It is not over: Trump's tariff pause does not fundamentally change much

A tariff pause doesn't fundamentally change much

American President Donald Trump’s decision on Wednesday to pause the so-called reciprocal tariffs for 90 days reportedly surprised even some of his closest advisors. In a way, this again shows decisions are not thought through, causing uncertainty in global financial markets and the economy. Nonetheless, the pause has given financial markets a much-needed relief. The S&P 500 in the United States, for instance, went up 9.5 per cent on Wednesday. Since the markets were closed in India on Thursday, they are expected to reflect the change on Friday. According to the revised plan, the base 10 per cent tariff will remain for all countries and the additional reciprocal tariff imposed on select trading partners, India included, will be on hold. In the next 90 days, trading partners will be expected to arrive at a deal that the Trump administration believes is “fair”. Notably, China is not part of this plan and tariffs on Chinese exports to the US have been increased to 125 per cent. The exclusion of China and retaliatory and counter-retaliatory tariffs mean risks can go beyond global trade and growth.

 

It is now clear the financial market rout made Mr Trump go a bit slow. The selloff in the bond market over the last few days was particularly worrying to many on Wall Street. Usually, when stocks fall, money moves to bonds, pushing up bond prices. This is what happened initially. However, over the past few days, bond prices also started falling, reflecting deeper concerns among investors. A dislocation in the US government debt market can be devastating for all other markets globally. To be fair, financial markets have reacted to the trade shock broadly in the expected fashion. It is surprising that Mr Trump and his advisors expected a different outcome. Nevertheless, while the rally in the financial markets is understandable, not much has fundamentally altered. It’s just a pause and Mr Trump has not changed his mind on the importance of tariffs in achieving his goals. Thus, the negotiations over the next 90 days for trading partners will not be easy and the level of uncertainty in global markets will remain elevated, with implications for global growth.

 

As evidence over the past few days suggests, the US will not be content with trading partners lowering tariffs. The offer of zero duty on US imports by Vietnam, for example, did not impress the American administration. For Mr Trump, the trade deficit with individual countries reflects unfairness and must be addressed. This will not be possible simply because this is not how things work. In effect, the largest economy in the world by far is questioning the basics of global trade and economic order. It is bound to make the system unstable.

 

Be that as it may, India must continue to engage with the US. India is in a relatively good position because it started negotiating a bilateral trade agreement much before the reciprocal tariffs were announced. It is worth reiterating that reducing tariffs and other trade restrictions on most items is in India’s own interests. It will also help India prepare to conclude much-awaited trade deals with other trading partners such as the European Union and the United Kingdom. Although the Indian economy will go through a period of uncertainty because of the US trade policy, and it is not clear how things will evolve over the next few months and beyond, it must be alert and engage with the rest of the world more proactively.