US Tariffs Rattle Global Markets, Strain Economies

Tariffs Explained: Protection at a Price

A tariff is a tax imposed by a government on imported goods and, occasionally, on exported goods. Tariffs are typically used to make foreign products more expensive, giving an advantage to domestic industries by making local products relatively cheaper and more competitive.

However, tariffs come with trade-offs. While they can protect domestic industries in the short run, they often lead to higher prices for consumers and potential retaliation from trading partners. Countries affected by tariffs may impose their own counter-tariffs on exports from the tariff-imposing nation, escalating into trade wars. Such conflicts can disrupt global supply chains, reduce international trade volumes, and increase economic uncertainty.

India, China Among Key Targets as U.S. Tariff War Escalates

On April 3, 2025, U.S. President Donald Trump announced a sweeping set of tariffs under the banner of the “Liberation Day” trade policy, marking a significant shift in the country’s approach to global trade. Effective April 5, a blanket 10% tariff has been imposed on all imports into the United States. In addition, countries with large trade surpluses with the U.S. are facing steeper tariffs. China, for example, is now subject to a cumulative tariff rate of 54%, including a newly added 34% duty on top of existing levies. India has also been directly impacted, with a 26% tariff now applied to its exports to the U.S. Other countries affected include Vietnam, Cambodia, Sri Lanka, Taiwan, and the European Union, with tariffs ranging from 20% to 49%. Moreover, a separate 25% tariff has been imposed specifically on all imported automobiles.

In retaliation, China announced a 34% tariff on all imports from the U.S., effective April 10, 2025, mirroring the rate imposed by the U.S. on Chinese goods. China also introduced export restrictions on key rare materials, escalating tensions further. 

An immediate consequence of the new tariffs has been a sharp correction in the stock markets. Indian equities have come under significant pressure, with both the benchmark Nifty 50 and the broader Nifty 500 index declining by nearly 6% over the past five trading sessions.

High Tariffs, Low Flexibility: India’s Growing Trade Challenge

For India, the newly imposed 26% tariff marks a substantial increase from the previous weighted average of 3.3%, effectively raising the average tariff rate by nearly eight times. While this rate is lower than that imposed on some other emerging Asian economies, it still presents significant challenges for Indian exporters.

When global trade slows down—meaning countries import and export less—it hits emerging markets like India the hardest. Even a small 1% drop in global trade can reduce average income in these countries by 2–6% and lower productivity. A report by Systematix warns that if all G20 countries raise import tariffs by 15%, it could trigger a global recession, shrink world trade by 22%, and reduce global economic output by 3%.

India’s economy is closely tied to global trade. Between 2008 and 2019, every 1% rise or fall in global trade growth affected India’s GDP growth by nearly 1.8%. For example, during the U.S.-China tariff war in 2019, India’s growth dropped to 3.5% from an earlier 6.8%.

Rising protectionism—where countries raise tariffs and reduce trade—can slow down private investment, job creation, household spending, and lead to more debt for both families and the government.

Indian businesses also feel the pressure. When global trade slows by 1%, companies’ sales can fall by 1–1.2%. In contrast, a 1% rise in tariffs may slightly boost sales (by 0.5%) in protected industries. However, higher import costs hurt profits—earnings can drop by 2% with a 1% fall in trade openness, and by 1.3% with a 1% rise in tariffs.

India’s ability to mount a strong government response is limited this time. Sluggish tax collections and a commitment to fiscal consolidation constrain the government’s spending capacity, pushing it to prioritize day-to-day expenses over long-term capital investments. This shifts the policy burden onto the Reserve Bank of India (RBI), which may respond with liquidity support and interest rate cuts. However, without a revival in global trade and given the limited fiscal space, monetary policy alone may not be sufficient to cushion the economic blow.

On the external front, the newly announced tariffs represent a potential peak, leaving scope for negotiations. India is currently working toward a Bilateral Trade Agreement (BTA) with the U.S., expected by late 2025. Increased imports of defense equipment and energy from the U.S. could be used as bargaining tools. At the same time, higher tariffs imposed on China (54%), Vietnam (46%), and Bangladesh (37%) could present an opportunity for India to capture a greater share of U.S. demand in sectors like textiles, footwear, and steel—provided domestic capacity can scale up to meet this potential shift.

Final Thought

This rising wave of protectionism isn’t just about trade—it has far-reaching effects on incomes, jobs, company profits, and even the tools available to policymakers. For India, which is highly sensitive to global trade shifts and has limited fiscal room to respond, the stakes are especially high. The coming quarters will test the country’s ability to navigate these headwinds through smart and targeted domestic measures.

In this context, investors should adopt a cautious yet balanced approach. It’s a good time to review exposure to export-heavy sectors and favor companies that are more insulated from global trade shocks—particularly those driven by domestic demand or operating in essential services like healthcare, FMCG, and utilities.

Quality matters more than ever: Focus on fundamentally strong businesses with robust balance sheets, low reliance on imported inputs, and consistent cash flows. Staying diversified and avoiding concentrated bets in vulnerable sectors can also help cushion volatility.

Finally, patience and a long-term view are key. While short-term disruptions may persist, well-managed companies and a calibrated policy response could provide attractive opportunities for investors who stay the course.

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