Has Trump done what WTO couldn’t? Financial Express 7th March 2025

 Idiosyncrasy and vicissitude stamp Donald Trump as exceptional. He has been erratic in articulation but consistent in his stance on economic policy, whether the world likes it or not. His recent tirade on customs tariffs is something that has got all nations back to the negotiation table. But, if one reflects, it will appear that his proposed actions would do something that the World Trade Organization (WTO) was unable to accomplish. Will this be a turning point in foreign trade?

The US is the largest importer of goods at around $3.3 trillion, followed by China ($2.6 trillion) and Germany ($1.5 trillion). The next in the top 10 are the Netherlands, UK, France, Japan, India, Hong Kong, and South Korea. These nations have considerable power over imposing tariffs, given the quantum of imports. The US threat to impose reciprocal tariffs on all trading partners may not be feasible, as it imports from almost 180 countries. Besides, the number of products is large, and it would be hard to map commodity- and country-wise tariffs for comparison. While the threat has been on matching tariffs based on commodities, it could practically be applied in generalised terms only. In this context, the average customs tariffs imposed by countries could be looked at, though this may not necessarily match the average that the US faces due to several free trade agreements between countries, including the most favoured nation (MFN) status.

The weighted mean average tariff on commodities imported is relevant here. World Bank data for 2022 throws some light on these rates, which vary from almost nil in Singapore to 29.5% in Bermuda. For India, it was 11.5%, while it was 8.6% in Korea, 7.4% in Brazil, 4.7% in South Africa, 3.1% in China, 3.1% in UK, 1.3% in France and Germany, and 1.5% in the US. These are averages and would have a varied set, depending on the commodities that are imported.

The outcome of the reciprocal tariff policy approach of the US has led to two things. The first is that it has opened the doors for negotiation, and this has meant that countries are talking to the US.

The second fallout is that countries have resumed talking to one another on trade issues. This was abandoned once the WTO concept fizzled out. What this will mean is that more agreements will be forged by like-minded nations on trade, which can be either bilateral or within groups of countries where the MFN-like status would be incorporated. India is already in talks with the UK and the European Union, which too are significant trade partners. The impetus for this will be more on the fear of the US raising its antenna at some point to tax goods from countries that have higher tariffs than it does (currently the number is nearly 100). Over 60 have an average rate of 5% or more.

The US trade policy has become the fulcrum for world economy as the concept of reciprocal tariffs has caught on. It is not certain whether these would be applied across the board. The higher tariffs on steel and aluminium are real and signal to the world that the US means business. Also, given that most of the exporting countries to the US have higher tariffs, non-compliance may not matter if there are no fewer cheaper substitutes. This can hold good in industries like pharmaceutical, where the US has to import because it is a necessity. Even in case of steel and aluminium, the US has to continue importing as it lacks production capabilities within. It will lead to higher prices and inflation in the US and could affect imports only marginally.

It has also been noticed that when tariffs are imposed on specific countries, there is a tendency to reroute goods through a third country. This helps dodge the higher tariffs. Often countries in the Gulf Cooperation Council are used for such routing. However, countries will deliberate whether rates should be rationalised keeping this factor in mind. It can lead to a reduction in tariffs on several product lines, which would be good for global trade, but this would also come in the way of domestic industry, which will see competition increase substantially.

For Indian companies, any reduction or rationalisation in tariffs would mean the doors are open wider for imports, which can affect competition. Therefore, the inherent protection that existed due to tariffs being at relatively higher levels would be withdrawn over time, becoming a major concern for the countries as well as individual industries.

At the policy level, there is always the threat of dumping where lowering of tariffs in general can lead to predatory trade. Other nations may under-price and sell their goods. A good example is China. India has had to apply anti-dumping duties to stem the flow of such goods. Surveillance would have to be increased to watch out for such practices.

The US double-speak is evident as the talk is only on goods and not services, where ambivalence persists. There is stern talk about driving migrants back, with some moves being made already. This will be a concern, given that there will be restrictions on issuing work-related visas. But then, this is the might of the US where the President is calling the shots and has changed the entire discourse of economics, with all countries revisiting their trade and tariff structures. Hence, it can be said that Trump has done what the WTO couldn’t.

Interest Rates Have Definitely Peaked In This Cycle: March 1, 2025

 

Interest Rates Have Definitely Peaked In This Cycle

The repo rate was reduced by 25 bps in the Feb policy, and it is expected there could be two more cuts during the course of the year, though the timing will have to be aligned with the inflation scenarios.

The minutes of the monetary policy committee indicate that there is a majority view that policy, henceforth, will target growth. This means that there will be a tendency for interest rates to come down even further over time. The repo rate was reduced by 25 bps in the Feb policy, and it is expected there could be two more cuts during the course of the year, though the timing will have to be aligned with the inflation scenarios. It has been assumed that inflation will keep trending downwards, and a normal monsoon would be the norm this year too. More importantly, core inflation has been low and stable, which has given more confidence to the committee to take this stance.

But an interesting observation is that post the policy announcement, there have been few moves by banks to lower the deposit rate as well as the MCLR (marginal cost lending rate). The EBLR (external benchmark lending rate), which holds for individual loans as well as those to MSMEs, should ideally have come down by 25 bps. However, this has not necessarily been the case, and several banks have chosen not to do so and increased the mark-up or spread over the repo rate. From the point of view of borrowers, rates have remained virtually unchanged.

The main issue is deposit rates. Banks have already been challenged all through the year in terms of garnering deposits. The relatively better returns in the capital market have caused some migration of savings to mutual funds. Those with higher risk appetites have invested directly in equities. This being the case, banks would be reluctant to lower deposit rates lest households move further away from deposits. This is the puzzle for bankers where liquidity is an issue. The present situation is characterised as one where growth in credit is steady, but the same cannot be said about deposits. The RBI has been using various techniques to infuse liquidity into the system, including VRR (variable rate repos), open market operations (OMO), and forex swaps. Deposits growth is the crux. If they do not grow, then it is hard for banks to lower their deposit rates.

This has affected the MCLR, which is calculated using a formula based on the marginal cost of funds. If the deposit rate does not come down, the average cost of deposits would remain unchanged, in which case the MCLR remains unchanged. This is why few banks have changed their MCLR.

This would be a thought for the Monetary Policy Committee going forward. While there seems to be some ideological consensus on further lowering the repo rate, the transmission would be in the hands of the banks. In fact, it can be said that in case there was stable liquidity in the system, the rate cut would have been translated to deposits and lending rates. The issue in banking is that when the repo rate changes, all loans are to be repriced at a lower or higher rate. However, in the case of deposits, it is only incremental deposits that get re-priced and hence banks do tend to face pressure on margins in a declining interest rate regime. Transmission of policy rates has always been an issue flagged by the RBI even when there was an upward cycle in the repo rate. The RBI had commented that transmission was still not complete and, hence, the stance was unchanged at ‘withdrawal of accommodation’ in successive policies.

In fact, in retrospect, it can be argued that the repo rate cut could have come after the liquidity situation was stabilised in the system. March is a crucial month for banks. There is the last instalment of advance tax payments made by companies, which will peak by the 15^th of the month. Then there are the GST payments which flow post the 20th. And last, the credit growth tends to increase towards the end of the month as banks set about meeting their targets.

Therefore, banks may not be too keen to lower their deposit rates at this point in time. Further, to the extent individuals are following the old tax scheme of taking advantage of exemptions, there would be a year-end rush to save in instruments such as PPF. All this would put some pressure on growth in bank deposits. Any which way, there will be pressure on both deposits and credit. In such a situation, there would be several interventions from the RBI to stabilise liquidity in the normal course of activity.

From the point of view of individuals, however, it can be assumed that interest rates have peaked and there would be few possibilities of banks raising deposit rates. The exceptions could be in certain tenure brackets where banks need to rebalance their portfolio. This could, hence, be the best time to book fixed deposits with banks, depending on the appetite of individuals.

The signalling on lending is also in a single direction. Rates would tend to move southwards in the coming months. As most loans are on floating rates, there would be benefits along the way even though the MCLRs may not have been altered presently. This may not happen immediately and will work through over the next couple of quarters. At any rate, the degree of reduction in bank rates (deposit and lending rates) tends to be lower than that of the repo rate. Therefore, even a 75 bps cut in the repo rate this year would probably lower the deposit rates by around 30-40 bps.

The present ideology of lowering the repo rate is based on an economic theory which says that as interest rates come down, people borrow more to consume more or invest more, which in turn leads to higher growth. The government has already worked its way through the budget to provide an impetus to both consumption (by cutting taxes for individuals) and investment (through higher capex). Monetary policy will now be supporting this effort through the next set of rate cuts.