Two months on from ‘liberation day’, the consequences of which are largely now being discounted by the market, and another unwelcome economic surprise has emerged. Donald Trump’s budget bill, which passed the House of Representatives at the end of last month, attempts to extend his administration’s attack on overseas investors. Of chief concern in this regard is section 899 of the bill, which seeks to impose additional taxes on both companies and individuals based in countries deemed to have punitive tax policies.
Those policies are thought likely to include digital services taxes, which means the UK is squarely within its grasp. In the crosshairs are those who invest in the US from overseas – be they countries, institutions or individuals. Taxes on US dividends received by overseas investors, for example, would rise by 5 percentage points a year, up to a maximum of 20 per cent. The current rate for individual UK investors is 15 per cent, halved from the usual 30 per cent, thanks to the UK-US double tax treaty.
Investors’ Chronicle flagged this possibility earlier this year. A turn of events that some thought “extremely unlikely” back then is now one step closer to fruition.
Still, the rationale for thinking it improbable has some merit, and the proposal could yet be watered down or amended much as trade duties have been. While that dilution could well come via Congress rather than the president, the catalyst (investor nerves) might be much the same.
Stock markets, however, are evidently not as nervy as they were earlier in the spring. It’s no surprise that threats are now treated with a sense of mistrust when you consider the rapidity with which U-turns have been performed over recent weeks. To take just one recent example, the 50 per cent tariff slapped on the EU on the eve of the May bank holiday weekend was postponed before that long weekend had even concluded.
But equity investors’ relaxed attitude should not be mistaken for a belief that none of this will ultimately matter. The most severe trade strictures may prove temporary, but even at current levels, there is enough evidence to suggest they are hurting. The ISM Manufacturing index for May, data for which was gathered once the ‘liberation day’ tariffs had already been watered down, this week showed a further contraction. Steel and aluminium tariffs – which bucked the trend by doubling to 50 per cent this week, although the UK has been exempted – will hit home here. It is not just industry: the services index has also fallen into contractionary territory, and the “prices paid” component keeps on rising.
The counter-argument is that ‘hard’ US data, while it naturally lags sentiment-driven surveys such as those the ISM provides, is still looking pretty good.
Bond and currency markets strike a more cautious tone. The US dollar index is down 9 per cent so far this year; the greenback has fallen 8 per cent against sterling in 2025. Thirty-year Treasury yields have risen from 4.5 per cent to close to 5 per cent since the start of April. The rise in long-term yields is not solely a US issue, given the way in which bond markets in Japan, Europe and the UK have seen similar increases in recent weeks. Still, the fact that the world’s reserve currency issuer is caught up in the storm is notable enough. Combined with the dollar’s performance, the conclusion may be that overseas institutional investors are losing at least some of their previously unshakeable faith in the global hegemon.
Section 899 may be just as pertinent in this regard as the trade war. One concern is that overseas holdings of Treasuries will be affected by the same kind of tax rises as planned for dividends. Taxes on corporate earnings, as well as on passive income such as dividends and interest income, are also scheduled to rise by 5 percentage points a year as part of the bill, which if enacted, would have an impact on UK companies with large US exposures, ranging from Compass to National Grid.
The bark may again be worse than the bite, even if we have to wait until the end of the year for certainty to emerge (as the bill makes its way through the Senate and into law). In the meantime, however, the end of US exceptionalism is becoming increasingly evident everywhere but the stock market.