A Strategy to Survive Trump’s Tariffs

IN THE LAST one week since US President Donald Trump announced “Liberation Day” for the US economy, not a single day has passed when global markets have not been rocked one way or the other. By April 9, the S&P 100 index—the US benchmark equity index—has lost 12 per cent of its value, wiping off nearly $6 trillion from the market. The extreme yo-yo movements in the US equity market—huge losses one day followed by gains the next day and losses again—are indicative of extreme uncertainty and are likely to continue. But market turbulence is just one part of the story of global economic doom. In addition to the 54 per cent tariff on China announced on April 2, the US announced another 50 per cent on Monday, April 7 after China’s retaliatory move of imposing 34 per cent tariffs on American goods. China has said that it would “fight to the end.”

Effective tariffs on Chinese exports to the US were 104 per cent, the highest ever known in history. But more was to follow.

Soon after the 104 per cent against China kicked in, China imposed an additional 50 per cent tariffs on US goods, over and above the 34 per cent tariffs announced earlier, taking the total to 84 per cent. This is the first full blown trade war of the 21st century. Later on Wednesday, April 9, hours after China raised tariffs against the US to 84 per cent, Trump further raised tariffs against China to 125 per cent. He also announced a 90-day pause in reciprocal tariffs against other countries.

At no time in the last three decades did anyone imagine that the process of globalisation—the free flow of goods, capital, men and women, and ideas across the world—would implode in such a spectacular manner. No trading nation has been left unscathed by Trump’s “reciprocal tariffs” that kicked in on April 9.

The world has responded in two ways. On one side are almost all countries affected by tariffs. Key trading countries like Japan and South Korea want to quickly conclude negotiations with the US to prevent lasting damage to their economies. India was quick off the mark, well before the tariffs were announced, to start negotiations. On the other side are China and Canada who have vowed to “fight” the US. Some early signs are already visible. After announcing reciprocal 34 per cent tariffs on US goods imported into China, there are signs that China has begun devaluing its currency—the yuan—to manage the fallout of what is certain to be a bruising trade war. On April 9, Canada announced 25 per cent tariffs on US automobile imports that are not Canada US Mexico Agreement (CUSMA) compliant. This is over and above a series of measures against the US that Can­ada has announced over the past one month. Canada is in political heat at the moment and the Liberal Party, which had become deeply unpopular under Justin Trudeau as prime minister, is now considered a frontrunner in national elections due later this month. The party cannot afford to be seen as weak against an “unjust” Trump administration.

These, however, are mere bumps when compared to the turmoil being witnessed in the US economy. Apart from the stock and bond markets rout seen over the past five days, the US is in a very difficult position from the perspective of managing the eco­nomic fallout of the Trump tariffs. On the one hand, the trade disruptions are certain to make imported goods more expensive for the average American. On the other hand, a variety of indicators and different institu­tions, among the Atlanta Fed and the invest­ment bank Goldman Sachs, are hinting at troubling scenarios for US economic growth. Goldman Sachs has in the past one week twice raised the probability of recession in the US: from 20 per cent to 35 per cent last week and from 35 per cent to 45 per cent this week. This makes the task of the US Federal Reserve (Fed) very difficult. If it reduces in­terest rates, inflation is likely to increase; if it does not reduce rates, economic growth will suffer. The latest figure for inflation is 2.82 per cent and has been coming down in recent months. But even before the US Fed could think of reducing interest rates, the Trump tariffs rocked the markets. It is an unenviable position to be in.

The bigger problem for the US economy is the unrealistic goals sought to be achieved by the “reciprocal tariffs”. At their heart the Trump tariffs are what one may loosely call an “industrial policy”. The idea behind them is to impose such heavy costs on countries that have acquired trade surpluses with the US that firms are forced to relocate to the US and begin manufacturing there. There are two problems in achieving that goal. One, other countries are not going to sit idly and let these tariffs “succeed”. China, for example, can devalue its currency to an extent that production within its territory will remain cheap and viable. Two, relocation to the US is not a simple matter of tariffs. A host of other issues— labour costs, supply chains for intermediate goods to produce final goods, among other problems—preclude simple relocation of manufacturing. In contrast, the message sent out to Trump’s political constituency is that tariffs will bring back “good jobs” lost due to the North American Free Trade Agreement (NAFTA) and other globalising agreements that allowed companies to reap the benefits of lower labour costs not just in Mexico but in countries as diverse as Vietnam, Bangladesh and China.

Apple’s iPhone is a good example. A recent Wall Street Journal story showed how difficult it would be to bring back production of these phones to the US. All that tariffs would achieve is make the phones more expensive for consumers in the US. The hard­ware cost of an iPhone16 Pro, the latest version, comes to around $550 based on components sourced from five countries. With tariffs kicking in, the additional cost would be $297, taking the total to about $850. If that were not enough, the entire supply chain of these components is located in Asia. Shifting it in toto to the US would make the device prohibitive to manufacture.

IN THE POST-TARIFF scenario, countries like India are set to gain from the changed situation. Apple has manufacturing facilities in India and is likely to ramp up production here, given the huge tariff differential between China (104 per cent) and India (26 per cent). But what is an advantage at the moment may come to a capricious end tomorrow. One reason for the eco­nomic uncertainty is the unpredictability of Trump’s moves, something that makes everyone—exporters, importers, inves­tors, and equity markets—jittery to the extreme.

In these testing times India’s economic strategy rests on two pillars. The first pillar is that instead of retaliating with counter-tariffs, as China and Canada have done, India has kept its hopes pinned on an early bilateral trade deal with the US. Speaking at an event in New Delhi on April 9, External Affairs Minister S Jaishankar said, “It is not possible to speak about the impact of tariffs as we do not know. We have been engaging with the Trump administration early on. India is the only nation which has reached an understanding with the US to have a bilateral trade deal.”

Since the ‘Liberation Day’ tariffs were announced, some Indian sectors that export goods to the US, such as automobile compo­nents and metal products, have come under pressure. The imposi­tion of a 26 per cent tariff on Indian goods has roiled the Indian equity markets. The announcement of tariffs on pharmaceuti­cals—a sector important to India as it is the largest producer (and exporter) of generic medicines in the world—is impending. India supplies 20 per cent of the world’s generics by volume, including 40 per cent of generics to the US. The 26 per cent tariff excluded pharmaceuticals. The sooner an agreement is reached with the US, the more calming will the effect be on Indian markets.

The second pillar of India’s response is prudent macroeco­nomic management. On April 9, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points to 6 per cent. The repo rate is the rate at which banks borrow money from RBI. In February this year, RBI had reduced the repo rate from 6.5 per cent to 6.25 per cent. Cumulatively, the central bank has reduced the repo rate by 50 basis points this year. But this is not the only measure taken by RBI to enhance liquid­ity. On April 1, the central bank announced that it would engage in open market operations (OMO) amounting to `80,000 crore this month in four equal tranches of `20,000 crore each. Under an OMO, RBI purchases government securities from the market, a process that injects liquidity into the financial system.

So far, global conditions, too, have worked in India’s favour. In the days since Trump’s announcements, oil prices have crashed, from $74 to less than $57. The one weak spot in India’s external sector is high oil prices that can wreck any budgetary calculation. Then, the announcement that Apple will ramp up production of phones in its Indian facilities can only be music to the ears of Indian policymakers. In 2024-25, mobile phone exports from India crossed `2 lakh crore. Of these, iPhones contributed `1.5 lakh crore. India’s bet on getting across to the Trump administration early, announcing tariff cuts on certain goods and displaying flexibility have worked in its favour.

These combined steps have been taken at a time when growth and inflation are both expected to moderate in India. RBI reduced its GDP growth projection for 2025-26 to 6.5 per cent from 6.7 per cent before even as it expects inflation (CPI) at 4 per cent for the next 12 months. The injection of liquidity, looser monetary policy and a shift in the monetary policy stance from “neutral” to “accommodative” are all signs that the coming times will be turbulent for the global economy and that India has to be prepared to meet any situation. In ordinary times, 6.5 per cent growth would not merit a reduction in interest rates. But these are extraordinary times. Trump has dynamited the global order built over the past half-century.

Chinese economyDonald Trumpglobal economytrade tariffUS