The ongoing trade war between the US and China has become a serious concern for investors and traders globally. The US recently increased tariffs on Chinese imports to 104%, which is a significant increase. In response, China has also increased trade tariffs on US imports, which officially started a bilateral trade war between the two countries.
Though it’s not related to the Indian market in any direct way, we cannot overlook the fact that a slowdown in global trade impacts global growth, which includes the growth of every country. So, in some way, the consequences of this trade war can impact India as well. But a lot og it also depends on how we react to the situation and, even more than that, how the US president takes it forward.
For now, let us have a deep look at what the current situation looks like and how you should think about this trade war:
Understanding The Current Trade War Situation
As US President Donald Trump imposed over 100% tariffs Chinese, a tariff war between the US and China has started. In response to this, China says that it will also increase tariffs on American goods from 34% to 84%. The increase in trade tariffs can impact other countries and their economies as well. Both the US and China contribute to a significant percentage of the global economy.
Last year, the trade of goods between the two countries was worth around $585 billion. An interesting fact here is that the US imported more from China than China imported from the US. This resulted in the US running a considerable trade deficit with China, i.e., around $295 billion.
In 2024, the biggest category of imports from China to the US included smartphones, contributing to 9% of the total imports. China manufactures a large number of smartphones for US companies. The recent decline in Apple’s market value (which is a US-based multinational company) is also caused by the increase in US tariffs on Chinese imports.
How to Look at Tariffs and How Not To?
Now, with the ongoing US-China trade war, a lot of questions may come to your mind about how this trade tariff war can impact other countries, how it affects the markets, etc. Let’s have a detailed look at different aspects of this trade war and understand how to look at it and how not to:
Interpreting The Situation: How Not to Think About The Trade War?
In such a time, it’s common to think that ‘tariffs will be rolled back,’ but who knows? It’s quite obvious that no president would want to hurt their own economy. Maybe it’s just a scare tactic, and maybe not. The stock market will not keep waiting for these hopes to come true. If people panic at the wrong time, these losses might become permanent. So, the right asset allocation is something very important right now.
If you think that India is quite safe because ‘India’s custom tariffs are at 26%, which is quite low,’ you might be wrong. When global trade is impacted and slowed, it impacts the overall growth of the trade and not just one specific sector.
Another way to look at the situation can be – ““India’s exports to US is only 2% of India’s GDP and therefore we are unlikely to see a large impact.” But is that really true? This bilateral war can even become multilateral. Now that China cannot send goods to the US at the same prices after 104% tariffs are imposed, it will likely send goods to other countries. In return, other countries might also increase import tariffs, resulting in a global trade war.
How to Think About the Trade War?
When thinking about the ongoing US-China trade war, we can consider three scenarios, which as as follows:
- The Best Case Scenario: The best case and the strongest type of damage control would be if Trump announces a temporary moratorium or reverses trade tariffs to pre-April 2nd levels. This can result in a short-term positive impact on the markets.
- Most Likely Case Scenario: What seems to be most likely now is that Trump agrees to bilateral negotiations. This will open doors to a wide range of winners and losers, resulting in market volatility.
- Worst Case Scenario: The worst case would be if something like a multilateral trader war happens. This can happen if other countries retaliate, not just against the US, but against all countries. If this scenario turns out to be true, it may impact global and Indian growth negatively.
Concluding Thoughts
As of now, nothing much can be said about what this trade war will result in. As explained above, the consequences depend on further decisions by the US President. For now, what investors need to keep in mind is asset allocation and the right risk management strategies. If you are feeling lost or confused as a stock market investor, you can consider talking to your mentors.
The Conviction Club by Strategic Alpha is a large community of investors and mentors who share their learnings and experiences. You can become a part of this club to learn trading strategies, risk management tactics and receive one-on-one guidance from experienced mentors. For any further information, get in touch with us now!
FAQs
- What are tariffs, and how do they work?
Ans. Tariffs are import duties or taxes imposed by a government on imports from a particular country. It is usually a fixed percentage of the good’s value that is being imported. - How do tariffs affect consumers?
Ans. The higher the tariffs on imported goods, the higher would be its price for the end consumers. So, the tariffs directly impact the market prices of a product or service. - Why do countries impose tariffs during a trade war?
Ans. Countries impose tariffs on foreign imports to protect/promote domestic industries, to generate higher revenue, or for political reasons. - Do tariffs help or hurt the economy?
Ans. Whether or not tariffs will hurt an economy depends very much on other factors as well. However, in general, tariffs can impact the economy and consumers negatively. - How can investors protect themselves during a trade war?
Ans. To protect themselves during a trade war, investors can consider the following tips:
- Focus on the right asset allocation.
- Don’t panic at the wrong time.
- Avoid trying to predict the future of tariffs and the market.
- Focus on risk management.
