Donald Trump was known to be unpredictable. But what he has unleashed since he became US president has shocked even hardened policy-makers, businessmen, traders, investors, politicians and bureaucrats. And he still has 46 months to go. I have been anticipating this for a while. Last October and early November, I wrote three articles pointing to a clear economic slowdown in India which also indicated a weaker stock market.
A fourth article in mid-November was titled ‘More Dark Clouds Gather’. Mr Trump had just become the president-elect, and I pointed out, “It would be suicidal to assume that his promised actions would be tempered by realpolitik or get bogged down in the Washington ‘swamp’ or the ‘deep state’. Even if a part of Trumponomics is implemented, it will hit the rest of the world like a tidal wave from which no major economies will be spared.” This is how it has turned out—so far.
After imposing punitive tariffs on Canada, Mexico and China, America’s top trading partners, his next targets are the European Union, Japan, South Korea, Taiwan and, of course, India. Whatever one can understand of Mr Trump’s policy— from a recursive stream of consciousness—it is combative, simplistic, unstable, nativist, and improvised. Any country that has a large trade surplus with America, he believes, is 'cheating us.' They need to pay a big tariff to sell to the US.
Coming next from Trumpland are reciprocal tariffs which will match, item by item, the duties that American exporters face. By one estimate, this would create 2.3mn (million) individual levies. How serious are Mr Trump’s antics and how will they affect us?
The intellectual basis for Mr Trump’s tantrums comes from Stephen Miran, now the chief of his council of economic advisers. In a paper written in November 2024, Mr Miran suggests that the Trump regime should aim for a weak dollar to boost exports, high tariffs to boost domestic manufacturing and make other countries pay for holding US debt or even make them swap short-term debt for lower-yield 100-year bonds.
Killing the Goose
As president Trump takes a wrecking ball to global trade linkages, the impact will be devastating. Economist Dani Rodrik, who specialises in globalisation, growth and development says, “The world economy has achieved unprecedented levels of growth since World War II. Nothing in history comes even close—not the Industrial Revolution and not the nineteenth-century era of globalisation.”
The basis for this remarkable growth is surging global trade between Asia, the US and Europe and regional trade within Europe and the Americas, made possible by low transaction costs, including low tariffs.
As East Asian countries like Japan, Taiwan, Korea and Singapore started working hard to exploit their low-cost advantage, their exports to the developed world surged. China joined this gang of exporting nations in the late-1990s and took it to a different level, becoming the workshop to the world, especially after it joined the World Trade Organisation in 2001.
Next, exporters set up bases near their markets (China in Mexico to serve the US market) or simply to exploit lower costs (China in Vietnam or Thailand; Korea and Japan in Malaysia).
Parallel to the surge in global trade, the post-war period also led to a rise in the US dollar as the global reserve currency. Almost half of global trade is invoiced in dollars. Since a bulk of Asian exports went to the US, the trade surplus they generated was reinvested by Asian countries in US government bonds, allowing the US to continue issuing more debt and financing its imports from these countries without distorting the exchange rate.
Hence, when Mr Trump intends to uproot the current network of global trade linkages, the dollar will become extremely volatile, getting pushed upwards due to tariffs and downwards due to reduced growth from the same high tariffs, among myriad other push and pull factors.
A third factor adding to the volatility is the stunning brawl that Mr Trump has got into with every ally of the US. The US dollar’s role as the world’s reserve asset allowed America to project its strength, visible in its military bases across the world and invisibly through its ability to impose crippling financial sanctions on rogue regimes.
President Trump has chosen to rip off the security cover that the US provided to countries from Japan to Europe, while openly siding with Russia, part of an axis that includes China, North Korea and Iran. In other words, he intends to upend global trade, global investments, the US dollar, and US security cover (which are all tightly interlocked), all at the same time.
The consequences will be nothing short of catastrophic, especially for smaller and weaker nations such as India. The US is the most important market for India, as it is for many developing countries. India’s exports to the US make up 9% of its total exports and 18% of its merchandise exports. Tied closely to Mr Trump’s new trade policy is national security in all forms.
Mr Trump wants to achieve self-sufficiency in several critical sectors, one of them being pharmaceuticals. India exported more than US$10bn (billion) of pharmaceuticals to the US in 2023. Finally, India exported US$50bn of software services to the US in 2023. Although the ‘tech bros’ that make up Mr Trump’s team are supportive of the H1B visa, which allows Indian software engineers to work in the US, Mr Trump’s core anti-immigrant supporters are not. These are two of India’s biggest job-creating export sectors. That aside, the best of Indian companies are exporters, mostly to the US. They all will be under threat.
Finally, there is now a looming threat of recession in the US, if Mr Trump’s policies are all simultaneously implemented. One of the key policies is letting Elon Musk declare war on the US government spending. His department of government efficiency (DoGE) has a target of cleaving US$2trn (trillion) from the US budget. Even if he is partly successful, the US may tip into recession. After all, it is spending by the US government that has been behind the strong US growth over the past few years.
Government job additions accounted for nearly 25% of total non-farm payroll additions in the past one year (versus a norm of 5%–6%). Similarly, government spending is about 4% of GDP, higher than pre-pandemic.
If the US gets into recession, Indian exports including software exports will suffer even more. All put together, unless something changes, Mr Trump’s policies are a huge threat right now which is perhaps not being recognised fully.
(This article first appeared in Business Standard newspaper)
Comments
iaminprabhu
7 days ago
Uncertainty & Unstability is the ckwar trend for next few Quarters & NOTHING deserves HIGH STOCK PRICES in our country which is facing dual threat of EXPORT TARIFFS & related high inflation combined with Job losses in many areas!
Great insights once again. How does all this augur for Gold and Silver?
It would be great if you can write an article on how these Trump trade wars ,etc could affect Gold /Silver going ahead (something detailed like the one written in 2011 and 2013) given the 30% surge in its prices this year.
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It would be great if you can write an article on how these Trump trade wars ,etc could affect Gold /Silver going ahead (something detailed like the one written in 2011 and 2013) given the 30% surge in its prices this year.