Is it a capital war after the tariff war? Hiding the foreshadowing of

Source: Wall Street News

A "hidden clause" buried deep within a thousand-page budget bill is quietly triggering panic on Wall Street. Known as **Section 899**, this vague tax provision could escalate trade wars into capital wars, directly threatening the trillions of dollars in U.S. assets held by foreign investors.  

The clause appears in the *Great Beautiful Act* tax and spending bill passed by the U.S. House of Representatives last week, titled "Enforcement Remedies for Unfair Foreign Taxes." It proposes significantly raising tax rates on investments in the U.S. by businesses and individuals from countries deemed by the U.S. to have "discriminatory" tax policies.  

Specifically, the measure would impose **escalating penalty taxes** on passive income (such as interest and dividends) earned by investors from target countries in the U.S. It would first increase rates by 5 percentage points, then add 5 percentage points annually, up to a maximum of 20 percentage points above the statutory rate.  

The risks of Section 899 became more urgent on Wednesday after a U.S. court blocked Trump’s reciprocal tariffs—long seen as a key funding source for his tax-cut plan, a signature component of the *Great Beautiful Act*. The uncertainty over tariff revenue has made the government more desperate to find alternative funding.  

This strategy aligns closely with the so-called "Mar-a-Lago Agreement" proposed by White House Council of Economic Advisers Chair Stephen Miran last November, in which he called for imposing a "usage fee" on foreign investors in U.S. Treasuries to weaken the dollar and boost U.S. manufacturers’ competitiveness.  

If passed, the legislation would introduce the broadest adverse changes to the U.S. tax treatment of foreign capital since the 1984 Deficit Reduction Act and the 1966 Foreign Investors Tax Act.  

Deutsche Bank analyst George Saravelos notes that the legislation creates space for the U.S. government to turn trade wars into capital wars, a sensitivity heightened by courts now restricting Trump’s trade policies.  

### The Triple Impact of Weaponizing U.S. Capital Markets  

Section 899 primarily targets countries that levy "digital services taxes" on large tech companies like Meta, such as Canada, the U.K., France, and Australia, as well as nations applying the global minimum corporate tax agreement.  

Potential targets include sovereign wealth funds, pension funds, government investment entities, and even retail investors and businesses holding U.S. assets.  

Saravelos identifies three key features of Section 899, each capable of shaking global capital markets:  

1. **Formal Legalization of Tax Weaponization**  

  The clause challenges the open nature of U.S. capital markets by explicitly using taxes on foreign-held U.S. assets as a bargaining chip to advance American economic goals. This mirrors tactics used in recent trade wars, where issues like digital services taxes are also part of the legislative agenda.  

2. **Extremely Low Activation Threshold**  

  Preliminary analysis suggests most developed market countries could fall under the new retaliatory tax regime. Critically, triggering the taxes requires only a Treasury Secretary’s designation of a "discriminatory country" on a list.  

3. **Deadly Threat to Twin Deficit Financing**  

  The legislation mandates a 20% tax on foreign income sourced from the U.S. under certain conditions. Notably, a Reagan-era exemption for foreign governments (covering central bank holdings of U.S. Treasuries and other reserve assets) would be suspended. In short, the real yield on U.S. Treasuries could fall by nearly 100 basis points. At a time when funding is most needed, the negative impact on demand for U.S. Treasuries and the country’s twin deficits (fiscal and trade) is evident.  

Gavekal Research economists Will Denyer and Tan Kai Xian note: *"The clause is clearly government-backed, intended to give Trump a negotiation tool to force countries to scrap digital services taxes and the global minimum corporate tax, which he views as unfairly targeting U.S. multinationals. The problem is that its mere existence could roil bond markets before Trump even gets a chance to use this new tool."*  

### Wall Street’s Prediction: High Likelihood of Passage with GOP Support  

Signum Global Advisors predicts Section 899 will likely remain in the final reconciled bill considered by the Senate, as it has gained broad Republican support.  

Charles Myers, the firm’s founder and a former Wall Street executive, and partner Lew Lukens argue: *"The president’s core assumption is that foreign demand for U.S. assets remains strong and will not be shaken by this new rule."*  

As court rulings cloud the outlook for tariff revenue, Section 899’s status as a new fiscal pillar in the *Great Beautiful Act* may be further strengthened.  

Markets Live macro strategist Michael Ball warns: *"With tariff revenue more uncertain and unlikely to offset the tax cuts in the Republican budget bill, traders need to prepare for tax changes on foreign holders, which will ultimately reduce demand for U.S. financial assets."*  

### Erosion of "American Exceptionalism"  

The U.S. Congressional Budget Office estimates that if passed by the Senate, the clause could raise $116 billion in taxes over a decade. But the cost could be a mass exodus of foreign investors from U.S. assets.  

While market reactions to Section 899 remain relatively calm for now, U.S. assets have underperformed overall this year as Trump’s policies weaken the narrative of "American exceptionalism." The S&P 500 has risen just 0.4% year-to-date, compared to a 20% gain for Germany’s benchmark index and an 18% rise in Hong Kong stocks. The Bloomberg Dollar Index has fallen about 7%.  

Pepperstone Group strategist Michael Brown notes: *"We already have a U.S. Treasury market that’s less attractive to foreign investors. Now, facing an extremely unfavorable tax environment, it’s another strong reason to divest."*  

Morgan Stanley strategists have listed Section 899 in their FAQs on the tax bill, concluding it will weaken the dollar and pressure European stocks with U.S. exposure. AXA Group Chief Economist Gilles Moec adds that it could further push up long-term interest rates, which have already hit multi-year highs this month.  

ABN Amro senior U.S. economist Rogier Quaedvlieg warns: *"This does sound worrying. By curbing new foreign capital inflows, the U.S. will inevitably face pressure on the dollar."*  

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