A Trade War Into a Capital War? The Overlooked Risk in Trump’s Tax Bill: Foreign Taxes Could Accelerate “Sell America”

TradingKey - While investors are closely watching how Trump’s tax and spending bill will affect U.S. fiscal sustainability, an overlooked provision in the legislation has raised alarm bells: a new tax targeting foreign capital could accelerate capital outflows from the U.S., suggesting that Trump may be shifting the battlefield from trade to finance.After passing the House of Representatives by just one vote, Trump’s so-called “Beautiful Big Bill” is now awaiting Senate review.While concerns over how the government plans to fund its massive tax cuts persist, Wall Street analysts have suddenly turned their attention to a clause that could pose a much deeper systemic risk—Section 899, titled “Enforcement of Remedies Against Unfair Foreign Taxes”.What Is Section 899?This provision empowers the U.S. government to impose higher taxes on individuals and corporations from countries with allegedly discriminatory tax policies—including increasing the tax rate on passive income (such as interest and dividends) earned by foreign investors holding trillions of dollars in U.S. assets.In effect, it means:Higher taxes on foreign-owned U.S. companiesIncreased levies on international firms with U.S. branchesAdditional taxation on sovereign wealth funds, pension funds, government entities, and even individual foreign investorsAnalysts warn that this move could further undermine the appeal of U.S. assets and accelerate the ongoing "Sell America" trend.PGIM analysts described this as a market-shaking event, one that risks eroding already fragile confidence—especially among foreign investors.From Tariff War to Capital WarDeutsche Bank analysts called the provision a legal step toward weaponizing the U.S. capital markets. By explicitly using foreign investors’ holdings of U.S. assets as leverage to achieve broader economic goals, the U.S. is challenging the very openness that has made American financial markets the global benchmark.The bank noted that this opens the door for the Trump administration to shift the focus from tariffs to capital flows—effectively turning the trade war into a capital war.Some market observers speculate that Trump believes foreign investment in the U.S. is so vital to global economies that foreign investors won’t reduce exposure despite the tax hik—but others argue this assumption may be dangerously flawed.Morgan Stanley estimates that Section 899 could weigh on both the U.S. dollar and European stocks with U.S. exposure. AXA economists warned that after recent spikes in long-term Treasury yields, this clause could further push up bond rates, adding to existing pressure from rising inflation expectations and widening deficits.TACO Trading Gains PopularityOver recent months, investors have increasingly viewed the U.S. Treasury market as a potential “soft spot” in Trump’s agenda—believing the administration would eventually retreat under market pressure.This idea has been dubbed the “TACO trade”—short for Trump Always Chickens Out — referring to the pattern where Trump reverses course under market or political pressure, as seen with his reciprocal tariff rollback in April.However, if Section 899 becomes law without significant modifications, it may prove more difficult to reverse than previous trade measures—signaling a deeper structural shift in U.S. policy toward foreign capital.Find out more