Last week was yet another week of passion in financial markets. The week ended with Trump’s announcement that the US administration will impose a 50% tariff on EU imports beginning on June 1st, as there was little progress in the negotiations between the US and EU representatives. This caused a sharp sell-off on Friday. During the weekend, EU Commission President Ursula von der Leyen called US president Trump and they agreed that those tariffs would be postponed until July 9th, unless an agreement is found.
There is still an inconsistency in Trump’s rhetoric: he said that there won’t be any tariffs on EU companies if they come and produce goods in the US. But that makes little sense for those imports that can only be produced in their country of origin, for example agricultural products such as French Champagne and Italian prosciutto)
On the same day, Trump also threatened Apple with applying a 25% tariff on its products unless it moved its production to the US, instead of locating in China or India. This also caused a sell-off of Apple shares on Friday. Apple may be more likely to move part of its production back to the US, but the investments it has made in China, both to build factories and train personnel, is huge, and cannot begiven up so easily.
Finally, last week the “One Big Beautiful Bill” (BBB, or triple-B) passed a vote of the US House of Representative, with a very narrow margin of 215 to 214. The bill was meant to renew, and make permanent, the tax cuts approved by Donald Trump in 2017. But the size of the legislative act (more than 1000 pages) suggests there is much more than fiscal measures included in it.
In terms of tax cuts, they will be financed through sizable cuts to Medicaid and other social and administrative spending, and (at least in the administration’s wishes) by the tariffs imposed on imports of foreign goods. But the Congressional Budget office said that the bill is likely to imply a further increase in the US public debt estimated to be between 3 and 5 trillion over the next 10 years, to be added to the already existing USD 36tn – which is the reason why the possibility of increasing the debt ceiling to USD 40tn has been discussed.
But the triple-B act (which is jokingly associated with the recent credit rating downgrade by Moody’s) also contains other provisions that make it particularly hard to digest for international investors, who in fact are fretting about it. In particular, the bill includes a tax on interest paid to foreign governments and sovereign wealth funds holding US debt, which are considered to be treating the US “unfairly.” This targets key holders of US debt like China, Japan, Saudi Arabia, and global pension funds. It is a move that risks their retaliation, bond selloffs, and higher borrowing costs.
More specifically, the proposed Section 899 would significantly increase US federal income tax rates — by 5% to 20% — on certain types of income earned by non-US individuals and entities that are tax residents of, or are established or effectively managed in, “discriminatory foreign countries.” These jurisdictions are defined as those that impose an “unfair foreign tax” under the proposed legislation.
While the House was passing the triple-B, the Senate approved the GENIUS act, which will push USD-linked stablecoins at the global level. Stablecoin issuers will become buyers of US public debt at the time in which international investors are spooked and may refuse to renew their investments in US Treasury bonds. This combination of events is putting global financial stability at risk of a potential “buyer strike” of US debt.
