Moneycontrol Pro Panorama | Trump's tariff tremors

Donald Trump

Dear Reader,

President Trump's recent imposition of tariffs on Canada, Mexico, and China has sent shockwaves through global markets, triggering sharp reactions across various asset classes. The 25 percent duties on Canada and Mexico and a 10 percent tariff on China have reverberated through energy, equity, commodity, currency, and treasury markets.

For India, the implications of this trade war are two-fold, affecting both the economy and financial markets. While the tariffs on Canada and Mexico may have limited direct impact on India, the duties imposed on China could potentially benefit the Indian economy. In recent years, India has been increasingly viewed as an alternative manufacturing hub to China, a trend that may accelerate with these new tariffs. This ‘China plus one’ strategy could see more production shifting to India, presenting a significant opportunity for the country's manufacturing sector.

However, the tariffs are not without their downsides for India. The rise in oil prices following the announcement is a cause for concern as it could lead to a higher import bill for the country. Canada, which supplied 60 percent of US crude oil imports in 2023, will bear the brunt of this impact. The difficulty in replacing Canadian crude, which flows directly from Alberta to American refineries via pipeline, could further exacerbate the situation.

The automobile sector in the US is expected to be significantly impacted, leading to higher car prices. Prices may rise because parts and vehicles undergo multiple border crossings during the manufacturing process, making them subject to tariffs. According to Trade Partnership Worldwide, Mexico supplied nearly 43 percent of imported motor vehicle body parts to the US through November while Canada provided over 25 percent. Additionally, The Wall Street Journal reports that more than 40 percent of Volkswagens sold in the US are sourced from Mexico or Canada.

Mexico represents 23 percent of US agricultural imports, including 63 percent of vegetable imports and 47 percent of fruit and nut imports. Last year, the US purchased over $3.1 billion of avocados and more than $2.7 billion in raspberries, blackberries, and strawberries from Mexico.

Additionally, Mexico is a significant supplier of imported beer and spirits, such as tequila—products that may experience price increases in the near future. Meanwhile, Canada provides the US with over $3 billion worth of beef and pork products.

The initial rationale behind the tariff increase was to pressure the two neighbouring countries to reduce illegal immigration and drug trafficking. Additionally, there was a hope that the tariffs would boost domestic production in the United States. During an interaction with corporate leaders at Davos, Trump explicitly warned them about potential tariff hikes if they did not shift their manufacturing operations to the US.

It is unlikely that agricultural production can be relocated in the near future; however, there is potential for a shift in the manufacturing of electronic goods imported from Mexico. Reports indicate that Samsung is considering moving its dryer production from Mexico to South Carolina, while LG Electronics is exploring the possibility of relocating its refrigerator operations from Mexico to Tennessee.

For India, the most significant impact will likely be on its financial markets, which have been on a downward trend since September 2024. The tariffs are expected to drive up inflation in the US, potentially leading to higher treasury yields and a stronger dollar. This scenario could prove challenging for emerging markets like India, as foreign institutional investors may withdraw funds to seek better returns in US Treasuries.

In conclusion, while the tariff hike may present some opportunities for India's manufacturing sector, it poses more significant risks to the country's financial markets than its economy. The only potential reprieve lies in the possibility of Canada and Mexico negotiating with the US to address immigration and drug trafficking concerns, which could lead to a reversal of the tariffs.

Meanwhile, China's decision to challenge Trump's levies at the World Trade Organization may take considerable time to resolve, potentially allowing India to capitalise on the shifting global trade dynamics in the interim. Provided, of course, that Indian exports to the US are not targeted, as the US has a bilateral trade deficit with India.

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Shishir Asthana Moneycontrol Pro