Tariffs Reloaded: How the New Trade War Could Hit Your Wallet!

Tariffs Are Back: What It Means for You and the Economy

Introduction to the New Tariffs

Hey Reader,

The Trump administration has reintroduced tariffs, imposing a 10% tariff on all imports from China and a 25% tariff on steel and aluminum. Meanwhile, tariffs on imports from Mexico and Canada have been put on hold until the end of February. Additionally, reciprocal tariffs are planned to equalize tariff rates across trading partners. Unlike the phased rollout of tariffs in 2018-19, these new tariffs will apply to both capital goods and consumer goods at the same time, making the economic impact more immediate and pronounced.

Impact on Inflation, Consumer Spending, and GDP Growth

The impact of these tariffs on inflation, consumer spending, and GDP growth is a major concern. Historical data from the 2018-19 tariff episode suggests that tariffs tend to drive up prices, leading to higher inflation in the short term. Consumers respond by cutting back on purchases, which in turn affects economic growth. Businesses, especially those reliant on imports, face higher costs, which can lead to reduced investment and potential job losses. The key question now is not whether these reciprocal tariffs will be imposed but how and when they will take effect.

Trade Relations Between India and the US

Trade relations between India and the US have seen fluctuations over the years, with both countries adjusting tariff structures in response to changing economic policies. While US tariffs on Indian exports have remained relatively stable, India’s tariffs on US imports have seen a steady rise. In FY24, the US remained India’s top export destination, accounting for 17.7% of total exports. The imposition of new tariffs could significantly impact India’s export sector, with top exports such as diamonds, petroleum, smartphones, jewelry, and semiconductor components facing an increased weighted average tariff from 1.9% to 7.6% under a proposed uniform tariff of 9.5%.

US Approaches to Imposing Tariffs on Indian Goods

The US has multiple approaches to imposing tariffs on Indian goods. One option is a uniform tariff across all products, similar to the approach taken with Mexico and Canada. This would increase India’s weighted average tariff by approximately 7%. A more likely approach is product-specific tariffs, targeting sectors with the highest trade imbalances. The ‘Fair & Reciprocal Plan’ mandates the US Department of Commerce to assess trade barriers and submit a report by April 2025, with further investigations to follow. This suggests that any new tariffs may be introduced gradually, focusing on key Indian export sectors such as pharmaceuticals, auto components, semiconductors, and jewelry.

Impact on Key Indian Sectors

If these tariffs are implemented, India's export sector could face severe consequences:

• Auto Components: A base tariff increase of 25% could impact India’s $2 billion export sector.

• Pharmaceuticals: India supplies nearly 47% of generic drugs in the US, and higher tariffs may reduce competitiveness.

• Semiconductors & PV Cells: India’s nascent semiconductor and solar cell industry could suffer if tariffs extend beyond China.

• Diamonds & Jewelry: A 10% increase in tariffs could hurt India’s dominance in this sector.

• Agriculture & Marine Products: With high existing tariffs, further hikes could affect their competitiveness in the US market.

India’s Strategic Response to US Tariffs

India is responding strategically by reducing tariffs on certain US imports to ease tensions while maintaining dialogue with the US. A high-level committee has been set up to review tariff relief measures, with a report expected by March 15, 2025. India is also exploring alternative export markets to reduce dependency on the US. However, beyond tariffs, the US has also flagged VAT and GST as trade barriers, which could lead to additional scrutiny of India’s tax policies in future trade negotiations.

Lessons from the 2018-19 Trade War

The 2018-19 trade war offers key lessons on the impact of tariffs:

• Inflationary Impact: Import costs rise, leading to higher prices for consumers.

• Decline in Consumer Demand: Higher prices result in reduced spending on tariffed goods.

• Manufacturing & Employment Suffering: Industries relying on global supply chains face significant challenges.

• Monetary Policy Adjustments: The US Federal Reserve shifted from raising interest rates to easing policy in response to economic slowdown concerns.

Global Economic Impact of Trade Tensions

On a global scale, trade tensions are expected to slow economic growth. The International Monetary Fund (IMF) projects that global GDP growth will remain between 3.1% and 3.3% from 2025 to 2029, lower than the historical average of 3.7%. India, however, remains a bright spot, with projected steady growth of 6.5%. In contrast, China’s economic growth is expected to decelerate to 4.5% in 2025 and further soften to 3.3% by 2029. The reintroduction of tariffs by the Trump administration is expected to put additional downward pressure on China’s economic performance.

Stock Market & Investment Trends

Stock markets have responded differently to global economic trends. Developed markets (DMs) have continued to perform strongly, gaining 16% in 2024 and reaching all-time highs. In contrast, emerging markets (EMs) remain 19% below their February 2021 peak, despite a 10% positive return in 2024, primarily driven by gains in Taiwan and China. Foreign portfolio investments (FPIs) have seen heavy outflows from India since September 2024, with cumulative withdrawals amounting to $25.6 billion, indicating concerns about global trade uncertainties and shifting investment priorities.

Outlook for India's Economy

Looking ahead, India’s macroeconomic outlook for FY26 remains stable:

• Projected GVA Growth: Expected to be 6.6%, slightly higher than 6.4% in FY25.

• Key Growth Sectors: Financials, auto, oil & gas, and IT are expected to drive economic expansion.

• Inflation Expectations: Likely to remain slightly above the 4% target.

• Stock Market Earnings Growth: Nifty EPS estimates project growth of 5% in FY25, 14% in FY26, and 13% in FY27.

Conclusion: Preparing for Trade Shifts

The return of tariffs is set to reshape global trade dynamics, posing challenges for India’s trade strategy. Whether through uniform or product-specific tariffs, the impact on key sectors like pharmaceuticals, auto components, semiconductors, and jewelry could be substantial. With concerns surrounding VAT, GST, and non-tariff barriers, India must prepare for a complex and evolving trade relationship with the US. India's cautious approach—reducing tariffs on select goods while maintaining diplomatic negotiations—may buy some time, but further discussions will be crucial in mitigating the impact of these tariffs. Businesses and policymakers should prepare for potential disruptions and economic volatility in the coming months.

⏰ Coming Up Next Week!

📰 Markets Eye IPO Listings, Inflation Data & Global Trade Developments

Indian and global stock markets remained buoyant last week, as strong economic growth data and positive investor sentiment pushed indices to new highs. With fresh IPOs, inflation updates, and global economic indicators on the horizon, investors will closely track key developments in the coming week.

General Market Overview:

• Indian stock markets surged amid GDP growth upgrades, with Moody’s raising India's FY24 forecast to 8%.

• The HSBC Manufacturing PMI hit a 5-month high, while the Services PMI remained strong at 60.6.

• Key macroeconomic events such as inflation updates, export-import data, and global oil market reports could shape sentiment.

📅 Key Events Next Week

• Monday, March 11

📌 China National People's Congress Ends: The key policy event wraps up, with China setting a 5% GDP growth target for 2024.

• Tuesday, March 12

📌 IPO Watch: The public issue of Popular Vehicles and Services opens for subscription.

📌 IPO Listing: RK Swamy shares debut on stock exchanges after strong investor interest. 📌 India Inflation & Industrial Production: Retail inflation expected to remain stable after easing in January. Industrial production data for January will be released.

📌 US Inflation Data: February inflation report will provide fresh insights after January’s higher-than-expected reading.

📌 OPEC Monthly Report: The oil cartel releases its latest market report amid extended production cuts till mid-2024.

• Wednesday, March 13

📌 IPO Listing: Shares of JG Chemicals set to list after receiving bids 28 times the shares offered.

📌 Key Board Meetings: D B Realty, IIFL Finance to discuss corporate matters.

📌 Euro Area Industrial Production: January’s data follows December’s unexpected increase.

• Thursday, March 14

📌 IPO Watch: The public issue of Krystal Integrated Services opens for subscription.

📌 IPO Listing: Shares of Gopal Snacks may debut on stock exchanges.

📌 India Wholesale Price Inflation (WPI): February WPI expected to remain soft after a 0.27% rise in January.

📌 US Retail Sales & Jobless Claims: Fresh data to gauge consumer spending and labor market strength.

• Friday, March 15

📌 Board Meeting: Bharat Electronics to convene for key decisions. 📌 India Export-Import Data: Trade figures expected to show stability after a 3% rise in January.

🎥 Prime Wealth Finserv In Media 

Chakrivardhan Kuppala., Wrote for Live mint

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