COVID-19 capital flight strengthens Trump administration's foreign policy hand
Trump's foreign trade and economic policy has relied heavily on capital flight to achieve foreign policy objectives. Prior to the COVID-19 pandemic, there was ample evidence that Trump's capital strategy was both productive and effective in achieving, or at least helping to achieve, foreign policy objectives. Undoubtedly, capital flight from China strengthened the U.S.'s hand in negotiating a more favorable trade relationship with China.
The U.S. struggle to gain footing in the pandemic-afflicted world raises the question: how will capital respond to the pandemic, and will it undermine the Trump policy, returning leverage and power to competing nations? Any answer is far from certain and arguably premature, given that no one knows the duration of the pandemic or the relative durations of dislocation competing countries will experience; those with far less mobility and freedom and therefore less opportunity for spread and those with demographic, geographic, or cultural barriers to spread can be expected to fare better than those that are comparatively, in those regards, less fortunate.
Regardless, the evidence suggests to date that the benefactors economically of COVID-19-induced capital flight are nations like the U.S., Canada, Germany, and France. Indeed the flight of capital from more vulnerable and weaker markets has accelerated post-pandemic. The Organization for Economic Cooperation and Development (OECD) recently noted:
Economies that had entered the crisis with weaker positions have already experienced massive outflows of portfolio investments. This repeats a familiar pattern whereby international investors transfer capital back home or invest in safer assets during periods of uncertainty.
According to the OECD, what is exceptional about capital flow dynamics during the COVID-19 crisis is the "scale and speed of the outflows." According to The Institute of International Finance (IIF) daily flows tracker, around $103 billion (U.S. dollars) was drawn from emerging market economies between mid-January and mid-May 2020, with equity inflows plummeting first, followed by debt flows. The OECD observed:
The sudden stop in capital flows has been faster and more incisive than observed during similar events in recent years, including during the 2008 Global Financial Crisis, the 2013 Taper Tantrum when the Fed announced a gradual exit to its quantitative easing programme, and the 2015 Chinese stock market sell-off.
Accompanying the massive flows of capital is relative strengthening of currencies for capital flow recipients vis-à-vis those nations from which capital is fleeing for relative safety. The U.S., Japan, the E.U., and Switzerland are the overwhelming beneficiaries of currency appreciation. After a notable drop in the first half of March, the Canadian and Australian dollars, too, rebounded. The rest of the world has not fared as well, with emerging markets suffering the greatest devaluations, many being forced to implement policies to encourage capital from foreign countries to replace or support currencies and capital markets.
As the pandemic accelerates, reaches a peak, and hopefully wanes, the Trump administration has positioned the U.S. in an exceptionally strong position to accomplish foreign policy objectives. Together with possible goodwill accompanying foreign aid consisting of ventilators, PPE, therapeutics, and technology, the U.S. is in a unique and enviable position to request reasonable concessions from trading partners, contributions to mutual defense and technological ventures, cooperation in combating human-trafficking and illegal drug–trafficking, and continuing the pressure upon state sponsors of terror, all stated goals of the administration.
It remains to be seen whether the electorate will give his administration the opportunity to exploit the advantage it has capably engineered.