Why use tariffs instead of a tax on foreign investment to remedy the "trade deficit"?

Question

Many people and politicians in the United States lament the trade deficit, or more precisely, the current accounts deficit. The necessary corollary to a current account deficit is a capital account surplus. If US consumers are buying more foreign goods than they are selling, foreigners must be buying more US assets than Americans are buying foreign assets. Whether or not this is a problem, there have been many attempts to "balance trade" by creating barriers to imports like tariffs or quotas. However, if the root of the problem is that US assets (like stocks in American companies and US treasuries) are attractive to foreign investors, then there is still likely to be a capital account surplus. Another approach would be to tax foreign investments and the sale of US assets to foreigners to make such investments less attractive.

Do any countries tax foreign investment to reduce current account deficits? What difficulties in such a tax might make tariffs a more attractive option?

Answer 1

A recent bill from senators Baldwin and Hawley (no not that Hawley) in the United States proposes to do just this. From a Bloomburg article:

The bill would task the Fed with implementing a variable tax on foreign purchases of U.S. dollar assets whenever foreigners direct substantially more capital into the U.S. than Americans direct abroad, something they have been doing for more than four decades. The tax would aim to reduce capital inflows until they broadly match outflows. Because a country’s capital account must always and exactly match its current account, if the American capital account is balanced, then its current account must also balance, and the U.S. trade deficit would effectively disappear.

Proponents of the bill argue that this method spreads the pain and benefit far more equally than tariffs and is less distortionary than tariffs on specific goods.

The Bloomberg article partially answers my question by explaining why tariffs are suddenly less attractive

But if the goal is to reduce trade deficits, wouldn’t tariffs on imported goods be more effective than taxes on imported capital? The answer depends on what drives the imbalances. Had Baldwin, a Democrat from Wisconsin, and Hawley, a Republican from Missouri, proposed their bill in the 19th century — when international capital flows were dominated by trade finance — their proposal wouldn’t have made much sense. Today, however, the world is awash in excess savings and has been for years, even decades. The need to invest these excess savings is what drives global capital flows, which in turn drive trade imbalances. Capital has become the tail that wags the dog of trade.

Tariffs looked better for a world where investments didn't flow across international boundaries as easily as they do now. This bill might be a sign of a shift in protectionist thinking.