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Implications of the Hong Kong Protests, from Peter Myers

(1) Implications of the Hong Kong Protests(2) China justifies Theft of Trade Secrets as Payback for Western/Japanese imperialism(3) NSA Chief: Cybercrime constitutes the "greatest transfer of wealth in history"(4) Middle Eastern governments turn to China for energy, economic relations & defense(5) US should tax Chinese capital inflows; US savings rate is low because it has to absorb so much foreign capital(1) Implications of the Hong Kong Protests- by Peter Myers, September 2, 2019The Protests in Hong Kong have already had many unforeseen effects.There has been an upsurge in emigration from Hong Kong to Taiwan. And in applications for "millionaire" visas giving Permanent Residence in Australia (yes, our beneficent rulers sell Citizenship).Sydney, which was white when I grew up in the 1950s & 60s, is now an Asian city, with large populations of Chinese, Koreans and Arabs. Indians are on the make too.One can expect that many Hong Kongers plan to migrate here one day.There's a big Buddhist Temple near Port Kembla, south of Sydney - Nan Tien Temple, as I recall. Quite beautiful and peaceful. A Vietnamese Buddhist told me that it was built by Taiwanese. "They will go there if there's a war," she said.Taiwanese are watching the Hong Kong situation very closely. The Protests have already had a big impact on the "One Country, Two Systems" doctrine. Basically, no one believes it any more.The likelihood of China peacefully regaining Taiwan is now zilch.Another effect of the Protests is that Hong Kong is losing its position as a Financial Centre and Gateway to China. It will be replaced by Shenzen and Shanghai.Hong Kongers will thus lose many lucrative jobs.Many reports say that a small number of oligarchs own most of the apartment blocks in Hong Kong, and are squeezing the people with high rents and high real estate prices. These oligarchs are cutting their own throats; their exploitation is the unseen reason for the Protests.(2) China justifies Theft of Trade Secrets as Payback for Western/Japanese imperialism’s Long March to Technological SupremacyThe Roots of Xi Jinping’s Ambition to "Catch Up and Surpass"By Julian Baird Gewirtz August 27, 2019Aly Song/REUTERSUntil recently, American perceptions of Chinese technology tended to be either hopeful or dismissive. On the hopeful side, the information revolution was taken as a sure drive of greater freedom. "Imagine if the Internet took hold in China," George W. Bush said in a presidential debate in 1999. "Imagine how freedom would spread." Some observers noted considerable theft and imitation of U.S. technology firms, but Chinese technology was generally thought to represent little or no competitive threat, with analysts explaining—as a 2014 Harvard Business Review headline put it—"why China can’t innovate."But China has quickly moved up the value chain, creating world-class industries in everything from 5G and artificial intelligence to biotechnology and quantum computing. Some experts now believe that China could unseat the United States as the world’s leading technological force. And many U.S. policymakers view that prospect as an existential threat to U.S. economic and military power. "Very dangerous," President Donald Trump said recently when talking about the Chinese telecommunications company Huawei; National Security Adviser John Bolton has warned of a "Manchurian chip."Yet if China’s rapid technological advance came as a shock to most observers in the United States, for Chinese leaders it reflects a drive that dates to the origins of the People’s Republic. President Xi Jinping has described a formidable objective for Chinese tech: "catch up and surpass." But that ambition, abbreviated as ganchao in Chinese, has long been one of the Chinese Communist Party’s defining goals; it remains the essential framework for understanding China’s ambition to become a technological superpower today, bringing together the legacies of Marxism, Maoism, and the tortuous pursuit of modernization by the Chinese Communist Party (CCP). In the minds of China’s leaders, from Mao Zedong to Xi Jinping, technological progress is not only a means to economic and military prowess but also an ideological end in itself—offering final proof of China’s restoration as a great power after decades of struggle."CATCH UP AND SURPASS"Long before Donald Trump and Xi Jinping began their trade war, the CCP’s historical fixation on advanced technology emerged from a combination of nostalgia for China’s lost imperial glory and awe for Soviet modernization. Mao, like other Chinese revolutionaries and reformers, blamed the country’s having fallen behind partly on its inability to keep up with international technological advancements. And he watched as leaders in Moscow carved their own path to technological progress.Initially, Mao’s China received extensive technological and technical assistance from the Soviet "elder brother." In 1957, Soviet Premier Nikita Khrushchev declared that his goal was to "catch up and surpass the United States." Mao took the idea and made it his own, putting the Chinese variant of Khrushchev’s goal—ganchao—at the heart of CCP ambitions. He envisioned the socialist world’s "overwhelming superiority" in science and technology and came to see technological strength as central to economic, ideological, and geopolitical power—the view of catch up and surpass that CCP leaders continue to hold today.The Chinese adaptation of catch up and surpass quickly turned fevered and utopian. Mao, impatient to develop faster than the overbearing Soviet Union, announced in early 1958 that China would take a Great Leap Forward, in which "politics and technology must be unified." The Great Leap Forward—a massive campaign to rapidly industrialize and collectivize the country—ended in a catastrophic famine that killed tens of millions of people. Yet even then, the CCP did not abandon ganchao. Continued concerns about China’s military backwardness, as Evan Feigenbaum has written, motivated repeated pushes for technological advancement. In 1975, Premier Zhou Enlai introduced the concept of the Four Modernizations: modernizing "agriculture, industry, national defense, and S & T . . . to the front ranks of the world" by the year 2000. And when Zhou and Mao died in 1976, their successors, Hua Guofeng and Deng Xiaoping, attempted "a new leap forward," aiming to help China "catch up" by importing more than $15 billion worth of advanced technology from abroad.When this new leap also foundered, due to soaring debts and sloppy decision-making, Deng took a new approach to ganchao, this time relying on market reform, industrial policy, and economic opening. The CCP rehabilitated those who had been purged during the Cultural Revolution, increased investment in S & T research and training, sent delegations abroad to bring new ideas and technologies back to China, and encouraged foreign firms to set up shop in China and share sophisticated equipment and know-how. The rise of information technologies became a particular fixation of the Chinese leadership in the 1980s. In 1983, Premier Zhao Ziyang gave a speech on the "global New Technological Revolution," invoking the need to "catch up and surpass" and citing the writings of American futurist Alvin Toffler, whose The Third Wave predicted the rise of a new Information Age. Zhao and Deng sought " ‘leap-frog’ development in key high-tech fields" such as information technology, automation, and bioengineering.In the marketizing economy, newly emergent private companies also served the national goal to "catch up and surpass." Liu Chuanzhi, an engineer at the state-run Chinese Academy of Sciences, started a side business that grew into Lenovo, one of the world’s largest makers of personal computers. Ren Zhengfei, formerly an official in the People Liberation Army’s engineering corps, began importing and reverse-engineering foreign network hardware and electronics, establishing Huawei in 1987.In the 1990s and 2000s, the pursuit of advanced technology involved several strategies of varying degrees of legality and publicity. Fostering the private sector remained a crucial part of the CCP’s strategy; Huawei especially won high-profile endorsements from senior Chinese leaders and tens of billions in loans from state banks, becoming a national champion as it expanded overseas and partnered with foreign companies. Information technology firms boomed, but the CCP assiduously managed the perceived political and cultural risks that accompanied the rise of the Internet. While building up the Great Firewall, China’s rulers also took advantage of the more open networks in developed countries: aggressively recruiting overseas Chinese experts to return to the PRC, obtaining foreign intellectual property by mandating the transfer of technical know-how in joint ventures, and engaging in industrial espionage targeted at high-value technologies.SILICON MARXISMIn 2013, shortly after being appointed CCP general secretary, Xi laid out his vision for China’s future in a series of remarks centered around the goal of national rejuvenation—regaining wealth, power, and glory for China. Alongside the problems of corruption, pollution, debt, and military competition, he worried openly about the lagging state of Chinese technology. Advanced technology had been key to the West’s "sway over the world in modern times"; Beijing would need an "asymmetrical strategy" to "catch up and surpass," he said, explicitly invoking this decades-old CCP ambition.That long-standing view, reflecting a single-minded focus on ganchao, explains the intensity and persistence of Chinese theft of trade secrets, involving both conventional spycraft and cybercrime—what former National Security Agency Director Keith Alexander called "the greatest transfer of wealth in history." It has been reinforced by a belief that China’s thefts were part of rectifying imperialist misdeeds by the Western countries as well as the linkage of technological advances to the ideology and identity of the CCP. It also reflects a paradox in the CCP’s relationship to technology: pursuing an ultimate state of self-reliance has relied above all on foreign technology and expertise.By the time Trump came into office, China’s rulers could see that their focus on ganchao was bearing fruit. Barring a major crisis, China will become the world’s largest economy by gross domestic product well before the hundredth anniversary of the People’s Republic’s founding, in 2049. Its rulers, accordingly, are already shifting from "catching up" to "surpassing."Xi argues that indigenous technological innovation is necessary to surpass the West, even if copying has been mostly sufficient to catch up. He calls innovation "the primary driving force of development," giving a Silicon Valley–friendly gloss to the Marxist idea of historical "driving forces." Working closely with private companies and universities, the CCP has positioned fields such as chipmaking, bioengineering, telecommunications, and artificial intelligence (AI) as test cases of whether China can "surpass" the United States. A state-supported flood of discounted capital, world-class researchers, "civil-military fusion," and less constraining norms give Chinese labs an edge. In the race to develop next-generation wireless service, 5G, Huawei is leading the pack, with one of the biggest R&D budgets of any tech company and revenues roughly equal to telecom competitors Nokia and Ericsson combined. And when it comes to the data powering AI, according to a report from the think tank MacroPolo, China may benefits from having fewer constraints on experimenting with new systems. (The Uighurs have experienced what this is leading to in the chilling techno-authoritarian model implemented in Xinjiang.) Because the CCP already engages in large-scale surveillance and limits personal freedoms, innovations in big-data systems for smart cities and social credit point in a startlingly dystopian direction.To Xi, innovation is good for both maintaining social control and growing national power. His Made in China 2025 demonstrates the breadth of Beijing’s ambitions. Made in China 2025 aims to bolster Chinese firms and ensure that they control the domestic market in advanced technologies such as robotics, new-energy vehicles, medical devices, quantum computing, and AI. One Chinese official told The Wall Street Journal that the plan has undergone cosmetic changes "because the Americans don’t like it." But it endures in substance, and other senior officials insist that the CCP "will never give an inch" on this scheme’s broader goals.Top-down, CCP-led technological innovation brings its share of challenges. Many observers correctly cite the risks of misguided government-steered investment, which has led to waste and massive oversupply, or the challenges of supporting small entrepreneurs and researchers without heavy-handed interference. But the record of the past several decades shows that CCP leaders will, in their pursuit of technological advancement, display persistence and ingenuity in responding to those obstacles. China’s leadership has certainly been prone to exaggerating its achievements throughout a long history marked by leaps, rushes, and "asymmetric steps"—but they also have a record of doing whatever it takes to make the hype real.A RACE AGAINST TIMEThe goal of surpassing other countries technologically does not mean that China’s rulers seek global military supremacy. But even in best-case scenarios, China’s transition from catching up to surpassing will be destabilizing, as other countries confront Chinese ambitions for greater prosperity and security and feel their relative power decrease. And for China, building 5G networks for other countries and making AI breakthroughs clearly advance CCP aims far beyond narrowly construed self-reliance. Even if firms such as Huawei and ZTE are not incontrovertibly compromised by the state, their work clearly serves CCP interests.Technology will remain at the heart of U.S.-Chinese tensions well beyond the end of the current trade war. Technology, to the CCP, is power in practice—it is historical change in material form. The roots of "catch up and surpass" demonstrates that the CCP’s approach to technology is far more deeply entrenched than many analysts realize. If China’s rulers feel their technological rise is under threat, they are likely to react more forcefully and uncompromisingly than policymakers may expect—as the Chinese response to Washington’s effort to block Huawei’s global 5G dominance has demonstrated.(3) NSA Chief: Cybercrime constitutes the "greatest transfer of wealth in history" Chief: Cybercrime constitutes the "greatest transfer of wealth in history"BY JOSH ROGIN | JULY 9, 2012, 6:54 PMThe loss of industrial information and intellectual property through cyber espionage constitutes the "greatest transfer of wealth in history," the nation’s top cyber warrior Gen. Keith Alexander said Monday. U.S. companies lose about $250 billion per year through intellectual property theft, with another $114 billion lost due to cyber crime, a number that rises to ...(4) Middle Eastern governments turn to China for energy, economic relations & defense the Middle East Is Betting on ChinaAug 22, 2019 GALIP DALAYChinese foreign policy in the Middle East is highly transactional, focusing on energy and economics, and avoiding sensitive geopolitical issues. In a region as volatile as the Middle East, however, the question is how long such an approach can be sustained.DOHA – Middle Eastern leaders seem to be in a race to gain favor with China. While the region buzzes with criticism of US policy, its political elites are busy showering China with accolades and heading to Beijing to sign a wide variety of bilateral agreements. Egyptian President Abdel Fattah el-Sisi, for example, has visited China six times since 2014.Although most engagement between China and Middle Eastern governments still focuses on energy and economic relations, cooperation increasingly covers new areas such as defense. Furthermore, Saudi Arabia and the United Arab Emirates have recently announced plans to introduce Chinese-language studies into their national educational curriculums. More tellingly, both countries (and others in the region) have defended China’s persecution of its mainly Muslim Uighur population, a crackdown that has been widely condemned in the West.All of this raises two questions. Why are Middle Eastern states betting on China? And to what extent can China fill the political vacuum in the region created by America’s diminishing footprint?At first glance, Middle Eastern governments’ newfound love for China is puzzling. Conservative Arab regimes were historically suspicious of communist China, and established diplomatic relations with it only in the 1980s or early 1990s. Moreover, many countries in the region have longstanding defense ties with the United States. Yet some of these US allies, most notably Egypt, the UAE, and Saudi Arabia, have now signed comprehensive strategic partnership agreements with China.These developments are causing growing unease in Washington. The US government has even conveyed its concerns to Israel over cooperation with China concerning sensitive technologies. The entry of the Chinese tech firms Huawei and ZTE into the Israeli market has been a particular source of concern.Such episodes reveal one of the major differences between the US and China regarding alliances and partnerships, at least in the Middle East. Mindful of its regional inferiority vis-à-vis the US, China is avoiding placing itself in situations that would require governments to choose between the two powers. America, by contrast, often wants its allies to make precisely such a choice. Most Middle East governments must now perform a balancing act between the two countries, which will likely generate friction with both.Several factors currently make China an attractive partner for Middle Eastern governments. For starters, China has a dynamic, fast-growing economy and leaders who are highly suspicious of popular uprisings and democratization. Their top foreign-policy priorities are economic connectivity, a secure flow of energy resources, and protecting regional investments. China wants to export goods and commodities, not political ideas, to the Middle East.Moreover, like China, many Middle Eastern regimes are trying to strengthen their legitimacy through economic growth and development rather than real political reform. Still mindful of the 2011 Arab Spring uprisings across the region, several governments have announced ambitious national development plans aimed at boosting living standards – such as Saudi Arabia’s Vision 2030 and Kuwait’s Vision 2035. China’s so-far successful track record of economic development without political reform understandably holds great appeal for Arab autocrats.Finally, stronger ties with China – and Russia – are an attractive option for Middle Eastern rulers as they navigate difficult relations with the West. Saudi Arabian Crown Prince Mohammed bin Salman’s trip to Asia earlier this year, just a few months after the murder of Washington Post columnist Jamal Khashoggi in the Saudi consulate in Istanbul, was a case in point. Shunned by the West, MBS tried to normalize his international image through Asian summitry. A similar logic applied to Sisi’s Chinese forays in the aftermath of his bloody coup in Egypt in 2013.And although Iran is a qualitatively different case, the country’s growing isolation from the West is pushing it, too, to cooperate more closely with China. Since the US withdrew from the 2015 Iran nuclear deal and reimposed sanctions, closer relations with China have been a matter of necessity, not choice, for the Islamic Republic. China, in turn, has taken full advantage and forced Iran to accept its terms for bilateral engagements and trade.At the same time, China seems aware of its limited ability to play a meaningful role in addressing the Middle East’s intractable political and security issues, such as the Israeli-Palestinian conflict or the Syrian crisis. Here, the US is still the primary extra-regional player.But American strength isn’t necessarily bad news for China: in principle, there should be no major conflict between Chinese and US interests in the region. Despite having naval bases in Djibouti and in Gwadar in Pakistan, China does not aspire to any great political role in the Middle East. Moreover, America’s declared goal of ensuring regional stability, in particular via its security umbrella in the Gulf, also helps to protect China’s economic and energy interests.Unlike the US, China has no special relationship with any Middle Eastern country. As a result, its approach is highly transactional, avoiding sensitive geopolitical issues and capitalizing on rulers’ discontent with US policy in order to advance Chinese economic interests. In a region as volatile as the Middle East, however, the question is how long such an approach can be sustained.Galip Dalay is a visiting scholar at the University of Oxford and a former IPC-Mercator Fellow at the German Institute for International and Security Affairs (SWP).(5) Pettis: US should tax Chinese capital inflows; US savings rate is low because it has to absorb so much foreign capitalMichael Pettis is here referring to the PBOC creating NEW Yuan with which to buy USD from Chinese exporters, then buying US Treasury Bonds with those $, in order to keep the Yuan from rising. - Peter M. Should Tax Capital InflowsMICHAEL PETTISTaxing capital inflows is a far better way to balance trade than imposing tariffs. This would address the root causes of trade imbalances, improve the productive investment process, and shift most of the adjustment costs onto banks and speculators.August 06, 2019TACKLING TRADE IMBALANCES THROUGH INVESTMENTOn July 31, 2019, U.S. Senators Tammy Baldwin and Josh Hawley submitted a bill "to establish a national goal and mechanism to achieve a trade-balancing exchange rate for the United States dollar, to impose a market access charge on certain purchases of United States assets, and for other purposes." According to an earlier memo that further explains the bill:The Competitive Dollar for Jobs and Prosperity Act would task the Federal Reserve with achieving and maintaining a current account balancing price for the dollar within five years. It would create an exchange rate management tool in the form of a Market Access Charge (MAC)—a variable fee on incoming foreign capital flows used to purchase dollar assets. The Fed would set and adjust the MAC rate. The Treasury Department would collect the MAC revenue. The result would be a gradual move for the dollar toward a trade-balancing exchange rate. The legislation would also authorize the Federal Reserve to engage in countervailing currency intervention when other nations manipulate their currencies to gain an unfair trade advantage.Whether or not this bill is passed, it marks the beginning of a necessary reappraisal of the forces driving international trade and U.S. trade imbalances. The heart of the bill would be a stipulation that the Federal Reserve levy a variable tax on overseas capital used to buy U.S. assets whenever foreign investors invest significantly more capital in the United States than U.S. investors send abroad, which has been the case for more than forty years. The purpose of the tax would be to reduce capital inflows until they are largely in balance with outflows. A country’s capital account and current account must always match up exactly, so a balanced U.S. capital account would mean a balanced current account, and with this the U.S. trade deficit would disappear.PUTTING THE INVESTMENT CART BEFORE THE HORSESome might think that imposing tariffs on imported goods is a more effective way to reduce U.S. trade deficits than levying duties on imported capital, but that’s the wrong approach. The key is to understand what drives the trade imbalances. If the recent Senate bill had been proposed in the nineteenth century—when trade finance dominated international capital flows—the proposal to tax capital inflows wouldn’t have made much sense. But today, as I have explained before (including here and here), the global economy is overflowing with excess savings. The need to park these excess savings somewhere safe is what fuels global capital flows, in turn giving rise to trade imbalances. As I explained in a recent Bloomberg piece, "Capital has become the tail that wags the dog of trade."After all, even though interest rates are historically low and U.S. corporate balance sheets are amassing heaps of nonproductive cash, the U.S. economy is still absorbing massive sums of capital from overseas. Clearly, this isn’t happening because U.S. firms need foreign capital. The reason for these imbalanced capital flows is that foreign investors need a safe place to direct their excess savings. With the deepest, best-governed, and friendliest capital markets, the United States is the obvious destination.Economists who contend that the U.S. economy needs foreign capital to compensate for low domestic savings rates are mostly confused about why U.S. savings rates are so low and how they respond to capital inflows. A fundamental requirement of the balance of payments is that net capital inflows must boost the gap between investment and savings, and if capital inflows do not cause domestic investment to rise, they must cause domestic savings to decline. There is no other possibility, and as I’ve explained elsewhere, capital inflows force the U.S. economy to adjust either by increasing unemployment or, more likely, by setting off conditions that cause fiscal or household debt to grow. Put another way, the United States doesn’t absorb foreign capital because the country has a low savings rate—the country’s savings rate is low because it has to absorb so much foreign capital.This is why it is a mistake to think—as many do—that Americans need foreign capital to counter low domestic savings rates, or even that the U.S. current account deficit is driven in part by a burgeoning fiscal deficit. If one country saves more than it invests, another country must save less than it invests: that is how the global balance of payments works. Americans automatically tend to assume that it must be the United States that sets the savings schedule of the whole world, but this is unlikely. The high savings rates of countries like China, Germany, and Japan are too obviously a function of the distribution of domestic income (see here and here for why), making it far more likely that excess savings in those countries drive down savings elsewhere.TAXING CAPITAL INFLOWS IS THE SMART PLAYIf it is excess savings in surplus countries that drive capital and trade imbalances globally, then taxing capital inflows is not just the most efficient way to rebalance the U.S. trade ledger—it may perhaps be the only way. And there are more reasons why the United States should consider restricting the capital account. If designed well, a tax on capital inflows could have at least five other advantages:Balancing trade flexibly: A well-designed system of taxing capital inflows would help broadly rebalance the U.S. current and capital accounts over several years. Having the Fed impose a variable tax on capital inflows at its discretion would give the United States a tool for managing trade imbalances that is far more flexible than WTO interventions, trade negotiations, tariffs, or subsidies. At the same time, this approach would allow for the temporary trade imbalances that are a normal feature of any well-functioning global trading system. Enhancing financial stability: Because it would be a one-off tax on transactions, this 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, much like a Tobin tax. Among other things, such a tax would not require huge shifts in the value of the dollar because it focuses so effectively on the most damaging kinds of capital inflows. For example, if the tax were 50 basis points (or half of a percentage point), the annual yield on a three-month investment in the United States would drop by more than two percentage points, making short-term investment a losing proposition. A one-year investment would fare better, but annual yields would still drop by just more than half of a percentage point.A ten-year investment, on the other hand, would reduce expected yields by a mere five to seven basis points, hardly enough to matter to an investor interested in building a factory in the United States, while a twenty-year investment would see yields drop even lower, by three to four basis points. The impact of the tax, in other words, would be to skew foreign investment away from short-term, speculative inflows. Long-term investments in productive facilities, however, could even become more attractive to the extent that the measure would lower the value of the dollar. In effect, this would enhance the stability of the U.S. financial system.Treating economic actors more efficiently: Whereas tariffs subsidize some U.S. producers at the expense of others, taxing capital inflows would benefit most domestic producers with the costs borne primarily by banks and speculators. Major international banks would lose out on a tax on capital inflows because they profit from the intermediation of capital flows into and out of the country, and because they fund themselves with cheap, short-term money that they redirect to borrowers at higher rates. This is why the biggest opponents of a tax on capital inflows are likely to be major international banks. But to the extent that these banks, many of which are considered too big to fail, are too large and have an excessive role in the economy and in policymaking, forcing them to pay for the benefits accrued by U.S. producers might actually create a further benefit to the U.S. economy. Avoiding broader economic disruptions: Unlike issuing tariffs, levying a tax on capital inflows doesn’t disrupt value chains to anywhere near the same extent or distort relative prices on tradable goods. Tariffs favor some sectors of the productive economy over others, so they can be highly politicized as well as highly distorting to global value chains and the role of U.S. producers. Taxing capital flows works by forcing financial adjustments—by adjusting the value of the dollar, for example, or by reducing debt—so such a tax is likely to be both less politicized and less distortionary to the real economy. In fact, to the extent that trade imbalances are driven by distortions in global savings, taxes on capital inflows will even drive prices closer to their optimal level.Allocating capital more efficiently: Some observers might argue that, by reducing the capital available for U.S. investment, a tax on foreign capital inflows would distort productive investment and make the capital allocation process in the United States less efficient. This would be true if most international capital consisted of sophisticated investment capital seeking its most economically efficient use, but only academic economists believe this is the case. In fact, much of the flow of international capital is driven by temporary investment fads, capital fleeing from political or financial uncertainty, reserve accumulation strategies by foreign central banks, debt bubbles, and speculative plays on currency or emerging markets. For that reason, a variable tax on capital inflows would actually improve the capital allocation process by discriminating against nonproductive uses of capital and so preventing them from distorting the financial markets.The biggest risk of a tax on capital inflows is that the U.S. economy might indeed experience periods when there are capital shortages and U.S. businesses are unable to access cheap capital. At such times, of course, the Fed would simply set the tax to zero.The trade shortfalls that plague the U.S. economy are chiefly a product of imbalanced capital flows, which are driven by distortions in global savings. Selectively restricting capital inflows is the best way to address these imbalances. Tariffs are a far less effective tool: they mostly just rearrange bilateral imbalances and distort the underlying economy without addressing structural issues. Whether it passes or not, the recent Senate bill is the right approach and an encouraging sign because it is the first time lawmakers have sought to address the persistent U.S. trade deficit by way of capital imbalances.My Twitter account is @michaelxpettis. Aside from this blog, I write a monthly newsletter that covers some of the same topics. Those who are interested in receiving the newsletter should write to me at, stating affiliation.This post is based on a recent piece that the author wrote for Bloomberg., Americans Don't Spend Too MuchForeign money, not greed, is driving down U.S. savings rates.By Michael PettisMay 8, 2017, 9:00 AM EDTMichael Pettis is a professor of finance at the Guanghua School of Management at Peking University in Beijing.Why does the U.S. run large trade deficits? As Harvard professor Martin Feldstein recently explained, the answer seems obvious: Americans save too little and consume too much. As a result, they must borrow from abroad to fund domestic consumption binges. Until Americans become a lot thriftier, Feldstein warns, U.S. trade deficits will remain high.But this view is based on a model of global trade that has long been obsolete. In the 19th century, it's true, an unstable banking system left Americans saving far too little to fund the investment needs of a rapidly growing economy. Fortunately, that fast growth helped the U.S. offer the high returns needed to attract capital from Europe.Today’s deficits are different. Since the 1980s, they've risen even when interest rates have fallen, suggesting foreigners are more eager to lend than Americans are to borrow. The need to deploy excess savings is driving countries to send capital to the U.S.This flood of money has in turn suppressed U.S. savings. To understand why, it's important to note that for nearly a century U.S. financial markets -- the world's deepest and most flexible -- have automatically adjusted to resolve global savings imbalances. After the first and second world wars, for instance, when devastated economies were being rebuilt, they generated high savings as the U.S. became the leading capital exporter in the world. Over the subsequent five decades, when the world needed to sell goods and services, they produced low savings as U.S. trade deficits soared.Consider what would happen today if the rest of the world suddenly increased the amount of capital it exported to the U.S. Would U.S. investment rise to accommodate the increased inflow? Certainly not. Interest rates have been close to zero for years, and yet U.S. businesses, flush with enormous amounts of cash, seem determined not to invest until profit opportunities reemerge. Simply making more foreign capital available is unlikely to change their minds.This is what makes Feldstein’s model obsolete. It is true that in the 19th century, the U.S. was a net absorber of foreign capital, just as it is today, and that therefore domestic investment exceeded domestic savings, just as it does today. In the 19th century, however, because U.S. investment was constrained by the lack of capital, the inflow of foreign savings allowed capital-starved businesses and governments to invest more in infrastructure than they otherwise could. Foreign inflows pushed U.S. investment above U.S. savings.This is no longer the case. In today’s world, the U.S. economy no longer faces a savings constraint. Businesses have more capital than they need, so additional foreign capital won't cause investment to increase. But if investment doesn’t increase in response to more foreign capital inflows, then of necessity savings must decline.There are many ways foreign capital inflows can depress savings. They can inflate asset bubbles that encourage spending through wealth effects, for example, or they can strengthen the currency. They can reduce interest rates on consumer credit, or weaken lending standards, both of which boost borrowing by more profligate households. They can force up trade deficits that increase unemployment.There are countless examples besides the U.S. in which this has happened. After Germany’s 2003 labor reforms caused German savings to rise, for example, German capital poured into the rest of Europe, quickly generating asset bubbles, real currency appreciation, low or even negative real interest rates, collapsing credit standards and eventually soaring unemployment. In every case, local savings rates collapsed, just as they had in the U.S.There's a great irony here. One hundred years ago, Lenin described imperialism as an economic process in which the great industrial powers forced their colonies to sop up excess domestic savings and run trade deficits with the motherland. As economist Kenneth Austin noted in 2011, the U.S. now plays this role, absorbing nearly half of the world’s capital outflows, and so runs the corresponding trade deficit.In today’s world, in other words, the U.S. trade deficit is not "caused" by Americans saving too little, nor will deficits disappear because Americans decide to spend less. As counter-intuitive as this may seem, foreigners, rather than U.S. thrift or profligacy, determine U.S. savings rates. If Americans tried to become thriftier, and foreign capital inflows remained at current levels, the economy would adjust to depress savings in some other way, probably through higher unemployment.U.S. savings will automatically rise when foreign capital no longer pours into the country. Only then will the U.S. trade deficit decline.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. To contact the author of this story:To contact the editor responsible for this story: Nisid Hajari at