Does a world of tariffs also mean one of capital controls?

In the hiatus following President Trump's embarrassing retreat over tariff implementation, investors should think about what comes next.

In a rare moment of modesty, Isaac Newton said his formulation of the laws of motion relied upon him standing on the shoulders of giants. While scientific knowledge seems to aggregate, market knowledge, especially relating to the instability caused by excessive speculation, tends to be forgotten only to be relearned in a crisis.

While President Trump is somewhat optimistically claiming that he’s struck 200 trade deals already¹, the countdown is on for the end of the 90-day suspension that he was ignominiously forced into as markets, especially the bond market, buckled in early April under the hurricane of executive orders as the White House implemented its express reordering of world trade.

Predictably, risky assets have rallied from highly-oversold levels and measures of market volatility, especially in equities, have collapsed. The White House still seems bent on replacing income tax with tariffs, so the argument that tariffs are just a diplomatic bargaining tool not a revenue-raising one seems a weak one, however unrealistic the presidential maths appears to be².

In the relative market calm before the tariff suspension deadline is reached, investors ought to be thinking about what a world with more tariffs and less trade looks like. If the flow of goods around the world is going to decline or be made more difficult, what does this imply for capital flows?

The world before Easyjet and weekend breaks. ‘Travels with my Aunt’ (Photo source: Warner Bros, 1972).

While business travellers and holiday makers can now simply use Revolut, credit cards or local ATM’s while abroad, before exchange controls were abolished in 1979, Brits abroad were limited to around £50 in foreign cash and £15 in sterling. Foreign investments by private individuals were also severely restricted.

To imagine how odd this world was, one can turn to literature, notably Graham Greene’s 1969 novel Travels with my Aunt, made into a film starring Dame Maggie Smith (of Downton Abbey fame) in 1972.

The book’s plot revolves around how the life of Henry Pulling, a rather staid suburban former bank manager, is turned upside town by a series of adventures involving his aunt, the louche Augusta Bertram, attempting to smuggle £50,000 out of England to pay a ransom for one of her former lovers. Used bank notes hidden in suitcases, gold hidden in elaborate wax candles and other hilarity ensues. LOLs all round, all because of the Exchange Control Act of 1947.

The gnomes of Zurich may be forced to get tough again (Photo source: Flickr).

One of the odd characteristics of the market sell off in early April was the weakness of the US dollar as bonds and equities sold off. Normally in such situations of reduced liquidity and risk aversion the dollar spikes, but this time, capital flight from the US saw the dollar fall.

One of the principal ‘beneficiaries’ of recent dollar weakness has been the Swiss franc, which rose from around USD 1.10 to a peak of around 1.22 at the height of the sell off. The rally in the franc is a major headwind for the Swiss economy, which lists the US as its biggest export market. There is already talk that the Swiss National Bank (SNB) will have to cut rates to zero to limit the rally in its currency³.

If trade wars, tariffs and multipolarity are to be the future, then it is worth remembering the extraordinary difficulties the SNB faced in the 1970s during the last period of prolonged dollar weakness. As the dollar slid following the suspension of gold convertibility in 1971 and again after the 1973 oil shock, the Swiss central bank was forced into drastic measures. Late in 1974, it imposed a negative 12% fee on non-resident franc deposits, which was then hiked to a massive negative 41% in 1975⁴.

The strong franc meant Swiss exports declined, causing a deep recession accompanied by high unemployment. Although the banking sector flourished with all the foreign capital inflows, it was only really in the early 1980s when the US Federal Reserve got serious about inflation that Switzerland got its industrial mojo back.

When trade is restricted, so is capital movement? (Photo source: Business insider).

Surely this is all in the past? President Trump’s ‘America First Investment Policy’ executive order (21/02/2025) specifically makes it harder for Chinese companies to invest in the US. In return, China’s state-backed funds are cutting new investments in US private equity firms⁵. With reference to the rumoured ‘Mar-a-Lago’ Accord, there is also talk of the US wanting to force long-dated bonds with discounted coupons on foreign nations in return for US military support and the blanket of freedom.

Whether this happens, or whether an alternative method of monetising foreign investment in the US bond market is implemented, quite clearly the direction of travel seems to be one where capital controls are emerging in practice (or out of habit) if not in actual name. Dollar weakness in 2025, caused by the repatriation of funds out of the US, might well be thought of as a kind of self-imposed capital control by investors and asset allocators.

If anything, the acute vulnerability of US policy with respect to adverse moves in the financial markets (especially the rise in bond yields in the early part of April) may suggest that if President Trump attempts to push through with his plans, controlling or limiting capital flows might have to be part of any attempt to reorganise the US fiscal and economic complex in such a grand way in so brief a period of time.

The ‘Trump slump’ in foreign visitors to the US in 2025 clearly isn’t the same thing as the difficulty in travelling abroad caused by exchange controls on private individuals back in the day, but it provides a salutary reminder that the same outcomes can happen under different names and for different reasons.

As uncertainty continues to reign in 2025, investors ought to start thinking more clearly about the implications of a world not only where tariffs restrict trade, but where national self-interest also starts to restrict capital flows in a way which people have become most unaccustomed in the past 40 or so years.

1. Steve Benen, Trump claims he’s already struck 200 trade deals, but reality proves otherwise, MSNBC News, 28/04/2025.

2. David Goldman & Matt Egan, Trump says he’ll eliminate income taxes. There’s a problem with that, CNN, 28/04/2025.

3. Emily Herbert et al, Swiss franc surge sparks bets on return to negative interest rates, Financial Times, 27/04/2025.

4. Stephen Mihm, Switzerland pioneered negative rates in the 1970s. It got very ugly, LA Times, 22/08/2019.

5. Harriet Agnew et al, China pulls back from US private equity investments, Financial Times, 21/04/2025.