America’s Waning Edge: Capital Flight, Tariffs, And De-Dollarization – OpEd

April 22, 2025April 22, 2025 Geopolitical Monitor 0 Comments

By Igor Desyatnikov

The global economic order is shifting, and capital is voting with its feet. Last week, we witnessed a wave of capital flight from US financial markets triggered by the Trump administration’s aggressive escalation of tariffs. Equity and bond markets sold off as investors digested the implications of a renewed protectionist agenda—and even the subsequent 90-day postponement of non-China tariffs has done little to reverse the damage. The mere announcement of such sweeping trade measures has already caused irreparable harm to market sentiment, and a broader reassessment is now underway: Is the U.S. still a safe and strategic place to invest?

The answer, increasingly, appears to be no.

Trump’s second-term economic policy has doubled down on a worldview that sees trade as a zero-sum game and tariffs as a blunt-force tool for asserting leverage. But in reality, these measures are functioning as a tax on US consumers and producers alike. The newly announced tariffs—broad-based and punitive—have begun to raise input costs, cloud corporate earnings visibility, and feed inflationary pressures. Combined with the Federal Reserve’s already tight policy stance, the U.S. is veering dangerously close to a stagflationary environment: sluggish growth paired with persistent inflation. That’s the worst possible mix for investors, and markets have responded accordingly.

This shift is not just about economics—it’s about credibility. For decades, the United States sat atop the global value chain, exporting services, intellectual property, and high-end manufacturing while importing inexpensive goods that kept consumer prices in check. It was a system that rewarded American innovation and enterprise while anchoring the US dollar as the world’s reserve currency. But that system relied on openness, rules, and predictability. What we are witnessing now is the unraveling of that compact.

Even before this latest tariff shock, US markets had been underperforming their international peers. Investors have been gradually adjusting to a new reality where America, once the global standard-bearer for open markets and stable governance, increasingly operates with an inward-looking, erratic economic posture. “Trump’s America” has come to symbolize uncertainty, coercion, and institutional strain. And investors are recalibrating accordingly.

The euro has emerged as the biggest beneficiary of this reassessment in currency markets. Last week, it posted the strongest gains among major currencies and the third largest on record —not because of a eurozone resurgence, but because it now stands as the only credible alternative to the US dollar in reserve portfolios. The options for global central banks and sovereign funds are narrowing: continue relying on a dollar system driven by impulsive trade policy and punitive tariffs, or diversify into a monetary bloc that, while imperfect, still prioritizes rules-based frameworks and policy coordination.

The deeper implication of these shifts is this: the United States may no longer be able to collect the “exorbitant privilege” of excess investment returns. For decades, investors were willing to accept lower yields on US Treasuries and higher valuations on US equities because they viewed the United States as uniquely safe, liquid, and strategically dominant. But those assumptions are now being questioned. If investors must price in persistent policy volatility, trade friction, and weakening institutional credibility, they will demand a higher risk premium to hold US assets.

That’s a dangerous place to be for a country that relies on global capital to fund deficits, support its currency, and anchor its geopolitical influence. A diminished appetite for US assets could mean higher borrowing costs, sustained dollar weakness, and a reversal of the postwar order in which the United States set the rules and others followed.

It’s important to understand what’s at stake. The erosion of investor confidence is not just about this quarter’s earnings or next month’s inflation print. It’s about the foundational narrative of American reliability. Confidence, once lost, is hard to regain.

The administration may claim it is defending American industry. In reality, it undermines the conditions that allowed American industry—and American markets—to dominate for so long. If this trajectory continues, the damage won’t be cyclical. It will be structural. And the rest of the world, as last week’s capital flows suggest, is already preparing for what comes next.