The World Has A “Nuclear Option” For Trump’s Tariff War: Target U.S. Debt
Story by Tommaso Carboni, Worldcrunch, 7/20/25
TURIN — Volatility appears to be the defining characteristic of how U.S. President Donald Trump governs. This past week, we’ve seen him effectively change his mind about Russian President Vladimir Putin, approving a new package of weapons for Ukraine, even if they will be paid for by European allies.
But there’s one basic policy question he’s unlikely to change his mind on, and that is tariffs, the benefits of which he’s been extolling for 40 years, long before he ever ran for office.
The epithet-acronym “TACO” — Trump Always Chickens Out — coined by the Financial Times is amusing and appropriately scathing, but it misses the point. That is, faced with a record loss of the markets earlier this year, Trump hesitated, it’s true, but the reversal was only partial. Tariffs have increased virtually everywhere, and by no small amount.
Trump is pursuing three objectives simultaneously: reviving U.S. domestic manufacturing, reducing the trade deficit, and generating significant government revenue to finance tax cuts. In addition to a 10% baseline tariff on nearly all imports, he has imposed specific duties on steel, aluminum, and automobiles, resulting in U.S. tariffs at their highest since the 1940s. The European Union and other countries are negotiating to avoid further increases, with an Aug. 1 deadline. With the exception of China, and to a lesser extent Canada, no country has retaliated. The European response, in particular, has been meek.
But everything could change (again) with that Aug. 1 deadline. The question is: could the world unite against Trump’s policies? That will depend in part on where the new tariffs end.
Like-minded partners?
European Trade Commissioner Maroš Šefčovič has been quite clear: If tariffs on European exports were to rise to 30%, trade with the United States would become “almost impossible,” and at that point, Europe would have nothing left to lose. For this reason, Šefčovič added, Brussels is already talking with other “like-minded” partners to explore joint countermeasures.
A widespread increase in tariffs would also hurt the United States. It would increase the cost of imports and, sooner or later, consumer prices for American citizens. Still, economists point to another factor that is America’s real weakness: its debt. U.S. debt will exceed $36 trillion in 2025, more than 120% of GDP.
Politicians in the U.S. seem unconcerned. Trump’s “Big Beautiful Bill” cuts taxes without sufficiently reducing spending. The result: the debt will grow further. This is also why the dollar has lost value against the euro.
If foreign investors were to cease Treasury purchases, the consequences would be severe.
Most of this debt, about 65%, is held by domestic investors, such as pension funds, insurance companies, banks and the Federal Reserve. However, the remainder is held by foreign investors, including sovereign states and private investors abroad. If these investors were to cease or drastically reduce Treasury purchases in response to hostile policies, the consequences would be severe.
Financed by the world
The three largest holders of U.S. debt are Japan, with more than $1.1 trillion, followed by the United Kingdom (about $800 billion) and China ($750 billion). Together, they control nearly 30% of U.S. foreign debt, according to data updated to April 2025 by the U.S. Treasury.
Then comes the second tier of investors, which nonetheless move enormous sums: the Cayman Islands (a tax haven and offshore financial center) with $448 billion, Belgium ($411 billion), Luxembourg ($410.9 billion), Canada ($368.4 billion), France ($360.6 billion), Ireland ($339.9 billion), and Switzerland ($310.9 billion). Taken together, these entities represent another significant portion of US debt.
A next tier is led by Taiwan ($298.8 billion), Singapore ($247.7 billion), Hong Kong ($247.1 billion), India ($232.5 billion), Brazil ($212 billion), Norway ($195.9 billion), Saudi Arabia ($133.8 billion), South Korea ($121.7 billion), the United Arab Emirates ($112.9 billion), and Germany ($110.4 billion).
In short, America is financed by half the world, and the dollar remains by far the most important global currency.
The moderate voices among most U.S. debt holders say: a bad peace is better than war. When Trump raised tariffs for everyone in February, it was a winning gamble: other governments, perhaps caught off guard, failed to coordinate.
The security factor
America enjoys some indisputable advantages: it is the world’s leading importer. Also, importantly, many countries depend on Washington for their security — which complicates negotiations.
Brussels is continuing to negotiate with the United States. But if one can imagine a coordinated retaliation that leveraged American debt as the ultimate card for the rest of the world. Is this really a viable option? The Japanese government has called it the “nuclear option.”
And this alone suggests it would have enormous consequences for all parties. If foreign demand for U.S. securities were to decline, Treasury prices would fall and yields would rise. This would make financing U.S. debt more expensive, with the dual effect of increasing interest payments and pushing up rates for households and businesses.
U.S. debt remains a sticking point in negotiations, and countries should coordinate more effectively to better confront Trump.
The risk? A slowdown in investment and consumption, a likely sharp economic slowdown, perhaps a recession. The Fed could inject liquidity into the system, fueling renewed inflation. Meanwhile, a mass withdrawal from Treasuries would devalue the dollar: on the one hand, it would make American exports more competitive; on the other, it would increase the cost of imported goods, further exacerbating inflation. Trump would find himself managing multiple crises. He can’t afford it: the midterm elections are just over a year away.
China’s card
But this, precisely, is a nuclear option. Japan, by pulling the trigger, is well aware it would be looking for trouble. A rapid sell-off of U.S. assets could trigger an appreciation of the yen, stifling the competitiveness of exports and risking a crisis similar to that of the 1990s. Furthermore, those who sell face almost certain asset losses. Banks, pension funds, and insurance companies buy U.S. securities to guarantee reliable returns and balance their portfolios. The same dilemma affects other creditors, such as China. Xi Jinping perhaps has a more effective weapon to blackmail the US: its near-monopoly on rare-earth minerals.
U.S. debt, however, remains a sticking point in negotiations, and countries should coordinate more effectively to better confront Trump. When Šefčovič, the EU trade commissioner, speaks of “countermeasures” to be taken together, he is also referring to new trade agreements with other countries and markets. However, internal disputes often stall negotiations. The agreement with Mercosur, Latin America’s major market, is being held up by France and other countries that protect farmers.
But this is a tiny economic interest (agriculture accounts for 2% of European GDP), at the expense of an opening that could bring great benefits to countries around the world.