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Ignore The Tariff Court Challenge: Here's The Obscure "Nuclear Option" Hidden In The Big, Beautiful Bill
BY TYLER DURDEN
FRIDAY, MAY 30, 2025 - 03:45 AM
The US Court of International Trade has ordered the Trump administration to suspend tariffs imposed under IEEPA authority. How this ruling is ultimately settled remains to be seen - according to both Goldman and the White House it will have little impact - but either way there is plenty of executive authority for a tariff agenda to be enacted via other tools.
Which is why what Deutsche Bank's policy team are most focused on is not this court ruling - which inevitably could delay trade negotiations even more – but something else: Section 899 of the "Big Beautiful Bill" that is currently making its way through the US Senate.
There remains a lot of uncertainty on the exact applicability of this new legislation, but overall our interpretation is that if it is voted through, it effectively introduces the most wide-ranging adverse changes to the tax treatment on foreign capital in the US since the Deficit Reduction Act of 1984 and the Foreign Investors Tax Act of 1966.
As DB's George Saravelos explains, this legislation creates the scope for the US administration to transform a trade war into a capital war if it so wishes, a development that is highly relevant in the context of today's court decision constraining President Trump on trade policy.
Saravelos makes a few broad points below:
- Weaponization of US capital markets in to law. Section 899 challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals. The parallels with the trade war over the last few months are clear. Numerous issues that are being referenced in the current trade war (eg. Digital Services Taxation) are also part of this legislation.
- Low bar to activate. Preliminary analysis suggests that the majority of developed market countries could fall under scope of the new retaliatory taxation. Furthermore, the bar to activate retaliatory taxation is low, triggered by the Secretary of Treasury publishing a list of foreign "discriminatory countries", though there is still uncertainty on this point.
- A problem for the twin deficit. The legislation provides scope to tax US-sourced foreign income at 20% under certain conditions. Especially notable is that the foreign government exception put in place under Reagan (think central bank reserve ownership of USTs) would be suspended. Put simply, the de facto yield on US Treasuries would drop by nearly 100bps. The adverse impact on demand for USTs and funding the US twin deficit at a time when this is most needed is clear.
While some may argue that carve-outs in the legislation leave the ultimate impact more constrained, DB counters that precisely by introducing further uncertainty and complexity on the returns on US capital, the legislation undermines the attractiveness of dollar inflows at a time when this is already put in to question. It is notable that the new potential legislation is already a topic of conversation among large real money investors. It is not unreasonable for the market to conclude that if the President is constrained on using trade policy, taxing foreign capital could be a new mean of leverage.
Meanwhile, the US dollar has fully reversed its gains since the tariff news overnight.
From Saravelos' perspective, the market has moved on from the specifics of the trade shock to the broader question of dollar asset allocations.
Indeed, should the new Section 899 authority be voted in to law, it will do little to ease concerns that these asset allocations are under structural reconsideration... at least until the weak dollar forces all major trading counterparts to engage in aggressive currency debasement of their own, at which point it will be a global race to the FX bottom, similar to what we saw for much of the post-Lehman decade. |
