Trump, Tariffs, Tradewar and Turmoil

The much-awaited US reciprocal tariffs announced on April 2 have jolted the world with a few countries in Asia becoming the target of Trump ire (China, Vietnam, Thailand) while the blow to India is relatively less-heavy.

Tariffs on goods from China (34 percent), Vietnam (46 percent) and Thailand (37 percent) are quite burdensome. Tariff hike on Indian goods is by a relatively modest 27 percent. Tariffs on the European Union are higher by 20 percent.

Earlier, tariffs were imposed on the auto sector, steel and aluminium. They will remain in place and are not part of the latest reciprocal tariff announcement.

Generally, commodity markets are far-less affected in this round of retaliatory tariffs. Copper and lumber have been kept out. Pharmaceutical products, energy, bullion and a few select others have been kept outside the tariff purview in this round.

Affected countries are still assessing the impact of US retaliatory tariffs. At this point of time, it is unclear what countermeasures they will take. But it stands to reason to believe that the affected countries may be wary of the US muscle power as well as be conscious of US support necessary for defense and security reasons.

The markets are still evaluating the full impact of the retaliatory tariffs. The tariffs and countermeasures, if any, are sure to lead to a slowdown in economic growth across many geographies, dislocate the established supply chains, keep inflation elevated and hurt producers in exporting countries and consumers in importing countries.

In the US, inflation is likely to stay at elevated levels. This means the US Federal Reserve will be in no hurry to reduce interest rates.

As compared with China’s goods trade surplus with the US of about $ 280 Billion, India runs a goods trade surplus of about $ 45 Billion with the US. While this may appear modest, the US would be keen to pressure India to open up agricultural markets covering grains, oilseeds, poultry, dairy, biofuels and so on. This can potentially prove to be disruptive unless trade is strictly regulated and monitored.

India has to be wary of possible further precipitate action by the US. Some of our key export goods include textiles, seafood, gem and jewelry, leather and so on. These are labour intensive goods. If these goods are heavily tariffed by the US, it will hurt Indian exports and result in job losses.

In particular, gem and jewelry is usually an item of discretionary purchase by consumers. Inflation combined with tariffs may discourage consumers from buying. It can result in loss of export market for India.

While commodities were not the focus of President Trump’s Liberation Day salvo, they could still be affected depending on how countries negotiate and retaliate, experts say.

The situation is still evolving. No one can rule out further tariff related disruptions. We are not sure what we saw was only the trailer. As they say in Hindi: ‘Picture abhi baaki hai’.

USA is an important trade partner for India. India and USA are in talks to strike a BIlateral Trade Agreement under which both countries want trade to reach $ 500 Billion by 2030 from the current $ 130 Billion.

Meantime, there are concerns. The US can tariff India’s exports – say, auto ancillary, electronics – that rely on Chinese components. In the case of steel, India's exposure to the US market is limited. Our aluminium exports to USA represent 4-6 percent of our total export. Tariffs will have a modest impact on aluminium. But remember, Indian aluminium is quite competitive as we have rich bauxite reserves.

How can India benefit from the ongoing trade friction? In the short-run, can India at least partially replace Chinese exports to the US? India should focus on IT services and high-tech sector exports with low US tariffs.

India has already offered overtures to the US. Import duty on Harley Davidson bikes has been slashed. Tesla is opening showrooms in India and will export cars to India rather than manufacture them here. Starlink has tied up with Reliance and Airtel for cellular service. India may buy F35 fighter jets.

India should see how to benefit from the ongoing tariff war between USA and China. China has imposed retaliatory tariffs on a range of US agri-commodities including soybean. China is the world's largest importer of soybean, mainly from the US. With the import tariff, soybean in China will become expensive.

We in India carry a massive inventory of soybean estimated at about 2.5 million tons. Locally, soybean prices are ruling 20 percent below the minimum support price. To support growers, India should offer two million tons of soybean to China. It will earn us over $ One Billion and help reduce our trade deficit with China.