No, I had not seen the linked piece, but I do not recall ever having agreed with Michael Pettis. This piece does not change that.

Consistently with my reductionist approach to these things, I treat “capital safety” as a service in which we have a comparative advantage, a service we trade for things in which others have a comparative advantage. Taxing that service makes no sense to me. What would Ricardo have said if the British had put export tariffs on cloth and the Portuguese had put excess tariffs on wine? Would they have traded at all?

As I see it, Pettis is suggesting a boycott of those imports in which the trading partner has the smallest comparative advantage. The tax depresses the dollar, the price of exports rises, and those priced out of the market we get to make ourselves. (Actually, our robots get to make them, but that’s for another day.)

There are only two things a country can do with a comparative advantage: exploit it or eschew it. Any scheme that seeks to reduce imports is protectionist, and protectionism always eschews comparative advantage. There may be strategic reasons for doing that — making your own weapons, for example — and nurturing nascent industries in which you would have a comparative advantage at scale may be another. (Even then, if we treat the relevant long-term goal as an opportunity cost, the comparative advantage forgone turns out to have been illusory.) In contrast to these strategic moves, Mr. Pettis’s tax scheme lets our trading partners decide what we will have to start making for ourselves, not based on our strategic need to be self-sufficient in that thing, but on the size of the comparative advantage the partner has in it. That strikes me as nuts.

It all boils down to a concept I mentioned in reply to one of your earlier posts: the technology of demand. We are stuck with “you-eat-what-you-kill,” and so Pettis suggests forgoing our comparative advantage in distribution, including our ability to issue a safe currency, so that we can have more jobs. That’s nineteenth century trade policy in service of twentieth century wealth distribution.

When will the world turn to other reserves? When we stop being the best place to sell into. When that happens, we won’t run a trade deficit anymore. But there is no reason to put ourselves in that position prematurely, no reason to balance our trade, no reason to make more things while we can still “export” political stability, product vetting, and distribution from port of entry to point of sale better than anyone else in the world. When that is no longer the case, because we keep self-destruct or, more inevitably, China becomes its own best market, the trade deficit will go away. With any luck, it will happen slowly enough that we can adjust to it as it happens. But I see no point in just throwing in the towel, which is what I hear Mr. Pettis saying we should do.

The best way to balance our trade is to redefine our exports to include distribution services, product vetting services, and asset safety services. Voila, balanced trade. Economists think of tourism as an export. Why not these other intangibles enjoyed by foreigners? A thing is what a thing does, not where it does it. A thing that is enjoyed by foreigners is an export. We just need to learn to take the win. And in that respect, we have some serious work to do.