Trump has done what many are describing as ‘worse than the worst imagined’. The quantum of tariffs is so high that almost the entire world trade with the US becomes unviable. Economies of all countries will be affected either directly or indirectly.
While the situation is very uncertain and could go in any direction, maybe even to the extent of major war, if things are not resolved soon enough, it is still necessary for investors to form a conjecture (even if it turns out to be totally wrong) about where all this could go and keep updating it on the basis of new inputs.
While the entire world is affected, the main actors of this horror or comedy movie, whichever way one wants to look at it, are US, China, India and Russia. A few thoughts on these are shared below: –
UNITED STATES OF AMERICA
Trump and his team would hopefully know that building factories takes time, sometimes years, so unless tariffs are negotiated to reasonable levels, American citizens will have to face huge inflation. Trump and Co would also know that running factories requires lots of labour, preferably cheap, if global competitiveness is to be maintained. Tough immigration laws are not exactly helping this cause.
Assuming they know all this, what is the US’ endgame?
It is likely that they know that at these levels of tariffs, world trade cannot happen and countries having large trade surplus with the US will be hit hard. They anticipate these countries would be forced to sit on the table, lower their import tariffs on US’ goods, and business as usual would resume.
Even if this is the outcome desired by the Oval war room, bilateral trade agreements take months if not years to materialize. In the interim there is going to be huge disruption. Inflation can shoot up in the US with recession happening simultaneously (called stagflation) because goods become too expensive for US consumers and they cut back on demand. US stock markets can go down sharply and the Fed wouldn’t know whether to increase interest rates to combat inflation or reduce them to battle recession.
What if the rest of the world, disgusted with the US’ attitude, turns to China for greater trade relations and the US is left ostracized? Unless the US manages to bottle the genie that it has opened, this period in history could mark the beginning of the end of US and dollar as world’s mightiest trade forces.
CHINA
The world’s factory has been hit the hardest. It perhaps deserved some of it. For long it has shut out its domestic market and flooded other countries with cheap goods powered by economies of scale and state subsidies.
What are China’s options? First option is that it takes the negotiation route and works out a mutually acceptable tariff structure with the US. This would mean that this gut wrenching movie ends on a happy note. The other not so comfortable option is that it shuts out America, sits with the rest of the world, tries to work out a trade deal with them – basically, project itself as the new and a more dependable America. But this is not so easy as most countries don’t trust China and are also now wary of depending on anyone but themselves after what the US has done.
China seems to be in for a tough few months unless Xi decides to shake hands with Trump or the rest of the world rolls over and takes on China as its messiah.
INDIA
India is in an interesting position. The tariffs applied on India are lower than on its competing global peers. Its main exporting items – pharma and IT services, have been spared from any levies. Also, India can afford to lower tariffs on almost all US goods except agricultural products. A Tesla costs upwards of INR 50 lacs, a Harley would mean minimum INR 20 lacs while the Indian consumer is happily buying Nexons & Windsors at INR 15-20 lacs and Royal Enfields & Splendours at INR 2-3 lacs. It is therefore likely that India would be able to thrash out a trade agreement with the US in a few months.
India’s biggest worry is China. With the US market out of its reach, China will try to flood the world with cheap goods and if India is not quick enough to protect its domestic industry by applying high import levies on Chinese imports, it would have an extremely negative impact on our economy and stock market.
How the Indian government deals with the glut of Chinese goods will determine the direction of the Indian economy. If handled well, India could emerge as a major winner at the end of the day. The downside of not handling well is not a comfortable thought, so I would rather not go there, denial is a very peaceful state!
RUSSIA
Trump has come out with a unique formula to contain crude oil sales from Russia. If Putin does not fall in line, the US may impose stiff tariffs on countries purchasing from Russia. If implemented, many countries will think twice before buying from Russia. This will choke off Russia’s finances.
What if Russia, China, Iran etc join hands and defy the new world order being sought by the US? Or worse, a war starts, to divert attention from all this tamasha which threatens to become a global Mahabharata with all countries forced to choose which side to fight for or risk losing relevance?,
TO SUM UP
It should all work out, it always does. Pushed to a wall, humankind finds a sane way out. Meanwhile I am going to look for the wise guy who said, may you live in interesting times. This interesting…I don’t think so 😊