January 4, 2016

Incoming Payments for US Exports -- Will They Pay the MAC?

Careful readers have suggested that, because the Market Access Charge (MAC) will apply to all capital entering the US from abroad, the MAC would apply to incoming payments for US exports, and they have asked if this would harm US exports.

This is a very good question -- and it deserves a good answer. This blog post summarizes a mechanism within the overall MAC proposal that would avoid this potential problem.

 MAC's A/B Bank Account (ABBA) system

All inflows of money (capital) entering the United States will in fact be subject to the MAC charge because this approach would:

  1. Minimize the risk that foreign investors will defraud America and reduce the MAC's effectiveness by claiming falsely that foreign capital is being brought into the United States to pay for US exports;
  2. Minimize administrative costs driven by the need to verify such claims; and 
  3. Be consistent with the general principal that any trade policy should help create a level playing field.
However, to be consistent with the facts that:
  1. the MAC is only designed to moderate net inflows of capital to reduce the dollar's overvaluation; 
  2. capital inflows that are actually used to pay for US exports do not result in net inflows of capital that stays invested in domestic US assets, nor do they contribute to the dollar's overvaluation; and 
  3. the MAC should stimulate, not discourage, US exports, 
the enabling legislation for the MAC could establish an A/B Bank Account system (ABBA).

This would work as follows: Foreign capital arriving at one of the "gateway" US banks that handle most of America's foreign capital inflows would be placed in a blocked (B) account. Funds in "B" accounts could not be withdrawn until either:
  1.  The investor bringing the capital in from abroad authorized the gateway bank to deduct the MAC charge, which the bank would then transfer electronically to the US Treasury;
  2. The gateway bank received an electronic message for US Customs indicating that a certain value of goods had been cleared for export against the account in question; or 
  3. The gateway bank received an electronic copy of an invoice from a US provider of exportable services indicating that payment for a certain value of exported services was due from the entity that was buying the US services.
As soon as one of these three conditions had been met, the indicated value of funds would be transferred electronically, and probably automatically, from the blocked "B" account to a parallel "A" account where the money would be available to the entity or individual depositing the funds for any legal use. 

Since this process would apply equally to all holders of foreign capital, regardless of whether the holders were foreigners or US nationals, this process would be fully consistent with the "national treatment" requirement common in trade law and free trade agreements -- the requirement that foreigners be treated like domestic nationals in investment-related matters.

In this day of high-speed electronic accounting, the extra cost of setting up and running parallel A and B accounts would be essentially zero for the following reasons:
  1. The accounts could be set up almost instantaneously based on information that is routinely available. 
  2. Once established for a given holder of capital held abroad, such accounts could be used for all present and future transactions by the holder. 
  3. Since the transfer from blocked to accessible accounts could take place in a matter of seconds after the foreign capital funds had been deposited in the B account, this A/B structure need not impose additional costs in the form of foregone interest on the funds. 
  4. Should the cost of foregone interest become an issue, a market rate of interest on deposits could be paid out of proceeds earned by the depository bank, which could lend out the money being held in the B account. 
  5. Finally, should the US ever decide to follow the example of other countries and require those bringing capital into America to hold the funds in non-remunerated accounts for a given period of time before release, the necessary accounts would already be in place. The only change needed would be to require that funds would have to be left in the B account for a specified period of time before being released to the A account.
In summary, by including an A/B Bank Account mechanism in the MAC legislation, it would be easy to assure that the MAC approach maintained a level playing field, minimized administrative costs, and removed any bias against US exports.
Note: This blog post is based on Annex C of the book I drafted a couple of years ago on the Market Access Charge. A draft of this book will soon be available in the "Papers" section of this blog under the title, A Competitive America Needs a Competitive Dollar - Preparing America for the 21st Century with a Market Access Charge to Link the Dollar's Value to Balanced Trade).

America Needs a Competitive Dollar - Now!

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