US Tariff War II:
- The global economy is facing increased uncertainty due to trade tensions, market volatility, and geopolitical risks. The US President is intensifying this instability by initiating trade wars with both allies and adversaries, using tariffs to counter what he considers unfair trade practices. His goals include boosting U.S. manufacturing, increasing revenue, and leveraging tariffs in negotiations.
Liberation Day:
- April 2, 2025, a day the US President called “Liberation Day”, he signed an executive order imposing a minimum 10% tariff on all US imports with elevated tariffs on 57 nations and limited exceptions.
- The general tariffs took effect on April 5, 2025.
- Import tariffs on the 57 nations, ranging from 11% to 50%, began on April 9, 2025.
How Reciprocal Tariffs are being calculated:
- When Trump presented a giant cardboard chart detailing the tariffs in the White House Rose Garden it was initially assumed that the charges were based on a combination of existing tariffs and other trade barriers (like regulations).
- But later, the White House published what might look like a complicated mathematical formula.
- But if you unpick the formula above it boils down to simple math: take the trade deficit for the US in goods with a particular country, divide that by the total goods imports from that country and then divide that number by two.
- For example, the US buys more goods from China than it sells to them – there is a goods deficit of $295bn. The total amount of goods it buys from China is $440bn.
- Dividing 295 by 440 gets you to 67% and you divide that by two and round up. Therefore, the tariff imposed on China is 34%.
- Similarly, when it applied to the EU, the White House’s formula resulted in a 20% tariff.
Impact:
- The Nasdaq fell from 20,204 to 17,398 in just 32 trading sessions, a staggering 14% decline in just over a month. That drop officially pushed the index into bear market territory (defined as a decline of 20% or more from recent highs). And it’s not just the Nasdaq. The Dow Jones and S&P 500 also saw sharp pullbacks. The CBOE Volatility Index (VIX), which measures market fear, surged to 45.3, the highest level since April 2020 when COVID first roiled markets.
- In total, the U.S. market has lost over $6 trillion in value in just two days, more than 1.5X India’s GDP.
- After days of turmoil since tariffs were first revealed, global markets initially recovered some ground on 8th April, 2025 as senior US officials attempted to reassure investors that new tariffs – including rates of 20% on the European Union, 26% on India and 49% on Cambodia – could be temporary.
- But the bounce didn’t last long. On Wall Street, the benchmark S&P 500 closed down 1.6%, at 4,982.77 – below 5,000 for the first time in more than a year – as the Dow Jones industrial average fell 0.8%. The technology-focused Nasdaq Composite also came under pressure, dropping 2.2%.
Reactions:
- Trump claimed “many” countries were seeking a deal with Washington, as his administration prepared to impose steep tariffs on goods from dozens of markets.
- However, Beijing vowed to “fight to the end” after Trump threatened to hit Chinese exports with additional 50% tariffsif the country proceeds with plans to retaliate against his initial vow to impose tariffs of 34% on its products. That would come on top of the existing 20% levy and take the total tariff on Chinese imports to 104%.
- The latest tariffs are higher than the previous 10% flat rate imposed on all global imports to the US and are tailored to specific countries based on a formula that has been criticized by economists that divides trade in goods deficit by twice the total value of imports.
Way Ahead:
- Prominent figures have urged the US president to pause trade tariffs citing risks of economic nuclear winter.
- Tariffs have increased inflation risk for the average Americans and heightened probability of US entering recession in coming year.
- Goldman Sachs said there is a 45% probability of the US entering a recession within the year; after estimating a 35% probability a week before, Trump unveiled his tariff plans at “Liberation Day”.
- As on date the question that everyone is wondering is that is the US president serious about cutting deals and bringing an end to the economic brinksmanship or are we looking at a new protectionist era of global trade? Hopefully it happens to be the earlier one.
- Anyways, tariff wars between US and China once again might prove beneficial for India as many MNCs may again revert to a “China +1” strategy which involves moving production out of China and into other countries (the +1) to minimize tariffs & geopolitical risks & to reduce dependency on Chinese production.
Acknowledgements:
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
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