Weaponized trade could introduce weaponized capital to the global economy

US President Donald Trump’s “Liberation Day” sweeping trade tariffs is clearly an admittedly weaponized plan to make countries more susceptible to his administration’s agenda. But what if other economies completely walk out of the deal? Broken supply chains, more trade deficits, and last but not least, the weaponization of capital.

Trump is promoting his policy direction as a way to revive domestic industry and reduce trade imbalances. He believes the way to do this is to mount heavy tariffs on everyone (excluding Russia). Does the world really need the US at the business table? Maybe some countries, but definitely not Trump’s supposed “number one enemy,” China.

International investors are now rethinking their exposure to the US economy. Owing to the current market bloodbath, they’re also preparing for a world in which capital, not just goods, is a tool of geopolitical pressure.

US market capital flows could be at risk

Over the past six months, according to multiple investor surveys cited by the Financial Times, exchange-traded fund (ETF) flows have been moving toward non-US markets. Foreign stakeholders hedge aren’t smiling about the growing unpredictability in US trade and economic policy, leaving Wall Street to deal with the brunt.

In the surveys, economists predicted that a shrinking US trade deficit, thanks to Donald Trump’s cutthroat tariffs, would inevitably lead to diminished cross-border capital flows. 

By the rule of business, a nation’s current account deficit mirrors its inward capital flows, so narrowing the trade gap could inadvertently restrict the foreign capital that has supported the US financial system for decades.

Non-bank financial institutions, which now control roughly 70% of America’s private sector financial assets, could get the bitter end of the deal. These establishments grow by channeling international capital into American listed and private investments. If the flow “mistakenly” slows or reverses, the US markets would have to bid goodbye to their operations, and even those that survive will have to squeeze funding for the sectors they support.

Will investors run away from US markets?

When President Trump won his ticket back to Washington’s most secure office in November, the stock market flashed green, market after market open. Foreign and local investors all had one idea: a Trumpian market would make them rich. And so they flocked to US markets, hoping to catch the rising train before the ultimate fall came. However, no one expected the fall to come this soon.

What’s left now is a threat of capital repatriation, the withdrawal of foreign funds from US markets. Since 2015, international investors’ share of US government debt has dropped from 33% to 24%, a downtick that will shoot down even further if global partners view the US as an unreliable trading counterpart. 

According to FT, foreign ownership of US stocks has steadily increased over the past two decades and now constitutes around 18% of total US market capitalization. 

Any concerted move by international investors to withdraw, either in protest or to fund rising domestic defense budgets, will definitely lead to a mass sell-off, and American household wealth will go down with it.

The US is reportedly fast-tracking the establishment of a sovereign wealth fund, combining it with large-scale privatizations and sales of federal land, now being slimmed down by Elon Musk-founded Department of Government Efficiency (DOGE).

Some analysts assert that it could help Washington build a domestic capital buffer that will surpass Norway’s $1.8 trillion Government Pension Fund Global. But these are just ifs, buts, and maybes; no one knows if President Trump will wake up tomorrow and change his mind.

Trump knows Europe and Britain are vulnerable

The consequences of a retreat in global capital flows would not be confined to the US because Europe is also grappling with slow growth, persistent inflation risks, and rising fiscal demands. 

Financial experts have criticized the EU’s fragmented capital markets for lacking the scale and integration needed to support large-scale investment in critical sectors such as defense, infrastructure, and energy.

Annual inflation in the Euro Area eased to 2.2% in March 2025, its lowest level since November 2024, and slightly below market expectations of 2.3%, according to a preliminary estimate released Friday.

Services inflation dropped to 3.4%, a 33-month low, from 3.7% in February. Energy prices also dipped, falling 0.7% after a slight increase of 0.2% the previous month.

Inflation remained unchanged for non-energy industrial goods, holding steady at 0.6%, and for processed food, alcohol, and tobacco at 2.6%. However, unprocessed food prices saw a sharp uptick, rising 4.1% compared to 3.0% in February.

Core inflation, which excludes volatile components such as energy and food, slipped to 2.4%, just below analysts’ forecasts of 2.5%. Consumer prices climbed 0.6% in March, following a 0.4% increase in February.

The stats show that inflation pressures are going down, but without a decisive and fully unified Capital Markets Union, the bloc will find itself in an existential crisis, which is exactly what Trump wants. We will have to wait and see if the EU will try and negotiate with the US President.

Is Trump ready to negotiate or not?

According to Trade Counselor to the President of the United States, Peter Navarro, the new tariffs are “not a negotiation.” But Trump, speaking aboard Air Force One on Thursday, told reporters he was open to discussions if other countries presented “phenomenal” offers.

Is the President using tariffs to bring down businesses that do not comply so that they will come and talk to him? Some netizens believe so.

“So basically, Trump sits back and waits for the captains of industry to all come to grovel at his feet, and then he grants them tariff waivers if they pay him extortion money. It’s the biggest grift in world history, folks,” said one user on social media X.

Minnesota Governor Tim Walz described the president’s trade ideas as outdated and ineffective. 

“You almost have to be an amateur psychologist on this. It’s like Trump is stuck in the ’80s. He’s been on this tariffs thing forever and every economist, conservative or liberal, will tell you they just don’t work … I think the biggest myth perpetuated on this country is that Donald Trump understands anything about business,” he told CNBC in a recent interview.

The room for negotiations is there – it’s always been there. But before anyone enters it, Donald Trump is asking for codeword: What will you do for America?