Trump tariffs will hurt one and all

US President Donald Trump onboards his promised Golden Age era with pervasive tariffs across all countries. Given that reciprocal tariff rates are estimated based on trade deficit ratios of individual countries, these are blanket tariff impositions rather than granular commodity-wise estimates.

The weighted average tariffs for the targeted 52 major countries contributing 66 per cent of US imports work out to 34.6 per cent. The remaining 170 countries, contributing an average of 0.2 per cent in US imports, are subject to a minimum 10 per cent tariff. For China, it implies an additional tariff of 34 per cent on top of the existing 23.3 per cent. The overall average of 26.2 per cent is eight times higher than the weighted average tariff of 3.3 per cent that has existed till now.

At these levels, the average tariff rate will be higher than the levels seen before the Great Depression and akin to levels around the start of 1900s, which culminated from the post-Civil War (1862-64) era of the US Gilded Age.

The perception is that the fallout will be transient, as the Trump administration is using the tariff tool to secure a favourable negotiation for the US. Some also see beneficial fallouts for India from the relatively low tariff imposition of 27 per cent compared to competing countries, mainly China (57 per cent). But the implications are far more complicated. (The maximum hike is for emerging economies, particularly in Asia, Eastern Europe, and the Middle East.) The factors at work are explained below.

The promised gains for the US are overstated: Considering the near 60 per cent tariff on China and a global average of 26.2 per cent, the Trump administration envisages a tax collection of $6 trillion over 10 years. Trump’s gambit is that intensified protectionism and tax cuts would lead to multi-decade expansion in productivity and reinstate US manufacturing dominance, just as it ensued during the Gilded Age following the Civil War (1862-64). These estimates are overly optimistic.

Using a modified Peterson Institute for International Economics model (May 2024), the estimated loss to GDP due to the tariff hikes would amount to $7.8 trillion over the next decade, 2.8 times gains in tax revenues from new tariffs estimated at $2.8 trillion. The effects on the global economy, and India, are obvious.

EMs to face considerable drag from US mercantilism: The Liberation Day tariff jolt is maximum for emerging markets (EMs); this makes the post-2008 experience of rising protectionism relevant. The impact could be intense, working through multiple channels, including the second-round impact of trade with the US, trade responses within EMs, impact on corporate profitability, domestic spillover on employment and external capital flows.

With China being a top trading partner with 120 countries, including India, a higher US tariff will imply an outsized supply of Chinese goods, thereby impacting their domestic manufacturing. Given that the Liberation Day list contains 170 countries subjected to 10 per cent tariff, there is a significant scope for using the tariff arbitrage through re-exporting cheap Chinese goods, limiting scope for other countries to outcompete China.

Of course, there is a possibility of global retaliation; an Australian study (2017) estimates that a potential 15 per cent uniform increase in import tariffs in all G20 countries can trigger a recession.

Impact on India larger than implied from an insular view: Rising global protectionism would result in a deceleration in private capex, employment creation, household disposable income, real consumption, and higher public and household debt. The general perception of India’s insularity needs to be juxtaposed with the fact that the Trump 1.0 tariff war (2019) slowed India’s GDP growth to 3.5 per cent (1Q-3QFY20), down 330 basis points from 6.8 per cent in FY18.

India’s real growth sensitivity (regression analysis) to global trade volume growth is high; for every 100 bp decline in global trade volume growth, real GDP growth is impacted by 178 bps. A restrictive trade environment will also impact corporate profits by increasing the cost of input. A 100 bps decline in trade openness leads to 200 bps lowered earnings growth, and a 100 bps increase in average import duty can compress it by 130 bps.

Trump’s neo-mercantilism is illusory, can invigorate the rising Global South: Trump’s vision of revitalising the Gilded Age is arguably outdated, particularly in light of the US’s ageing population and the potential productivity losses resulting from tighter immigration policies. His proposed manufacturing gains hinge on government support for select sectors, which could negatively impact the broader economy.

Trump’s first term failed to restore US manufacturing as restrained Chinese supplies were compensated by imports from other sources. Moreover, Trump’s tariffs could be creating barriers that reverse the US’s postwar economic advantages. This decline in US free trade policies may further diminish the dollar’s standing in global commerce, as evidenced by the Global South’s increasing alignment with BRICS.

Looking ahead

Given the deepening flux, the market scenario can swing between a worst-case scenario and a more constructive outlook. The worst case can encompass scenarios akin to the Great Depression, with global trade conflict leading to a recession, culminating into market cap erosion of the kind seen during the 2008 crisis.

A constructive scenario, on the other hand, can impel from US disruptions, prompting Trump to mellow his initial stridency. It can also engender from global economic realignment with the Global South consolidating around China’s alternative model of equitable globalisation. As this may not be an immediate outcome, markets will have to live with uncertainty.

India’s market confronts further moderation of earnings expectations, FPI retrenchment and moderating domestic flows. We will be fortunate if Nifty 50 earnings can deliver even a 5-6 per cent growth in the coming few years.

Amid adverse trade impulses, fragile household situations, and enfeebled corporate sentiments, domestic policy responses, both fiscal and monetary, will be paramount. Slowing tax collection and fiscal consolidation path limits the scope for large fiscal stimulus. This would also sharpen the spending trade-off between revenue and capital expenditure, with the former taking a larger share. Hence, policy responses will likely lean heavily on RBI’s liquidity infusion along with permissible rate easing, which may have only a limited efficacy in addressing the structural headwinds.

The writer is Head of Research – Strategy & Economics, Systematix Institutional Equities. Views are personal

Published on April 4, 2025