US Tax Retaliation Sparks Global Trade Fears, Threatens Investment

The US House’s reconciliation bill, unveiled on May 12, 2025, targets foreign tax policies like the global minimum tax’s undertaxed profits rule (UTPR), digital services taxes (DSTs), and diverted profits taxes (DPTs) with punitive measures, risking over 80% of US foreign direct investment (FDI). As President Donald Trump’s administration pushes aggressive trade tactics, experts warn of a looming global economic clash. According to experts, diplomacy must replace tax warfare to safeguard growth and jobs, or the US risks alienating allies and stifling investment.

Punitive Taxes Target Foreign Firms

Section 899 hikes US income tax rates by 5% annually, up to a 20% increase, on entities from countries with UTPR, DSTs, or DPTs, such as EU nations, the UK, and Canada. It also strengthens the base erosion and anti-abuse tax (BEAT), raising its rate to 12.5% and eliminating credits, burdening foreign firms. Congressional estimates project $116 billion in revenue over a decade, but the measures hit FDI from allies accounting for over 80% of US inbound investment, per 2023 data. Experts argue the US must avoid repeating the 2018 tariff war’s market disruptions, which raised costs and slowed growth.

Economic Risks Outweigh Gains

Taxing FDI threatens US workers and consumers by curbing foreign capital that drives productivity and jobs. The 2017 BEAT implementation, which reduced FDI by 10%, highlights the potential damage. Experts caution that rigid enforcement, with little room for negotiation, could freeze investment as firms hesitate. These measures target US-friendly foreign businesses rather than the policymakers behind UTPR or DSTs, misaligning with Trump’s goal of boosting domestic investment. According to experts, the US should pursue targeted diplomacy to address grievances without harming economic allies.

US-EU Tax Tensions Escalate

The EU’s UTPR and DSTs in countries like France and Italy have fueled US claims of unfair taxation on American tech firms. Trump’s team views UTPR as an overreach on fiscal sovereignty, while the EU seeks digital market taxing rights. The 2019 French DST dispute, which prompted US tariff threats, shows how quickly tensions flare. With China avoiding these tax policies, experts warn the US must avoid alienating allies. According to experts, the US should leverage negotiations, like past OECD tax agreements, to de-escalate rather than mimic the EU’s coercive “Brussels Effect.”

According to experts, the Federal Reserve, under Chair Jerome Powell, must brace for tariff-driven inflation while advocating for diplomatic solutions. Trump’s administration should prioritize talks over tax hikes to preserve FDI and growth, experts advise, citing the 2018 trade war’s job losses and price spikes as a warning. With global markets interconnected, a cooperative approach via regional deals is essential, experts argue, to ensure the US remains an investment hub rather than a trade war battleground.