US President Donald Trump’s unprecedented moves on tariffs have started impacting world trade and will have consequences for global growth, too. Some countries will be impacted more than others, and the US, too, will be impacted by these tariff tantrums.
At this stage, there is no clarity on how things will unfold. The latest jobs report from the US indicates an increasing probability of the US tipping into a recession. The Fed is likely to cut rates at the September FOMC meeting. This will have implications for global growth and financial markets.
Trump triumphs in the short term
Though unpalatable, the fact remains that President Trump has had his way on tariffs.
As of now, he has succeeded in riding roughshod over other countries except China.
A US-China trade deal has yet to happen, but others, like the EU and Japan, have capitulated.
The minimum baseline tariff is 10 per cent for the UK, rising to 15 per cent each for the EU, Japan, and South Korea; 20 per cent for Taiwan, Vietnam, Sri Lanka, and Bangladesh; 19 per cent for Malaysia, Indonesia, Philippines, and Cambodia … and so on.
Many countries, developed and developing, have offered near-zero tariffs on exports from the US. Truth be told, Trump has triumphed in the short run. But the long-run impact of Trump’s tariffs remains to be seen.
Global trade and growth will take a hit
Since each country has separate trade deals with the US, trade will not be smooth.
Productivity and efficiency will be affected. Efficient producers taxed at higher rates will lose out to inefficient producers taxed at lower rates. Supply chains will shift to a tariff-based system from a cost advantage-based system.
This efficiency loss will impact global trade, which in turn will impact global growth. Global growth in 2025 and 2026 will be lower than projected earlier.
India singled out for higher tariffs
India—the ‘Tariff King’ according to Trump—has been singled out for harsh treatment, with a 25 per cent tariff and an unspecified penalty for energy and defence trade with Russia.
The market perception is that this is a typical Trumpian carrot-and-stick strategy: imposing high tariffs initially and then lowering them through negotiations while extracting concessions in other areas like access to markets.
It is possible that the tariff on India will be reduced to around 20 per cent after the conclusion of the next round of negotiations.
The hit on growth will be insignificant
India is a domestic-consumption-driven economy. Our exports to the US are only 2 per cent of our GDP; if the tariff-exempted goods are excluded, the exports to the US are only 1.4 per cent of GDP.
Therefore, even if the 25 per cent tariff remains, India’s GDP will be impacted only marginally. FY26 growth is likely to decline to 6.2 per cent from the estimated 6.5 per cent.
Even with 6 per cent growth, India will continue to be the fastest-growing large economy in the world.
The Fed is likely to cut rates in September
The latest non-farm payroll data from the US indicate a slowing economy.
In July, the jobs generated came much below expectations, at only 73,000. The June and May jobs numbers have also been revised downwards sharply by a combined 2,58,000.
Clearly, the US economy is slowing down. With the inflationary impact of the tariffs kicking in soon, a stagflationary scenario cannot be ruled out. This will put the Fed in a tight spot.
High valuation and tepid earnings growth are the real concerns
Soon, the tariff tantrums will be behind us, and clarity will emerge. The real concern for markets now is the tepid earnings growth.
Nifty 50 earnings grew only 6 per cent in FY25: sharp deceleration from the 24 per cent CAGR during FY21 to FY24.
The earnings growth projection for FY26 is around 10 per cent. This pedestrian earnings growth cannot justify a PE of 21, at which Nifty is trading now.
Even though a correction will be justified from the valuation perspective, that is unlikely due to two reasons.
One, the DIIs, flush with funds, will buy every dip, providing resilience to the market.
Two, an earnings recovery is likely starting with the Q3 results.
The monetary stimulus provided through rate cuts and phased reduction in CRR, and the fiscal stimulus through big cuts in income tax have been significant.
The economy will start responding to this stimulus beginning with the festival season.
Expectation of better earnings growth in Q3 and Q4 can keep the market resilient.
(The author is Chief Investment Strategist at Geojit Investments. Views are personal.)
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
