It's often advised to keep wars small. But US President Donald Trump's 'Liberation Day' global trade tariff regime seems to be anything but that, forcing countries to sharpen ink sticks into swords.
Traditionally, tariffs are considered a barrier to trade until Trump changed it into a macho power game and is now charging aggressively to stab anywhere and everywhere.
The proposed tariffs will greatly annoy some, which is one of its intended goals and powered by rebel vibes, they may prompt a chain of retaliatory levies, or even a prolonged, full-blown trade war. If this happens, it could rip off global output by about 0.3% in three years, and raise inflation by 0.4% per annum, the OECD had warned just last month.
Unmindful of the consequences, Trump walked in with a bespoke tariff board on Wednesday, and with warm paternal protectiveness towards domestic producers, he unleashed country-specific levies as high as 34% for China (over and above the prevailing 25% tariffs), 46% for Vietnam, 37% for Bangladesh, 49% for Cambodia and so on. For Trump and his team, the levies are a sort of a gospel number, but critics view them as solutions in search of a problem.
The worst-affected nations have morphed into a ball of angst and despair and believe they were forced to survive unfair choices. If Beijing firmly opposed the move and vowed countermeasures, the German industry concluded that tariffs 'will only create losers.' Japan said it was 'extremely regrettable,' Australia believes it was 'not the act of a friend,' while Canada warned that the tariffs will 'fundamentally change the global trading system.'
Even as governments across the world are taking a deep breath and are yet to settle into a battle stance, markets feel as if they have been set aflame. On Thursday, both Sensex and Nifty too ran like frightened horses as soon they opened, but managed to rebound shortly.
Notwithstanding the bonhomie with Prime Minister Narendra Modi, Trump barreled 26% reciprocal tariffs on goods India exports to the US and preliminary estimates peg the impact variously from $8.2 billion to $34 billion. If brokerage Emkay Global projects it at $34 billion or up to 0.9% of GDP, Motilal Oswal pegged a export trade loss of about $3.6 billion, or 0.1% of GDP. Likewise, SBI Research believes the potential impact of US tariff reciprocity on Indian exports would be modest at 3-3.5%.
Slice it any which way, for India the likely impact seems limited for now and not as spine-busting as countries like China, Canada and Cambodia, who may have to heave up more trouble. That said, what's undeniable is that India is in a tough spot with slowing exports and growth and the fresh tariffs are literally throwing salt from the sidelines.
Perhaps hoping to avoid the shots about to be fired, India gummed it up with several concessions in recent weeks. For instance, overhauling its tariff regime, the government snipped off import duties on as many as 8,500 products including bourbon whiskey and high-end motorcycles. It also expressed willingness to buy more American oil, LNG and defense equipment to narrow its bilateral trade surplus.
But the wall of measures weren't thick enough to pre-empt Trump's tariff gunfire. In short, we weren't as lucky as Trump, whose last-second head tilt miraculously avoided the assassin’s bullet during last year's election campaign.
While key sectors like pharma and energy were exempt, others like auto, apparel and textiles, electronics, and engineering weren't spared. In response, India said it was 'carefully examining' the impact, and has already begun trade talks with the US and both countries aim to double bilateral trade to $500 billion by 2030, up from $127 billion in 2023.
As for sector-specific levies, India's apparel and textile industry is particularly hit with the US market accounting for $10 billion, or nearly 28% of exports. Likewise, auto component exports touched $5.72 billion in FY24, or 27%, and the proposed 25% tariff threatens the growth of exports. Moreover, the 26% reciprocal tariff on auto industry is in addition to the 25% tariff on imported automobiles and auto parts. Together, they could significantly impact the earnings of auto companies.
The US remains the largest revenue-contributing market for large-cap IT firms, accounting for over 50% of industry revenue. While the impact on services from tariffs could be minimal, restrictive trade policies affecting other sectors and countries could influence overall technology spending. Analysts believe sectors such as BFSI, auto, retail and discretionary are particularly vulnerable to these macroeconomic pressures, potentially leading to a further delay in technology investments, which have already been in a holding pattern for the past two years.
According to Morgan Stanley, while India is exposed to direct tariff risks, the bigger effect on growth from tariffs likely comes via the indirect transmission channel of weaker corporate confidence from heightened policy uncertainty and the spillovers to capex and trade cycle.
From 2021-24, the US was the largest trading partner for India and accounts for about 18% of India's total goods exports, 6.22% of imports and 10.73% in bilateral trade. America has a trade surplus with India of $35.52 billion in goods in FY24. According to the White House, prior to reciprocal tariffs, the US tariff rates were among the lowest, with simple average tariffs at 3.3%, compared with India's 17%.
Tariffs are nothing but border taxes charged on the import of goods from foreign countries. Charged as a percentage of a product's value, importers pay them upon entry to the customs agency of the country or bloc that levies them. They are levied on components and raw materials, pushing up the costs to producers.
The US is the world's largest goods importer buying products worth $3 trillion in 2023 and also has the largest goods trade deficit of $1 trillion. Trump has long complained that the deficit reflects 'unfair' practices from US trading partners, and is determined to restore factory production from overseas locations. Its largest goods trade deficit is with China at $295 billion, followed by the EU at $235 billion.
