Decades of misguided trade policies have transformed the United States into the world’s consumer of last resort, absorbing the world’s excess savings at the expense of its manufacturing sector.
U.S.-imposed tariffs are the first step towards rebalancing the system, but they aren’t sufficient. Solving these problems will require the application of capital tools as well.
This article proposes reimposing the withholding tax on interest income earned by foreign investments and establishing a Sovereign Wealth Fund.
Much has been said about the implications of recent tariffs on the U.S. economy. These debates range from the short-term effects of tariffs on the stock and bond market, to the possibility of a recession, to fears about retaliation from other countries. But lost in these fevered discussions is the deeper significance of what U.S. trade policy is attempting to signal to the world: that America will no longer serve as the global buyer of last resort, endlessly absorbing the surplus savings and overproduction of export-driven economies like China, Japan, and Germany.
Under the prior global trading order, the United States maintained open capital markets and lowered its trade barriers under the misguided assumption that its trading partners would follow suit. At the same time, countries like China, Germany, and Japan pursued mercantilist policies that propped up their manufacturing sectors at the expense of the United States’.
Such measures have included wage suppression—which subsidizes domestic production—currency intervention, non-market subsidies, and strict capital controls all of which has restrained domestic consumption in these economies while promoting chronic trade surpluses. The United States has compensated for this imbalance through heightened consumption—as reflected in its high trade deficits—which have been matched by surging capital inflows from abroad (figures 1 and 2).
This arrangement is not the result of market efficiency, but of structural imbalances embedded in the global trading system.To take one example, during 2024, three of the world’s largest surplus savers, China, Germany, and Japan collectively ran a current account surplus of $884 billion, which the United States more than offset with a $1.1 trillion deficit (figure 3).
The Balance of Payments: A Primer
Most discussions of global imbalances focus on trade—who exports more, who imports too much—but this captures only one half of the story. Every time money crosses a border, it does so to either buy goods and services (trade flows) or buy financial assets (capital flows). These two flows are locked together by a principle called the balance of payments, expressed in a simple but essential identity:
Trade Flow = Capital Flows¹
This equation means that every dollar a country spends beyond its earnings (a current account deficit) must be financed by an equal inflow of capital—through U.S. borrowing or sales of dollar-denominated assets. In the U.S., when a foreign central bank buys $1 billion of U.S. Treasuries, that dollar has to come from somewhere: it enters the U.S. financial system as capital inflow and must be matched on the other side of the ledger by an outflow in the current account (figure 4).
That typically takes the form of a trade deficit—the U.S. imports more goods and services than it exports. Even though no physical goods are exchanged in the financial transaction itself, the inflow of capital strengthens the dollar, makes imports cheaper, and erodes export competitiveness—thereby widening the trade deficit. Over time, these financial inflows and trade deficits accumulate, reinforcing the U.S.’s role as the global absorber of excess foreign savings (figure 5).
Most often, this heavy inflow of capital into the United States has targeted non-productive assets, as opposed to genuine capacity building. Broadly speaking, foreign capital inflows can be divided into three categories based on their economic function (figure 6):
Productive inflows refers to greenfield foreign direct investment (FDI) that builds new factories, facilities, or expansions—capital that directly builds industrial capacity.
Speculative inflows consist of short-term, liquid investments such as equities, short-term debt, currency, and other financial instruments aimed at quick profits but do not promote economic output.
Passive inflows include foreign acquisitions of existing U.S. companies (M&A), reinvested earnings, and long-term holdings like bonds or deposits. These are long-term investments that also do not generate new production or employment.
The Role of the Dollar
What makes the U.S. situation unique is the centrality of the U.S. dollar as the global reserve currency. Under ordinary circumstances, a sustained U.S. trade deficit would lead to a depreciation of the dollar, as demand for foreign currency would rise to purchase imports. This depreciation would adjust the unbalanced trade by making U.S. exports more competitive and imports more expensive.
However, the centrality of the U.S. dollar to international commerce props up the dollar’s value and prevents it from adjusting downward as theory predicts. For example, during periods of global uncertainty, foreign investors often seek safety in U.S. financial markets, increasing demand for Treasuries and other dollar assets. This inflow of capital strengthens the dollar and effectively subsidizes U.S. imports, allowing the United States to run large trade deficits without experiencing a meaningful currency depreciation.
At the same time, countries around the world hold dollar assets to stabilize their currencies and protect against financial crises, and many actively buy dollars to keep their own currencies weak and exports competitive. Generally speaking, the U.S. treasury market has been upheld as the world’s largest, most liquid, and the safest capital market in the world, making it the principal destination for surplus-savings countries to invest (figure 7).
China’s acquisition of dollar assets has been especially strong over the past decade. During 2014–18, for example, such assets were valued at roughly 60 percent of China’s total foreign exchange reserves, with the bulk of those assets in U.S. treasuries. Although China has begun reducing their ownership of U.S. treasuries since President Trump was first elected in 2017, they still currently own nearly $1.5 trillion in U.S. securities, with more than half of this debt composed of U.S. treasuries as of 2024 (Figure 8).
The influx of foreign capital has placed upward pressure on the U.S. dollar, which has eroded the competitiveness of its export sectors by making them more expensive relative to imports. Federal Reserve data shows that the real value of the dollar as of April 2025 remains 20 percent above its 52-year historical average of 89 (figure 9).
The Strong Dollar Has Weakened U.S. Manufacturing
The historically strong dollar has decimated the U.S. manufacturing sector, acting like a tax on exports and a subsidy on imports. Since its peak in 1980, the U.S. has lost 6.4 million manufacturing jobs. Meanwhile, the trade deficit has more than tripled over the past 25 years, reaching $1.2 trillion at the end of 2024, as previously noted in figure 2.
As of 2024, the U.S. current account deficit widened to 3.8%, while manufacturing value-added as a share of GDP has stagnated at roughly 11 percent. In contrast, surplus saving countries like China, Germany, and Japan continue to boast competitive manufacturing sectors, buoyed by their current account surpluses. Manufacturing value-added as a share of GDP is nearly twice as high in each of these economies as it is in the United States (figure 10).
Tariffs and Capital Tools to Rebalance the U.S. Economy
The challenge of redressing decades of unbalanced trade will require a combination of tariffs and capital tools. Encouragingly, current U.S. trade policy aims to establish a 10% baseline tariff on all merchandise imports. This—along with sector-specific national security duties—represent the foundation of a greater plan to reindustrialize America, while reclaiming the country’s supply chains from China and other countries for everything from pharmaceuticals, to automotive parts, to semiconductors, to steel and aluminum.
In addition, the United States can target distortionary foreign capital inflows in two ways:
Reimpose the Withholding Tax: One possibility would be to reinstate the 30% withholding tax on interest income earned by foreign holders of U.S. securities. This policy, which existed until 1984, would correct a fundamental asymmetry in the current system where foreign investors are exempt from U.S. taxes on most capital gains from U.S. financial assets, interest on U.S. bank deposits, and income from debt securities, while American savers are not. These decades-old exemptions in the tax code have effectively functioned as a state-sponsored subsidy for foreign capital inflows.
At a minimum, the Administration should proceed with terminating the 1984 U.S.-China tax treaty, as highlighted in the White House’s “America First Investment Policy.” This treaty currently allows Chinese government entities to earn interest income from U.S. securities completely tax-free—despite holding nearly $1.5 trillion in U.S. financial assets. Its termination would instantly restore the statutory 30% withholding rate on Chinese investments, fundamentally reshaping the financial incentives underpinning China’s massive accumulation of U.S. debt.
Moreover, the revenue derived from this tax could be used to invest in strategic sectors like artificial intelligence and advanced manufacturing, but also to support worker retraining programs that restore economic opportunity in communities harmed by decades of unfair trade. The United States has not done nearly enough to support workers harmed by these failed trade policies (figure 11).
Establish Sovereign Wealth Fund: A Sovereign Wealth Fund (SWF) is a publicly owned, independent investment entity that channels national capital into long-term strategic sectors of the economy. The CPA’s proposed U.S. Sovereign Wealth Fund would invest directly in domestic manufacturing, infrastructure, and frontier technologies to restore economic independence, reindustrialize the country, and reduce reliance on foreign capital.
Unlike politically driven subsidies or passive spending, the SWF would act as a market-guided investor—taking minority equity stakes, issuing low-interest loans, and co-investing alongside private capital in projects that meet strict national security and economic impact criteria. It could be funded through natural resource royalties, targeted taxes on non-productive foreign capital inflows, reinvested returns, and dedicated public savings instruments.
The fund’s mission would be both economic and strategic: to rebuild America’s industrial base, anchor capital in productive uses, and reassert national control over the foundations of economic security that globalization and financialization have hollowed out. In an era of rising geopolitical competition, the SWF is not just a fiscal tool—it is a structural instrument to redirect capital toward the national interest.
As with any policies that disrupt the status quo, these proposals will likely draw concerns ranging from fears that foreign investors will dump U.S. assets and drive up interest rates, to the likelihood of retaliation, to the utility of creating a SWF. It is important to note that the depth and breadth of U.S. financial markets still make it the most attractive capital market in the world for investors. Second, most foreign jurisdictions already impose their own withholding taxes on U.S. investors; the reimposition of the withholding tax in the United States would simply reciprocate the policies maintained by other nations. Likewise, a U.S.-based SWF is sensible given that 21 states in the U.S. and over 90 countries already operate such funds as a strategic tool to promote financial sovereignty and generate economic benefits.
FOOTNOTES:
[1]This is a very simplified version of the Balance of Payments. The identity is technically expressed as: current account + capital account + financial account + errors and omissions= 0, where the current account is the sum of the trade balance, net primary income, and net transfers. The capital account includes small, one-time transfers of non-produced, non-financial assets, and the financial account is the sum of foreign direct investment (FDI), portfolio investment, other investments, and changes in reserve assets held by central banks.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
Tariffs and Capital Tools to Revive American Trade Policy
IDEA IN BRIEF:
Much has been said about the implications of recent tariffs on the U.S. economy. These debates range from the short-term effects of tariffs on the stock and bond market, to the possibility of a recession, to fears about retaliation from other countries. But lost in these fevered discussions is the deeper significance of what U.S. trade policy is attempting to signal to the world: that America will no longer serve as the global buyer of last resort, endlessly absorbing the surplus savings and overproduction of export-driven economies like China, Japan, and Germany.
Under the prior global trading order, the United States maintained open capital markets and lowered its trade barriers under the misguided assumption that its trading partners would follow suit. At the same time, countries like China, Germany, and Japan pursued mercantilist policies that propped up their manufacturing sectors at the expense of the United States’.
Such measures have included wage suppression—which subsidizes domestic production—currency intervention, non-market subsidies, and strict capital controls all of which has restrained domestic consumption in these economies while promoting chronic trade surpluses. The United States has compensated for this imbalance through heightened consumption—as reflected in its high trade deficits—which have been matched by surging capital inflows from abroad (figures 1 and 2).
This arrangement is not the result of market efficiency, but of structural imbalances embedded in the global trading system.To take one example, during 2024, three of the world’s largest surplus savers, China, Germany, and Japan collectively ran a current account surplus of $884 billion, which the United States more than offset with a $1.1 trillion deficit (figure 3).
The Balance of Payments: A Primer
Most discussions of global imbalances focus on trade—who exports more, who imports too much—but this captures only one half of the story. Every time money crosses a border, it does so to either buy goods and services (trade flows) or buy financial assets (capital flows). These two flows are locked together by a principle called the balance of payments, expressed in a simple but essential identity:
Trade Flow = Capital Flows¹
This equation means that every dollar a country spends beyond its earnings (a current account deficit) must be financed by an equal inflow of capital—through U.S. borrowing or sales of dollar-denominated assets. In the U.S., when a foreign central bank buys $1 billion of U.S. Treasuries, that dollar has to come from somewhere: it enters the U.S. financial system as capital inflow and must be matched on the other side of the ledger by an outflow in the current account (figure 4).
That typically takes the form of a trade deficit—the U.S. imports more goods and services than it exports. Even though no physical goods are exchanged in the financial transaction itself, the inflow of capital strengthens the dollar, makes imports cheaper, and erodes export competitiveness—thereby widening the trade deficit. Over time, these financial inflows and trade deficits accumulate, reinforcing the U.S.’s role as the global absorber of excess foreign savings (figure 5).
Most often, this heavy inflow of capital into the United States has targeted non-productive assets, as opposed to genuine capacity building. Broadly speaking, foreign capital inflows can be divided into three categories based on their economic function (figure 6):
The Role of the Dollar
What makes the U.S. situation unique is the centrality of the U.S. dollar as the global reserve currency. Under ordinary circumstances, a sustained U.S. trade deficit would lead to a depreciation of the dollar, as demand for foreign currency would rise to purchase imports. This depreciation would adjust the unbalanced trade by making U.S. exports more competitive and imports more expensive.
However, the centrality of the U.S. dollar to international commerce props up the dollar’s value and prevents it from adjusting downward as theory predicts. For example, during periods of global uncertainty, foreign investors often seek safety in U.S. financial markets, increasing demand for Treasuries and other dollar assets. This inflow of capital strengthens the dollar and effectively subsidizes U.S. imports, allowing the United States to run large trade deficits without experiencing a meaningful currency depreciation.
At the same time, countries around the world hold dollar assets to stabilize their currencies and protect against financial crises, and many actively buy dollars to keep their own currencies weak and exports competitive. Generally speaking, the U.S. treasury market has been upheld as the world’s largest, most liquid, and the safest capital market in the world, making it the principal destination for surplus-savings countries to invest (figure 7).
China’s acquisition of dollar assets has been especially strong over the past decade. During 2014–18, for example, such assets were valued at roughly 60 percent of China’s total foreign exchange reserves, with the bulk of those assets in U.S. treasuries. Although China has begun reducing their ownership of U.S. treasuries since President Trump was first elected in 2017, they still currently own nearly $1.5 trillion in U.S. securities, with more than half of this debt composed of U.S. treasuries as of 2024 (Figure 8).
The influx of foreign capital has placed upward pressure on the U.S. dollar, which has eroded the competitiveness of its export sectors by making them more expensive relative to imports. Federal Reserve data shows that the real value of the dollar as of April 2025 remains 20 percent above its 52-year historical average of 89 (figure 9).
The Strong Dollar Has Weakened U.S. Manufacturing
The historically strong dollar has decimated the U.S. manufacturing sector, acting like a tax on exports and a subsidy on imports. Since its peak in 1980, the U.S. has lost 6.4 million manufacturing jobs. Meanwhile, the trade deficit has more than tripled over the past 25 years, reaching $1.2 trillion at the end of 2024, as previously noted in figure 2.
As of 2024, the U.S. current account deficit widened to 3.8%, while manufacturing value-added as a share of GDP has stagnated at roughly 11 percent. In contrast, surplus saving countries like China, Germany, and Japan continue to boast competitive manufacturing sectors, buoyed by their current account surpluses. Manufacturing value-added as a share of GDP is nearly twice as high in each of these economies as it is in the United States (figure 10).
Tariffs and Capital Tools to Rebalance the U.S. Economy
The challenge of redressing decades of unbalanced trade will require a combination of tariffs and capital tools. Encouragingly, current U.S. trade policy aims to establish a 10% baseline tariff on all merchandise imports. This—along with sector-specific national security duties—represent the foundation of a greater plan to reindustrialize America, while reclaiming the country’s supply chains from China and other countries for everything from pharmaceuticals, to automotive parts, to semiconductors, to steel and aluminum.
In addition, the United States can target distortionary foreign capital inflows in two ways:
At a minimum, the Administration should proceed with terminating the 1984 U.S.-China tax treaty, as highlighted in the White House’s “America First Investment Policy.” This treaty currently allows Chinese government entities to earn interest income from U.S. securities completely tax-free—despite holding nearly $1.5 trillion in U.S. financial assets. Its termination would instantly restore the statutory 30% withholding rate on Chinese investments, fundamentally reshaping the financial incentives underpinning China’s massive accumulation of U.S. debt.
Moreover, the revenue derived from this tax could be used to invest in strategic sectors like artificial intelligence and advanced manufacturing, but also to support worker retraining programs that restore economic opportunity in communities harmed by decades of unfair trade. The United States has not done nearly enough to support workers harmed by these failed trade policies (figure 11).
Unlike politically driven subsidies or passive spending, the SWF would act as a market-guided investor—taking minority equity stakes, issuing low-interest loans, and co-investing alongside private capital in projects that meet strict national security and economic impact criteria. It could be funded through natural resource royalties, targeted taxes on non-productive foreign capital inflows, reinvested returns, and dedicated public savings instruments.
The fund’s mission would be both economic and strategic: to rebuild America’s industrial base, anchor capital in productive uses, and reassert national control over the foundations of economic security that globalization and financialization have hollowed out. In an era of rising geopolitical competition, the SWF is not just a fiscal tool—it is a structural instrument to redirect capital toward the national interest.
As with any policies that disrupt the status quo, these proposals will likely draw concerns ranging from fears that foreign investors will dump U.S. assets and drive up interest rates, to the likelihood of retaliation, to the utility of creating a SWF. It is important to note that the depth and breadth of U.S. financial markets still make it the most attractive capital market in the world for investors. Second, most foreign jurisdictions already impose their own withholding taxes on U.S. investors; the reimposition of the withholding tax in the United States would simply reciprocate the policies maintained by other nations. Likewise, a U.S.-based SWF is sensible given that 21 states in the U.S. and over 90 countries already operate such funds as a strategic tool to promote financial sovereignty and generate economic benefits.
FOOTNOTES:
[1]This is a very simplified version of the Balance of Payments. The identity is technically expressed as: current account + capital account + financial account + errors and omissions= 0, where the current account is the sum of the trade balance, net primary income, and net transfers. The capital account includes small, one-time transfers of non-produced, non-financial assets, and the financial account is the sum of foreign direct investment (FDI), portfolio investment, other investments, and changes in reserve assets held by central banks.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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