Market slump sums up global chaos
AS global markets slump and India sees the most calamitous fall in equities since the Covid-19 pandemic, it is clear that US President Donald Trump’s tariff offensive has swept the global economy into a state of uncertainty. The trade war seems to be imminent as China and Canada have fired the first round of retaliatory tariffs. The European Union has threatened to join the battle, while other countries are voicing anger over America’s new policies. The immediate effect is on stock markets around the world, including Nasdaq, which has moved into the bear territory, while Asian markets are following suit. Crude oil prices have also dipped to around $64 in reaction to a gloomy economic forecast.
The April 2 tariff rollout has wreaked havoc on the international economic system. In the midst of this crisis, India has maintained a low-key approach for the time being. The initial response was merely that the situation is being assessed in the backdrop of the bilateral trade pact talks. Meetings are also on the anvil with exporters to reassure them about the future outlook in relation to US trade.
The relatively mild approach can be linked to several factors. A bilateral trade agreement is actually on the table, despite the hard negotiations needed to make it a reality. This is a positive as Indian trade diplomacy has been successful over the years in safeguarding the country’s interests, especially in sensitive areas like the dairy sector and foodgrains. At the World Trade Organisation (WTO), for instance, India managed to wrest concessions for its agriculture sector, overriding vociferous complaints by most developed economies. Much depends on the political will, but it is likely that the bilateral treaty will end up being balanced rather than tilted towards US interests.
The concept of balance, however, will have to undergo a change as the time has come to end blanket protection for even the so-called ‘sensitive’ sectors. Some farm experts are now arguing that there are areas even within agriculture where tariffs can be cut with minimal impact on producers. These include fruits and walnuts.
Similarly, irrationally high tariffs on goods not made here can be easily acceded to and in return, the US should be asked to ease non-tariff barriers on processed food and marine products. Other issues relating to data localisation and intellectual property rights may not be resolved easily, but compromise formulas may save the day. Given that talks are already underway, unlike in the case of other countries facing the April 2 tariffs, any rigid public stance could reduce the room for flexibility in negotiations.
Despite Trump’s persistent criticism of India’s protectionism, the trajectory of India-US strategic relations looks set to improve considerably under this administration. Deepening of defence ties is clearly on the cards.
Yet one cannot downplay the short-term impact of the new tariffs on some domestic industries. Gems and jewellery exports, for instance, will be hit hard. Out of the $33 billion worth of exports in the 2023-24 financial year, as much as one-third went to the American market. The industry, primarily in the medium and small enterprises segment, employs as many as 50 lakh skilled and semi-skilled workers. It virtually collapsed during Covid-19, with skilled artisans going back to rural areas. A dip in orders from the biggest market could worsen the job situation once again. Hopes are being pinned on the new trade deal, but that may be finalised only by September. So, there could be a crisis in the intervening months.
It is a mixed bag, however, with tariffs in some areas like apparel actually becoming lower than in other countries, prompting bigger orders from American buyers. Reports from apparel export hub Tirupur (Tamil Nadu) say Indian goods will be cheaper than those from competitors; hence, buyers are rushing to book more orders. The caveat is that there should be a discount to relieve customers there of the higher price burden.
This brings us to the fact that disruption to the settled international trade order will probably hurt the US economy more than the rest of the world. The crash on Wall Street and around the world is probably just the beginning of worse times ahead unless the Trump administration is able to provide some reassurance to the markets. Investment banks are already predicting higher chances of a recession. JP Morgan has raised the risk to 60 per cent from 40 per cent, citing “disruptive American politics”. The firm estimates that the new tariffs would cost $700 billion, but this assessment was made before China retaliated with a 34 per cent tariff hike on American goods.
A recession in the world’s biggest economy is bad news for everyone, including India. It could reduce the growth momentum of the last few years as supply chains are likely to be disrupted and global consumption could plummet. Even now, the Indian economy’s growth estimates are being pared down, with Goldman Sachs revising its forecast for the 2025-26 financial year to 6.1 per cent from 6.3 per cent.
What is equally worrying on the global stage is the disruption of the rules-based multilateral system that had been built after World War II following decades of negotiations. The WTO undeniably enabled the Global South to have a significant voice in the multilateral trade arena. The US has not always had its way here, which could be a factor for jettisoning the settled trade order.
For India, the repercussions of the trade war could be graver than those feared earlier. The immediate impact is on financial markets, but global recessionary trends could worsen the outlook. The wisest policy right now is to rapidly conclude bilateral trade treaties with giant trading partners like the European Union. At the same time, other export markets also need to be explored as retaliatory tariffs are shifting the dynamics of international trade. As for whether India loses or gains significantly in these global battles, a realistic assessment will only be possible after the dust settles down in the coming days.
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