First they already receive something of value, which is our money.
No one forces them to sell their stuff for our money.
Nor does selling us $1 of goods entitle them to get anything above and beyond $1 of our money. They have already been paid with sufficient value.
Now they must spend that dollar in America somewhere. So they have a choice
a) buy some other good or service from America (trade is balanced)
b) buy some American asset like a bond, share of stock, etc. Then the trade deficit goes up by $1.
The world is choosing to do b). No one is forcing them to. The moment they stop doing b) and start doing a), the trade deficit will be balanced. The moment they sell their existing dollar investments and buy US goods, the trade deficit will reverse. It is their choice, not America's choice.
The input of the U.S. in influencing this choice is merely the setting of interest rates. By setting rates, they determine the overall returns obtained from option b). Thus they can make option b) more attractive by raising rates, and less attractive by lowering rates. But our rates are basically zero already. Does it appear to you that the U.S. is running high interest rates in order to attract foreign investment? No, we don't really take the trade deficit into account when setting rates, we focus on inflation.
Now we could take steps to change the regime and strongly discourage imports. This would be the equivalent of
a) taxing foreign investment, so that there is a wedge between the interest rate obtained by foreigners and our domestic policy rate for fighting inflation. At a high enough tax, the rest of the world will collectively want to pull their money out of America, sell their dollar assets, and then buy American goods to get out from under the tax.
b) Subsidizing domestic production. The problem here is that business will tend to pocket the money. Option A is the more efficient approach.
Option A also attacks our status as the global reserve currency - it's about time we stop being the gold standard for the rest of the world. All of these deficits are the result of us being burdened with reserve currency status, which on the one hand gives us a lot of power to punish other nations, but on the other hand destroys the domestic manufacturing base.
I look forward to the time when we are no longer the world's banker but merely any other nation that needs to run balanced trade. For that to happen, we need to make our assets unappealing to foreign purchasers.
And a rate of a trillion worth of goods per year will stop flowing into USA, that is the current trade deficit, you don't think that will cause some sort of crash?
Your explanation here is like saying "This isn't a bubble, people wanted to pay this much for stocks, if stocks don't deliver people will sell and prices goes down, that is how it should be!". That totally ignores the effect of the economy when that correction happens.
There is a lot of trickery you can do with economics, but other countries will protest sooner or later and stop sending things. I think the economy should take that into account or that crash will be horrible.
Many countries, including the US, have run trade deficits in the past for multiple decades and it's been fine. In those cases where it's not fine it's because the economy had nothing (or not enough) foreigners wanted, e.g. Russia in the late 90s.
Yes if your economy collapses for some reason you'll have a deficit problem, but in fact past deficits don't affect that. They don't matter because the deficit was already invested in domestic assets. Since those assets change in value as your economy changes, it nets out. The foreigners already invested their money in your economy and they suffer as you suffer. However the past deficit isn't going to cause any such collapse. There would have to be some other additional factor.
That's what history tells us actually happens, anyway.
A 1% tax would not cause a trillion worth of goods per year to stop flowing into the USA. Honestly, I think you are reacting too emotionally. The nice thing about a tax is it can be gradually increased to reduce foreign investment. There are actually many that have discussed taxes on foreign capital inflows, it's not some random idea I just cooked up.
>Your explanation here is like saying [crazy stuff]
No, it's nothing like that. If you have some substantive disagreement, let's here it over the doomsaying. Note, the real downside here is just somewhat higher equilibrium interest rates, which is why now is a great time to do this.
> crash will be horrible.
See above.
And no matter what finance trickery you do, fact is that USA will need to stop consuming so much. Your solution would lead to the same decrease in consumption, just with different means. And when that happens it will no longer be able to attract foreign workers as easily since American consumption is no longer privileged. And when that happens the domino effect will cause issues all over the economy.
