This is one I'll disagree with, I think. 1/
Whenever we r presented with accounting identities, there is always controversy over causal stories. In this case, @NathanTankus suggests, I think, there r countries with propensity to save, others with a propensity to spend, and that this is the deep driver of CA imbalances. 2/
I don't think that's the best way to think about it. I think the US' apparent propensity to spend and the fact that the US issues a financial asset foreigners' find especially useful to hold for trade and insurance purposes is far from a coincidence. 3/
That domestic capital can be "exported" in exchange for foreign capital with no effect on the net balance is true, but uninteresting. 4/
The motivation for "capital account protectionism" — taxing (or subsidizing) foreigners' holdings of domestic currency and debt securities — is to adjust the net balance, one way or another. 5/
Changing the net balance implies changing the net propensity of transactors for the international exchanges that affect it. 6/
Those exchanges are driven both by the value of the real goods and services that flow and the value of the financial instruments that are offered in exchange. Changing either will alter propensities to transact. 7/
Taxing foreign holders of the financial media of exchange reduces the value of those media to the sellers. It's hard to explain how that would not, at the margin, discourage sales of real goods and services. 8/
There are devils in details. Obviously a tax that's evadable won't have much effect, for example. But the basic logic of taxing foreign holdings renders the most obvious avoidance scheme—resell to domestic holders—consistent with the objective. 9/
To evade the hot-potato, the seller of the capital must purchase real good and services from a domestic buyer. Any other transaction leaves the taxed capital in foreign hands, continuing to be taxed. 10/
Purchases of real goods and services by a foreign past seller from domestic supplier reverses the imbalance, as desired. 11/
But would the cost of using this sort of regulation, both because of the adjustment it is intended to provoke and due to unintended knock-on effects (like suppressing exchanges of capital), be severe disruption and recession if it was to be effective? 12/
One advantage of this sort of regulation is that tax rates can vary continuously. A country can tax foreign capital holdings incrementally, and observe the costs and adjustments. 13/
Another, political economy, advantage is that "capital account protectionism" substitutes for the traditional kind, — tariffs, quotas, etc. — which are more costly and disruptive to administer and which tend to be discriminatory, inflaming national passions. 14/
The financial system is fundamentally a regulatory system. That is what it is all about. 15/
Adding new regulatory and compliance objectives to financial security holdings does not interfere with the operation of finance, any more than a Federal agency adopting a new regulation interferes with its mission. 16/
Goods-and-services side protectionism means places economic producers directly in a compliance and lobbying role, a distraction from their core purpose. Tariff my competitors, give me a waiver for my suppliers. 17/
Capital account protectionism is nondiscriminatory across countries, and across categories of goods and services. It places the regulatory burden of managing the current account in a system fundamentally devoted to regulation—the financial system—abstracting it from producers.18/
It best meets its objectives while remaining entirely nondiscriminatory across trade partners, reducing the likelihood that countries' legitimate efforts to manage their overall balance turn into tribalized, nationalistic fights that threaten goodwill and world peace. /fin
