Welcome to Trade War 2.0
With Trump back in power, the US is once again focusing on “America First.” This time, the big push is toward reviving domestic manufacturing and reducing dependence on imports.
Back in 1990, manufacturing made up 17% of the US GDP. Today, it’s fallen below 10%. To reverse this, the US is hiking tariffs sharply.
What’s changing?
The average US import tariff is set to rise from 2.5% in 2024 to around 20% by April 9, 2025 (Source: US Govt Estimates). A new baseline tariff of 10% is being applied, but actual rates could go much higher depending on how trade deals evolve.
Tariffs to the Rescue?
The US is sitting on a massive debt pile — $36 trillion, up from $23 trillion in 2019. Interest payments alone now make up 17% of total government spending, more than what the US spends on defense.
(Source: US Treasury)
In the coming year, $9.3 trillion of debt will mature. Refinancing at current rates (around 4.5%) will raise interest costs by $86 billion — that’s more than current annual customs revenue.
So, boosting customs collections through tariffs is one way the government hopes to shrink the fiscal deficit. It might work, but only if tax cuts don’t offset these gains.
Is a Fed Pivot Coming?
Higher tariffs and supply chain disruption mean slower growth and possibly higher inflation.
Here’s what the data shows:
- US GDP could shrink by 0.5% to 1.5%
- Inflation estimates for Q4 2025 have jumped to 4.4%, up from 2.5% in February 2025 (Source: Fed and market research)
- Unemployment is ticking up
- Bond yields are dropping, indicating market fear
This mix of weak growth and high inflation — also known as stagflation — gives the Federal Reserve more reason to step in. Markets are now expecting four rate cuts of 25 basis points each this year.
(Source: Fed Funds Futures)
Lower Returns Ahead
With higher interest rates and global trade friction, companies may struggle to deliver strong returns.
Financing costs are rising. Tariffs are squeezing margins. Demand could weaken as prices rise across the supply chain.
All this points to lower return on invested capital (RoIC) and compressed valuation multiples in the years ahead.
What Should Indian Investors Do Now?
Here’s a practical approach:
1. Use Market Rallies to Restructure
If volatility spikes (like when the VIX hits 40 or more), expect short-term rebounds. Use these to:
- Exit stocks with high US exposure
- Reduce holdings in companies with low visibility or weak balance sheets
2. Shift Focus to India-Oriented Businesses
Look at companies focused on domestic demand and less exposed to global trade tensions. Promising sectors include:
- Travel and hospitality
- Healthcare (hospitals, diagnostics)
- Financial services
- Power and water infrastructure
- Consumer retail
- Electronics manufacturing (EMS)
- Import substitution plays
3. Watch Out for Dumping
Countries hit hard by US tariffs might offload surplus goods in other markets like India. Keep an eye on such trends, especially in sectors sensitive to global pricing.
China+1 Still Makes Sense, But It’s Complicated
Diversifying supply chains away from China is still relevant. But now, the US is also becoming an option for manufacturing — especially for firms selling directly to US clients.
India needs to stay competitive and improve its ease of doing business to attract such investments.
Conclusion: Stay Local, Stay Smart
We’re in a world where global trade is getting messier, growth is slowing, and protectionism is rising. In times like this, Indian investors should focus on domestic themes, pricing dislocations, and long-term value.
This is a time for smart positioning — not panic.
Sources: US Treasury, Federal Reserve, Fed Funds Futures, US Government Policy Briefs, Moneycontrol Research
Until then, Happy Trading!
Commodity Samachar Securities
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