Rebalancing Trade in a Fragmented International Order

This article was previously published as part of The Reconstruction Papers. The entire book is available in print and as a PDF.

1. Introduction

On April 2, 2025, the world celebrated Donald J. Trump’s “liberation day.” Trump imposed “reciprocal” tariffs at rather extraordinary rates. The tiny, impoverished African nation of Lesotho had it coming and was slapped with 50 percent tariffs.¹ It was a matter of mere reciprocity, only fair, to impose 10 percent tariffs on the Heard and McDonald islands. The penguins, who are the islands’ main inhabitants, import nothing, nothing, from the USA.² This must surely reflect trade barriers or currency manipulation on their part. Those bastards are suppressing the value of the krill!

Catastrophic policy has rarely been imposed with such amusing malignity. No one could have predicted this. But we could have, and should have, predicted that there would eventually be a political reaction in a country that had for decades accepted the role of “consumer of last resort,” that had seen a once-magnificent manufacturing base “offshored,” even as finance and property speculation replaced industry as the path to affluence for the ambitious, as indebtedness deepened and inequality grew. Donald Trump in his inimitable particulars could not have been foreseen, but the American polity’s thirst for the brand of resentment he peddles was a predictable result of a country running large trade deficits, for no publicly legible purpose and with no end in sight.

The case for free trade is sometimes—rightly!—described as the crown jewel of economics. The core insight of the discipline is that specialization and trade make everybody better off. But David Ricardo’s case for free trade, the logic of what we now call comparative advantage, is based on trade of current goods and services. The exchange of goods and services for promises, for debt, is something else entirely.

It is not uncommon for trades that are voluntary, and so apparently mutually beneficial ex ante, to lead to mutual ruin ex post when debt is involved. We jeopardize our crown jewel, and with it our collective prosperity, when in our zeal for free trade we pretend a promise is just another good like cloth or wine. It is not. Trades of goods for debt are complicated. If we want to preserve and expand free trade, we need to understand, scrutinize, and regulate unbalanced trade.

John Maynard Keynes viewed chronic trade imbalance, and the international indebtedness it engenders, as a kind of original sin in world affairs. Keynes famously offered a solution³ in the form of an International Clearing Union (ICU), which would issue bancor, a global currency that would be exchanged among central banks.

Although Keynes protests that by forming his union “no greater surrender [of sovereign rights] is required than in any commercial treaty,” it is clear that the intended result is a supranational organization capable of regulating, and in turn meaningfully disciplining, member states. Keynes suggested the United Kingdom, the United States, and the Soviet Union, “if she can be a party to so capitalist-looking an institution,” as the ICU’s founding members. In other words, it was to be founded by the victorious powers at the termination of the greatest and most destructive conflict in world history. These were conditions under which, despite notional appeals to voluntarism, the sway of hegemony could be relied on to help settle affairs. For worse and for better, our situation is very different today.

I will propose, as a solution more suited to our times, a Foreign Payouts Tax. This would be an instrument any state would be at liberty to avail itself of under the norms of international trade. It would be an adjustable tax on payouts from financial securities (interest, dividends, and capital gains) whose beneficial owner is not a resident of the state whose entity issued the securities. A tax of this form, I will argue, is an instrument that is precisely targeted to a narrow problem (chronic trade imbalance), whose use by individual nations composes to a globally sustainable equilibrium (trade generally balanced, except where for intelligible reasons temporary deviations from balance are desirable), and that is incentive compatible (the states that would resort to it are those that would help bring the whole system to an equilibrium by using it).

Importantly, the Foreign Payouts Tax is proposed as an international norm. It would be an instrument available to all states that would be equitably applied to all nondomestic holders. This is in contrast to superficially similar proposals—for example, Stephen Miran’s,⁴ under which imposition of “user fees” on securities holdings would be the privilege of a financial hegemon and could be applied in a discriminatory manner, distinguishing friends from foes and favoring the former. The Foreign Payouts Tax is crafted not as a tool in zero-sum conflict and competition among states but as a means of promoting mutually beneficial trade on equitable and durable terms. I’ll briefly compare the Foreign Payouts Tax to Miran’s proposal and other related tax policies.

A Foreign Payouts Tax would be an arcane policy, the province of tax accountants, corporate treasurers, and international economists. It wouldn’t make for very engaging content among pundits and podcasters.

Nevertheless, the problem it quietly addresses sits beneath many of the calamities that we do shout about: asset price booms and financialization, inaccessible housing prices, yawning gaps between rich and poor, resentment of foreigners and foreign countries. All of these phenomena can be explained, at least in part, as downstream from chronic trade deficits.

Arcane, subtle, and technical though it may be, a Foreign Payouts Tax might help undergird a world that would be a bit more sane and a bit more stable than the one we now inhabit, a world in which we could enjoy the shouting matches of pundits and podcasters without fearing all the sound and fury might signify the end of everything.

2. Trade should mostly balance

International trade should in general be balanced.

“In general” does not mean everywhere and always. There are times when some nations should in fact run a trade surplus or a trade deficit, but for limited periods of times and plainly cognizable reasons. Perpetual or indefinite trade imbalance is a pathology that eventually yields conflict among states and fascism within them.

Arguments on this subject often go deep into the weeds of economic technicalities. They should not. Certain stylized facts are obvious.

Polities dislike trade deficits

Running trade deficits can inspire consumption booms and bursts of GDP growth, a “good economy” in the immediate term. Despite that, when treated as a political question, such long-standing deficits are generally looked upon unfavorably. Just as our decision not to purchase a bag of potato chips should be respected as our actual preference in place of a “revealed preference” to eat the chips if someone puts an open bag on the table, we should accept collective preferences durably expressed at a political level as those we should seek to fulfill, absent very strong reason to do otherwise. Since polities dislike running trade deficits, they should be able to opt out of the circumstances that yield undesirable trade, just as we all should be able to opt out of in-home minibars overflowing with Lay’s and Pringles.

Polities do in fact have economically cognizable reasons to detest trade deficits.

Indefinite indebtedness is undesirable

It is, of course, bad to have a continually growing pile of debt, with no foreseeable means of generating income by which to repay or even fully service it. While it’s true that running trade deficits involves the receipt of real resources in exchange for mere spreadsheet entries,⁵ the latter represents promises, obligations.

Yes, at a contractual and mechanical level, an issuer of own-currency debt in exchange for external goods and services has the option to devalue the debts away. That is a form of default that invites hostility. Polities should attend to their capacity for tradables production relative to external indebtedness in order to ensure their debts can be serviced or redeemed in order to avoid recrimination, conflict, and the very long-term consequences that can ensue.

Trade deficits distort production

Trade deficits provoke shifts in domestic production and distribution that polities often wisely find undesirable. Production is shifted toward services and real estate rather than domestic goods production. Incomes shift toward finance and asset holders, away from current labor, as service provision tends to be lower complexity and less capable of recruiting and sustaining market power than goods production.

On a forward-looking basis, the distributional case for tradables manufacturing is indeed weakening due to automation. All roads favor capital, absent state intervention.

However, even looking through the lens of distribution, an economy’s productive capacity comes to specialize away from the production of tradable goods that would be essential should the country’s terms of trade shift, and may well be critical to national security. The capacity to produce these goods atrophies, even as debts that may eventually need to be serviced in net exports to prevent currency devaluation grow indefinitely.

Capabilities are ultimately more valuable than current goods and services. Acquiescing to persistent trade deficit means tacitly adopting an industrial policy no sane leadership would otherwise choose.

Trade deficits drain demand, encouraging expansion of public debt

Trade deficits are a drain on domestic demand, rendering full employment difficult to sustain unless the state runs persistent fiscal deficits.

Fiscal deficits, like trade deficits, are not always bad, but they do have to be managed. Failure to do so results in growing inequality⁶ of wealth and, more perniciously, of insurance against economic downturn, as holders of Treasuries do not bear the losses they would have had to bear had their wealth been stored in risky assets.

Poorly managed fiscal deficits may leave governments with no choice but to accept destructive inflation, politically impossible levels of wealth and income taxation, or interest rates that further exacerbate distributional conflict.

Trade deficits undesirably constrain management of fiscal deficits by forcing states to run deficits to offset demand leaked to foreign producers.

Trade deficits drain demand, encouraging asset booms, private borrowing, and inequality

Since fiscal-deficit and public-debt expansion makes governments uncomfortable, policymakers facing deficient demand often seek to supplement it by creating a regulatory environment tolerant of financial “innovation” and by running loose monetary policy, in order to encourage asset booms and expanded private borrowing.

This feels great, at first. Despite the growing indebtedness that is the counterpart of the trade deficit, domestic balance sheets seem to net-improve, because booming assets can reprice faster than debt accumulates. Markets are efficient and asset prices represent real wealth, boosters will say, so the growing debt is no problem. It’s only financing our growing wealth.

But at best, rising private-asset values exacerbate inequality. The already rich own most of the appreciating assets, and therefore grow much richer much faster than people with few or no claims to them.

Over time this approach comes to feel less and less great. Increased private indebtedness, collateralized by elevated asset prices, becomes difficult for consumers and businesses to service. But if overall indebtedness (private and public) ceases to expand, asset prices may fall. Any kind of slowdown risks pairing loans that prove unpayable with a collapse of loan collateral value, blowing holes in lenders’ balance sheets. The name we give to this state of affairs is financial crisis.

To prevent this, policymakers and business elites may seek to ensure that high asset prices are supported by “fundamentals,” i.e, cash flows. But the cash flows that support stock prices are business profits, and swelling business profits put the squeeze on consumers. The cash flows that support real-estate assets are high rents and expensive home prices. Strategies to buttress asset prices include accommodating consolidation of industries to increase firms’ pricing power and “NIMBY-ism” to prevent home-price declines. Policymakers find they’ve created an affordability crisis in order to stave off the financial crisis. They will have made their polity poorer in real terms by limiting business competition and strangling housing growth.

In the end, they find they must either accede to financial crisis, which will compel them to issue public debt to make creditors (“savers”) whole, or forestall the crisis by increasing public deficits after all, continually replacing fragile private indebtedness with more resilient public indebtedness.

Eventually the burden of sustaining demand despite a trade deficit falls on the state’s balance sheet after all, if the balance sheet can support it. It falls on the public as sudden impoverishment, if the balance sheet cannot.

When the state is able to stabilize the economy, whether by continually expanding the public debt to stabilize burgeoning asset prices or by intervening during a crisis to bail out creditors, the inequality engendered by gearing demand to asset-price growth is cemented in place by state action. To the policy community, an impoverishment of affluent communities—from which they themselves disproportionately hail, to which their friends and peers belong—is the very definition of failure. The risky, once-booming assets that made a small part of the public so much richer than the rest will be replaced on private balance sheets by safe state debt, via deposit insurance and recapitalization of lenders, and supported by new state spending, which may include stimulus of businesses and subsidies to home buyers.

Trade deficits encourage a politics of resentment

Citizens of trade-deficit countries frequently come to equate the straightforward and predictable economic effects of specialization away from tradables with the idea of other countries stealing industries, jobs, economic vitality. This sets the stage for backlash, conflict, even fascism: “We set down our hammers, closed our factories, imported plushies, coddled our children, let our boys decide to be girls since there was nothing left for men to build. Now we must be men and take back control!”

Policy that shapes polities into an active and admirable self-understanding, that promotes international harmony rather than conflict and liberality rather than intolerance, is intrinsically superior to the alternative.

If polities tend to dislike trade deficits for valid reasons, they also tend to like surpluses for mirror images of those same reasons.

Increasing financial wealth is desirable

Under a trade surplus, a country gets rich in financial terms. Its businesses pile up financial securities that amount to money. Just as firms are eager to sell even though selling involves exchanging real goods and services for mere spreadsheet entries, as long as people remain confident in the value of the spreadsheet entries, they often prefer them to the goods and services they produce.

Of course, while a deficit country risks being forced to eventually devalue, a surplus country risks the devaluation of the securities it holds as money. But as the entire history of banking attests, if securities stay sufficiently money-like, decades of reliable use in payments and as a store of value can make even the most inevitable solvency crises seem absurd and theoretical until the moment they actually occur.

When crises do happen, surplus countries almost never take responsibility for having made the mistake of accepting foreseeably shoddy debt in payment for their exports. They blame debtor countries for shirking their obligations, and they use whatever coercive means are at their disposal to immiserate debtors in hopes of recovering the original value of the debt, or to just punish the debtor if recovery is not possible. The arrangement has no winner and loser. It is negative-sum.

Trade surpluses distort production, too, but in ways that enhance resilience and capability

Surplus-country production shifts away from services and real estate and toward tradable goods and industry.

In geopolitical terms, this is desirable. Military production is complementary to tradables manufacturing. Should terms of trade shift, a surplus country may suffer from overcapacity, which puts financial stress on businesses but creates no deficiencies or shortages of real goods and services.

It is better to have financial problems that the state can overcome by writing checks than to lack physical resources the state’s checks may prove incapable of purchasing. Overcapacity implies capacity: Surplus countries tend to be active in many industries and therefore capable of effectively acting and adapting to changes.

In distributional terms, historically surplus countries enjoyed the widely dispersed middle-class incomes that used to accompany tradables manufacture. But on a forward-looking basis (and e.g., in China today), specializing in tradables is unlikely to fully address the distributional problems that stem from contemporary capitalism.

Trade surpluses augment demand, permitting full employment without debt expansion (public or private) and asset booms

Trade surpluses represent an injection of demand into an economy, making it possible to run the economy “hot,” with ample jobs and little unemployment, and with no need for potentially undesirable fiscal deficits or asset booms and expansion of private indebtedness.⁷

Trade surpluses encourage a politics of pride

Citizens of surplus countries tend to feel proud and capable. However, when their trade partners eventually struggle to expand or service their debts, or when those partners rebel and impose protectionist measures to reclaim industry they perceive as stolen, surplus countries come to join deficit countries in embracing narratives of victimization that can contribute to international conflict: “We worked and built and gave you everything. You were lazy and dissolute, and now you threaten to renege on your obligations, or to raise unfair tariffs to harm our industries.”

If running trade surpluses is good for polities, and most polities wish to keep it up, why should balance be desirable rather than surplus? Unfortunately, any country’s desirable surplus must be matched by other countries’ undesirable deficit. Persistent trade imbalance represents positive-sum trade in much the same way that purchase of street heroin does. Both parties consent and benefit in the immediate term. But both also understand, or should understand, that one party is likely to suffer in the longer term for the transaction. We don’t let the sustainable economic benefit to the dealer rehabilitate a pattern of exchange that is likely to be extremely detrimental to the user. In particular, if the heroin buyer is struggling to quit, we don’t tell them that rules of trade require that they mingle in a drug market each time they receive a paycheck.

“Everybody runs a surplus” is an outcome that fails to compose. Surplus countries (think Germany with respect to Greece) tend, when criticized, to advise debtor countries to be like them, without acknowledging that no countries could be like them if others did not assume the role of debtor they endlessly scold. It’s no good to say the solution to the drug problem is that all the addicts become dealers. To whom would they sell?

Sometimes, though, it is in fact wise and useful to purchase an opiate, in which case it is fine and good that there are sellers. If you have just been stabbed, a bit of heroin, or morphine, or fentanyl, might literally be what the doctor ordered. The key is, the generally undesirable thing can become desirable for specific and understandable reasons, and only for a limited time.

Suppose a developing country whose citizens produce beautiful textiles by hand wishes to industrialize by mechanizing and scaling up its textile production. It will need capital goods—generators, mechanical looms, etc.—that are only available as imports. It may lack sufficient savings in international money or capacity for exports to purchase those capital goods today. So it may choose to run a trade deficit, borrowing what it needs to build its factories. This is temporary, however. The plan would be to borrow international money but to service or even outright repay the debt over a predictable horizon, using the proceeds from exported textiles. Running a trade deficit under these conditions is fine. It’s the international analogue to getting a bank loan to start up a business, anticipating the loan will be repaid from future sales.

Suppose a small country has a “baby boom,” followed by a “demographic transition” that leads to much smaller generations down the line. Such a country might be unusually motivated to run a trade surplus during the peak working years of the baby-boom generation. Whether mediated via private savings or a public pension plan, it will foreseeably need more resources to support the baby boomers once they retire than the domestic population will be able to provide. This country might provide exports on unusually good terms to induce other countries to take on a debt the foreigners will later repay in goods and services to the retired. The imbalance is temporary and presumably reversible instead of permanent and indefinitely expanding.

We want trade imbalance, in some situations, under some circumstances. But those circumstances are exceptions to the norm, which must be balance, because a norm of surplus for some countries implies a norm of deficit for others, and that combination is ultimately undesirable and destructive.

Note that it is each country’s overall trade, not bilateral trade, that should generally balance. If you make your living as a car mechanic but you buy your food from a grocery store, you run a trade deficit with the grocery store. You send it money for the goods it supplies; it sends you no money for the goods you supply. But you run a trade surplus with your customers. They give you money for your services while you give them no money for theirs. As long as the trade deficit with the grocery store is at least offset by the surplus you enjoy from your customers, you accumulate no debt. Most of us run deficits with all the businesses we patronize and surpluses with the firms that employ us, but we seek to ensure that overall our proceeds from employment more than cover the financial cost of our purchases. In the same way, most countries should have trade not in balance with any or each of their trading partners, but they should ensure that their surpluses at least balance their deficits, unless there is a good and temporary reason to increase their indebtedness.

David Ricardo outlined the case⁸ for specialization and trade due to differing comparative advantages more than 200 years ago, and it is as true today as it was then. It is a mechanism that applies to balanced trade.⁹ To insist that trade be generally balanced is not to impugn or impair the classical case for free trade. On the contrary, it is to vouchsafe the conditions under which free trade will be durably and mutually advantageous, and thus prove sustainable. If you are for free trade, you should be for free and generally balanced trade.

3. A Foreign Payouts Tax as a virtual International Clearing Union

In 1943, John Maynard Keynes gave a speech before the House of Lords¹⁰ in which he directly connected the rise of Nazism to mismanagement of the global economy in the decades before.

The subject of the speech was his proposal for an International Clearing Union.¹¹ The ICU would be a kind of global bank of central banks. As its name suggests, it would “clear” global trade, meaning it would be the place where net payments from one country to another would occur. Say the United States and the UK trade during a certain month. First suppose that American and British trade is balanced, then there is nothing to clear—no international payments actually need to be made. British banks debit accounts from buyers of American goods and credit the accounts of sellers to Americans, with no money crossing borders. The reverse happens within American banks: Nothing crosses the pond. Weird, huh?

But suppose the Brits sell more to the Americans than the Americans sell to the Brits. Then British banks have to credit British sellers with more funds than they can debit from British buyers. Americans do have to send some money over the Atlantic, at least metaphorically. Keynes proposed that this international sending would be managed by the ICU, which would maintain accounts for Great Britain and the United States. If the US bought more than it sold, funds would be drawn from the US account and paid to Great Britain’s account. The Bank of England would ensure those funds carried over to banks whose customers would need to be paid.

In order to be neither parochial to any country nor subject to the constraints of gold, Keynes proposed the introduction of a new currency, bancor, in which these settlements would be maintained. In the popular imagination, most of what remains of Keynes’s proposal is a faint whiff of enlightenment and utopianism attached to the possibility of this global currency, even if it would only be transacted between central banks and international institutions. The oddest and most important aspect of Keynes’s proposal was this: Not only would interest be charged on debit balances—overdrafts, or loans—in the ordinary way, but interest would also be charged rather than paid on credit balances. Whereas your ordinary bank is delighted to have a cache of your deposits and will pay you interest in order to encourage you to accumulate them, the ICU would penalize both sides of the international lending arrangement symmetrically.¹²

A through line of Keynes’s career, beginning with The Economic Consequences of the Peace,¹³ is that international indebtedness is dangerous, that keeping it moderate and supportable is a prerequisite to peace and human flourishing. Keynes’s innovation to charge creditors is both practical and moral. In lending arrangements, the debtor is “naturally” penalized by the interest charge. But it takes two parties to make the peculiar institution that is debt, and the creditor is often better placed to regulate it than the debtor. As a practical matter, penalizing both sides of accumulations of imbalance is more effective at discouraging its multiplication than penalizing only one side. On a moral level, Keynes recognized, and urged others to recognize, that immoderate lenders are not angels. Human commerce and exchange only work when we are buyers and sellers to one another. Those who would accumulate large hoards by selling but then refuse to buy are not thrifty, prudent benefactors of humanity but nuisances, and often aspirants to relations of domination that should be opposed.

The International Clearing Union as Keynes described it would be a “super-national authority”¹⁴ whose operations, he conceded, would involve substantial discretion. Following a successful termination of World War II, it was not inconceivable that an ICU chartered by the victorious powers of the United States, Great Britain, and the Soviet Union would have been widely subscribed despite the compromise of sovereignty, owing to the hegemony these great powers would enjoy.

Today is not 1943. We suffer, now as then, from a recrudescence of fascism. Now as then, “frustration of men’s efforts and the distortion of their life pattern” by virtue of economic mismanagement, and by the accumulation of international imbalance in particular, “have played no small part in preparing the soiled atmosphere in which the Nazis could thrive.”¹⁵

But the world is much more “multipolar” than Keynes anticipated postwar. We now lack the plausible ability to stand up institutions of international governance, which increasingly adversarial powers would have to agree to be bound by. We have neither a global sovereign nor a global hegemon. We are not (necessarily) condemned to rank anarchy or a Hobbesian war of all against all. But we must content ourselves with what coordination we can achieve by norms we can agree upon in theory and mutually enforce in fact.

International commerce is already governed primarily by norms. No law compels US Treasuries to serve as international reserves, or major central banks to offer swap lines to one another, or a thousand other arrangements that lubricate and sustain international trade and finance every day. In recent years, some of those norms have been upset—dangerously violated or prudently updated, depending on your perspective—as the US and other financial authorities have imposed and enforced an increasing array of sanctions and frozen certain countries’ assets. Despite these changes, and loud protests by affected parties, the financial system as it emerged from the 2008 financial crisis remains broadly in place. Institutions made of nothing more than air and norms prove remarkably durable when many parties coordinate and rely upon them.

We cannot stand up an ICU under current conditions. But its core innovation—charging interest on international credit balances as well as debit balances—is one we can reproduce simply by adopting a norm of license. We can render it “normal” for countries to charge a tax on payouts to foreign rather than domestic holders of securities issued by domestic issuers.

Under the ICU, international surpluses would have taken the form of credit balances in bancor. In the contemporary world, international surpluses take the form of financial securities held by surplus countries, issued by firms, households, banks, and governments of debtor countries.

The ICU would have discouraged the accumulation of credit balances by charging a kind of interest against them, essentially taxing them. In the contemporary world, governments could unilaterally discourage their own net-creditors by charging a tax on the securities holdings that serve the same role Keynes imagined for ICU accounts.

Keynes, when proposing the ICU, suggested that “members of the Clearing Union should feel sufficiently free from anxiety to contemplate the ultimate removal of the more dislocating forms of protection and discrimination,” including “excessive tariffs.” During the neoliberal era, a strong norm of restriction against tariffs and import quotas emerged. For the usual economic reasons (comparative advantage), and because tariffs tend to discriminate between nations and aggravate international hostility, that norm ought to be preserved.

However, as Keynes understood and we currently endure, absent other means of “free[ing] from anxiety” deficit nations, a norm against large tariffs is difficult to sustain. Norms of restriction are always harder to enforce than norms of license. They demand that the rest of a community, in this case the community of nations, actively punish violations rather than passively refrain from punishing. Under one of the most common and widespread norms, that of reciprocity, punishing the imposition of tariffs often takes the form of imposing retaliatory tariffs. This further undermines the norm against imposing sizable tariffs.

In order for the norm against imposing large tariffs to remain sustainable, there need to be alternatives, other means of addressing the defensible purposes of tariffs without incurring their undesirable and pathological effects. For Keynes, the ICU could fill that role. In our more fallen world, a Foreign Payouts Tax could.

The Foreign Payouts Tax would not be a privilege of the United States, or any other nation. Ideally, the ICU would have stood above all nations and regulated international commerce and finance on evenhanded terms. A much more fragmented international community can encourage an evenhanded regulation of commerce by simply tolerating and supporting (e.g., via financial reporting) each nation’s right, on universally identical terms, to impose a tax on investment proceeds paid by domestic to foreign entities, including households, firms, banks, and governments.

4. A Foreign Payouts Tax: some nuts and bolts

How would a Foreign Payouts Tax work in practice? The basic mechanics would be very simple.

Tracking domestic versus foreign, only

Every financial security, taken broadly to include publicly traded stocks and bonds, or ownership shares of a closely held business, or even a deed to a piece of real estate, has an issuer and beneficial owners. The issuer always has a nationality. Even if it is a multinational company, it will be one of a collection of related legal entities, each of which is chartered in a particular state. The beneficial owners also have a nationality; this is presumptively categorized as “foreign,” but that presumption can be overcome by demonstrating to an issuer and/or financial intermediary that they hold the same nationality as the issuer, in which case they will be categorized as “domestic.”

No further distinction should be maintained for the purpose of a Foreign Payouts Tax. States, of course, are free to demand that their issuers and intermediaries track the nationalities of beneficial owners more specifically, and they are free to impose more elaborate or discriminatory taxes than the one proposed here. But no near-universal norm of license would protect those other taxes from retaliation if other nations disliked or disagreed with them.

Taxing payments

Issuers and/or financial intermediaries would withhold payouts to entities categorized as “foreign” at the current level of their home state’s Foreign Payouts Tax, and remit them to their government. Payouts would include interest, dividends, and distributions as well as capital gains, which are a bit of a special case, since funds do not derive from, and so cannot be withheld by, an issuer. Nevertheless, capital gains are already widely subject to taxation, and states should cooperate to ensure that sales of one country’s assets by a foreign beneficial owner are properly taxed.

Level of taxation

The level of taxation of a Foreign Payouts Tax would be discretionary and variable. It would be prudent to adopt a general norm of adjusting the level no more frequently than quarterly, and telegraphing changes in advance. There is no benefit to an element of surprise. If foreign owners sell to domestic buyers in anticipation of a rise in the tax, that is not avoidance but rather evidence of the tax working as designed.

For states whose trade is not in significant deficit, the level of the Foreign Payouts Tax should usually be zero. The norm licensing the imposition of the tax would do so for the specific purpose of remedying trade imbalance. States in balance or surplus could choose to impose a sizable tax, but it would raise the financing costs of their own issuers and encourage the same choice among their investment partners.

For states in deficit, however, the expectation should be that a Foreign Payouts Tax will be imposed, and will rise gradually but continually until balance is restored. There is no ceiling on the tax. In principle, it could rise to more than 100 percent of payouts (and then become more of a foreign wealth tax than a foreign income tax), although that would bring additional enforcement complexities. The purpose of the tax is to restore balance by rendering it less economic for foreign nationals to finance current and past trade deficits. Foreign nationals would be wise to take that into account when making their portfolio decisions, therefore preferring securities issued by countries in balance or in surplus. That preference would itself encourage balance in the global system.

Absent the pressure of a trade deficit, political economy is likely to encourage setting the Foreign Payouts Tax at a low level. If this expectation proves wrong, if states universally and persistently impose a high Foreign Payouts Tax “reciprocally,” the net effect would be no hindrance of free and balanced free trade but an incentive to keep finance and investment domestic. That’s not a terrible failure mode.¹⁶

Enforced mechanically and hermetically

Historically, taxes based on nationality have had a lot of loopholes. Perhaps foreign holdings of government securities should be exempt, because that reduces the interest rate the state must pay and takes pressure off the budget deficit. Perhaps debt issued by financial intermediaries should be exempt, as the “real” issuer is on the other side of a two-sided relationship. Maybe we should give a break to nationals of our geopolitical allies or close trade partners. Surely it would be impractical to tax remittances across subsidiaries within what conceptually is a single multinational firm.

No, no, no, no. To qualify as a normatively protected Foreign Payouts Tax, there must be none of these exceptions. Excepting certain classes or issuers of securities from the tax removes pressure from the trade imbalance and just shifts foreign portfolios toward the favored securities. If the creditor on the other side of debt that a bank or financial institution issues is domestic, the tax is appropriately paid at the national boundary. It genuinely would disfavor the business of third-country financial institutions intermediating between two foreign parties. But that’s desirable. Given the sensitivity of finance, and its special role in governance and economic regulation, decentralizing provision of financial services would be a net benefit globally, even though there would be a cost in traditional specialization and comparative advantage terms. For sure, it would be inconvenient for large multinationals to manage this tax. But they are large multinationals in the extravagant business of managing taxes, often parasitically (cf. transfer pricing¹⁷). The alternative choice would replace pressure on the trade deficit with a bias by those who finance it even further toward the securities of large multinationals.

Temporary and nonexclusive

Many countries already tax payouts from domestic entities to foreign investors distinctly, in a variety of ways for a variety of reasons. A common, very defensible reason is to try to place foreign investors on an equal footing with domestic investors in terms of their obligation to support the state superintending the businesses from which they are profiting. States also enter into tax treaties with one another, which are discriminatory by nature, often reducing the tax burden of one another’s nationals if they pay analogous taxes in their home jurisdiction.

The Foreign Payouts Tax would be a tax layered on top of, and logically preceding, all of these other arrangements. Its purpose is not primarily fiscal (although it is important that its fiscal burden is negative, if it is to be politically competitive with tariffs). For the purpose of all other taxes, the gross payout received by a foreign holder would be the payout less the Foreign Payouts Tax. This is consistent with tax regimes that seek to keep a level playing field across classes of investors for fiscal purposes: Foreign investors should only have to support the domestic fisc equitably as a percentage of the payout they might actually receive.

General tax regimes surrounding international investment are more or less permanent. States require tax revenue and strive to raise this revenue on terms they deem equitable and supportive of economic activity. The Foreign Payouts Tax would be imposed separately, only as necessary to restore international balance. Once balance is achieved and sustained for some time, when trade patterns have adjusted so that the value of exports sold by a state more or less matches that of its imports, the expectation should be that states gradually back off the tax, until or unless a trade deficit reappears.

Optional but intentional

Some states might, for good and intelligible reasons, affirmatively choose to run a trade deficit. We discussed earlier the case of a developing country seeking loans to build a modern capital stock in order to expand production of exports.

States that affirmatively wish to net-borrow externally would simply not impose the Foreign Payouts Tax.

However, the existence and normative role of the tax would still condition domestic politics. In a world where the Foreign Payouts Tax is widely acknowledged as an effective, available tool to manage trade imbalance, governments would have to take responsibility for and publicly justify trade deficits.

This would be a dramatic political change. Most balance-of-payments crises begin with debt-financed domestic booms. The usual pattern is that Cassandras tut-tut about the trade imbalance, while political leaders, who enjoy presiding over booms, shrug them off as “market outcomes.” What can you do?

Elevating the Foreign Payouts Tax as a normal and recommended means of addressing deficits would eliminate this cop-out. Political leaders could make an affirmative case for accepting a deficit, or they could use the available tool to eliminate it. Trade deficit would be explicitly removed from the netherworld of market outcome and become a matter of political choice.

5. How does it work? Why not tariffs? Some intuition

Most people find it obvious how tariffs might address a trade deficit, which, by definition, means a country is buying more imports than it is selling exports. If you want less of something, tax it. If you impose a tax on importing goods, people will buy fewer imports and you can bring the deficit toward balance.

Tariffs are an easy tool to understand, but a tool with profoundly harmful side effects. In the previous section, we noted that if all countries imposed a Foreign Payouts Tax universally and reciprocally, the result would be free trade in goods and services but primarily domestic finance. David Ricardo would still slumber in peace. But if all countries imposed high tariffs universally and reciprocally, the result would be a collapse of trade, an autarkic, significantly poorer world.

If we could agree that tariffs would only be imposed on nondiscriminatory terms, only by countries running trade deficits, and only until the conditions creating trade deficits were remedied, they would be less harmful. But in fact, political leaders are often petty and reciprocity is the most fundamental norm in all of human affairs. Tit for tat. We know the medication will not be taken solely as indicated, so it is important to choose a pill whose side effects won’t be too harmful. A tariff discourages trade, all trade, whether it be balanced or unbalanced. A Foreign Payouts Tax discourages international finance generally but does not discourage trade generally. It discourages unbalanced trade specifically. It is a medication whose effects are narrowly targeted to the disease, with few side effects.

It is easy to explain how tariffs work. But how does a Foreign Payouts Tax reduce a trade deficit? Let’s work through it.

Suppose trade is balanced. An American firm buys a thousand cars from a country we’ll call Rest of World. At the same time, a Rest of World firm buys a passenger jet from the US. The two transactions are of similar value. For simplicity, we’ll treat the US and Rest of World as aggregates rather than try to trace currency exchanges and fund flows through particular firms and the two countries’ banking systems. The US sends dollars to Rest of World to buy cars. Rest of World sends the dollars right back to the US for a jet. The net effect is an exchange of physical cars for a physical jet, with no dollars left behind. A Foreign Payouts Tax would not affect this transaction whatsoever.

Suppose, however, the trade were temporarily unbalanced. The US firms buy the cars. A year later, Rest of World buys the jet. The US sends dollars. Rest of World quickly converts those dollars to US Treasury bills. (Firms and governments are careful not to forgo risk-free interest by holding cash.) Rest of World holds those Treasuries for a year. Then its firm buys the airplane, sending back the same US cash it had received. But now Rest of World has extra dollars remaining from the deal, because it earned a year of interest on US Treasuries.

Here is where the Foreign Payouts Tax matters. Let’s say the transaction value is $100 million and the Treasury interest rate is 4 percent. Without the Foreign Payouts Tax, anticipating the one-year holding period, the forward value Rest of World receives for its car is $104 million. If there is a 25 percent tax, the one-year-forward value Rest of World receives is only $103 million.

It will be helpful to review the financial concept of “present value.” If I pay you ten dollars today and you use it to buy dinner, you’ve gotten ten dollars of value right now. But if I pay you ten dollars and you crumple the bill and set it in your sock drawer, then find it and spend it ten years from now, what’s that whole sequence worth? If you can earn 4 percent interest in a bank account, then the ten dollars of spending power that you’ll enjoy ten years from now is worth only $6.76 today. If you just put the $6.76 in the bank today and let it earn interest, it’ll give you the same ten dollars of spending power in the future.

If 4 percent is the going interest rate on dollars and, after the Foreign Payouts Tax, Rest of World will have $103 million of spending power in one year, then the present value of the payment it receives for the cars has dropped from $100 million to $99 million. In effect, the tax has reduced the value of the dollars Rest of World has received for its cars.

The amount of reduced value triggered by the tax is proportional both to the size of the imbalance and to its duration. If Rest of World buys the plane on the same day it sells the cars, the cost of the tax is zero. If it buys the plane a week later, the cost is still negligible. Yet if Rest of World maintains a perpetual imbalance, if it will hold the Treasuries indefinitely, the cost of the tax (simplifying somewhat) grows to 25 percent x (4/0.04) = $25 million. It will be selling the cars for 25 percent off!

In fact, since the US currently has an indefinitely expanding trade deficit, securities purchased with the proceeds of sales to the US are expected to be held by foreigners indefinitely. A Foreign Payouts Tax could make this a very, very bad deal for firms and countries that export to the US.

So how could Rest of World respond? It could try to recoup the lost value by raising its prices. If it increased the price of the cars it sells by a third, it could fully recover the value lost to a 25 percent Foreign Payouts Tax. But that would have the same effect on American sales as a 33 percent tariff would. If you understand why tariffs can reduce a trade deficit, you understand why Rest of World’s raising prices to recover the payouts-tax loss would do the same.

Alternatively, and more constructively, Rest of World could try to use the dollars it holds to purchase valuable goods and services from the US quickly. If Rest of World buys planes, or grains, or oil, or chips from the US rather than holding financial securities, and puts those goods and services to immediate use, it can gain the full present value of its sales to the US without having to raise its prices at all. In this case, Rest of World’s sales don’t decline at all, but the United States’ exports increase, bringing down the US trade deficit while increasing the volume of global trade. Far from a trade barrier, a Foreign Payouts Tax might be net trade supportive!

The simplification into the US and Rest of World, as opposed to some specific country, is deliberate and instructive. Sure, there is no country called Rest of World; it might be Korea that the US purchases cars from and Belgium to which the US sells a plane. Yes, Korea can try to escape the tax by using the dollars to buy German securities, on which no tax is imposed. But then Germany bears the tax burden, and it is only willing to value the dollars it receives at the tax-discounted value, unless it has plans to use dollars to buy US goods soon. You can talk yourself in circles with scenarios, but since the tax is imposed on the same terms across all foreign countries, foreign-to-foreign transactions make no difference. Home-country securities are either abroad, in which case someone abroad is paying the tax, or redeemed for goods and services from their issuer’s home country.¹⁸

6. Related ideas

Special taxation of foreign securities holders is hardly a novel idea. The United States has taxed income to foreign investors in one way or another since 1909.¹⁹ As recently as 1984, the United States levied²⁰ a 30 percent “withholding tax” on US-sourced income paid to nonresident aliens and foreign corporations. In 1984, the withholding tax was eliminated for interest payments. It remains in effect to some degree²¹ with respect to dividends and other payouts but was never applied to capital gains. These taxes have never been tailored primarily to regulating the international trade account. Taxes on foreign income (including in the present proposal) frequently take the form of “withholding,” because enforcement of tax liabilities on foreign entities after funds have been paid can prove challenging.

Our historical experience with these taxes is why in Section 5 we emphasize that a Foreign Payouts Tax needs to be “hermetic.” “Withholding taxes” have often been negotiated away with respect to particular countries as part of reciprocal tax treaties. By the early 1980s, a tax treaty with the Netherlands, combined with some entrepreneurship by the Caribbean island known as the Netherlands Antilles²² and favorable US court opinions, allowed firms to route their foreign borrowings through subsidiaries chartered in that microstate and entirely avoid the tax. This practice was so widespread that when the 30 percent US withholding tax on interest payments was abolished in 1984, it had very little fiscal impact.

An effective Foreign Payouts Tax would have to be something new and explicitly geared toward regulating the overall volume of the trade (really current-account) deficit, and it should not be permitted to discriminate between classes of securities, forms of payouts, recipient entity types, or nationality of nondomestic recipients. In terms of a general tax, there may be plausible reasons to entertain various kinds of discriminatory treatment. But any such discrimination undermines the purpose of a Foreign Payouts Tax, turning it into a mechanism that alters how a trade deficit is financed rather than constricting its overall volume.

A case in point is a recent proposal by Stephen Miran²³ to impose a “user fee” on official holdings of US Treasuries. Miran is explicitly motivated by a desire to alter US trade patterns and reduce its current account deficit. It is structured, like the present proposal, as a tax on payouts. But because it would apply only to official holdings of US Treasuries, it is hard to imagine that it would be very effective. As Brad Setser points out,²⁴ “Just as China has ‘shadow banks’… China has what might be called ‘shadow reserves.’ Not everything that China does in the market now shows up in the [People’s Bank of China’s] balance sheet.” Government holdings can always be quietly mediated via private financial institutions. And the vast majority of foreign holdings of US financial securities—and therefore the vast majority of finance provided to sustain accumulated US trade deficits—are owned by private, not public, investors. Miran’s proposal would encourage a shift away from direct holdings of US Treasuries by foreign governments, but it would not meaningfully disincentivize the US trade deficit. And his proposal relies on the special role of US Treasuries as a reserve asset. It is intended as a unilateral tool of the United States as financial hegemon, not as a universally accessible instrument by which a global norm of balanced trade could be enforced on an evenhanded basis.

Another superficially related Trump-era proposal was the fortunately scrapped Section 899²⁵ of the House of Representatives’ original One Big Beautiful Bill Act. It would have allowed imposing differential taxes on payouts to foreign investors. But it was not motivated by trade balance. It was explicitly, gleefully retaliatory and discriminatory. It would have given the Treasury (and therefore under a unified executive theory, the president) the power to decide that particular foreign countries had engaged in discriminatory trade practices and to impose penalty increments beyond the statutory rates on payers’ existing US tax obligations. It is unlikely that this provision would have meaningfully affected the US trade balance. Affected countries could continue to sell to the US and simply purchase non-US securities with the proceeds, leaving unaffected countries to finance the trade deficit. It is the opposite of a nondiscriminatory, universally accessible instrument by which a global norm of balanced trade could be enforced on an evenhanded basis.

The proposal closest to this one that I’m aware of was offered by Michael Pettis²⁶ and submitted as legislation by Senators Tammy Baldwin and Josh Hawley under the name Market Access Charge. Instead of a tax on payouts, this would essentially take the form of a “sales tax” on US securities when they are sold to foreign investors. Sales taxes on securities, frequently described as Tobin taxes, are a widely suggested financial reform, for reasons that Pettis highlights:

"[T]his tax wouldn’t treat all investment equally. It would more heavily penalize short-term, speculative inflows while barely affecting returns on longer-term investment into factories and other production and logistics facilities."

Pettis does not suggest imposition of such a tax as a general-purpose instrument that all countries could deploy, but there is no reason it could not become one.

I think the one-time Market Access Charge is inferior to the Foreign Payouts Tax, precisely because it mixes the functions of a Tobin tax and a capital control designed to regulate trade balance. The two functions do not sit easily together. Tobin taxes are meant to penalize short-term over long-held investments and become negligible on investments that will be held indefinitely. The conditions that lead to trade deficits can be resilient, and countries that enjoy trade surpluses have strong incentives to keep their counterparties’ deficits financed. Financial engineers would, I think, have little difficulty crafting financial assets that foreign investors would be willing to purchase and hold for long periods to finance continuing trade deficits. A Foreign Payouts Tax, on the other hand, continues to exact a toll the longer it is held. Contrary to the Tobin tax intuition, from a trade-balance perspective, short-term finance should be favored in preference to long-term finance. Even under the most balanced of trade regimes, on a week-to-week or month-to-month basis, some countries will run surpluses and others deficits. In a balanced world, these transient surpluses and deficits will reverse quickly. Financing deficits that will quickly be reversed should be cheap. It is financing lengthy, continuing deficits that ought to be discouraged.

7. Conclusion

The world is in pieces.

It is unlikely, at least in the near term, that sufficient global consensus among powerful states will emerge to the forms of international governance that prevailed during the postwar period. The International Clearing Union that Keynes proposed never existed. Institutions like the World Bank, the IMF, and the United Nations are already mere shadows of what they once were.

But this brave new world still requires governance. I propose that the best way forward is a modest one, to devise and promote international norms that are likely to be widely accepted and recruit spontaneous and decentralized enforcement. Norms of license—things widely understood to be within states’ rights to do unilaterally, without provoking retaliation—are among the easiest international norms to enforce.

Trade imbalance—particularly the pathologies that tend to arise in countries chronically in trade deficit and international debt—has resurfaced as an important source of instability in the world. The atmosphere of hostility between the United States and China, which perhaps threatens human life more than any other fault line, has emerged largely because the United States deluded itself for decades into believing that markets know everything and industrial policy is folly. The persistent imbalance that resulted has had predictable effects on the material economy and on the psyche of the American polity. The ascendancy of fascism in the United States has, I think, been a surprise to most of us. But it should not have been.

As we reconstruct a civilized world, tools that countries can use to protect themselves from the economic and moral pathologies of persistent trade deficits, and that can function even in a shattered world, will be essential. The Foreign Payouts Tax proposed here is one such tool.

1. “Trump Imposes 50% Tariff on Africa’s Lesotho, the Highest Among Nations,” Al Jazeera, April 3, 2025.
2. Kate Lyons and Nick Evershed, “‘Nowhere on Earth Is Safe’: Trump Imposes Tariffs on Uninhabited Islands Near Antarctica,” The Guardian, April 2, 2025.
3. “The Keynes Plan,” IMF eLibrary, February 29, 1996.
4. Stephen Miran, “A User’s Guide to Restructuring the Global Trading System,” Hudson Bay Capital, November 2024.
5. Warren Mosler, The 7 Deadly Innocent Frauds of Economic Policy (Valance Co., Inc., 2010), 58–61.
6. N. Gregory Mankiw, “The Savers-Spenders Theory of Fiscal Policy,” NBER Working Paper 7571, February 2000.
7. Contemporary China might seem to challenge this claim, as the country’s growth has been largely debt financed—often covertly via “local government financing vehicles”—despite its frequently very large trade surpluses. But China has historically suppressed household demand in favor of investment spending, by keeping its currency weak, interest paid to household depositors low, and precautionary savings high in the face of a weak safety net. It has made a policy decision, for political and ideological reasons, to sustain full employment through external demand while keeping its own public poorer, hungrier, and arguably less entitled than citizens of more consumption-focused Western economies. See: Amit Kumar, “Why China’s Finances Are Weaker Than They Seem,” ThinkChina, March 19, 2026; Gero Kunath, “Debt-Fueled Growth in China and Local Government Indebtedness,” Institut der deutschen Wirtschaft Report 35/2025, July 16, 2025.
8. David Ricardo, On the Principles of Political Economy and Taxation (J.M. Dent & Sons, 1911, based on Third Edition originally published 1821).
9. For Ricardo, trade imbalance would occur only temporarily, as a result of technical change. The price level—at the time understood as the price of domestic goods in gold and silver—would then adjust, as imbalance would cause the deficit country to export monetary metals to the surplus country, raising the price level in the surplus country until balance was restored.
10. “International Clearing Union,” UK Parliament, May 18, 1943.
11. “The Keynes Plan.”
12. I have presented a simplified version of the mechanics here. Keynes would have given each country a quota of bancor, and charged as countries deviated from their quota, whether in surplus or deficiency, rather than have them fall embarrassingly into outright overdraft. Our simpler account accurately describes the economic effect.
13. John Maynard Keynes, The Economic Consequences of the Peace (Harcourt, Brace and Howe, 1920).
14. “The Keynes Plan.”
15. “International Clearing Union.”
16. John Maynard Keynes, “National Self-Sufficiency,” The Yale Review, July 1, 1933 (“above all, let finance be primarily national”).
17. “What Is Transfer Pricing?”, Tax Justice Network.
18. A wrinkle is that they can also be exchanged for third-country securities held by the issuer’s home country. But third-country securities from countries imposing a lower tax and available for sale on good terms will quickly be exhausted under a continuing trade deficit.
19. Dwight Robert Shockney, “US Taxation of Nonresident Aliens and Foreign Corporations: A Strategy for the International Capital Market Game,” SMU Law Review Vol. 42, no. 3 (January 1988).
20. Lawrence H. Goulder, “Implications of Introducing US Withholding Taxes on Foreigners’ Interest Income,” Tax Policy and the Economy Vol. 4, ed. Lawrence H. Summers (The MIT Press, January 1990).
21. “Tax Compliance and Enforcement Issues With Respect to Offshore Accounts and Entities,” Joint Committee on Taxation, US House of Representatives, March 30, 2009.
22. Leslie E. Papke, “One-Way Treaty With the World: The US Withholding Tax and the Netherlands Antilles,” International Tax and Public Finance Vol. 7, 295-313 (2000).
23. Stephen Miran, “A User’s Guide to Restructuring the Global Trading System.”
24. Brad Setser, “Shadow Reserves—How China Hides Trillions of Dollars of Hard Currency,” The China Project, June 29, 2023.
25. Andrew Lautz, “What Were the Retaliatory International Tax Provisions in the House GOP Tax Bill?”, Bipartisan Policy Center, June 16, 2025.
26. Michael Pettis, “Washington Should Tax Capital Inflows,” Carnegie Endowment for International Peace, August 6, 2019.