Laal Street & Tariffs War; Let’s Understand

The market is dancing on the tariffs war, world leaders are confused, and manufacturers are fingers crossed on this uncertainty. You must be reading this on the news that everyday the U.S. President, Donald Trump, comes up with a new tariff plan. Donald Trump has shaken up the global economy by announcing tariffs ranging from 10% to over 100% on the goods imported into the U.S. This whole web of tariffs is so complicated now and hard to understand its effects on the economy. Uday Kotak, Chairperson of Kotak Securities said, “World in a tizzy,” he quoted Lenin, “There are decades when nothing happens and there are weeks when decades happen.” So, in this blog from MINTIT, let’s understand this whole game of tariffs tantrums.

What is Tariff?

Tariff is a kind of import tax which governments impose on each other to protect their domestic manufactures from foreign competition. Also, it generates additional revenue for the government. Governments also impose tariffs to fix the mismatch or deficit of import and export tax to create a level playing field. Now let’s understand this with an example. Suppose the domestic car manufacturer is Tata Motors and U.S. car manufacturer is Tesla, both price their car at Rs 10 lakh and Raman is confused to choose which car to buy. So, when the Indian government decides to impose 30% tariffs on auto imports from the U.S., now the same car of Tesla will cost Rs 13 lakh to Raman in the Indian market. However, Raman will get the Tata Motors car with same features at Rs 10 lakh, resulting in lower sales of Tesla in the Indian market due to Tariffs. Hence, to balance this trade deficit, now the U.S. also imposes a 30% tariff on auto imports from India. Now in the U.S. market, Tata Motors car will cost at Rs 13 lakh, which will subsequently give price advantage to Tesla and price competition to Tata Motors in the U.S. market. And if John is to choose between Tesla and Tata Motors in the U.S. market, he is likely to prefer Tesla.

Why Tariffs?

Donal Trump decided to impose tariffs to protect their trade deficit and curb unfair practices caused by lack of reciprocal tariffs from other nations. He believes if the US is offering lower tariffs to other countries, US goods should also be offered the same tariffs. Hence, Trump wished to punish the countries that impose high import duties on the U.S. goods and also to stop China from smuggling drugs into the U.S. Trump believes tariffs will also help to stop illegal immigration into the U.S. from Mexico and Canada. Further, it will also collect higher revenue to pay-off some debt as modern problems require what? Modern solutions.

A Poisonous Tariffs’ Cycle

Initially tariffs appear to be a good deal to American citizens, but what’s the catch? Why are the stock markets worried? Let’s say the average tariff is 30% on all the imported goods to the U.S., this means that the end customer will have to pay a 30% higher cost for almost everything imported. This will lead to the customer buying less of imported goods, thereby reducing profits for businesses. Lower profits for businesses would mean that they will end up spending less money. The first cost cutting starts with discretionary or optional expenses like marketing and advertising which will directly impact tech companies like Google, Meta and X (formerly twitter). Tech companies will then be forced to cut costs by, of course, firing people. This will further lead to reduction of household expenses and further reduction in profits of various businesses. The chain reaction would not end here, John’s country would suffer more. Now more companies will fire employees and this cycle will continue until either tariffs are cut or the government introduces stimulus by cutting interest rates through printing more money and increasing more debt. So something, which was supposed to reduce debt will further increase the debt eventually. Some people expect a recession, some want Trump to step down, some think Trump is just bluffing and he will cancel the tariffs. Ughh! God knows what the plan is.

US-China

Trump had some special plans for China which further instigated this tariff war. The U.S. imports Chinese goods worth $438.9 billion and exports only $143.5 worth of goods to China. Trump expected China to negotiate the tariff deal, however China did not accept to surrender. In retaliation, Trump imposed an additional 104% tariff on Chinese goods, while China imposed 84% additional tariff on U.S. goods in response and this continued further. These quarrels shook the global market significantly, on 07 April Nifty fell 3.24%, while Hang Seng fell over 15%, the most brutal decline in 16 years. The Taiwan Weighted index declined almost 11% percent in a single session, whereas the European markets registered a fall of between 5% to 8% in a single session. It did give a nostalgia of the 1987 crash when Dow Jones plunged 22% in a single session.

Fed & RBI

The US Federal Bank’s chief, Jerome Powell indicated the possibility of high inflation in the economy due to tariffs measures. Jerome said that the ‘tariffs are larger than expected’ and the Fed needs to wait for clarity before it cuts the interest rates further. However, Trump advocated that this is the perfect time to cut the interest rate. In one of its social media posts, Trump said this is a perfect time for the Fed to cut the interest rate and advised him to stop playing politics. Yes, that's what he said. On the other hand, considering the economic situation, the Reserve Bank of India (RBI) cut the interest for the second time. On 09 April, RBI reduced the interest rate by 0.25% to 6%, incentivising economic growth.

Foreign Selling

The Indian stock market has been under huge pressure due to constant selling by the foreign investors. Year-to-date (YTD), foreign institutional investors (FIIs) have sold shares worth Rs 1.74 lakh crore. However, the domestic institutional investors (DIIs) have been constantly attempting to rescue the Indian stock market. YTD, DIIs have bought Indian stocks worth Rs 2.06 lakh crore. On Friday, 11 April, FIIs sold net stocks worth Rs 2,519 crore, marking their ninth consecutive session of selling.

Nifty & Nasdaq

Amid the chaos of tariffs war, Nifty 50 and Nasdaq suffered various wounds. The U.S. stock market technology-stocks index, Nasdaq confirmed its venture into bear territory on 04 April after falling over 20% from its peak in a couple of sessions. Nifty 50 seemed to be on the same trajectory, the index slipped over 15% from the top. The decline resulted in the wipe-off of over Rs 12 lakh crore market capitalisation of Bombay Stock Exchange listed companies from Rs 403 lakh crore to Rs 390 lakh crore. However, the market recovered this week but ended the week 0.3% lower. On the other hand, the U.S. market experienced weekly gains. On Tuesday, 08 April, Nasdaq rose over 12%, whereas on Friday, 11 April Nasdaq surged over 2%. The technology stocks index posted the biggest weekly gains since November 2022. But how did this change in course happen? Let’s find out.

Trump’s New Scheme

Trump in its latest summon, paused the game of tit for tat tariffs with other nations except China. The President announced a 90-day pause on his sweeping tariffs on all countries, excluding China. This cheered the market, the S&P 500 jumped 9.5%, Dow Jones gained nearly 3,000 points, whereas Nasdaq rallied over 12% in a single session. The Indian markets also reacted positively, Nifty 50 closed Friday session with nearly 2% gain, while Sensex jumped over 1,300 points and managed to close the week with only 0.3% loss. Now the game is not over yet, analysts advised to wait to get a clearer picture of the world's new trade order and investors continue to buy the dip, exit the market, time the market without any plan or experts’ guidance. In these uncertain times, it is very important to invest with caution and plan. But no worries, MINTIT is here to educate, check the latest blogs on market updates and financial pyramid. MINTIT, India’s only dedicated Mutual Fund Platform which caters to your personalised goals and accompanies you to achieve your financial milestones is eager to help you build your wealth. Depending on your profile it precisely suggests tailored investing plans to achieve your goals.

Happy Investing !