One man holding world markets to ransom was unprecedented. We called it Tughlaqian in an earlier column.
US President Donald Trump with his reckless reciprocal tariffs wiped out $10 trillion of wealth in the first three days. And then came the 90-day pause announcement that triggered a rally which saw $4 trillion flowing back in.
Some might say that it was all in keeping with the script.
Financial market movements are expected to reflect the long-term impact of economic and business leadership choices on debt, equity and commodity prices. Financial intermediaries are expected to think through the impact of these choices on household earnings and consequently on their consumption and investment decisions.
For example, if the intermediaries in financial markets assess that the household earnings are expected to decline (or grow), they are expected to vote with their own and/or other people’s money and let the politicians and business leaders know that their choices make no or little (or ample) sense.
We saw the decline scenario play out on April 2, 2025, when the global equity, energy and industrial metals markets declined – the message was that 'all is not well.’
On Wednesday, when Trump announced that he is giving himself and us 90 days to sort things out, the markets rallied – informing us that all is well. S&P 500 is just 4% below its closing level on April 2, after rallying by 9.5% on April 9.
Trump mentioned about the anxiety people were feeling by saying that “You know, they were getting a little bit yippy, a little bit afraid". The US president has argued that he is flexible and would like to negotiate a fair deal with everybody, including with China. He has; however, singled out China for greater punishment for retaliating to his unilateral imposition of reciprocal tariffs on 60 major and minor trade partners.
It is not surprising that the markets are "yippy" or anxious. The world’s richest country and the oldest democracy has chosen to unilaterally decide that we must unwind all the policies that have benefited its own businesses and households, along with many other countries.
An aside
Around four hours before the 90-day pause announcement, Trump posted on Truth Social, his social media platform, that "THIS IS A GREAT TIME TO BUY!!! DJT". The Associated Press has reported that it is not clear if Trump was promoting his own stock (Trump Media and Technology Group with DJT as its symbol) or urging people to invest in a wider market. Was the Truth Social post the wisest choice available to the US President, when everyone is anxious about his and his administration's actions?
Reciprocal tariffs: Will they achieve the stated US objective?
Without going into the moral or legal aspects of Trump's post, a side show, in his policy agenda, let us assess if the pause is a meaningful step forward or another announcement that will cause uncertainty and increased volatility.
It will be a meaningful step forward, if the US and its trade partners are able to reach an agreement that helps identify the specific problems, allows all the parties to build on their advantages, find a solution that gives everyone time to remove the barriers that we consider the most crucial for the long-term well-being.
At the time of April 2 announcement, the White House has outlined that reciprocal tariffs will help "rebuild the economy and restore national and economic security". The document mentions the following objectives:
1. Reduce trade deficit through increase in advanced domestic manufacturing and driving economic growth for American people.
2. Discourage harmful policies like currency manipulation and imposition of VAT by trade partners
3. Rebuild agriculture trade surplus.
4. Protect the US intellectual property.
5. Reciprocal trade – America First trade – will increase the US competitive edge, protect its sovereignty and strengthen its national and economic security.
Reshoring advanced manufacturing
It is indeed important for all countries to build advanced manufacturing capability, as that is the only way to improve wages and thereby quality of life for people. Since the US is one of the richest countries in the world, its cost of living is naturally high. It is, therefore, even more important for the US to invest in advanced manufacturing. However, the questions we have to ask are:
1. Will the US entrepreneurs and large corporations invest in advanced manufacturing for intermediate goods if their existing suppliers outside the US can supply these goods at significantly lower costs than in the US? It is unlikely that they will invest, as their customers are equally smart businesses.
2. How long would it take for the US firms or the global firms to set up advanced manufacturing capacity in the US? Would it be a few months or a couple of years? We do know that it is not months.
3. If the US has to levy currently implemented/proposed high tariffs for the next couple of years, which is likely to be the time required for building the advanced manufacturing capacity, will the US firm be able to maintain their current competitive advantage, as they will be buying fairly expensive products – products for which there is no change in value?
4. On the other hand, if these are consumer goods, will their cost of manufacturing in the US be lower than elsewhere? If not, are the US households in a position to bear the additional cost or will these firms accept lower margins? We do know that real median earnings for the US households have grown at miserly rates during the last many decades.
5. How will the US financial investors react to investments that will take years to pay back and their firms will have to accept lower margins as they drop prices to retain volume?
For example, can Apple and its suppliers lift and shift iPhone production (not just assembly) from China, Japan, Korea, etc. during the next few months at the current cost levels with minimal capex? Which are the US firms that can produce or are willing to invest in the production of advanced industrial robots in the US at costs similar to that of China or Germany?
On the other hand, If the global players who are currently exporting to the US are expected to invest, what does building the US plant do to their cost competitiveness? Are the higher US costs likely to be much lower than the punitive tariffs that are being talked about? We do know that there are significant differences in the cost of production in the US and its trade partners. If that was not the case, the US businesses or consumers would not have imported from these countries.
Eliminating currency manipulation
It is a known fact that the emerging market currencies are subject to much higher volatility than advanced economy currencies. For example, a country like India that runs significant trade as well as a current account deficit needs its currency to be stable so that it can attract foreign capital not only for financing its current account deficit but also for building capacity to accelerate growth.
Stability in this context will often mean that the rupee does not depreciate with high volatility –- though depreciate it will, as the Indian inflation is consistently higher than the US inflation.
Sharp rupee depreciation, particularly with high volatility, will result in India's imports becoming expensive and it will also not remain an attractive destination for foreign investors. Should we see it as currency manipulation or a way to build its ability to grow – the same way the US needs to rebuild its ability to grow?
The US and the rest of us can learn from good old Japan, where firms helped them become the export powerhouse even when their currency was appreciating consistently. Even if a currency appreciates, a firm can remain competitive through higher productivity and innovation. The US does not need the dollar to depreciate, particularly given the fact that it is still one of the most innovative economies in the world.
If we review the data for last two decades, it is only since January 2021 that the Real Broad Dollar Index shows significant appreciation, possibly resulting from the US exceptionalism that everyone has been talking about. It is the same period during which the US equity market has been exceptionally strong.
The average index value for the last two decades is 100.7. The average during the years prior to January 2021 is 97.1.
During the last four years, Japan has consciously allowed Yen to depreciate, the European economies have been weak, COVID has wreaked havoc across the world, and we have been dealing with multiple conflicts (Russia-Ukraine and Israel-Palestine). In such situations, the dollar will remain strong, given the strength of the US economy and the role it enjoys as the superpower.
Rebuilding Agriculture Trade Surplus
It is unreasonable for a rich country to ask the poor or low-income countries to open themselves to international trade. A rich country’s cost of production will always be higher than that of a poor country and, therefore, the rich countries have to provide producer subsidies, if they do want to sell to low-income countries. It is, therefore, not surprising that the OECD countries provided a total of USD 224 billion in support to their agricultural producers during 2023, whereas India and Vietnam provided a negative producer support of USD 57.7 billion and USD 6.9 billion, respectively. The US support during the year was USD 34.9 billion.
Once the OECD eliminates the agriculture producer support, there will be very little demand for their products outside the OECD nations. Most low-income countries would not be able to afford them.
It is a well-known fact that the producer subsidies, whether in agriculture or industry, distort trade and create disincentives for productivity and innovation.
It is also surprising that Dr Peter Navarro, Senior Counsellor for Trade and Manufacturing for Trump, in his opinion article in Financial Times, does not want to give the rest of the world the right to choose their food. He argues that the countries must not ban import of US poultry, hormone-treated beef, and genetically modified crops, once they have lost a trade dispute at WTO.
Protecting US Intellectual Property
That is a fair ask. The question that we need to ask is: Are unilateral punitive tariffs the solution to the problem of protecting IP.
It is important that the price that an advanced economy company charges is fair, considering the cost of living of a poor or low-income nation and its shareholders. We also know that a lot of research is funded through government and charitable grants.
A rich country business does not have to subsidise across the board, but a selective subsidy in specific circumstances (e.g., healthcare) will not do much harm to above normal returns or incentive to invest in innovation. We do know that the open source and right to repair movements in advanced economies are the responses to conditions where IP owners are not being seen as fair.
As mentioned earlier, an Indian farmer is subsidizing (negative producer support) rich country consumers when we export food products.
In summary, it is important for the US and Trump to walk the talk, i.e., the 90-day pause should result in a genuine effort at finding a solution that creates longer-term value for all the partners. It is not possible to reverse the four decades’ decline of the US manufacturing by bullying trade partners through penal tariffs or threats to destroy their economies or doing deals for select set of businesses or influential people. Even if the current set of politicians in exporting countries gives in, there is no guarantee that the next round of elections will put the same set of people (or people with same set of ideology or values) back in the saddle.