Ever since Donald
Trump took over as president of the USA, there has been considerable disruption
across markets. With different statements and deadlines being announced
periodically, it becomes difficult to conjecture the future. There are at least
10 major consequences that can be visualised for 2025.
First, the higher
tariffs announced along with the reciprocal tariffs being spoken of with major
economies like the EU, UK, India, China, Mexico and Canada, among others, would
mean that there will be disruption in trade at the general level.
Exports to the USA
would come under pressure due to this factor. As already seen, there have been
retaliatory tariffs announced by some of these countries, which, if not curbed,
can lead to an all-out trade war where all countries pursue such policies, not
just the USA but others too.
Second, at the micro
level, industries within countries which are dependent on exports to the USA
would have to rework their strategies, as this could mean lower demand for
their products going ahead. Therefore, profitability concerns would be there,
which will also get reflected in the stock prices depending on the intensity of
the same.
Third,
export-oriented economies would witness a severe blow if there is a major
slowdown, and this holds for China for certain, which is heavily dependent on
exports. This has the potential to slow down global growth too. It may be too
early to put a number to the same, but any significant barrier to foreign trade
will retard the GDP growth.
Fourth, the outcome
of higher tariffs being imposed by the USA raises the possibility of countries
like China getting more aggressive in terms of pushing their exports to other
markets. This would mean that the threat of dumping cannot be ruled out, which
has to be monitored by the commerce ministry.
It was seen in the
past, too, that China did resort to dumping (a phenomenon where goods are sold
lower than cost price in other countries to capture markets). This is something
which can be a major pushback to both domestic and exporting industries.
Fifth, domestic
industry would feel the heat on two counts. First, if countries agree with the
USA to lower tariffs to avoid the reciprocal tariffs, there would be serious
implications for domestic players who will face competition.
Second, as mentioned
earlier, any dumping from the third country will have the same impact of posing
competition for domestic industry. Dumping, it should be remembered, is not
easy to prove, and hence, until a firm policy is in place to check such
practices, domestic industry will encounter uncertainty.
Sixth, a positive
consequence of all these actions on tariffs is that it has also engendered new
interest in countries beginning to talk to one another to negotiate trade
deals. This can be seen with the recent talks India had with the UK and EU. In
a way, such dialogues can lead to more bilateral or group-level trade
agreements, which is good for global trade. There is, hence, a possibility of a
new wave of such deals, which can, in a way, revive trade negotiations which
virtually ended post the redundancy of the WTO as an institution.
Seventh, the USA has
been critical of the spending of the USAID and virtually closed down funding to
over 80% of schemes. While this would be big savings for the government, this
will lead to a lot of distress in the least developed countries, especially in
Africa, which are completely dependent on the USAID for health support.
Given the high levels
of poverty and rather corrupt governments, the USAID was the only support
received by these nations. This will be a concern for the future of these
economies. In fact, post the economic altercation with the EU, several
countries like France, Germany, etc., are also scaling back on such
disbursements. This is not a good sign for sure.
Eight, the constant
talk of tariffs and making America great again has had a sharp impact on the
currency, with the dollar getting stronger. This has meant that all global
currencies have weakened, which has caused considerable volatility. India has
also felt the tremors with constant intervention by the RBI to quell this
excess volatility.
This, in turn, has
affected liquidity, as any sale of dollars in the market results in liquidity
being drawn out. To counter this development, it has become expedient for the
RBI to boost liquidity through inducing measures consistently. On the positive
side, the price of gold has gone up as investors are preferring the metal as a
safe haven.
Nine, on account of
the triad of policies – higher tariffs, lower taxation and evicting illegal
immigrants, the Federal Reserve has been on guard and could go slow on lowering
interest rates. The dilemma is that while there is fear of inflation, if rates
are cut at a rapid rate (4 cuts were spoken of before the elections), the
possible slowdown in the economy can cause a quandary for the central bank
where a rate cut may have to be expedited. Further, the US president has been
more than vocal on having more rate cuts.
Last, the result of
the Make America Great Again doctrine being backed by a stronger dollar and
possibly higher Fed rates for long has caused investors to flock back to the
USA. This means that emerging markets are now less preferred, as they are also
the exporting countries, which can face headwinds on account of the tariffs.
This has sent FPIs out of these markets, and India has already witnessed
negative equity flows this year. The ultimate impact has been felt on the stock
market, where there have been significant corrections in the benchmark indices.
Hence, the trauma
caused by the Trump administration has been all-encompassing, leaving virtually
no major economy out of the repercussions, whether perceived or real.
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