A bored Donald Trump recently pivoted back to his unfinished and chaotic economic wars. Restricted by a loss in the Supreme Court, the administration used tenuous arguments about forced labour and unfair trade practices to try to reimpose tariffs ranging from 10 to 50 percent.
Tariffs—Trump’s favourite word—have not corrected the trade deficit, which remains at over 3 percent of the US GDP. American importers and consumers have borne 96 percent of the cost, with foreign exporters absorbing only 4 percent.
Revenues from tariffs, which have consistently been below projections, is expected to cross $181 billion in 2026, below the record $264 billion in 2025. This amount is only 9.5 percent of the estimated 2026 budget deficit of $1.9 trillion and will not deliver the promised $2,000 dividend to citizens—a promise made way before the recent offer to pay each voter $5,000—or make possible the elimination of income tax.
Over the next decade, tariffs will raise $1.8 trillion, but will reduce US GDP by about 0.5 percent, before foreign retaliation and restructuring of supply chains, offsetting much of the new tax cut benefits while not paying for them.
The economic battlefront is likely to shift to US government debt which is near $40 trillion (130 percent of GDP). Budget deficits—fuelled by tax cuts, an ageing population and defence expenditures to support increased military activism—are expected to add $3-4 trillion more to the debt over the next decade. The country’s debt-servicing costs are due to double over the next 10 years.
There is concern around the use of short-term borrowing to reduce interest costs and decrease pressure on long-term bond yields. US debt maturing within 12 months is around 30 percent, the second highest after Japan, and the average maturity is 6 years, one of shortest in the world.
A significant proportion of US government debt is now not held by long-term investors like central banks, pension funds or insurance companies. Instead, hedge funds own around $2.5 trillion funded by large borrowings primarily to take advantage of short-term arbitrage opportunities.
The need to fund its twin (trade and budget) deficits makes America vulnerable to withdrawal of foreign capital. Overseas investors hold around $17 trillion or 18 percent of US equities, $8.5 trillion (24 percent) in US Treasury bonds, and substantial amounts of corporate and agency debt. Outside of equities, foreign investment has declined with overseas ownership of US Treasuries falling to around 25-30 percent from above 50 percent.
To further its policies, the administration will need to focus on increasing revenue from foreigners and capital controls. Taxes on overseas entities would be electorally popular. Possibilities include penalties of (up to) a maximum of 20 percent above the existing rate on entities from countries deemed to levy discriminatory taxes on American businesses, changes in tax treatment of foreign sovereign wealth funds, or additional tax on foreign remittances, and port fees. Seizures of foreign assets, such as Venezuelan energy resources, have opened new doors.
But the main measures will focus on preventing capital flight and wiping out its debt or deferring repayment into the never-never. The Mar-a-Lago Accord proposed by Stephen Miran, chairman of the US Council of Economic Advisers, suggested exchanging some US Treasuries for longer dated low- or zero-coupon debt (a de facto default), requiring foreign holders to pay a user fee for government securities (a withholding tax) and foreigners holding securities in a limited access escrow account (asset seizure). Controls on foreign investment, de-listing of foreign companies and restricting export of funds are further options.
In effect, America may adopt financially repressive policies penalising foreign companies and investors to reduce its debt and deficits, an approach that Treasury Secretary Scott Bessent has openly acknowledged.
This will be accompanied by parallel domestic financial repression through borrowing-fuelled budget deficits and lower interest rates to create nominal growth and inflation to reduce US debt levels in real terms. The approach follows Trump’s business strategies, where he borrowed heavily to grow, declaring bankruptcy several times. Possible changes to US government bond terms resemble debt-to-equity conversions used in corporate restructurings.
For foreigners, the shift is problematic because the US holds “all the cards”. The dollar and Treasuries are more important than America’s position in global trade. A capital war, especially if implemented in the erratic manner of tariffs, risks financial Armageddon. Volatility in asset, interest rate and currency markets would be on a different order of magnitude to the “yipes” after the Liberation Day tariffs. It would trigger a global financial crisis.
Foreign investors with significant dollar investments are trapped. Having followed mercantilist policies, building up massive foreign exchange reserves invested in dollars, many nations now find themselves facing the spectre of serious economic and political ruin. Europe is thought to hold around $8 trillion is US assets. Major Asian holders have US investments of around $3.7 trillion. Japan is the largest holder of US government debt, holding nearly $1.1 trillion, while China holds about $689 billion in US Treasuries.
If they try to divest on the required scale provided buyers can be found, they face large losses as asset prices and the US currency would fall under the selling pressure. If foreign investors maintain their exposure, then they would suffer as the values of their savings are trapped or destroyed.
In the trade wars, foreign states, especially those lacking the economic power of the US, have been restrained behaving tactically to try to preserve the status quo as much as possible. In a capital war, that will be more difficult, at least in the short term. Bypassing the US dollar, creating new payment systems and developing alternatives to fund and invest independently of America will take years.
The only option may be for creditors to join forces and threaten wholesale divestment of their holdings that would force the dollar’s collapse, higher US interest rates and funding difficulties for US companies. The risk of European investors selling part of holding of US gilts was most likely a factor in the backdown over Greenland. But this game of mutually assured destruction requires investors to risk catastrophic losses.
Having ignored the fact that outsourcing physical and financial security to another party leaves you at their mercy, many countries now have limited options.
Satyajit Das | Former banker and author of the forthcoming book, The Everything Bubble
(Views are personal)
