Global trade is once again facing a potential storm as anxieties rise over anticipated tariffs, especially with the possible return of Donald Trump to the global stage. While tariffs are not inherently detrimental – they can, in theory, level the playing field between domestic and international goods – their misuse as blunt instruments in trade wars is a genuine concern. The current apprehension surrounding a tariff deluge might be slightly exaggerated, but it warrants a closer examination of the nuances. News source

Tariff Impact Not Always Decisive

It is crucial to remember that tariffs are not a novel phenomenon capable of single-handedly overturning global trade. The first Trump administration’s tariffs, for instance, led more to a rerouting of trade flows than complete reshoring. Global trade growth did slow to 1.4% in 2019 from 4.3% in 2018 post-tariff implementation, but the subsequent dramatic slump was largely pandemic-induced. Supply chain disruptions, rather than tariffs alone, have been the primary drag on global trade in recent times.

The narrative of tariffs as economic shocks leading to spiralling inflation, interest rates, and fiscal deficits might be somewhat overstated. While the long-term erosive effects of tariffs on productivity are undeniable, their immediate impact on global trade may be less catastrophic. As Marieke Bloom from ING rightly points out, deglobalisation’s consequences are more likely to manifest as a gradual decline in long-term productivity and overall economic prosperity, making everyone poorer in the long run.

Currency Wars Loom Large

The World Trade Organisation’s revised forecast of 2.7% global trade growth for 2024, potentially rising to 3% next year if Middle East tensions ease, highlights that factors beyond tariffs play a significant role. Indeed, wars pose a more immediate threat to trade by disrupting the safe passage of goods. Historically, countries targeted by tariffs, particularly China, have resorted to weakening their currencies as a counter-strategy. A depreciated renminbi could enhance China’s export competitiveness, a tactic likely to be revisited. Many emerging market currencies, including the Indian rupee, are already exhibiting a downward trend.

The repercussions of tariffs might extend beyond trade itself, causing collateral damage in other markets. Exchange rate volatility is anticipated as emerging economies strive to maintain export competitiveness. Latin American economies are also feeling the pressure, with the Mexican peso nearing two-year lows. While a weaker renminbi might suit China’s slowing economy, Beijing is actively seeking ways to mitigate the anticipated tariff impact. Their growing influence in Latin America, juxtaposed with perceived waning US influence, is noteworthy in this context.

Business Resilience Shines

Interestingly, even amidst these global economic currents, companies like Walmart are demonstrating remarkable resilience. Walmart’s Q3 FY2025 results reveal a robust 5.5% revenue increase and a staggering 910.4% surge in net income. This performance, driven by strong US sales and a 27% jump in global e-commerce, underscores the ability of businesses to thrive even in uncertain times. Walmart’s strategic focus on ‘everyday low prices’ and efficient inventory management appears to be paying dividends, showcasing that adaptability and strong fundamentals can buffer against global economic headwinds.

Prime Minister Modi’s recent visits to Nigeria, Brazil, and Guyana signal India’s proactive approach to diversifying trade partners amidst global shifts. Energy security, a critical component of global trade, is clearly a priority for India. The Reserve Bank of India’s (RBI) currency intervention policy, aimed at managing volatility, reflects a cautious approach to navigating these turbulent times. While some criticise the RBI’s stance as potentially hindering rupee competitiveness, the central bank maintains that its forex interventions are proportionate to India’s growing economy and market size.

Tariffs, while a slow-acting impediment to global trade benefits, are perhaps less immediately disruptive than the potential currency wars they might trigger. Currency devaluation can swiftly spill over into other markets via capital flows, posing fresh challenges for emerging economies already grappling with persistent inflation. Trump’s tariffs may not precipitate a sharp global trade downturn, but they are likely to compel policymakers to opt for short-term fixes and damage control measures.

Will these short-term fixes suffice, or are we heading towards a prolonged period of economic adjustments? The next few quarters will be crucial in observing how these trade and currency dynamics unfold and impact global markets.