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Last month, a bill was submitted to the US Senate: the ‘Competitive Dollar for Jobs & Prosperity Act’. It aims to maintain a current account balancing price for the dollar within five years. In this article, Michael Pettis, Professor of Finance at Peking University’s Guanghua School of Management, argues that taxing capital inflows might be the only effective way to tackle trade imbalances other than imposing tariffs. However, Pettis highlights that the big risk with taxing capital inflows comes when there are capital shortages in the US. Overall Pettis considers that the recently proposed bill is a step in the right direction to address trade imbalances.
Why does this matter? The US has a persistent trade deficit and lawmakers have always sought to address this by way of trade tariffs, which are considered a far inferior tool than taxing the capital inflows.
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