Trump's tariffs on goods may be a prelude to tariffs on money

This month, many investors feel dazed and confused. No wonder: as the U.S. government flirts with another shutdown and U.S. President Donald Trump intensifies his trade war, indices of economic uncertainty have skyrocketed above even the 2020 pandemic or the global financial crisis of 2008.

But the uncertainty could get worse. For amid all the tariff shocks, there is another question hovering: could Trump’s assault on free trade lead to attacks on free capital flows too? Might tariffs on goods be a prelude to tariffs on money?

Until recently, the notion would have seemed crazy. After all, most western economists have long seen capital inflows as a good thing for America, since they have helped to fund its US$36 trillion national debt and business. For instance, Elon Musk, Trump’s advisor, has benefited from Chinese investment, some of which is private.

But some maverick economists, such as Michael Pettis, have long dissented from this orthodox view. Pettis sees these capital inflows as not “just” the inevitable, and beneficial, corollary of America’s trade deficit, but as a debilitating curse. That is because inflows boost the dollar’s value, foster excessive financialisation and hollow out America’s industrial base, he says, meaning that “capital has become the tail that wags the dog of trade,” driving deficits.

Pettis wants curbs, like taxes, therefore. And six years ago, Democratic senator Tammy Baldwin and Josh Hawley, her Republican counterpart, issued a congressional bill, the Competitive Dollar for Jobs and Prosperity Act, which called for taxes on capital inflows and a United States Federal Reserve weak-dollar policy.

The bill seemed to die. But last month American Compass, a conservative think-tank close to