Global Macro Research
Macro BytesWill the trade war become a capital war?
As global tensions grow attention is shifting from tariffs on goods to restrictions on the flow of money. What would a capital war look like — and who would get hurt?
Authors
Paul Diggle
Chief Economist
Luke Bartholomew
Deputy Chief Economist
Lizzy Galbraith
Senior Political Economist
Duration: 32 Mins
Date: 30 Jan 2026
With the US threatening fresh tariffs on various economies, trade wars are back in focus. But the risk of a trade war turning into a capital war has become more pressing.
The European Union (EU) is considering activating its ‘Anti-Coercion Instrument’ in response to US threats to Greenland, which could see services trade and capital flows targeted.
Paul, Luke and Lizzy discuss how a capital war could be the next stage; how the EU may have leverage over the US; the prospect of European institutions dumping US Treasuries; and whether the US capital account surplus is really a chokepoint trading partners could exploit.
Some highlights:
Paul, Luke and Lizzy discuss how a capital war could be the next stage; how the EU may have leverage over the US; the prospect of European institutions dumping US Treasuries; and whether the US capital account surplus is really a chokepoint trading partners could exploit.
Some highlights:
- Trade and capital are two sides of the same coin. Countries that run trade deficits — like the US — must attract foreign investment to fund them. That direct link makes it natural to ask whether disputes over tariffs could spill into restrictions on capital flows.
- A capital war could target politically sensitive sectors. Governments might try to target influential industries such as technology and finance, the same groups with the most lobbying power in Washington. This mirrors how past trade retaliation hit symbolic US exports to sway political opinion.
- Europe’s Anti Coercion Instrument. The ACI could impose tariffs, restrict digital services, limit foreign access to public contracts, or curb foreign direct investment. But slow decision making and the potential for self inflicted economic damage make it an unwieldy instrument.
- Tech dependence complicates Europe’s options. With US firms dominating cloud, operating systems and online platforms, aggressive restrictions would hit European consumers and businesses hard.
- The US is considering its own leverage. Ideas floated in Washington include changing tax rules for foreign sovereign wealth funds and charging ‘user fees’ for holding US Treasuries. These measures are not yet policy, but they show how financial tools are increasingly seen as geopolitical instruments.
- Talk of Europe or China ‘dumping Treasuries’ is overblown. Coordinated mass selling would be legally complex and economically damaging — likely hurting the sellers more than the US. Still, some investors are quietly re-examining their long term exposure to US assets.
Listen to the full discussion on the latest episode of Macro Bytes.
