining rough international balance.

One apology for neoliberal insouciance toward balance of payments is that unbalanced trade helped bring forth the greatest economic miracle in human history, the sudden, sharp rise of a billion plus Chinese out from acute poverty. Perhaps, but it's worth pointing out that Europe and Japan circa 1945 had become very poor, and their redevelopment from the ashes of war into prosperous social democracies did not require huge imbalances with trading partners. History is only run once. But it is not obvious that China could not have developed and succeeded with its market reforms in a world of balanced trade. If it had, the developed world that it joined might be more stable and peaceful than the one in which it finds itself now.

Perhaps Dani Rodrik was right back in Y2K, and by 2100, we'll all enjoy democratic enfranchisement in a prosperous, stable United Federation of Planet Earth. But for now, it seems to me the place that we want to go is back to Keynesian compromise, where we get two and a half out of Rodrik's three desiderata: nation-states, meaningful democracy, and economic integration.

It's that last bit, economic integration, that we only get half of. With Keynes, I say that the half we leave behind is cross-border finance. What we want is free but balanced trade. Tariffs are a tool poorly targeted to encouraging balance. Tariffs tax all trade, not just unbalanced trade. If instead you tax foreign payouts from securities, or otherwise deter cross-border accumulation of obligations, you can specifically disfavor imbalance.

If you insist upon balance and disfavor cross-border ownership, you restore scope for meaningful economic democracy, Rodrik's "mass politics". The neoliberal free-trade regime eroded democratic prerogatives primarily through its obsession with "non-tariff barriers". All kinds of government actions can affect trade or devalue foreigners' investments. Banning a dangerous chemical might constitute an "expropriation" from the multinational that manufactures it. An anti-smoking law might discourage imports and sales of Marlboros. "Sweatshop labor" is a non-tariff barrier from the perspective of nation-states that wish to offer strong labor protections. Joe Weisenthal points out, jokingly but accurately, that Europe's narrow streets disfavor US monster truck exports.

When countries compete mercantilistically for surpluses, non-tariff barriers are a big problem. The Trump administration's apocalyptic, now withdrawn, "reciprocal tariffs" were motivated in large part by accusations that bilateral surplus countries were "cheating" the US via non-tariff barriers. But under an overall balance constraint, to whatever degree non-tariff barriers discourage imports to a country, they also foreclose the possibility of exports. A country's regulatory environment can shape whether it is more or less integrated in world trade, but cannot be used drain other countries of tradables demand or to accumulate foreign financial claims.

If cross-border ownership is discouraged, multinational brands will prefer to license per-country franchises rather than directly hold property or plant. Then whatever "expropriation" is embedded in a regulatory change becomes a domestic political matter rather than predation of unfairly disenfranchised foreign concerns.

Of course, discouraging imbalance will not (and should not) yield perfect balance at all times. A trading regime that generally disfavors cross-border ownership doesn't mean it won't make sense sometimes for foreign owners to accept a penalty and invest directly, or for countries sometimes to seek and so affirmatively encourage foreign direct investment.

But it's the norms of the trading regime that matter. If our aspiration is a world in which capital is mobile and international ownership is the norm, then mechanisms like ISDS make sense. If we seek a world in which ownership is generally domestic, then they do not. If countries have the tools to unilaterally prevent trade deficits and a global consensus encourages balance, then running a deficit or surplus becomes an exception that demands justification. This sharply contrasts with the fading neoliberal view, under which imbalance reflects putatively optimal market outcomes, which deserve deference.

In my view, we are at the tail end of a half-century mistake. The Keynesian compromise — free trade, but subject to a balance constraint — was wise. We should return to it. If possible, we should rebuild it on an infrastructure of norms and tools that nation-states can unilaterally deploy to enforce those norms, rather than rely upon supranational institutions.

draft by Steve Randy Waldman
2025-04-20 @ 07:30 PM EDT

If we weren't idiots, Balance of Payments edition

Tomorrow is "liberation day" when Donald Trump is supposed to unveil a catastrophic slate of tariffs, layered on top of the belligerent tariffs he has imposed already on Canada and Mexico. Of course, you never know, because Trump's de facto policy is always policy uncertainty.

Trump's tariffs are stupid. Singling out and discriminating against particular countries is worse than stupid. It rips opens the demon seal of national grievance, from which wars and end times may emerge. The whole American political class is guilty of this sin with respect to China. But Trump takes it to another level. He takes such pleasure in the pettiest application of gratuitous insult. (Canada? Really?)

Trump's tariffs, and tariffs in most (but not quite all) cases, are stupid. Worrying about bilateral trade balances is stupid.1

But worrying about ones overall balance of trade is not stupid. It is necessary. Here is where the inchoate tendencies jockeying behind Donald Trump do have a point. The US policy establishment has pretended that the international balance of payments doesn't matter. Or that even if it does matter, it derives from a deep, mysterious imbalance of humors in the American temperament. We insist upon investing much more than we save due to predillections impervious to price or to policy.

All of that is bullshit. A country's balance of payments matters, and is a legitimate and necessary objective of a country's economic policy. As Michael Pettis often emphasizes, a current account deficit is a drag on domestic demand, which then requires a fiscal offset to sustain full employment. A capital account surplus, the obverse and equivalent of a current account deficit, implies an ever growing pile of promises to foreign investors and creditors. Honoring those promises may impose constraints on policy that ultimately harm domestic constituencies. Dishonoring those promises is dishonorable, leaves a nation's reputation in tatters, provokes international strife.

There are good reasons, sometimes, for countries to run large current account deficits. There are good reasons, sometimes, for countries to behave mercantilistically, and seek large current account surpluses. But most of the time, under most circumstances, a country's trade should be reasonably close to balanced. Balanced trade composes: every country can pursue it all at once without suspending the laws of arithmetic. Deviations should be just that — limited and temporary, undertaken for coherent and well understood purposes. They should be offset by international partners who have good reasons to take the other side of the flow, rather than showing up like some kind of emergent shruggie and continuing indefinitely.

So if, as I claim, international balance-of-payment is a necessary object of policy, and current-account deficit countries like the United States should pursue reversion toward balance, why am I so mean to Donald Trump? Why aren't tariffs the greatest word in the English language?

Because tariffs are a stupid way to pursue balance. They interfere with trade on the real side of the ledger, rather than on the regulatory side of the ledger, which is finance. They require enormous infrastructures in customs inspections, and enforcement of weird, fine-grained categorizations of goods. They hold up physical processes. They penalize balanced as much as imbalanced trade. They are often imposed in hostile, country-discriminatory ways. They invite corruption by favor or waiver. There are much better policy instruments.

If we weren't idiots, we would normalize policy of the following form:

  1. Ownership of every financial claim issued by a country's government, firms, or citizens would be categorized as "foreign" or "domestic". Maintaining this categorization, based on beneficial ownership, would be a role of financial institutions, which are, among other things, privatized functionaries of the regulatory state. Countries would either require disclosure of beneficial ownership information by any party that wishes to hold legally enforceable financial claims, or else assume holders are foreign if beneficial ownership is not disclosed.

  2. All payouts to foreign claimants, whether interest or dividends or capital gains, would be subject to a tax that domestic claimants would not pay. The level of this tax would be a policy variable by which a desired international balance can be effected.

That's it! It's not so hard! It's a regime that doesn't perniciously discriminate between nations, industries, or importers. It's an approach that international organizations could normalize, that states could cooperate to enforce.

Unlike a tariff, a foreign-payout tax imposes no cost on balanced trade. It taxes only imbalance. If a country is running an undesirably large current account deficit, it can incrementally raise the tax rate, making it less remunerative for trade partners to hold financial claims as payment for unbalanced trade. No trading partner is singled out, no containers are held for inspection, no fuss, no muss, no hurt feelings. There's just a tax of financial instruments, which raises revenue and supports what should be universally recognized as a legitimate national interest.

I can't claim this suggestion is particularly novel. The aforementioned Pettis, along with partner-in-crime Matthew Klein, sometimes proposes similar solutions. I've long described these ideas as "capital account protectionism". Like most good policy ideas, this constellation of proposals lies strewn among blog posts and whitepapers, discussed for a moment and then abandoned.

The neglect has left real problems unaddressed and unaddressable. Now we get to watch Donald Trump blow up the world under pretext of filling the void.

When, someday, civilization re-emerges from the radioactive muck, let's, maybe, just try this?

Note: This piece is published April 1, only because April 2 is Trump's "liberation day". It is very much meant in earnest.

  1. Worrying about trade deficits, bilateral or otherwise, is distinct from worrying about the diversity and resilience of sourcing for important goods and services. The latter should always be an object of policy.

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draft by Steve Randy Waldman
2025-04-01 @ 12:30 PM EDT