Missing in debates about free trade and tariffs is discussion both about the movement of people between countries, and the challenge of not having a credible unit of account to facilitate trade. Even a back-of-the envelope calculation shows that “brains” contribute far more in revenues to the U.S. Treasury than do tariffs.
This does not mean that a change in immigration laws would quickly settle debates about balance of payments and international trade. As pointed out in previous analyses (“Toward a New Bretton Woods agreement,” American Affairs, 2017), the unsettled state of the international exchange regime following the collapse of the Bretton-Woods agreement has predictably brought about the present situation. So, before focusing on evidence across countries and time showing that “flow of brains” very much overcomes tariff policy, first a brief reminder about clauses in the discarded Bretton Woods monetary agreement. These clauses were expected to deal with balance of payment situations and accumulation of reserves by central banks, the situations Washington now feels will be solved by tariffs. Focusing on the flow of talents would be such a solution.
- Exchange Rates and Disguised Protection Policies
When Western countries and the U.S. negotiated the Bretton-Woods agreement of fixed exchange rates, they expected both the United States to have a robust tax base—the collateral—to back its bonds, and commitment of the parties to the agreement to expand international trade and their domestic commerce “fairly.”
The parties to the agreement agreed that “fairly” would mean the following. Since fixed exchange rates could create a situation where some countries would have chronic balance of payments problems and others constantly rising dollar reserves, the agreement had clauses to correct the situation. Countries with constantly rising dollar reserves had to “commit” to expand domestically and liberalize imports. The IMF, created as part of the Bretton Woods agreement, had the right to impose penalties for such countries by limiting purchases of their exports – though the IMF did not enforce this clause. The agreement also provided for occasional, one-time devaluations once the IMF identified a fundamental disequilibrium – unrelated to narrow domestic political interests.
Bretton Woods is gone and Western countries adjusted to the floating regime with growing currency markets meant to hedge the absence of currency policy, the hedging preventing havoc in international trade). However, China is not part of this new regime, it essentially allows the dollar to manage its currency with a “snake” in the 7–8-yuan range since the 1990s. China’s, and other countries’ constantly rising dollar reserves have long been a sign – and not a particularly secret one – that for political reasons, they are neither committed to liberalize imports, expand commerce domestically, nor deepen their domestic financial markets as all would weaken ruling parties’ political clout.
By both restricting access to its domestic market and having central control over deployment of their labor force, shaped by a wide range of laws and regulations, China has been exporting production at prices with which Western countries, with their combination of commercially-focused and welfare models of society could not compete with. The consequence has been as expected: significant accumulation of dollar reserves in China, combined with large current account deficits in the U.S., and much in the way of relatively unskilled labor-intensive industries moving from the U.S. to China.
A new Bretton Woods agreement is not on the horizon, exactly for the reason that China and other countries pursue their centralized models of society – the present situation was predictable. However, as shown below, tariffs – except for miliary reasons (that Adam Smith advocated in his Wealth of Nations) – are not a good substitute for solving the problem. A combination of revision of immigration laws in the U.S., combined with incentives to re-direct the domestic flow of talent – would be the far superior solution to expand more quickly the U.S.’s collateral – its robust tax base, backing the Treasuries, and, indirectly, its military clout too. Indirectly too, these changes, would pressure other countries to weaken their centralized model of society over time.
When Brain Flow Produces Miracles
Before presenting wide ranging evidence about the dominant impact of the movement of talent and skills unlocking a country’s potential – the “vital fews” as I have long called them (as the great late historian, Jonathan Hughes, called them too) - here is a recent example to start with.
With war raging in Ukraine, and between Israel and Iran, Elon Musk’s Starlink, a SpaceX service, offered in both Ukraine and Iran assistance to these countries’ civilians. SpaceX is just one of the seven or so companies Musk created (valued at $350 billion, of which Musk owns 42%). Musk was born in South Africa in 1971, moved to Canada in 1989, and in 1995 moved to the U.S. to study, where he then stayed. With his personal wealth estimated in the $400 billion range, how much wealth has he created in the United States? One- one and half trillion dollars? Even if U.S. taxpayers subsidized his electric vehicles or perhaps other ventures with a few billion – even $40 billion, as some suggest – would not taxpayers willingly pick up such a tab, knowing the 30 or 40 times returns on it within few years?
I started with this example for a couple of reasons: One, to illustrate the contribution of “vital fews” migrating to the U.S.; Two, that with increasing emphasis on the value of AI not only in industry and everyday life but in times of war too – the key is not talking about “investing in AI,” but securing the talent pool to be attracted to the U.S. A mediocre, or good team in AI, will stay mediocre and good. However, a few vital few can pull those teams to outstanding levels of performance. Before moving on, here is just another recent example illustrating what brains behind AI can do: Nobitex, one of Iran’s largest cryptocurrency exchanges, used to circumvent sanctions and finance terror. Used to is operative. Recently it was victim of a hack that led to nearly $90 million in losses. The hacking group Gonjeshke Darande, which has ties to Israel, claimed responsibility for the attack.
Two, the contribution of these vital few to a country’s prosperity far exceeds whatever revenues even well-placed tariffs could bring in over a short time. The long-term impact of the vital fews is even greater.
The miracle of 17th-century Europe did not happen in Spain or Portugal, their hoards of gold and silver notwithstanding, but in below-sea-level Amsterdam and Holland despite their natural disadvantages. The Dutch created the first religiously tolerant European republic and enforced property rights. Amsterdam had the world’s first stock market, where French, Venetians, Germans, Russians, Turks, Armenians, and Hindus came to be bankers and traders, dealing with sophisticated futures and derivatives.
Gradually England took over the Lower Countries industrial advantages, in part by attracting their entrepreneurs with its patent laws. King Henry VI granted in 1449 the first patent for a glass-making process unknown in England at the time, to John of Utynam, a Flemish-born stained-glass manufacturer, and later others in the fields spinning and weaving.
England applied not only monopoly carrots to induce domestic talents and foreign ones to come, but sticks too, restricting exports of textile machinery and preventing experts in technologies to emigrate. These policies did not work. They resulted in industrial espionage, as the historian John Steele Gordon noted recently, people with photographic memory quickly brought the technologies to the U.S.
This episode is worth noting, since politicians do not appear to have learned from it. In December 2024, the Quebec government presented bill 83 – still on the table - that would force new Quebec-trained doctors to spend the first five years of their careers working in Quebec’s public health network. If they moved either to the private sector or quit the province, they would face daily fines ranging from Ca $20,000 to Ca $200,000 per day – no, no misprint. How many bright young people, wanting to dedicate their lives to medicine would do their studies in Quebec? What will happen to Quebec’s medical schools? Already, because of other drastic legislation in the province’s socialized health care, a third of the people in Montreal have no family doctors, as physicians have moved out of the province.
Communist countries had similar restrictions on their skilled people, with the result that they missed using their potential. Numerical evidence shows the consequence of what happens when these people suddenly quit. At the end of the 1980s, the Soviet Union let its Jewish population emigrate, and one million went to Israel. About 1/3 of them, some 300,000, were skilled technicians, engineers, and scientists, when Israel’s population was around 4 million altogether. Israel could not have become the “start-up” nation without the migration of this critical mass or ready-made talent, which came with drastic domestic de-regulation too.
Hamburg, Hong Kong, Singapore, and Taiwan have displayed similar patterns. The state provided an umbrella of law and order, relatively low taxes, attracting immigrants and entrepreneurs from around the world. Since the 17th century, Taiwan, Singapore, and Hong Kong offered Chinese emigrants opportunities denied them by the Chinese mainland, which was dominated at first by warlords and a status-conscious bureaucracy and then, until about 1990, by a rigid Communist bureaucracy.
Though Israel and the U.S. are prominent examples of the benefits of migration, a reminder of West Germany recovery after World War II offers a sharper insight confirming the above patterns. Though conventional wisdom attributes the country’s recovery in part to the Marshall Plan, a closer look suggests how insignificant it was materially for Germany, even if it may have had symbolic importance.
Germany between 1944 and 1948 saw an influx of about 12 million skilled Germans that Eastern and Central Europe had expelled (although their ancestors lived there for centuries), a 15% addition to West German’s population at the time. Most resettled in West Germany. In 1945-6, after the war ended, West Germany faced economic chaos, inflation at 19,000 percent per month, black markets thriving, and had a tax rate at a confiscatory 95% across incomes.
In 1948 Ludwig Erhard, West Germany’s new finance minister, stabilized the currency and carried out fiscal changes, drastically lowering tax rates and abolishing price controls. The Deutsche Bundesbank documents note that the reforms “changed people’s lives from one day to the next.”
Yet, the Marshall Plan was only enacted in 1948. And while the U.S. contributed $13.2 billion to European recovery until 1951, only $1.4 billion went to the Western-occupied zones of Germany. The post-World War II West German miracle was consequence of Erhard’s policies combined with the massive arrival of skilled people – a roughly similar combination to Israel’s case four decades later, and, of course the U.S. for more than two centuries by now.
The Canada-U.S. Flow of Talent
Since the relationship between Canada and the U.S. is much in the news, here are recent numerical reminders about the movement of people between the U.S. and Canada, their impact far overwhelming any trade related numbers.
The Census Bureau says 126,340 Canadians moved to the U.S. in 2022, up from 75,752 in 2012. Among those headed to the U.S. have been Canada’s top technical talents, attracted by much higher compensations and career options. More than 70% of the University of Waterloo’s software engineering class of 2022 accepted job offers in the U.S. Charles Plant, who researches startups in Canada, found that 10 per cent of all STEM grads in Canada end up in the United States, those from McGill University, Waterloo and the University of British Columbia dominating in numbers. Among software engineering graduates, a preliminary count of University of Waterloo’s class of 2022 showed that 71 percent accepted job offers in the U.S. (The fact that, Canada received immigrants with technical skills during this timeframe suggests that Canada too can attract brains – from countries around the world that offer inferior opportunities to their talents).
These numbers are no different from those in a detailed research in 2018, titled “Reversing the Brain Drain: Where is Canadian STEM Talent Going?,” by Brock University’s and University of Toronto’s researchers. The study looking at students in STEM programs at the aforementioned three universities found that 66 percent of software engineers, 30 percent of computer engineers, 30 percent of computer science, 27 percent of engineering science and 24 percent of systems design engineers, ended up in the U.S. It also found that between 6 percent and 15 percent of those graduating in math, physics, chemical, mechanical and electronic engineering, ended up in the U.S.
A back of the envelope calculation puts the wealth transfer from the transfer of so many smart young Canadians to the U.S. at tens of billions of dollars a year, if not hundreds of billions. The tariff-related numbers are a rounding error by comparison.
What is Then to Be Done?
The above non-political evidence suggests that the U.S. would be far better off focusing on carving more narrowly focused fiscal, regulatory and migration policies, targeting entrepreneurship, and attracting and retaining a variety of skills, drawing on meritocracy.
Such policies would force countries around the world – eventually - to change their own policies to prevent losing their own talents. They will force more societies to change their domestic fiscal and regulatory policies, opening them “fairly” for commerce as the Bretton Woods agreement once required, but was not done. Attracting disciplined skilled and talents from the rest of the world with carrots would achieve what Bretton Woods did not.
Pursuing a skill and talent focused policy also appears less divisive politically, whereas the tariff policy is not only harming foreign relations, but domestic ones too. Focusing on migration policy does not imply “open borders”: a commercially based welfare society cannot afford that in a world whose population grew from 1 billion a century ago, 4 billion in the 1950s to some 8 billion now. But the U.S. carrot policy combined with firmly legalized and enforced migration policies would gradually force the countries, that did not offer options to their domestic talents to do so. Otherwise, they would lose their “vital few” and will be impoverished, at best, or become failed states at worse.
The evidence everywhere shows that prosperity happens when brains and skills are combined with capital, laws, institutions and civil education holding all parties accountable. This is what creates expectations for steadily building up collateral, that can be leveraged in cases of crisis and wars.
