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 money 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 Bonded Bank Account (BBA) System

All inflows of money entering the United States will in principle be subject to the MAC charge because this approach will:

  1. minimize the risk that foreign investors will defraud America and reduce the MAC's effectiveness by claiming falsely that foreign money 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, the MAC system would be consistent with the facts that:
  1. the MAC is only designed to moderate net inflows of money from abroad that would otherwise contribute to the dollar's overvaluation; 
  2. money inflows that are actually used to pay for US exports do not result in net inflows of money that artificially push up the price of 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 therefore establish an Bonded Bank Account system (BBA). Just like a bonded warehouse allows physical goods to enter the United States for processing and re-export without paying duties, a bonded bank account would allow money to enter the United States to pay for US exports while assuring that the money is not used for other purposes such as speculating in US financial markets.

The bonded bank account would work as follows: Foreign money arriving at one of the "gateway" US banks that handle most of America's foreign capital inflows would be placed in a bonded account (usually a checking account). Funds in bonded accounts could not be withdrawn until either:
  1.  The investor bringing in the money from abroad authorized the gateway bank to deduct the MAC charge. At this point, the bank would transfer the MAC charge electronically to the US Treasury and release the money from bond to the owner of the account.
  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 bonded account in question. At this point the bank would pay the funds directly to the US exporter of record.
Since this process would apply equally to all holders of foreign domiciled money, regardless of whether the physical 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.

The extra cost of setting up and running bonded accounts would be essentially zero for the following reasons:
  1. The accounts could be set up electronically and almost instantaneously based on information that is already routinely available. 
  2. Transfers from bonded to normal checking accounts would take place in a matter of seconds once one of the above conditions had been met. Furthermore, money in a bonded would earn the same rate of interest as paid on a normal checking account.
  3. Consequently, the BBA structure would not impose additional costs in the form of foregone interest on the funds. 
  4. Should the US ever decide to follow the example of other countries and require those bringing money 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 be left in the bonded account for a specified period of time before being released.
In summary, by including a Bonded Bank Account mechanism in the MAC legislation, it would be easy to assure that the MAC approach maintained a level playing field, minimized evasion and administrative costs, and removed any bias against US exports.

America Needs a Competitive Dollar - Now!

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