Opinion Trump’ tariffs and market fall — India needs to be better prepared

The Indian stock markets experienced a sharp fall in the wake of the trade war that is unfolding globally. The benchmark indices — Nifty 50 and Sensex — each lost more than 2.5 per cent of their value on Monday. This is the most they have fallen since the dip in the wake of the results of the general election in June last year. The Indian markets took their cue from the sharp declines in US markets towards the end of last week; US markets lost over $6 trillion in value thanks to the fall on Thursday and Friday. The other Asian market benchmarks have registered even more painful lows. The Nikkei 225 (of Japan) was down almost 8 per cent, the TAIEX (of Taiwan) fell 9.7 per cent, the Hang Seng (of Hong Kong) lost more than 13 per cent of its value and the SSE Composite of Shanghai stock exchange was down more than 7 per cent. And the bad news may not end tomorrow since the European indices continue to fall; German DAX, British FTSE 100, French CAC 40 and the broader STOXX600 — all were trading at losses of around 5 per cent even as the futures market in the US suggests further weakness across S&P 500, Dow Jones Industrial Averages, Nasdaq 100 as well as Russell 2000.

At one level, the reason is pretty straightforward: The massive upending of global trade thanks to the unilateral announcement of punitive tariffs on the rest of the world by US President Donald Trump. Tariffs — regardless of who pays them — are an increase in costs without a commensurate increase in production or productivity. As such, they bring down corporate profits just as they dent demand and raise prices across the board. The indirect effects in terms of the disruption of well-established and efficient global supply chains is far less understood but possibly, in effect, even more damaging. But the problem with Trump’s tariffs is not limited to their existence; it also pertains to their legality (will they hold up in a court of law in the US), their permanence (will the US Congress, especially the Republicans, allow the US President to upend trade relations with the rest of the world), and their effectiveness (how many company CEOs will decide to allocate billions of dollars towards new factories in the US just based on tariffs that lack legislative backing of the US Congress). None of these uncertainties take into account the element of retaliation by others such as China and the European Union.

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There are two ways in which Indian policymakers can view this fall. One, as just a temporary blip and a good opportunity to buy more of the market especially since Indian markets are falling less than the rest. Soon, tariffs will be withdrawn and all will be fine. Two, as a tectonic shift in global trade where the US has lost its credibility as a trade partner and opened the door to protectionist industrial policies that belong to a bygone era. In a world without fair trade rules, India will have to be better prepared to make its way, and thrive.