Tariff Tracker: The lasting fallout of Trump’s trade upheaval

And now, he has promised to look at short-term tariff exemptions to help car companies.

Who can predict where tariffs will be in a week’s time?

Trump volte face on smartphone, electronics tariffs

After global stock markets bounced back up on Monday (April 14) morning after Friday’s official announcement that some of these electronics items would escape levies of up to 145% slapped on China, Trump interjected to say that Chinese-made smartphones and other electronics would not be exempt.

This despite a US Customs notification on Saturday that explicitly stipulated that smartphones, computers, and some other electronic devices would be excluded from the tariff on goods entering from China.

Trump then got on to social media, saying there was no exemption for these products and called such reports about this notice false. Instead, he said “they are just moving to a different Tariff ‘bucket’”. “We are taking a look at Semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN in the upcoming National Security Tariff Investigations,” he said.

So the issue of tariffs on smartphones and electronics has come full circle in a little over 48 hours, belying initial expectations of a softening towards China.

Apart from the now predictable pattern of abject chaos in all of this, there is no tangible takeaway.

More worrying is the fact that the anxiety has now spilled beyond economics. Trump’s willingness to defund universities that harbour his critics – the US administration announced a $2.2 billion funds freeze on Harvard that follows a witch hunt against Columbia University – his move to pull back government business from legal firms that work with his opponents, and the brazenness in deporting migrants against court orders, now threaten to upend all the ideals at the heart of American society and the American way. And there is no telling how far this would go.

China’s diplomatic outreach

Deng Xiaoping, the architect of China’s economic reforms, had a doctrine for China’s growth: “Hide your strength, bide your time”, an exhortation inspired by Sun Tzu’s ‘The Art of War’. That broadly helped rebuild China after a century and a half of economic difficulty, what the Chinese refer to as the century of humiliation.

Chinese President Xi Jinping has marked a break from this since the middle of his term in office, with his aggressive wolf warrior diplomacy. Even he, in all of this tariff madness, put up a semblance of restraint, repeatedly calling on Trump to “completely cancel” his tariffs regime, and “return to the right path of mutual respect”. This is even as his administration kept asserting that China will not be “bullied”.

Beijing has consistently kept its own tariff hikes lower than what the US has slapped on it, and appealed for calm amid the stock market upheaval. In that sense, Xi has tried portending an image of a statesman, a torchbearer of free trade, even as Trump’s policymaking has been capricious and unstable.

On Monday, President Xi embarked on a high-stakes diplomatic tour of the South East Asian region’s major export-reliant economies in a bid to position his country as a stable partner in contrast to the US.

The Chinese leader arrived in Vietnam on Monday and is set to visit Malaysia and Cambodia from Tuesday to Friday.

This soft-diplomacy outreach seems more durable than China’s Belt and Road Initiative, particularly given the circumstances and the threat of the bully that is tormenting everybody.

The unintended consequences of Trump’s tariff policy, as well as the way that he’s going about penalising friends and foes alike, is that it pushes countries to re-engage with China in a way that was unimaginable before January 20.

And all this would be viewed with a certain amount of trepidation by New Delhi, given that the reasons for countries to rally around China appear more compelling with every passing day.

Lasting impact of trade upheaval

The longer-term fallout of the higher tariffs and trade war resulting from Trump’s actions would most certainly be higher inflation in the US, and that is stirring opposition domestically.

This, combined with runaway deficits and a possible dilution of institutional autonomy, could lead to foreigners beginning to rethink whether they should continue to lend unlimited money to the US Treasury, analysts say. That could mark the beginning of the end of a big advantage Washington DC has had so far – the advantage of having the global reserve currency and the ability to live beyond its means.

Such a shift could mark a possible watershed moment — of the scale, perhaps, of the decision in early 2022 to freeze Russian foreign assets, which forced central banks around the world, including India’s RBI, to buy physical gold rather than derivatives or exchange-traded funds that track the yellow metal’s price.

Then there is the selloff in American bonds that began as confidence in the US economy plummeted. Foreign holders, including Japanese and Chinese investors, are among those said to have dumped US government debt amid the rising concern over the impact of Trump’s tariffs.

Meanwhile, the dollar is falling, too. This is reflective of a breakdown of a fundamental assumption underpinning global finance – that when there are serious bouts of volatility in the forex markets and a spike in the VIX (volatility index), it normally leads to a surge in demand for dollar assets. Over the last week, the trend has been exactly the opposite.

All of this could force the BRICS countries to accelerate non-dollar payments, given that the world is going to need alternative ways to make payments as the US dollar’s status as the reserve currency comes under cloud. China is likely to work on this, aided by Russia, while India and Brazil are unlikely to play along.

As of now, India is almost entirely invested in the bilateral investment pact with the US, although the going is likely to be tough as Commerce Secretary Howard Lutnick’s team in Washington DC looks to extract concessions on items such as agri and service. A lot of this could happen publicly, making things more difficult for negotiators.

Then there is the R-word that is increasingly being mentioned. Trump’s tariff barriers and promised tax cuts will likely end up stoking inflation — and could force the Fed to end its rate-cutting cycle sooner. The US has bonds worth more than $35 trillion in circulation, much of which is in foreign hands. America does not normally see interest rates — or yield — spikes on its debt since its bonds are viewed as among the safest investments. That seems to be changing now.

Large-scale selloffs of American bonds could pose a problem for the world’s biggest economy, making it more expensive for it to raise the money to finance its budget gap. If the American government cannot sell its debt, it is then unable to pay for things such as social security or flagship programmes such as Medicaid. For the first time in 24 months, investors had started to demand a bigger premium to hold junk-rated American debt over European equivalent, reflecting fears of a slowdown in the world’s largest economy.

With the odds of an America-led global recession going up with every passing day of policy twists by the US, it is bad news for the global economy.

According to Ray Dalio, American billionaire and co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, internal conflict in the US could lead to an international conflict in a way that could be highly disruptive to the world economy, and could even turn into a military conflict, as has been the case whenever such breakdowns and disruptions have occurred earlier.

According to Fareed Zakaria, host of CNN’s GPS, Trump has bungled with his tariff policy. “The greatest deterrent (to a Chinese invasion of Taiwan) was not any weapon we had. It was the fear that China had, that they would be decoupled from the American economy, the economy with which they had it for the last 40 years built a deep interdependent relationship. Trump has fired that gun pointlessly, without a plan, without a strategy,” he told CNN on Tuesday.

That could well prove to be prophetic.