From Redistribution to “Predistribution”—Rebuilding Worker Support for Markets and Trade

The CFR RealEcon: Reimagining American Economic Leadership initiative looks to assess the role of the United States in the international economy, analyze what is at stake for the American people, and identify the trade-offs in different policy approaches.

As part of this effort, the initiative seeks to understand the domestic preconditions for robust U.S. international economic engagement and explore relevant domestic policies. Panelists discuss policy-reform ideas to address the sources of inequality, which were featured in their recent piece for RealEcon, “Toward a More Prosperous, Less Polarized, Worker-Friendly Economy.”

GOODMAN: Well, good afternoon from New York. Welcome to the Council on Foreign Relations. My name is Matthew Goodman. I direct the Greenberg Center for Geoeconomic Studies. And I also direct an initiative called RealEcon, or Reimagining American Economic Leadership.

And just a little bit of shameless advertising, we are building a platform for conversation about the American role in the global economy, why that matters for American interests, why it matters for American people, why it matters to the rest of the world. And we’re looking at trying to come up with some kind of new, durable consensus for what that role ought to look like in this era. And in that context, we’re very interested in—in fact, we really feel it’s very important to understand the domestic economic story better than I think we have traditionally in the international policy world, and really to understand what domestic adjustments and disruptions are happening in people’s lives, the inequalities that exist in our domestic economy, and the policies that are being brought to bear to deal with those challenges.

And that’s why we’re delighted to—this event, “From Redistribution to ‘Predistribution’: Rebuilding Worker Support for Markets and Trade,” which is really a derivative of a fantastic essay that I hope you all have had a chance to read, or will read. It’s on the RealEcon website. And it was written by two of our panelists today, Alex Raskolnikov, who is Wilbur H. Friedman professor of tax law at Columbia Law School, and Benn Steil, my colleague here at CFR. He is senior fellow and director of international economics at the Council. And so they wrote this paper and are going to talk about it today. And we’re delighted that Lydia DePillis from the New York Times, as an economy reporter and covers a lot of the issues that are going to be talked about today, is here to help preside and moderate.

So I’m going to hand over to you, Lydia, and take it from here. Thanks.

DEPILLIS: Thank you, Matthew. Thank you all for coming. This is a really interesting essay, with two excellent writers and thinkers on this subject. So it’s really a pleasure to be here today. As mentioned, I’m a reporter at the New York Times. So I think about this stuff all the time. And I think Benn is going to start out with an overview of the subject.

STEIL: Yeah. So the essay that Matt mentioned, what Alex and I set out to do was to develop the beginnings of a policy framework for addressing what we argue is the economic basis of the growing political polarization in the United States. We don’t claim that economics explains everything, but we do believe it explains a lot. We argue that the roots of the problem go back, in particular, to the early 1990s, on the immediate aftermath of the collapse of the Berlin Wall and the Soviet Union. It was the beginning of what, we argue, was a triumphalist decade in which we believed that democratic capitalism had essentially supplanted all other political ideologies, and that free trade was going to be at the heart of this. That the successes of implementing free trade, both on a regional basis and a global basis, was going to be so compelling, so overwhelming, that it would be very easy to compensate the small groups of losers in the process.

And we argued that there were three problems with this thesis—quite fundamental ones. The first one has to do primarily with what’s been called the China shock. The first fifteen years or so of this millennium, after China joined the WTO in 2001—and we made clear that we don’t believe that China’s accession to the WTO was the cause of the problem, that China was going to be a rising economic power irrespective, but it certainly contributed to China’s advance. And the China shock had a far more devastating effect on certain professions, on certain communities in the United States, than had been anticipated. And in particular, the problem was that the economic dislocations were very concentrated in certain areas. That’s something that hadn’t been anticipated by economists.

Second, that the primary tool that had been laid out for us in the early 1990s to deal with the problem of losers in the process—so-called trade adjustment assistance—was grossly insufficient to deal with the problem. But, thirdly, it wasn’t just insufficient in terms of the resources that were made available. It was that these resources, government transfers, were really incommensurate with what was at stake. That people were losing their vocations, losing their identities, losing their families, losing their whole communities. And government transfers couldn’t address these problems. Voters have made absolutely clear over the past ten to fifteen years, in particular, that they were going to vote for good jobs and good wages and not for better government transfers when those jobs disappear.

So the framework that we tried to develop in the paper is called predistribution. It’s an alternative to redistribution. And its essence is this: It’s commonly assumed that the broad rules of the marketplace in which we all operate are neutral. They don’t favor one group over another. We would argue that this is a very flawed perspective, and that in fact in many cases the rules that guide the operation of the market hurt certain groups more than others, in particular those on the lower end of the income scale. Often, it’s completely unintentional. It’s not built into the system. But we need policymakers to begin carefully examining the rules of the marketplace to make sure that those on the bottom of the income scale are able to withstand these sort of transformations, transitions much better than they have been. And we call those rewriting of the rules of the marketplace predistribution.

DEPILLIS: So thank you for that overview. It does make me wonder what took you all so long. I mean, the term “predistribution” has been around for more than a decade. There were many people who realized that trade adjustment assistance was inadequate, even when it was being dispensed, mostly. So was it just the election of Donald Trump? Like, why is it only now percolating in these circles?

RASKOLNIKOV: So I would say that there are a couple of things. So, one, it’s not just the election of—so, remarkably, reality got ahead of the expertise. I was looking at it several years ago, about the debates about the effects of free trade, and NAFTA, and China’s accession to WTO. That was already post-2015-16 presidential campaign where, you know, famously, both Sanders and Trump ran on protectionist policies, and Hillary Clinton had to back off of her support PTT—TPP—sorry.

So after all of that I was reading economics literature, and there were still debates about whether free trade overall is helpful or unhelpful, and including China’s accession to WTO, which United States helped to happen. So the deference to expertise, I would say, combined with sophistication of economists who wanted to find, one way or another, the continuing debate about things that seem to just stare you in the face already you. You know, that that took a while to sort of, I think, work its way through into more broad understanding and agreement about what the problems were.

DEPILLIS: Right.

STEIL: Economists, as you know, also tried to deflect attention from trade by pointing to technological developments. And those were, indeed, important, but you can’t separate them from trade. They are often incentivized by trade. So there’s a—you know, a symbiotic relationship between them. You can’t separate them out and say: Well, don’t blame trade, it’s all about some exogenous force from outer space, which we call technology.

DEPILLIS: Right. Well, how would you like trade to operate differently? Because it sounds like there is a revulsion to the idea of the kind of protectionism being advanced now, but still an admission that the ravages of imports have done real damage. So would you like that to operate differently with new rules? Or is the goal more to help people adapt more quickly and be more nimble and agile?

STEIL: More on the second. I mean, we’re not ideologically protectionist. We’re not looking to shut down the global trading system. There are elements of it that we think need some sand in the gears, particularly related to growing Chinese mercantilism. China has become such a dominant player on the global trade scene that we can no longer ignore the fact that the Chinese economy is not a market economy. When Xi Jinping chooses to designate EVs, for example, as a strategic sector which he is determined to dominate globally, it will happen irrespective of whether that is economically sensible from the perspective of market economy.

So we argue in the piece that there are—there are areas in which the U.S. and its allies putting up trade barriers make sense. But that’s not the fundamental approach that we take in this piece. We identified, for example, three aspects of labor market operation where we believe some changes to the market can actually not only protect those on the lower end of the income scale, but actually make the market more efficient.

DEPILLIS: So let’s take the labor piece, because if you haven’t read it, it’s got to do with noncompete agreements, occupational licensing, and, I think, housing supply, all of which are things that the Biden administration has tried hard to do. And their efforts are currently either caught up in the courts or housing supply is not a short-term fix, right? So on that front, is there anything that you actually would like to see the Biden administration or the next administration do differently?

RASKOLNIKOV: So I thought that what FTC proposed was a good idea, with noncompetes. It’s all been challenged. There are questions—so FTC wanted to make, you know, it illegal for workers earning less than 150,000—or 151,000, or something like that—

STEIL: Which is about 20 percent of the workforce that are currently affected by noncompetes, according to the FTC.

RASKOLNIKOV: OK, yes. OK, so it’s challenged, whether FTC has the regulatory authority to do this. Recent Supreme Court case law makes it even harder for administrative agencies to, you know, enact regulation. But Congress can certainly do that. So we are running into—and there are Republicans in Congress who would support this. This is not—this is not a party line split. So, you know, that that’s a perfectly plausible possibility going forward.

The housing supply is more difficult, although nothing that Benn and I mentioned or write about this in this essay requires anything more than an act of Congress, OK? Everything can be done by legislation, either before—

DEPILLIS: Easy. Simple. Act of Congress. No problem. (Laughter.)

RASKOLNIKOV: Well, like, either by federal legislation and regulation, or through preemption of states. So zoning restrictions are local restrictions, and so the federal government cannot just change zoning laws location by location. But we suggest that it can do a few things that will influence how the zoning laws are—the content of the zoning laws enacted by various jurisdictions. So that—and then, of course, there’s a tax angle that’s a completely different thing.

DEPILLIS: Yeah. Can you tell us—can you explain how that works? Because I think it’s the least—

RASKOLNIKOV: Sure. So I will start with the idea why tax comes into play at all. And Benn, if you want to jump in on that part please feel free. And then I will say maybe a few words about the substance.

So the idea is very straightforward. When a country like China has a large trade surplus with the United States, it gets a lot of U.S. dollars, after a company—a Chinese companies sell its goods. It needs to do something with these dollars. And the most natural thing for China to do, which in fact it is doing, is to use these dollars to invest back in the United States, a lot, in the Treasurys but also in corporates, probably some equities, much less than that, mostly that. So there is a very large investment by China, which means to a large extent Chinese Investment Corporation, which is its sovereign wealth fund, but also large companies and so on, many of which are still, you know, controlled or influenced by the government. So large investment in the United States.

So making this investment less profitable will reduce—not eliminate, but reduce—the incentive to aggregate U.S. dollars, right? Like, if China gets these dollars and can’t do anything with them that makes nearly as much money as before, then it’s less appealing. So that brings us to tax. So for reasons that made perfect sense when these rules were enacted, international tax rules look like, and in fact do under certain assumptions, favor foreign portfolio investors over domestic investors. The reason for this is that countries of residence of those investors then are free to tax these portfolio investors as they wish. So, for example, when U.S. investors invest in, I don’t know, U.K., the tax imposed by U.K. is fairly low, under bilateral treaties, so that United States can then tax this income the way it wants.

But it works both ways. So when, when Chinese investors invest in the United States, the tax that they pay on returns from these investments is lower than when Americans invest in the same things. OK, so if you just look at it this way, there is an advantage for foreign investors—not just Chinese, but any foreign investors. Then there is another preference. United States is uniquely generous—that one is really uniquely generous—in exempting gains and income of foreign governments, broadly understood—so certainly sovereign wealth funds are included, and central banks, of course, are included, and government-affiliated entities are also included. So all of their income and gains from their portfolio investments in the United States is not just taxed at a lower rate, but is completely tax free, OK?

This is still—but not to the extent the United States—no other country has this blanket exemption. OK, well, so you can see why Chinese government and sovereign wealth fund and so on have good use for their dollars. They can basically earn better after tax returns from investing in U.S. Treasurys than Americans can, or anybody—

DEPILLIS: Can I clarify something?

RASKOLNIKOV: Yes.

DEPILLIS: So the problem here is investing in U.S. Treasurys, not investing in real goods, like factories, or—

RASKOLNIKOV: No, no, no. When I’m talking about—when I say portfolio—

STEIL: Portfolio securities.

RASKOLNIKOV: Securities.

STEIL: Including private securities.

RASKOLNIKOV: Right, right, but not buying companies. When foreign businesses buy American companies or take large stakes in American companies, they’re taxed as just as Americans are. The idea is like, once you’re here, you’re paying this—you’re playing by the same rules, including tax rules. But when you adjust abroad and put some money, without actual control of anything, then we have this tax-preferred treatment. OK.

So there are ways to change that, obviously, right? Again, I understand that legislation is difficult, but this can only be done by legislation—(laughs)—and by changing U.S.—bilateral U.S.-China income tax treaty. There are—there are more complicated ways. Of course, tax people always think about loopholes and how people can get around it. There are ways to deal with that too. But the idea is there. So that has not been considered at all, as far as we know, at all—changing domestic U.S. tax rules to affect the profitability of gaining U.S. dollars by China.

STEIL: Can I link that to the underlying economic problem we’re trying to address? China, as we know, has displaced a lot of manufacturing in the U.S. China would say, well, that’s all, quote/unquote, “our competitive advantage.” But competitive advantage can be manufactured by a government that presides over an economy that large. Again, if China chooses to dominate the EV sector globally, they will, because they will subsidize it to the extent that is necessary. So the current account deficit that we run with China, which disproportionately affects our good-paying manufacturing jobs in the United States, is fueled by Chinese policy.

Now, the current account deficit is mirrored by something called the capital account surplus. The United States runs a capital account surplus with China because China is sending us these dollars back that we’ve sent them for their goods. They send it back to us in return for securities. Now, it’s been argued that we need Chinese portfolio investment because otherwise, you know, how would we cover the current account deficit? We argue this is looking at it from the wrong direction. Effectively, because of these tax anomalies, dollars earned by foreigners can be more profitably invested in the United States than dollars earned domestically by Americans. If we eliminate this subsidy for Chinese investment in the United States, Chinese investors have less incentives to earn dollars in the United States. And they have, therefore, less economic incentive to dump goods in the United States.

So the causality goes in two directions. If instead of trying to affect the current account deficit through tariffs, which doesn’t work, you address it through reducing the capital account surplus, which does work, you will materially rebalance trade between the U.S. and China. In a new paper that we’ve written, that we hope to publish shortly, we’ve tried to quantify this. And we estimate, for example, that if we simply eliminated these bilateral treaties that reduce the Chinese portfolio investment tax rate below the standard 30 percent withholding rate, we would reduce our current account imbalance with China by about thirty billion (dollars) a year. If you, in fact, increase the tax rate higher from that, you can get much larger numbers. We argued, if we tax Chinese portfolio investment at 100 percent—and that’s not crazy, by the way. China was investing in the United States at a zero percent return during the great financial crisis—we could reduce the current account imbalance with China by almost $100 billion.

DEPILLIS: Well, I’m glad there’s a paper coming out on this because it does seem like it deserves a whole paper. And it doesn’t—you know, I wonder, though, even if you fixed this problem, does that guarantee that the gains from this policy would be more equitably distributed? Or would you have to do more work to try to channel those investments in a more equitable way?

RASKOLNIKOV: So it’s always, you know, a big question, what happens with the gains? Who is the actual beneficiary of anything, you know, of any policy? And so that’s one. And two, there are, of course, always winners and losers. So that you have to—you have to pay attention to where the effects are. And they may not be immediately available, and so on—immediately obvious, and so on. But overall, you know, this will—this will partly reverse what happened in the wake of 2001, and so on. And we know what those effects were. So that’s kind of the—that’s why we’re making these arguments.

The most likely effect of these kinds of policies—we are talking about now the dealing with, you know, the profitability of Chinese investment in the United States—are going to be the opposite of the effects of what happened during the China shock. So, you know, there were definitely benefits. You know, Chinese produced goods are cheaper, right? And so, like, it’s not like it was all cost. But the problem is that, you know, when somebody can buy something 30 percent cheaper, or whatever, it’s nice to have. But when somebody loses one’s livelihood and an opportunity to find a comparable job and, you know, that’s a that’s a shock of a very different magnitude to individual lives. So that’s what we’re concerned about.

Talking about other policies, you know, like the noncompetes, and the licensing stuff, that’s just really bad. (Laughs.) Like, there’s really not much—there’s not much debate about this. Like, licensing—a three-year license for a nightguard, I mean, who needs this? It’s complete state-level protectionism. And it—and there’s plenty of support—econometric support for arguments that, you know, it really does depress—it reduces competition, it benefits small groups and hurts large groups of people who really could use some help.

STEIL: Your question highlights why we think we need to address these issues as a portfolio of policies. That is, trade policy, tax policy, labor market policy, they’re not separate. They actually need to be combined. To the extent, for example, that we were able to reduce the current account imbalance with China through our tax perspectives, we believe that our labor market proposals will help ensure that the benefits of this rebalancing go disproportionately to those at the bottom of—

DEPILLIS: Yeah. Well, and we’ll turn to questions in a second, but I have been wondering why this portfolio seemed like the best set of options for you guys, because there’s a ton of policies that folks have been calling predistributionist for a while, having more to do with labor power—whether it was through helping people organize unions, or through antitrust in terms of making sure that large companies can’t keep out competition. There’s a whole gamut that—I mean, industrial policy, right, like, which the Biden administration has revived. So why these ones and not a broader suite of options?

STEIL: I should emphasize that the suggestions that we made are not the be-all and end-all. We don’t claim that—this is the portfolio, put in place these policies and you’ve settled the problem. We consider the proposals that we made in the paper to be the low-hanging fruit where you could significantly help those on the lower end of the income stratum without harming efficiency. And, in some cases, improving efficiency. The sort of proposals that you were suggesting, for example, with regard to unionization, one can argue—argue—that they would have negative effects on efficiency. And then you have to start balancing the benefits of predistribution against the cost of declining efficiency. So, you know, we were trying to focus on the easy stuff there. When you get into unionization, antitrust, the tradeoffs become more complicated.

RASKOLNIKOV: Which is not to say that those would be bad policies.

DEPILLIS: There’s a bit of disagreement on this panel, I’m sensing.

RASKOLNIKOV: It’s just that these are—right. There is—this is what we can—this is what the two of us agree on. So that’s in the paper. (Laughter.)

DEPILLIS: Right. This is what you can both get through in a paper.

RASKOLNIKOV: Right. That’s what we can both get behind. But, yeah, I think that this is low-hanging fruit. And, as you mentioned, even that low-hanging fruit turns out to be difficult to pick, right? Even though several of these proposals are bipartisan already. But I don’t think that this is going to be enough. And, yes, the—definitely labor related issues, especially with gig economy workers—who are now pretty much completely unprotected by laws that that help employees create unions, expand unions, and so on. Corporate governance issues, antitrust, this is—this is all—this is all very much of the same ilk of policies, but they all raise questions, as Benn said, that there you really get into tradeoffs.

STEIL: Just to highlight, you know, the more clear-cut tradeoffs. I’m not—I’m not introducing this as something that’s common across industries—but the longshoremen strike recently. As you know, the longshoremen were not just striking for higher wages, but they want to put an end to the automation process in American ports. That will clearly affect the efficiency of the operation of American ports. So if you’re going to say, well, more unionization is a benefit to predistribution and therefore we ought to support it, you’ll have to address the question of whether the damage to efficiency will be in excess of the benefits that you will get through supporting broad increases in unionization.

RASKOLNIKOV: Yeah. To which some of us will reply that, right, there’s no free lunch. The fact that there seems like there is free lunch just tells you how out of whack the policy’s gotten, right? (Laughter.) The fact that you can improve so much significantly—(coughing in background)—I don’t know what’s wrong with—you can significantly improve on sort of the distributional front with policies that are also either efficiency increasing or at least neutral just kind of tells you how bad things are now. You know, because that seems like a no brainer.

DEPILLIS: Yeah. No, I do remember when there were a lot of concerns about raising minimum wages being introducing inefficiencies, and then people started doing it and learned that there were not as many as were feared. And so—it hasn’t helped on the federal level, but.

OK, time for questions. Who would like to ask a question? Sir. Do we have mics? Please identify yourself and—yeah.

Q: Yeah. Thank you very much. Joseph Gasparro, Royal Bank of Canada.

In your paper, you know, labor is a pretty big component. And what Matt and the RealEcon Initiative is talking about is U.S. economic leadership. And right now, the U.S. is undergoing an industrial renaissance on par with the, you know, railroad boom in the ’20s and ’30s. At the same time, we don’t have a lot of skilled workers. And in a recent article, you know, 3.8 million new jobs have to be created. And Alex, you know, you talked about intergenerational economic mobility. So how do we address this? Is it immigration laws? Is it more training? Because this obviously could help with efficiency, help a broader, you know, economic mobility. Thank you very much.

RASKOLNIKOV: Yeah. So I would say both immigration and training are clearly on the table, especially with—well, immigration is so fraught. But I think—well, from U.S., it looks like Canada is doing pretty well. (Laughs.) You know, like at some point, hopefully soon, there’s going to be—you know, there was already legislation, that kind of Trump torpedoed, that could have been enacted dealing with that pretty substantial immigration reform that would rationalize some of this. It’s going to—I believe it’s going to happen sooner rather than later, anyway. Or, at least I hope.

And with training, you know, that’s—like, this idea that everybody has to go to college was really problematic, in at least two ways. It created a crisis of people who went to not-so-great, to put it mildly, colleges, or some of them were for profit, and now they’re saddled with debt. And that’s why Biden’s talking about loan forgiveness, and so on. And they haven’t acquired the skills that would help them actually to get jobs. So that’s one. And two is really this ethos of, like, everybody goes to college and that’s the future, while in fact it isn’t. You know, there are plenty of jobs here, and there will be plenty of jobs, that do not require college education. So, you know, like, these adjustments definitely make sense to me.

STEIL: I strongly echo Alex’s comments. The notion that if you go to college and get yourself $100,000 in debt to major in interpretive dance is going to be good for your economic future is probably misguided. That doesn’t mean you shouldn’t—you shouldn’t do it if you have—

RASKOLNIKOV: A passion.

STEIL: —reason to believe that this is going to improve your life. But it’s not necessarily going to get you a well-paying job in an industry in which the economy is becoming increasingly reliant. You know, Joe pointed to, you know, the new emphasis of industrial policy on, for example, building chips manufacturing plants in the United States. Well, that’s got to be intimately linked with the question of immigration, because we’re going to have a massive shortage of skilled workers in these areas that can’t possibly be rectified purely by increases in training. Skilled immigration is going to have to go hand in hand with it. So this, I think, serves to highlight that we have to appreciate some of the subtleties of the debate.

For example, the American population is said to have been turning against immigration and, you know, because of what’s going on at the southern border. But to take an approach that would simply shut down immigration would really be self-defeating for us. The problem isn’t immigration, per se. It’s the type of skills that we’re importing, and what sort of distributional effect that will have on existing workers.

DEPILLIS: I have questions, but we have more questions. So, back there.

Q: Thank you. Earl Carr, representing CJPA Global Advisors. Men, thanks for—and Lydia—thank you for a fascinating discussion.

I wanted to argue the—from China’s perspective, that, yes, as China is taking American manufacturing jobs, the kind of view from China is that that, in fact, is a—is a myth; that when you look at automation, when you look at offshoring, these primarily result for the decline in—this is—this is the result of why these jobs were taken away. And the other argument is that by China producing low-cost goods at Walmart, these are actually good for the U.S. economy and for American consumers. So how do you respond to those criticism(s)?

RASKOLNIKOV: Well, so these are sort of—thank you. These are familiar arguments. And there are—and I guess what I sort of tried to mention before is it’s not just a view from China, OK? So even now, there are economists here who publish papers saying that, you know, like, oh, it’s not—you need to look, like, further up and down supply chains. You know, you think that there is a—you know, this industry disappeared, but there’s another industry before it that gained jobs. There are—the arguments continue. And, of course, the cheaper goods is the obvious argument to make.

I believe, and I think Benn agrees, that by now it’s pretty clearly established that there were enormous costs imposed. And the reason for this is—that actually brings one addition to what Benn said. So he’s correct. That’s what the evidence showed, that one reason is that these costs were so concentrated. So the benefits were dispersed. Inside the U.S., the benefits were dispersed but the costs were very concentrated.

STEIL: The Walmarts were the benefits.

RASKOLNIKOV: Right. The benefits are lower prices. And all the population benefits. And in fact, low-income population benefits more, OK? But the cost was super concentrated, as Benn said. And there’s another problem. They were very fast. So there was very—there was very little time to adjust. It happened very quickly.

So because, you know, China, from Chinese point of view, has done a great job. Once the opportunity arose, you know, they had human power, and they have determination. And so it just went—(makes sound)—and, like, all these jobs have disappeared from here. So, yeah. Now, add to this the peculiarities of American political system. OK, we have election coming up. Something like six states is going to decide the presidency. So if these costs arise in these battleground states, that has an enormous—even though the number of workers affected may not be so large compared to enormous workforce in the United States, the impact of those workers could be—and their views—can be huge.

And in fact, the same group of economists who you know, came up with the term the “China shock” and did the—and did the research showing the magnitude of the distributional costs, later followed on with a paper looking at the counties where they—where they—or, commuting zones, whatever. Like, the areas where they found the biggest effects, the biggest costs imposed by the China shock. And sure enough, they found radicalization. So both to the left and to the right, sort of basically both Sanders and Trump, but more Trump. So, you know, these are—these are—and given the way that American, at least presidential, elections work, these are—these are very significant effects countrywide.

STEIL: It’s worth reminding ourselves that the GATT and the WTO were created to integrate market economies. When the GATT was created in 1949, there were certain principles behind it. For example, that government subsidies needed to be strictly limited. And because of all the restrictions that the United States placed on who could participate in the GATT, the Soviet Union decided not to participate because they weren’t going to play by those rules. Fast forward to 2001 and China’s accession to the WTO, it was acknowledged by the United States that China didn’t meet the definition of a market economy yet. But we granted them a period of transition. Fast forward to Xi Jinping, and things are actually moving in the opposite direction. The Chinese economy is becoming more dominated by state-owned enterprises, more dominated by state-owned and state-directed financing, such that China can—I’m repeating myself—but choose which sectors they can dominate with an automation and cost advantage.

And that’s a big problem. For example, I don’t mean to suggest that these questions are simple, and the tradeoffs are simple. But in the EV sector the U.S. has made significant investments over the course of the past ten years. If we’re going to let in China EVs with no tariffs, we have to accept that within a period of years—a few years in the United States, our domestic EV industry will be wiped out. Currently, 52,000 high-paying manufacturing jobs depend on the EV sector in the United States. And they are well paying. We’re talking about generally—these are blue-collar jobs from $75(,000)-150,000. Now, if you wanted to argue with that, well, that’s the cost of, you know, operating a global economy according to competitive advantage, I would have to respond, well, if China can choose what sector it will have a competitive advantage in, we have to take upon ourselves the responsibility of making those same choices. We can’t ignore these issues.

DEPILLIS: Yes, sir.

Q: Hi. Whitney Baxter from Paramount TV. Thanks for the great conversation.

The question is motivated by the complexity of just doing things on the federal level. Is there an opportunity for states to be that laboratory on elements of the policy?

RASKOLNIKOV: So there are—there are surely some, but—and they’re limited. And they vary by the area. So when we are talking about licensing, when we’re talking about zoning restrictions, can California, you know, do something about San Francisco? Absolutely, right? So the shortage of housing, you know, that’s the deep irony of all of this. The shortage of housing, and the high housing prices, is all in blue states. Not all—is predominantly in blue states, right? Here, and it’s on the West Coast, right? So New York and Massachusetts, right? Like, Boston, Washington, D.C. is very blue in terms of local government. California, Seattle, right? Like these are all blue states and cities. Yeah, they can relax zoning laws in sort of a, you know, smart way. Not the complete abandonment of anything. And things will improve. You know, you look at Atlanta, you know, the housing is cheaper. The city is growing. That doesn’t mean that it doesn’t have—every city has problems, but whatever. All right, so that’s that.

When we’re talking about capital account and current account, that’s a federal issue. And there is—can California—can California or New York impose an excise tax on investments in California bonds? They can, but it’s not—it’s hard to imagine that—even for California, which is, you know, as a country would be like—the reason I keep talking about California because I think, as—if California were a country, it would be, like, a seventh-largest economy in the world, all right? And still, you know, most of the Chinese investors in U.S. debt is in U.S. Treasurys. It’s not in state bonds, and so on. So that’s going to be much harder.

STEIL: Can I just emphasize that when we look at a question like housing, these costs disproportionately affect those on the bottom of the income scale. So you take zoning rules in New York. Well, the cost of living in New York is high for everyone, of course, but it disproportionately affects those on the bottom of the scale. For a lawyer living in New York, housing will take up about 21 percent—we talk about this in the paper—of his or her income. But for a janitor, it would be over 50 percent of his or her income. So these costs disproportionately affect those on the bottom, which is why we consider them part of a predistribution approach to reform.

Q: Hi. Thank you very much. Rory MacFarquhar from Gemsstock.

A question for Professor Raskolnikov, about your description of this tax exemption for state entities. First, what is the history of that? Second, how do other countries handle it? And, third, are you concerned about the continued status of the dollar as the world’s reserve asset under conditions when this is taxed?

RASKOLNIKOV: OK, thanks. So I’m definitely going to punt on the status of the dollar, sitting next to Benn—(laughs)—who is, like, a world expert on that. The history is the sovereign immunity kind of thing, like deference to other sovereigns. And it was pretty widely understood to be the motivation. And so many other countries—most other developed countries have something like that. So the idea itself is not outrageous. What is unique is the blanket exemption. So we looked at what other countries do, and no one does what the United States has done and has implemented. So some countries do it, you know, case by case. Some countries do it more broadly, but then pull it back. Canada has pulled it back on some aspect of Chinese investment some time ago, like actually quite a long time ago. So United States has this blanket exemption and has never done anything about this.

So when we were thinking about this, part of me thought, like, you know, domestically this would be clearly unconstitutional. Like you can’t—you can’t enact a domestic rule that’s going to single out one state, OK, or one city, right? Like that’s—you know, we have equal protection law—clause in the Constitution, and so on. But internationally, not only is it—it doesn’t raise constitutional issues, it’s actually already done by the United States, just not for that purpose, all right? There are specific exemptions for countries that support certain boycotts. In practice, it’s a boycott of Israel. There’s countries that United States State Department designates as supporting terrorism. There are already exemptions from other favorable tax rules for those countries. So this idea that U.S., as we are suggesting, is going to basically, like, pick on China and eliminate the tax-favored status of Chinese portfolio investments just for one country is not outrageous at all.

As for the—I want to make one more point about this, and then, Benn, you can talk about the dollar. So if you go back forty or fifty years ago, U.S. was enacting other rules in addition to what we talked about to attract foreign investment, especially into U.S. corporations, OK? There was a whole London euro-dollar market. Congress enacted a special exemption for portfolio interest so that foreigners who buy U.S. corporate bonds—not Treasurys, but corporate bonds—pay no tax on interest at all, because U.S. companies needed cash. U.S. companies today do not need cash, OK? They’re sitting on billions of dollars in cash. (Laughs.) The whole thing with buybacks is debated because the companies are saying, like, what do you want us to do? We were sitting on this cash. We don’t know—like, we don’t know what to do with this. So we buy back our stock, right? And the alternative view, of course, is that it’s all to jazz up stock prices. But the point is that that world, when U.S. corporates needed a lot of foreign investment, is not today’s world. And so that’s another reason why we think it’s a good idea to do this.

STEIL: If they did need cash, we’d still be smarter to subsidize our U.S. investors rather than somebody else’s investors.

RASKOLNIKOV: U.S., exactly.

STEIL: With regard to the status of the dollar, that could go on for a long time so I’m not going to—

DEPILLIS: We’ve got eight minutes.

STEIL: Let me just say that, first, there is no obvious alternative to the dollar. The euro has many flaws that I won’t go into right here, in the interest of time. The RMB is actually sinking in terms of its internationalization. It’s been so since 2014. But what I would argue is that should give us no comfort whatsoever. That doesn’t mean the world can’t move away from the dollar. And if you look at our approach to trade over the past ten to fifteen years, and in particular the increasing use of tariffs and sanctions, we are encouraging countries to use alternative means of exchange, which are effectively barter.

When, for example, China and Brazil announced that they are going to trade with each other without using the U.S. dollar as an intermediating vehicle, they don’t really mean that they’re going to send Brazilian currency and Chinese currency back and forth. Neither country is willing to accumulate the other’s currency. So what do they do, as the world moves into this type of trading formation? They seek to balance their trade bilaterally with each of their trade partners. If everyone moves in this direction, the whole multilateral trading system collapses.

Because the idea of the multilateral trading system is that we buy and sell where it’s most efficient. In the system that I’m describing, that’s not how you do it. You seek to trade where you can balance your currency exchange. That’s a very different world. It’s a very efficient world, which I think just highlights the need for a more rational approach to dealing with imbalances in trade.

DEPILLIS: We have time, I think, for one question, and being directed over here. Yeah, madam.

Q: Zongyuan Zoe Liu. I work here at the Council on Foreign Relations.

I learned a lot from the conversation. And I think it is a very powerful argument, hearing from both of you and reading your paper, in terms of the preferential tax exemptions, in its essence, although unintentionally, subsidizing Chinese investment, hence Chinese industrial policies. But I’m just curious, you know, at the RealEcon Initiative, we also think a lot about policy tradeoffs. I think the role for the U.S. dollar, the liquidity, or the attractiveness of the U.S. Treasurys is one that I think about.

And then the other trade off that I hope you can help me think through is what about our relationship with our allies? You know, yes, China invests a lot in U.S. Treasurys. But if I think through on top of my mind who hold—apart from China, who are the top holders or buyers of U.S. Treasurys? On top of my mind is you have Japan, Canada, Luxembourg, and, you know, a lot of U.S. security allies. So I’m just curious in your design, are you thinking that we are imposing a blanket to everybody, or we give our allies a discount? Thank you.

RASKOLNIKOV: Definitely not everybody. So that was—(laughter)—that was— so United—actually, U.K. is the largest. I think, if I remember correctly. It’s probably either the largest or the second-largest holder of U.S. Treasurys. So, yeah. That’s why, when we were thinking about this, I was wondering if it’s OK to do a single exemption or single burdensome change just for China, or, you know, for China or any other country with whom U.S. trade has a similar problem. You know, obviously China is unique economically now, but if someone else does the same thing we would say you should do the same thing with them too. Which is why I found it so fortunate to learn that it’s perfectly fine and would not be particularly revolutionary to have separate tax rules, basically, for Chinese portfolio investors from portfolio investors from all of the countries you mentioned.

Now, you mentioned Luxembourg, which is a small country and has a lot of U.S. Treasurys. And why is that? That’s not the Luxembourgians who are investing. It’s not Luxembourg corporations, right? It’s all the money that’s flowing through Luxembourg. So the challenge that we saw was, OK, so you do our change, you know, Congress repeals this special rule. Then what? Then, all of a sudden, the amount of money that was flowing from Chinese start flowing through Luxembourg or some other small country that can, you know, easily be convinced, perhaps for some fee, to cooperate with the enormous amount of funds that it’s going to see flowing through it. So that led us—we’re not going to get into this now. But, yes, there are ways to deal with this.

The ways to deal with this is U.S. will need—if U.S. was going to try to do this, it would need to see who the actual beneficial owners are. It would need to see, when the bank in Luxembourg tells U.S. bank, send us the money for our account holders, U.S., bank will need to have some way of knowing who the actual beneficial owners is—are—owner is of that account. And the short of it is that between the already global information reporting regime that is in place, which United States has not joined but can join. (Laughter.) So if you had this regime, and the fact that this is an enormous amount of money that will need to be rerouted and so it’s hard to hide, right, when there is, like, trillions of dollars. So between these two things, as we say in the follow-on piece to this, it can be done. It can be done where it’s just going to be directed at China with very little effect on anybody else.

DEPILLIS: Well, thankfully, we have a tax bill coming up so we can have this debate. But I think we’re out of time. I mean, we always end on time here. So thank you very much. Maybe if you have extra questions, come talk to these gentlemen afterwards. But thank you all. (Applause.)

(END)

This is an uncorrected transcript.