A looming global trade war jerked to a halt hours before it was about to begin on Wednesday.
As the clock touched the scariest point on the pendulum on April 9, and amid rumbling unease across the world, US President Donald Trump unexpectedly withdrew the tariff tripwire. It's not a full stop though and the proposed reciprocal levies will crank into gear 90 days later.
Actually, scratch that.
Some 75-odd countries are folding the tent and if, as Trump noted, they do manage to strike a deal with the world's largest economy, chances are, reciprocal tariffs will be nicked to death and sent off to its resting place.
But, as they say, there's no such thing as a total truce and a partial one rarely lasts. So it'll be interesting to see how Trump's scattergun approach towards trade tariffs will unfold having unleashed a record-setting disaster across global stock markets, wiping off as much as $12 trillion in just a few days.
The global panic was palpable and critics jeered that crashing markets were a sign of growing investor hatred towards Trump, who often takes the applause for record market rallies under his watch.
But more than the stock market crash, the driving force behind the 90-day pause happens to be bond markets. Even as Trump vowed not to delay reciprocal tariffs, he gave in to the bond market's rant. Last week, bonds crashed at an indecent speed and faster than stocks, forcing Trump to press the pause button. "I was watching the bond market. It's very tricky. If you look at it now, it's beautiful," he said after announcing delaying the deadline.
On Wednesday, the Trump pivot prompted a euphoric rally with indices from Wall Street to Asian markets to Europe witnessing one of their best days in history.
While the S&P 500 had its third-best day since 1940, the Dow Jones Industrial Average and the Nasdaq composite leaped to 7.9%, and 12.2%, respectively. In fact, the S&P 500 recouped about $4 trillion in market value, or roughly 70% of what had been lost over the prior four trading days. On cue, Asian markets surged in early Thursday trading, with Japan's benchmark jumping over 2,000 points, while Australia's S&P/ASZ 200 soared 5.1%. European markets too had their best day in three years.
However, as the salutary slap of reality emerged, Wall Street retreated to its deeply irritated state and crashed yet again on Thursday.
It took an entire day for markets to absorb the wisdom of the written word that the witching hour may have been moved to July 9, but Trump's knee-on-the-neck tactic isn't completely off the table. The 10% baseline tariff on all countries globally took effect on Saturday, and so does the 25% tariffs on automobile imports to the US, 25% tariffs on steel and aluminum, 25% tariffs on imports from Canada and Mexico and the mother of all -- the 145% tariff on imports from China.
Accusing China of still 'ripping off' the US, Trump charged ahead with historic tariffs raises hoping to bring the Chinese dragon to heel. But Beijing refused to bow down and retaliated with an open-finger punch imposing a tit-for-tat 125% tariffs on all US imports.
China's strategy
And before Washington could react, China drew the last line stating that any further levies by the US will be ignored as the tariff hammer has no nails to pound.
"The United States' imposition of round upon round of abnormally high tariffs on China has become a numbers game with no practical significance in economics," Beijing's commerce ministry said adding that "at the current tariff level, there is no possibility of market acceptance for US goods exported to China.'
Stated another way, the trade war isn't over, and an escalating battle between the world's two largest economies is about to touch the third rail. Trump is yet to speak with China's President Xi Jinping since he took office in January, making it the longest period in 20 years for the presidents to remain without contact. He, however, is open to talking it out with Jinping.
China, on the other hand, is believed to be circling the wagons, forging regional economic partnerships, strengthening supply chains and encouraging investment flows among cooperating nations. As we speak, Jinping is getting ready to forge a Eastern flank covering Vietnam, Cambodia and Malaysia to shore up his base.
Clearly, China is bent on a radical overhaul of the world trade order and is in no mood to let go of the opportunity to claim its dominance. If it happens, it may end up as a massive diplomatic and geopolitical headache for the rest of the world.
For one, much of China's exports go to the US, but with the current tariffs, a tidal wave of Chinese goods might end up everywhere, swamping markets and dampening global growth in the process. And as the WTO noted, a US-China tariff war could cut merchandize trade between these two economies by as much as 80%.
'Wrongheaded'
Even some of Trump's ardent supporters are questioning the wisdom of Trump's policy to destroy knives to produce knives. It doesn't take much to realize that you just cannot have production plants or new supply chains overnight. Moreover, to match China's economies of scale won't be easy and it's unrealistic to get there without periods of severe economic pain, or even a recession.
So, an increasing number of proponents are collectively voicing doubts about tariffs, terming them 'really problematic' and a major policy error. "The idea that this is inherently good and makes the American economy strong is wrongheaded," said political commentator Ben Shapiro adding, "It's untrue. The idea that it is going to result in massive re-shoring of manufacturers is also untrue."
Bill Ackman, the pro-Trump hedge fund manager too chimed in warning on X that "we are heading for a self-induced, economic nuclear winter," unless Trump took a more deliberate approach.
Short-run pain for long-term prosperity argument
Interestingly, others believe that tariffs and the end of globalism are a necessary outcome. There's another counterintuitive idea that it's going to get worse, in order to get better.
According to this theory, an orchestrated recession or a deliberate slowdown might actually benefit the economy in the long run as it could purge inefficiencies, tame inflation, and offer robust growth. Trump said as much on Wednesday, when he spoke of a "period of transition" that would ultimately "bring wealth back to America", implying short-run pain for long-run prosperity. His Commerce Secretary Howard Lutnick too defended Trump's protectionist policies, saying they were 'worth it' even if they trigger a downturn.
Meanwhile, the EU too launched its own counterattack, announcing measures targeting some US products in retaliation for American duties on global steel and aluminum exports. The 27-nation bloc, which Trump has accused of being created to 'screw' the US, will hit more than $28 billion worth of US imports. But the EU notably did not retaliate against the 20% US tariffs that came into effect a minute after midnight on Wednesday.
Impact on India
As for India, we cannot probably escape the growth chop, which is why the RBI lowered its growth projection by 20 bps to 6.5% for FY26. According to Governor Sanjay Malhotra, the tariff uncertainties will impact exports and growth.
On the positive side though, he reasoned that the dollar has weakened appreciably, bond yields have softened, equity markets were correcting and crude prices fell to their lowest in three years. That said, there are several areas of concerns.
"First and foremost, uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households. Second, the dent on global growth due to trade frictions will impede domestic growth. Thirdly, higher tariffs shall have a negative impact on net exports," he noted.
