7 Aug 2019
Legislation Would Tax Foreign Financial Investments to Lower Value of U.S. Dollar
Legislation introduced on 31 July by Sens. Tammy Baldwin (Democrat-Wisconsin) and Josh Hawley (Republican-Missouri) would direct the Board of Governors of the Federal Reserve to establish a market access fee for foreign purchases of U.S. assets, including stocks, bonds, other financial instruments, real estate, intellectual property and “any other asset class or transaction identified by the Board of Governors of the Federal Reserve as trading in sufficient volume to cause a risk of upward pressure on the exchange rate of the United States dollar.” The market access fee would apply to all transactions over US$10,000.
The Federal Reserve would be required to set the fee at a level to bring the U.S. current account into balance within five years and maintain that balance thereafter. If an initial fee has not been established within 180 days from the date of enactment of the legislation, a fee of 50 basis points of the value of a covered transaction would automatically apply. The fee would be collected by financial institutions and transfer agents, with a monthly fee transfer to the Treasury Department. Financial institutions and transfer agents would be authorised to charge a service fee as well. Moreover, in addition to the current Federal Reserve mandates to maintain price stability and economic growth the legislation would direct the Fed to keep the value of the U.S. dollar at a “trade balancing price.”
A joint press release from the two senators’ offices justifies the market access fee as a way to counter currency manipulation pursued by other economies (including mainland China) as well as the overvaluation of the U.S. dollar as a result of foreign purchases of U.S. stocks, bonds and other assets. Baldwin indicated that reforms are needed to “create a competitive American dollar and an even playing field for manufacturers, farmers and workers” while Hawley argued that the new legislation “creates a powerful new tool to fight back against foreign currency manipulators, encourage investment in American jobs, and make our exports more competitive around the world.”
The lawmakers claim that, according to the Coalition for a Prosperous America, “bringing the U.S. dollar into alignment could add nearly $1 trillion to America’s GDP, create more than five million new U.S. jobs and raise more than $2 trillion in tax revenue over six years.” Dan DiMicco, CEO of the Coalition for a Prosperous America, was an early proponent of Trump administration trade policy regarding mainland China.
While this legislation has the formal support of only two senators, it has received considerable press coverage in the United States. The bill includes “sense of Congress” language claiming that its provisions are consistent with U.S. obligations at the World Trade Organisation and the IMF, but analysts see several problems with it and the U.S. financial services sector is expected to oppose it.