Dear Financial Voice Reader,
What does Trump’s tariff war mean for US, Us and …India?
Goldman Sachs sees four scenarios:
1. US tariffs without retaliation. We round up the announced tariffs to 1% of total imports, partly because the Trump administration has already announced a few specific tariffs (e.g. on Canadian lumber) and partly because some further restrictions are likely even in a mild conflict scenario. We allow interest rate and the exchange rate to respond endogenously to the tariffs, but assume that equity prices remain unchanged.
2. A US-focused trade war. We assume that the US tariffs lead to retaliation from trading partners and further US tariff increases. In this scenario we assume that tariffs on all trade to and from the US rise by 5pp. But we assume that trading partners do not put up tariffs between each other; for example, the EU and China both put up a tariff against US imports but do not erect trade barriers between each other.
3. A global trade war. We assume that each country imposes a 5% tariff on everyone else. For example, the EU puts up a tariff against China in response to the US steel tariffs in an effort to prevent Chinese steel from flowing to Europe.
4. A global trade war with a global equity sell-off. We assume that global equity markets drop by 10%, in addition to the global 5% tariff.
Let’s not forget Canada, Mexico and Australia are already exempted. Plus the announced tariffs cover hardly any US trade as the Goldman Sachs pointed out.
So why was there all this panic? Should traders worry? And if tariffs are so bad, how come India has so many and yet grows so rapidly?
The markets didn’t crash. The reason for it being in the headlines was that it goes against decades of tariff reduction. Even relatively closed economies like the Indian one move toward tariff reduction annually.
Investors can still hold their breath and feel little relaxed because the President is not in a mood to begin massive trade war on international grounds. But it doesn’t mean that this new tariff plan will not leave any impact on US Stocks. It seems like genie has now come out of the bottle and the reverberations of US market will showcase tariff terror for several months and even years ahead.
The time when President Trump tweeted his statement that trade wars are good, world stock market reflected an immediate response towards it. Investors became threatened and ultimately the stocks sunk everywhere. US dollar was greatly affected by president’s social media deliberation and soon the investors started tracking US steel stocks with a thought to avoid losses.
Although the US stocks managed to rise slowly after President’s tweet but if we look at the broader spectrum, the confusion initiated with the fear of trade war will leave the higher burden on the shoulders of investors.
If the 25% tariff on steel gets materialized with impact to President Trump’s actions, the US stocks will suffer to a great extent. The red states will lose more with this trade war as conjectured by Goldman Sachs. European politicos knew that if they target domestic markets that are populated by Republicans, it will be much easier to force President’s focus on this issue.
Alpesh Patel
