Moneycontrol Pro Weekender | Twisting the tariff knife

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Dear Reader,

The TACO trade appears to be dead as of now. The acronym that stands for Trump Always Chickens Out was coined by an FT journalist to denote the US President’s habit of making threats such as levying tariffs by a certain date and then deferring them. A negotiating tactic, if you will.

But Donald Trump’s reciprocal tariffs went into effect as scheduled on August 7, and are currently working their way through connected global supply chains. US importers have been successful so far in keeping price increases to the minimal through a combination of measures such as advance purchases, squeezing concessions from suppliers and absorbing cost increases. But that cannot last for longer.

As new inventory with higher tariffs begins to hit their raw material costs, they will need to come up with an alternative strategy. Price hikes are likely to get added to the list of countermeasures. News reports have speculated that US retailers have asked suppliers to put orders on hold, but it’s not confirmed yet.

Will US consumer demand get affected? If prices increase, that would be a natural outcome. However, one of the ways to make it easier for consumers to keep buying is to lower interest rates. But the Fed chair Jay Powell stands between Trump and lower interest rates, which has led to the President openly criticising Powell. His dissatisfaction with the recent jobs data revisions led him to summarily firing the chief of the Bureau of Labour Statistics, claiming that the data was rigged, and his decision surprised data watchers who are now pondering on the hit to the long-established credibility of US economic data.

Powell, of course, cannot be fired easily. But his life can be made difficult, as we saw recently when Powell and Trump were pictured wearing hard hats and discussing the Fed buildings’ over-budget renovation. But Trump has got lucky, it appears. After the surprise resignation of a Fed governor he has nominated Stephen Miran, chairman of Trump’s Council of Economic Advisors, to the Fed’s board of governors. Expect more fireworks.

Miran authored a famous paper ‘A User’s Guide to Restructuring the Global Trading System’ that has laid out an economic agenda that Trump appears to be following. We had written about this in April. It makes for not just interesting but relevant reading, given how things are playing out. The eventual outcome: the creation of ‘a currency accord in exchange for a reduction of tariffs’ or the Mar-A-Lago accord. Not surprisingly, Miran’s nomination led to the dollar weakening on Friday.

A wholesale makeover of everything that the US stood for appears to be underway. If close allies like Europe and Canada are getting the short end of the stick, then one should not have fancied India’s chances much. Trump followed through on his threat of imposing secondary tariffs with a 25 percent penalty tariff for India’s dealings with Russia.

Trump’s initial bonhomie with Russian President Putin disappeared after it became clear that Russia was not keen on a cease-fire with Ukraine. India found itself caught in the middle. US importers will have to pay 50 percent duty on their purchases from India, unless they are from exempt categories – such as pharmaceuticals, semiconductors and energy or are covered under some specific exemption. There’s a 21-day waiting period before the secondary tariffs kick in. If India can negotiate it away by offering something to the US or if a Russia-Ukraine cease-fire is reached, then we may still avoid the worst of the tariff hit. Otherwise, it’s a tough situation for India. And for investors.

We wrote about how investors could navigate these turbulent waters, asking them to rejig their portfolios to have a more domestic focus,  steer clear of risky export-oriented sectors and use sharp dips to add to one’s portfolio here and here. We also wrote about whether the high tariff wall could affect India’s ambition for a Viksit Bharat by 2047. While the direct effect of these tariffs is not much in terms of the affected basket’s exports as a percentage of India’s GDP, the indirect impact on sectors, consumption and on the China+1 opportunity could be significant. And for exporters, especially in sectors such as textiles, chemicals, the risks have risen manifold.

Will the penalty tariff be rolled back before August 27 is the question on investors’ lips. There’s more chaos ahead as trade investigations are ongoing into sectors such as pharmaceuticals and semiconductors -- and products made using them such as phones, laptops -- which are exempt from these tariffs. If these investigations lead to harsh tariffs being imposed on these sectors as well, the pain will spread further for export-oriented sectors and companies.

This could be a time for engaging in deep reforms some believe, along with supportive fiscal and monetary measures. While the case for more economic reforms can never go stale, the kind of reforms that remains is the very difficult one to execute. Since the US’ target is on exports, it also affects a small part of the economy –2 percent of GDP.

Therefore, the support for any large-scale reform measures may be tepid. Two main areas where reform has been sought for years are labour and agriculture, but these have proven to be difficult subjects to tackle. In fact, high tariff on agriculture imports in India was one main reason for Trump’s displeasure.
The government could roll out some measures to support exporters. However, a big-bang fiscal package can be ruled out as that will hurt fiscal discipline and scare markets anyway. On the monetary front too, the mood is one of waiting. This week saw the RBI pause on lowering rates, even as it acknowledged the uncertainty caused by tariffs. We wrote about how the RBI lowered its interest rate projections, but whether it has missed the bus on policy action, and also that global factors such as tariffs could shape the RBI’s policy decisions in the second half of FY26 but there is limited space for further monetary easing. We had pointed out earlier how consumer price inflation may have eased but core inflation is still a source of concern.

While markets have slipped in the wake of rising tariff tensions, they are down by only 5 percent over a month ago. Therefore, there isn’t undue concern among investors as yet although foreign portfolio investors have been in the sellers’ camp. Domestic investors are still keeping the faith. That shows that expectations are that India Inc will ride out the storm. But, if things do get worse, remember that this too shall pass, as long as you have a well-diversified portfolio, across asset classes and within them as well. And we will be tracking developments closely and give you investing advice as well as sharp views on them. Stay tuned.
Cheers,

Ravi Ananthanarayanan

(Your regular Moneycontrol Pro Weekender columnist Manas Chakravarty will be back next week)

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