US President Donald Trump and tariffs unnerve equity, bond markets

Given the prospects of global economic slowdown and fragmentation of global trade, India is rushing to work out some sort of trade deal or the other with UK, EU and US

Trump and tariffs dominate global headlines and keep world leaders engaged. Europe is rattled by Trump’s moves to take the side of Russia in the war with Ukraine and ask for scarce minerals in exchange for the aid given to Ukraine to defend against an invader. Smaller countries are becoming more anxious about what Trump might demand from them, given his utter disregard for global rules, including fundamental principles such as respect for the sovereignty and territorial integrity of other nations. These developments have heightened uncertainties, making the equity and bond markets nervous and slowing down investments in productive assets. Many analysts fear that the world is heading not only toward an economic slowdown but also toward a "might is right" approach by some leaders —  reminiscent of the attitudes that pushed the world toward a disastrous war nine decades ago.

 

Last week, the leaders of France and the United Kingdom met the President of the United States at the White House to revive some meaningful dialogue and explain their points of view but went back without any assurances on security guarantees for Ukraine. The predicament of the European leaders was best expressed by Fredrich Merz, the leader of the party that is likely to form a government after the recent elections. He said that it is clear that the Americans, at least this administration, are largely indifferent to the fate of Europe. He also talked of his absolute priority to help Europe achieve independence from the USA. The net effect of a mix of hostility and indifference of the US to European security is diversion of more money for military purposes by the European countries, a process that accelerated last week with the decision of the United Kingdom to raise the defence spending to 2.5 per cent of the GDP by 2027.

 

Through his election campaign last year, Donald Trump sold to his voters a grievance that the entire world, including its adversaries, allies and multilateral institutions, has taken undue advantage of the US. He promised to fix the problems by using tariffs as a weapon. Soon after taking over, the US raised the tariffs on goods from China by 10 per cent and on imports of steel and aluminium from all countries by 25 per cent.  Last week, he talked of raising the tariffs on goods from China by another 10 per cent and from Canada and Mexico by 25 per cent. He has also asked his advisers to study and recommend imposition of reciprocal tariffs i.e. imposing the same level of import duties that other countries charge for imports from the US.  How all this will play out is difficult to say but the data released last week showed the US economy losing momentum and slowing down.

 

Given the prospects of global economic slowdown and fragmentation of global trade, India is rushing to work out some sort of trade deal or the other with the United Kingdom, the European Union and the United States. However, apprehension abound that the real problems of these economies have more to do with productivity and competitiveness. Our government’s chief economic adviser has recommended deregulation as a key driver to improve competitiveness and our Prime Minister has hinted about setting up a ‘de-regulation commission’. However, our domestic producers would prefer to see some tangible action on deregulation.

 

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