Gillian Tett in “Tariffs on goods may be a prelude to tariffs on money” (Opinion, FT Weekend, March 15) lays out the convoluted thinking of US policy influencers on pairing US tariffs on capital inflows with tariffs on goods imports.
The US is starting from the wrong place. To correct US current account deficits, dollar depreciation rather than imposition of tariffs is economically the better response.
The theory of second best implies that if there is only one distortion then correct it, but the welfare effects of adding a second, supposedly offsetting distortion, may not increase welfare and can reduce it.
In the context of an overvalued dollar caused by the dollar’s status as the predominant global investment currency — a distortion adversely affecting the US manufacturing sector — the “first best” policy is not to impose tariffs because this adds a trade distortion on top of an exchange rate distortion and can easily be welfare reducing. US imports may be diverted to higher-cost foreign producers not subjected to the tariffs, and tariffs do nothing to promote US exports.
The first best policy is directly to reduce the distortion of an overvalued exchange rate by discouraging excessive accumulation of foreign holdings of US securities. A tax on foreign holdings is a way to accomplish this.
Paul Hallwood
Professor of Economics, University of Connecticut, Storrs, CT, US
