Two friends, Tushar and Mohit are waiting for a work meeting to start. The discussion veers towards Trump and reciprocal tariffs.
Mohit: It has been a barrage of information to deal with ever since US President Trump has taken over. The most recent salvos are the reciprocal tariffs. What are your views?
Tushar: Trump wants trade to be on an even keel. While USA imposes an average tariff of 2-3 per cent on imports, the products from USA face higher tariffs when exported, regularly touching 10-15 per cent. So, Trump is now pursuing a tit-for-tat policy. What you charge USA, USA will charge you.
Mohit: When you put it that way, it does sound reasonable. But a lot of countries impose tariffs to protect the fledgling domestic industries, which would face high competition otherwise.
Tushar: Yes that could be the case. Thinking positively, the domestic industry could rise up to the challenge and invest in R&D to push back. Honestly, the R&D investment does have scope to improve.
But Trump is more concerned about MAGA – Make America Great Again. The US domestic industry is in a fix. It cannot serve the world demand because of trade restrictions across the World. Hence it cannot build scale and hence cannot even defend domestic markets from importers who have built the scales for efficiency.
Mohit: But I thought US moved on from manufacturing and is riding on high tech enterprises. FANG stocks, defence industries, and financial services, this is where it is focused right?
Tushar: Yes it is. It remains to be seen if US capital will shift to domestic manufacturing after the trade restrictions are brought to an even keel,. Will US steel, chemicals, pharma, auto companies expand capacities to “take advantage”. I doubt that. Like you said, they are more of a tech economy than a manufacturing one. But only time will tell.
Mohit: Not only that, what it does to global inflation is another worry.
Tushar: Yes right on the money. Put simply, when capacities are not fully utilised because of trade restrictions, there will be global inflation. More so in USA which will now have to pay more for the same basket of goods. That too at a time when central banks are readying to announce victory over inflation and willing to lower rates. The US Fed is also watching the impact of tariffs on inflation before announcing any more rate cuts.
Mohit: So bottom line is no one will come out looking good from this episode.