The case for capital controls

Edmund Wilson

September 4, 2026

American politics, I often hear in the United Kingdom, is in crisis. Trump’s tariffs are nigh-on tearing the world economy apart, we are told. I was at a lecture in London by economist James K. Galbraith, who was asked why Trump cares about developing manufacturing when the United States is by and large a service economy; it is a good question, he said. Meanwhile, in more Trump-sympathetic quarters, industry is seen as the way forwards, particularly to compete with a rising China, which has successfully mobilized domestic savings to increase exports in recent decades. How effective, then, is the Trump administration’s own purported strategy to increase productive investment and boost exports?

The recent depreciation of the dollar, an anticipated effect of tariffs, ought to make U.S. exports more competitive. However, a currency’s value is not the only influence on the trade balance. The capital account matters profoundly for trade, as economists Matthew Klein and Michael Pettis argue in Trade Wars Are Class Wars. Since cross-border financial claims have risen from 16% of global output in 1855 to 400% in 2020, Klein and Pettis contend that financial imbalances now determine trade imbalances.

So I was struck by recent evidence from Reuters and Morgan Stanley that net foreign ownership of U.S. assets stands at over $27 trillion. Net foreign ownership of U.S. equities has doubled since the beginning of 2024, now standing at $6.32 trillion, so around 55% of U.S. equities are foreign-owned. Capital flows significantly into the United States, and not just out of it, potentially creating difficulties for export-led growth. The dollar’s moderate depreciation has not reversed this dynamic, and the current war has seen the dollar’s value rise despite the initial shock.

As Klein and Pettis show, the United States’ trade deficit follows from its position as a net debtor, while China’s trade surplus follows from its position as a net creditor. China’s government has transferred income from households to production through financial repression, labor restrictions, regressive taxation, and weak welfare policies. China’s National Bureau of Statistics reports that, as of the first quarter of 2026: “the imbalance between strong supply and weak demand is still acute.” This weak demand generates an excess of savings which are then invested (by banks and investors) in foreign assets, generating net capital outflows that sustain the trade surplus. The United States absorbs global excess savings by allowing foreign investors to easily purchase U.S. assets, thus sustaining trade imbalances.

Changing the exchange rate does not determinately change the trade balance. As financial analyst Michael McNair notes, currency markets have varied in the degree to which “willingness to buy” scales with “the price incentive,” so exchange-rate changes can have unpredictable effects. Dollar depreciation might, for example, lower the cost of U.S. assets for international investors, inducing capital inflows which frustrate attempts to rebalance world trade.

Capital inflows to the U.S. are rising. According to the U.S. Treasury, the sum of banking flows and net foreign acquisition of securities was an inflow of $212 billion in November 2025. That month, foreign residents purchased net $221.8 billion of long-term U.S. securities while U.S. residents purchased only net $1.6 billion of long-term foreign securities. The trade deficit in November was $56.8 billion, widening “by the most in nearly 34 years” from the previous month, though lower than the 12-month average. The net flow of capital into the United States increases trade inflows and widens global imbalances. As Klein predicted in April last year, U.S.-China trade flows have persisted amidst tariffs and volatile capital flows. Capital has continued to flow into the United States this year, as foreign investors purchased net $262.8bn in U.S. securities in May 2026, contributing to the trade deficit sharply rising to $77.6bn.

As South China Morning Post recently reported, China’s surplus now exceeds $1 trillion and is financed by significant and rising capital flows from China to the rest of the world, including the U.S. financial system. Economist Brad Setser observes that the People’s Bank of China increasingly delegates investing in foreign assets to state commercial banks which quietly accumulate currency reserves, thus contributing to global trade imbalances. Pettis has consistently observed that tariffs, without his preferred policy of capital controls, would merely redirect China’s surplus from the United States to elsewhere, while savers around the world still invest in U.S. assets. As political economist Helen Thompson summarized world trade in her book Disorder: “Made in China, needs Dollars.”

Economist Kenneth Rogoff similarly indicates that exchange-rate controls often face countervailing capital flows in a world of capital mobility. To manage this risk, East Asian countries like China have used capital controls to prevent destabilizing inflows from undermining export-led trade policy. Industrialization relied not simply on the blunt instrument of tariffs but also on strategic state interventions—non-tariff barriers like subsidies and capital controls. Tariffs, or taxes on goods, today risk costs being passed onto consumers, while capital controls, which tax financial flows, are taxes on financial institutions rather than producers, consumers, and—by extension—most voters.

Capital controls have not always been as unfashionable as they are now. Keynes’s capital controls were a key pillar for rebalancing trade. As he recommended, the IMF allowed countries to tax inflows and outflows of capital throughout the post-World War II era, right up until the 1970s, when Nixon ended dollar-gold convertibility and currencies floated against the dollar, while capital controls were lifted. While capital controls lasted, they facilitated higher economic growth than developed countries enjoy today, and countries could tax the wealthy at relatively high rates without fear of debilitating capital flight.

Keynes’s proposals follow from Britain’s experience with capital-flow imbalances. In 1902, J.A. Hobson argued in Imperialism that net flows of goods from Britain to its colonies stemmed from the excess savings of Britain’s middle and upper classes, leading to the export of capital abroad. The insufficient consuming power of workers meant that capital was invested overseas as it could not find sufficient demand for commodities at home, creating new markets in official and de facto colonies where excess savings could be invested and goods sold. The “fight for foreign markets or foreign areas of investment,” as Hobson put it, stems from class inequality from within the surplus-exporting country, which flushes out its excess savings overseas. Hobson’s theory has significantly influenced Marxian theories of imperialism, such as in the writings of Lenin, Luxemburg, Hilferding, and Nkrumah, as well as contemporary economists such as Klein and Pettis.

Investment thus flowed from richer to poorer areas of the world economy, driving trade imbalances and the deployment of military forces to sustain these investments. This was particularly egregious in Britain’s imperial treatment of China, where British “militarism” defended “plutocracy,” thus explaining the “exploitation of China” in terms of “international capitalism,” Hobson argued. Consider the Opium Wars, the Eight Nation Alliance, or the Consortia which pushed China into debt, to the benefit of Western empires and banks such as Hongkong and Shanghai Banking Corporation (the British-owned HSBC) and J. P. Morgan & Co.

As Hobson notes, Britain’s own imbalanced trade system was a net boon to investors but weighed heavily on lower classes and the public purse. While the British state derived an annual income from foreign and colonial trade of £18 million in 1899 on a turnover of £800 million, investors pocketed “90,000,000 or £100,000,000 representing pure profit upon investments,” indicating “the dominance which business considerations exercise over our imperial policy;” the principal beneficiary of imperialism is “the investor,” Hobson argued.

Capital now tends to flow in the opposite direction from developing to developed countries, contrary to traditional economic theory. Capital inflows do not translate into productive investment in a world where capital flows freely and global savings outstrip demand: instead of reducing interest rates, capital inflows result in “more debt, less investment, and slower wage growth” in the United States, Pettis argues, stemming from wage repression and savings accumulation in less-open economies like China. Deficit economies, such as the U.S., absorb excess savings in the form of capital inflows, therefore taking on unneeded debt and importing products. The situation is unsustainable for China, which represses consumption, and for the United States, which represses production. Economic inequality is rising in both countries, aligning with Hobson’s argument over a century ago that imbalanced trade in goods and capital benefits wealth owners more than wage earners.

An established argument against capital controls is that they would hike interest rates, thus increasing the cost of necessary borrowing, just as capital inflows lower interest rates and reduce the cost of borrowing, creating economic benefits for all. Pettis responds to this economic orthodoxy with the following argument. Due to the U.S. economy’s abundant supply of savings, capital inflows increase U.S. domestic savings, forcing a correction through a savings reduction by reducing employment or increasing debt; in this way, “borrowing becomes necessary just to sustain demand.” Importing goods and capital at scale can have severe economic consequences: “It is not a coincidence, after all, that among advanced economies, those that receive the most amount of net foreign inflows—such as the United States, the United Kingdom, and Canada—are far more likely to be characterized among their peers by higher debt levels than by lower interest rates.”

One way out of this predicament is to stem the flow of capital across borders, through the last century’s tried-and-tested mechanism of capital controls. Just as tariffs do not uniformly result in massive inflation, capital controls do not uniformly produce higher borrowing costs—particularly in a globalized world characterized by a glut in savings, itself arising from capital flows, such as from East Asian economies due to the 1997–8 financial crisis. As then-Federal Reserve Governor Ben Bernanke pointed out in 2005, “these countries increased reserves through the expedient of issuing debt to their citizens, thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and other assets.” The working class bears the brunt of this indebtedness in surplus and deficit countries, while capital flows uncontrolled across borders, generating fruitless interstate conflict which can do nothing more than “Mock mothers from their sons, mock castles down,” as the Bard said.

Perhaps the United States, like East Asian countries before it, will respond to capital flight through foreign reserve accumulation, currency depreciation, and capital controls. However, the U.S. government is not so far reliably implementing any of these policies, as the U.S. imports more capital than it exports, retains a much-higher-valued dollar than pre-2010 levels (as Rogoff’s LSE lecture evidenced), and is not taxing financial flows.

But perhaps this time is different. The United States has created a Sovereign Wealth Fund to invest in strategic companies such as Intel and MP Materials, and may attempt to emulate post-1998 East Asian economies in accumulating foreign reserves to boost exports. Now that China is relaxing capital controls and internationalizing the renminbi, the United States has an opportunity to make dollar devaluation and export-led growth sustainable by controlling the flow of capital into and out of its borders. The “Babylonian captivity” of the “free” market, as economic sociologist Wolfgang Streeck puts it, could be overcome by a U.S. government intent on taxing capital flows, reducing trade imbalances, and restructuring the economy around the common good.

Indeed, before it was scrapped, Section 899 of the One Big Beautiful Bill Act (2025) indicated the possibility of capital controls. This could be a bipartisan endeavor: Republican Senator Josh Hawley and Democratic Senator Tammy Baldwin proposed a “market access charge” in 2019 that would tax some cross-border capital inflows, in the hope of raising revenues, reducing deficits, and increasing taxes in the long run. Pettis similarly advocates a “Tobin tax” that would moderately tax short-term speculative inflows while leaving longer-term productive inflows intact. This employs modern financial tools to replicate, with variation, Alexander Hamilton’s financial ingenuity, as I have previously suggested. Recent changes to Section 892 of the U.S. tax code may result in taxes of Sovereign Wealth Funds investing in U.S. corporations and bonds, constituting a tax on capital inflows. The final regulations exempt derivatives from this tax burden but potentially open foreign governments and corporations to broad taxes on “commercial” investments in U.S. financial assets. Perhaps capital controls will be realized sooner rather than later.

Capital controls after World War II protected developed countries from destabilizing current account imbalances that exacerbate inequality today. When capital controls were lifted in the 1970s, trade imbalances were spawned that went together with devastating economic inequality—which was temporarily reined in after World War II, thanks in part to Keynes’s financial ingenuity. Furthermore, due to capital mobility, countries are disincentivised from taxing higher rates for the highest income earners and wealth owners, due to the threat of capital flight. Capital controls could trap wealth within countries, making it easier to tax, as occurred in the immediate decades after World War II. Perhaps it is time to resurrect Keynes’s proposal for capital controls and balanced economies.