Tariff Wars: The Push, The Pull And The Price

As investors and businesses position themselves for potential gains from Trump 2.0 and the China Plus One strategy, the U.S. has introduced a new twist ‘trade tariffs’ sparking global concern. With the Indian markets already navigating a challenging phase, will these tariffs pose another hurdle, or could they unlock new opportunities? The answers will unfold soon. Mandar Wagh explores the latest U.S. tariff moves, their impact on global trade, the implications for India, and the sectors facing heightened risks versus those poised for growth 

Since October 2024, the Indian markets have faced a challenging phase, experiencing a broad sell-off driven by weak macroeconomic fundamentals and underwhelming corporate performances that fail to justify lofty valuations. However, this downturn isn’t limited to India—global markets have also been under pressure recently, with ‘Trump’s tariffs’ emerging as a key catalyst. Even major Wall Street indices have erased all their gains made following Donald Trump’s victory in the U.S. presidential elections. 

This raises a critical question—if U.S. investors themselves are reacting negatively to Trump’s policies, why is he pushing ahead with the tariff war? What’s driving this aggressive stance, and what could be the broader implications for the global markets? This story delves into the nature of these tariffs, their impact on businesses and economies, the implications for Indian economy, and the sectors most vulnerable to risks and those presenting potential opportunities. 

Trade Tariffs: A Boon or a Bane?
Trade tariffs are government-imposed taxes on imported goods, making them costlier to encourage domestic production and protect local industries. Policymakers use tariffs to reduce trade deficits, boost employment, and counter unfair trade practices. While tariffs can strengthen specific sectors, they may also disrupt the global supply chains, raise consumer prices, and trigger retaliatory measures, impacting corporate earnings and investor sentiment. Understanding tariff policies is crucial for assessing market risks and opportunities. 

Trump’s Tariffs
U.S. President Donald Trump has imposed significant tariffs on key trade partners, including China, Canada, Mexico, and the European Union, as part of his protectionist trade policies. These tariffs have targeted steel, aluminium, and various consumer goods, aiming to reduce trade deficits and boost domestic manufacturing. United States imposed a 25 per cent tariff on all steel and aluminium imports, affecting countries worldwide. These measures escalated the trade war, increasing tensions and adding to economic uncertainty across the global markets. 

China - The United States significantly escalated its trade dispute with China by increasing tariffs on Chinese imports, raising the rate from 10 per cent to 20 per cent across a broad range of goods. These tariffs were implemented as part of the U.S. government’s broader strategy to address trade imbalances, protect domestic industries, and counter perceived unfair trade practices by China. The decision was also influenced by national security concerns, with the U.S. administration arguing that certain imports posed risks to critical industries. The tariff hike primarily targeted sectors such as electronics, machinery, consumer goods, and industrial components. 

By making Chinese imports more expensive, the U.S. aimed to encourage domestic production and reduce its reliance on Chinese supply chains. However, the move also had unintended consequences, increasing costs for American businesses that depend on Chinese raw materials and components, ultimately affecting consumers with higher prices. In response to the recent U.S. tariff hikes, China has implemented a series of retaliatory measures, intensifying trade tensions between the two economic giants. China imposed additional tariffs on key U.S. agricultural imports, including a 15 per cent levy on chicken, wheat, corn, and cotton. 

In addition, a 10 per cent tariff was levied on sorghum, soybeans, pork, beef, seafood, fruits, vegetables, and dairy products. Additionally, China has also restricted exports and investments involving 25 U.S. firms, citing national security concerns. In a further blow to U.S. industries, China has suspended timber imports from the U.S., citing pest-related risks. These countermeasures signal Beijing’s firm stance against Washington’s trade policies, adding to the economic uncertainty for global markets. 

Canada and Mexico - The United States has imposed a 25 per cent tariff on all imports from Canada and Mexico, with a reduced 10 per cent rate specifically for Canadian energy products, including oil and natural gas. In retaliation, Canada has enacted a 25 per cent tariff on USD 30 billion worth of U.S. goods, with plans to extend these measures to USD 125 billion in the coming weeks. Meanwhile, Mexico has also announced its intent to impose counter-tariffs on U.S. goods, though specific details are yet to be disclosed. 

Later, Trump signed orders to delay the implementation of new tariffs on Canadian and Mexican imports. The decision to postpone the tariffs by over a month followed discussions with Mexican President Claudia Sheinbaum and negotiations between Canadian officials and the Trump administration. Despite this postponement, Canada has maintained its initial retaliatory tariffs against the U.S., targeting items like American orange juice, peanut butter, and motorcycles. 

India - As of now, the United States has not imposed new tariffs specifically targeting Indian imports. However, the U.S. has announced plans to implement reciprocal tariffs on countries that impose higher tariffs on U.S. imports, with these measures expected to begin on April 2, 2025. In response to these developments, Indian Prime Minister Narendra Modi visited the White House in February 2025 to negotiate tariffs and work on a deal to double bilateral trade to USD 500 billion by 2030. India agreed to lower tariffs on motorcycles from 50 per cent to 30 per cent and on bourbon whiskey from 150 per cent to 100 per cent. 

Additionally, it pledged to review other tariffs and increase the imports of U.S. energy and defence equipment. Despite these efforts, India’s exports continue to face pressure due to aggressive trade policies from the United States and the European Union. As the April 2 deadline approaches, India is actively engaging in diplomatic efforts to mitigate potential impacts on its economy and maintain stable trade relations with the United States. To counter trade pressures, India is also diversifying its export markets, focusing on expanding trade with the European Union, ASEAN nations, and the Middle Eastern economies. 

Reasons, Reactions and Repercussions
President Donald Trump’s recent escalation of trade tariffs targeting China, Canada, Mexico, and other nations stems from a confluence of economic and geopolitical motivations. A central objective is to reduce the U.S. trade deficit by encouraging domestic production and curbing reliance on foreign imports. By imposing significant tariffs, the administration aims to incentivise American companies to manufacture products domestically, thereby bolstering local industries and job creation. Beyond economic considerations, these tariffs are also wielded as instruments of foreign policy. 

The administration has linked trade measures to pressing issues such as immigration control and the opioid crisis. For instance, the tariffs on Mexican goods have been justified as leverage to compel Mexico to enhance its efforts in curbing illegal immigration and drug trafficking into the United States. Similarly, tariffs on Chinese imports have been associated with the need to address the influx of fentanyl, a potent opioid, into the U.S. Despite these strategic intentions, the aggressive tariff policy has elicited significant concerns among U.S. investors. 

The financial markets have reacted adversely. Notably, the S&P 500 has entered correction territory, reflecting a decline of over 10 per cent from its recent highs. This downturn is largely attributed to the escalating trade tensions and the resultant uncertainty permeating the global economic landscape. Investors are particularly apprehensive about the potential for a recession, as the tariffs may lead to increased costs for consumers and businesses, disrupt supply chains, and provoke retaliatory measures from the affected trading partners. Such dynamics can stifle economic growth and dampen corporate earnings, thereby diminishing investment returns. 

Economic forecasters have raised the probability of a recession, with major financial institutions acknowledging the heightened risks associated with the current trade policies. In summary, while the administration’s tariff strategy is designed to protect and promote domestic interests and address broader policy issues, it has concurrently introduced volatility and uncertainty into the investment environment. The negative sentiment among investors underscores the delicate balance policymakers must navigate between advancing national objectives and maintaining economic stability. 

Tariffs and India: A Roadblock or a Catalyst?
The recent surge in U.S. trade tariffs under President Trump is reshaping global trade dynamics, with ripple effects reaching India. While intended to safeguard American industries and correct trade imbalances, these policies have triggered shifts in supply chains, creating both hurdles and openings for key sectors of the Indian economy. 

Manufacturing and Export Growth 

The trade tensions between the U.S. and China have prompted companies to adopt the ‘China Plus One’ strategy, diversifying manufacturing bases beyond China to mitigate risks associated with tariffs. India’s stable government, large workforce, competitive production costs and improving infrastructure make it an attractive destination for such diversification, potentially leading to increased foreign direct investment. 

For instance, MGA Entertainment, a major U.S. toymaker, is accelerating its shift from China, increasing production in countries like India, Vietnam and Indonesia. This move underscores India’s potential to attract manufacturing investments, leading to job creation and economic growth. However, Trump’s tariffs can make Indian exports less competitive by increasing costs for U.S. buyers, potentially reducing the demand. Higher duties may lead to supply chain disruptions, forcing exporters to find alternative markets. Retaliatory tariffs from India could further strain trade relations. 

Information Technology 

While India’s IT sector has the potential to benefit from providing cloud solutions, cybersecurity, and supply chain management tools to global companies adjusting to changing trade policies, it also faces several challenges that could impact its growth. Firstly, India’s leading IT majors derive a significant portion of their revenue from the U.S., making the industry highly vulnerable to any escalation in tariff tensions. Any adverse developments, such as restrictive trade policies or increased outsourcing costs, could disrupt contracts, impact profit margins, and create uncertainty for the sector, posing a significant risk to its growth trajectory. 

The trade war may lead to a global economic slowdown, affecting various industries that are clients of Indian IT services. A trade war often triggers retaliatory measures, impacting global businesses and market dynamics. A recent example is Nvidia’s stock slump, driven by escalating trade tensions between the U.S. and China. As the U.S. imposed restrictions on advanced chip exports to China, Chinese AI companies, like DeepSeek, have emerged as strong competitors, developing powerful AI tools that challenge Nvidia’s dominance. Such retaliatory shifts highlight the growing risks for global technology firms amid geopolitical trade conflicts, potentially impacting India’s IT sector by intensifying competition and disrupting the supply chains. 

Automobile 

Trade tariffs can disrupt India’s automobile industry, particularly in terms of supply chain costs and export competitiveness. Higher import duties on essential components like semiconductors, lithium-ion batteries, and advanced electronics—many of which are sourced from China and other global suppliers—could increase vehicle production costs. This may result in higher prices for consumers, affecting demand, especially in price-sensitive segments. Additionally, India’s automobile exports to the U.S. and other key markets could face challenges if protectionist policies lead to increased tariffs, making Indian vehicles less competitive globally. 

Global trade disruptions may also impact electric vehicle (EV) adoption, as India relies heavily on imported battery technology, delaying cost reductions and mass adoption of electric vehicles. However, on the positive side, driven by the China Plus One strategy, major global automakers may look to establish or expand manufacturing bases in India, strengthening the local supply chains and generating new employment opportunities. Government initiatives like PLI schemes for automotive and EV components could further strengthen domestic manufacturing and reduce reliance on imports, enhancing India’s position as a key player in the global automobile supply chain. 

Pharmaceuticals 

The U.S. healthcare system is facing a decade-high surge in drug shortages, with over 300 medications across 22 therapeutic areas experiencing limited availability. Historically, such shortages have led to price hikes, creating an opportunity for pharmaceutical companies to raise prices for scarce medications. Given the U.S.’ heavy reliance on India for both finished drugs and active pharmaceutical ingredients (APIs), Indian manufacturers are well-positioned to capitalise on this demand while maintaining price competitiveness. However, Trump’s new tariffs on Indian pharmaceutical imports could disrupt this dynamic, potentially driving up drug prices and exacerbating supply shortages in the U.S. 

India supplies nearly 50 per cent of America’s generic drugs, making it the largest supplier and a key factor in keeping U.S. drug costs 40-60 per cent lower than the branded alternatives. Any trade restrictions could significantly impact millions of consumers and strain healthcare affordability. To mitigate economic fallout and protect its pharmaceutical exports, India is actively negotiating a trade deal with the U.S. A favourable resolution could not only preserve India’s market dominance but also reinforce its role in global healthcare security, ensuring stable growth for domestic manufacturers while preventing job losses in the industry. 

Agriculture 

Rising trade tensions and tariff barriers can significantly challenge India’s agriculture sector. Higher import duties on fertilisers, agrochemicals, and farm equipment due to disrupted global supply chains will increase input costs for farmers, squeezing their profit margins. If key export destinations like the U.S. impose tariffs on Indian agricultural exports, it could reduce demand for products such as rice, tea, spices, and processed foods, making them less competitive in the global markets. Additionally, retaliatory tariffs by other countries may further restrict India’s market access, leading to an oversupply of certain commodities in the domestic market and depressing the farmgate prices. 

The uncertainty surrounding global trade policies may also deter investment in agriculture technology, farm mechanisation, and cold storage infrastructure, slowing innovation and productivity growth. Furthermore, reduced export revenues can impact rural incomes, affecting overall economic stability in agrarian regions. If trade tensions escalate, India may need to explore alternative markets, but finding new buyers and adjusting supply chains could take time, potentially leading to short-term disruptions for the agriculture sector. 

Textile and Apparels 

The ongoing trade tensions between the U.S. and China, coupled with Bangladesh’s economic and political instability, are creating significant opportunities for India’s textile industry. Bangladesh, a global leader in textiles, faces multiple challenges, including political instability, rising production costs, power shortages, and an economic slowdown. Frequent labour unrest and infrastructure constraints further weaken its appeal to international buyers, prompting them to seek more stable sourcing options. 

India, with its well-established textile ecosystem, skilled workforce, and government incentives under schemes like PLI (Production-Linked Incentive), is well-positioned to attract business shifting away from both China and Bangladesh. Additionally, the global fashion industry’s shift towards sustainable practices presents an opportunity for India to position itself as a leader in eco-friendly textile manufacturing. Plans to triple the value of its fashion and textile sector to USD 350 billion by 2030, coupled with initiatives to reduce emissions, align with global sustainability goals. 

Renewable Energy and Electronics 

Despite Trump’s focus on fossil fuels, the renewable energy sector remains optimistic due to strong global demand and a broader shift toward clean energy. Countries worldwide, including the U.S., continue investing in solar, wind, and battery storage to meet sustainability goals, ensuring steady growth. Trump’s trade tariffs on Chinese solar panels and renewable energy equipment have created new opportunities for India’s renewable energy sector. 

With the U.S. aiming to reduce reliance on Chinese imports, Indian manufacturers of solar modules, wind energy components, and battery storage systems can expand their exports to fill the supply gap. India, already a key player in the global solar supply chain, can leverage this shift by ramping up domestic production under initiatives like the ProductionLinked Incentive (PLI) scheme and Make in India. Increased demand from the U.S. could attract foreign investments into India’s green energy sector, boosting manufacturing capacity and creating jobs. 

Commodities and Currency 

• Gold: Traditionally a safe-haven asset, gold prices have surged as investors seek refuge from market uncertainty. Any further escalation in trade tensions could push gold past record highs.
• Oil: Global crude prices remain in flux as trade tensions impact demand projections. If the trade war dampens economic growth, oil consumption could decline, impacting countries reliant on crude exports.
• Rupee versus Dollar: The Indian rupee has faced depreciation pressure against the U.S. dollar, as investors flock to the greenback amid heightened global risks. 
   

Conclusion
Trump’s trade war has set the stage for another period of economic uncertainty, with potential winners and losers emerging across industries. While global markets brace for impact, India’s economy could find opportunities amid the disruptions. As trade tensions evolve, investors must remain agile, leveraging diversified strategies to navigate the complex geopolitical landscape. The next few months will be critical in determining whether Trump’s policies bring renewed prosperity or heightened volatility to the global financial ecosystem. 

Investors should focus on defensive strategies to protect portfolios from volatility while capitalising on emerging opportunities. 

• Diversification: Allocating investments across asset classes such as equities, gold, and bonds can help mitigate risks from market fluctuations. A balanced portfolio can cushion against sudden policy shifts.
• Sector Rotation: Investors may consider shifting focus from highly exposed sectors like technology, automobiles and metals to defensive segments such as FMCG, pharmaceuticals, and utilities, which tend to remain resilient during trade disruptions.
• Quality Stock Selection: Investors should prioritise fundamentally strong companies with robust balancesheets, stable cash flows, and limited exposure to trade-sensitive markets, ensuring long-term portfolio stability.
• Defensive dividend Stocks: High-dividend-yield stocks can provide stable returns and act as a hedge against market volatility during uncertain global trade conditions.
• Infrastructure and Domestic Plays: Given India’s focus on self-reliance and PLI schemes, sectors like defence, capital goods, renewable energy, and automotive components may offer promising equity investment opportunities.
• Technology and AI Investments with Limited U.S. Exposure: While the technology sector faces risks due to restrictions on Chinese AI and semiconductor firms, Indian IT firms offering cloud, AI, and cybersecurity solutions could gain from the shifting global investments. 
   

The U.S. tariff decision for India, set to be announced on April 2, 2025, will provide greater clarity on the sectors that may face challenges or benefit from emerging export opportunities. Stay tuned to Dalal Street Investment Journal for in-depth analysis and insights to navigate investment opportunities in this evolving landscape.