Stock market crash & tariff war: Recession fears overblown? 'Make in India' could be the winner | Opinion

By Shishu Ranjan: The global stock market crash on Monday is being talked as start of another recession by several economist and financial experts. The stock market in India reduced by nearly 4%, UK by nearly 5%, Germany by nearly 6%, Japan by nearly 8% and Hong Kong by 13%. This global trend in stock values turning bearish is triggered by imposition of steep reciprocal tariffs by USA President Donald Trump, who has been vocal about using this method in order to achieve - one, reduce trade deficit with the trading partners; two, improve fiscal health of US economy; and three, nudging domestic or global firms to shift their production units into USA in order to fulfil his commitment to voters on employment front. The intent and message should not be lost as a worker union leader from Detroit was also present at the event of tariff announcements.

It is true that the stock markets across the globe are reacting to the uncertainties amid speculative trade wars that may start with US trading partners announcing retaliatory tariffs. China has already jumped in and has retaliated with matching tariff rate of 34% on all US products. Worst part of this tariff war, it is still early to speculate how long this would continue as the rollback is not only dependent on economic rationale, but also involves domestic political compulsions attached to election theatrics. This increases the uncertainties on the world trade and its impact on overall economy in the near and medium term. However, terming this as a trigger point for another financial recession is a bit too harsh as well as too early for various reasons, which are subsequently explained.

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Is This the Start of Another Recession?

First, prices in stock markets are not a true representative of health of overall economy and therefore, its fluctuations many times are based on speculative or expected trends, which may not hold true even in near future. For example, Covid19 severely impacted economies across the globe including India. The Indian stocks not only recovered within few months, but kept on breaking records of all-time highs for next 5 years. Stocks prices, especially in India are in bearish model since September 2024, when it reached 85,978 to be all time high, and has shed nearly 15% since then. The bearish behavior is attributed to a number of factors such as overvaluation of Indian stocks, rate cut by Federal Reserve Bank, and sharp decline in Q3’24 growth rate. At most, the market may be in a wait and watch mode for few weeks before adjusting rationale expectations in investment decisions.

Tariff War Could Trigger Realignment in Global Trade

Second, the tariffs at best can slow down the rate of economic growth due to lower world trade. The total effect of higher tariffs on consumption may turn out to be negligible in medium term as there will be renewed efforts to use substitute products that may be produced domestically or imported from alternate supplying nation. The difference in tariff rates levied has provided an opportunity for countries to increase their trade values and volumes if they are able to leverage the comparative advantage. For example, the tariff rates imposed on India and Bangladesh stands at 27% and 37%, respectively which provides an opportunity to Indian textile sector to grow its share as apparel prices produced in Bangladesh would be more expansive than Indian for US consumers.

Sensitive Sectors Exempted: A Calculated US Strategy

Third, USA has shown sensibility in selecting the sectors to levy reciprocal tariffs and has exempted the strategic or important industries with inelastic demand curve out of this reciprocal tariff list. Indian Pharma industry and Taiwanese Semiconductor Chips are few important examples where USA does not see viable substitute available at competitive price and its production can’t be shifted to US territories with appropriate economies of scale in short or medium term. Therefore, contraction or disruption in total global production is not expected as the sectors where production is concentrated and can’t be shifted in few years, are not likely to be under tariff war.

Possible Outcomes for the US Economy

Fourth, there could be two situations within the US economy. One, American trade partners relents and reduces the tariff barrier which would help in expanding overall global economy size with more consumption, even at the same income level. Two, American trading partners don’t increase the tariffs on USA products and that helps US economy by improving their trade deficit as well as fiscal deficit. An improving US economy health is a good sign for global economy. Third, all countries trading with USA are involved in tariff war. In this scenario, the global economy would be led by growth in economy which can reduce production cost by either improvising on production technology through innovation or leveraging cheap production of factors to create comparative advantage in world trade. However, the US consumers would be the real losers as they end up paying higher prices for the same product and there will be an inflation risk. However, US government will still have higher revenue from import tariff, which will improve their fiscal health as well as will incentivize industry to invest in US for creating production capabilities, that caters to President political agenda.

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Make in India: A Rare Opportunity in Global Chaos

Lastly, assuming India not pressing on the tariff war which is also reflected from Indian government intent to finalize its trade deal with USA as soon as possible, the ongoing trade war would help Indian economy in the medium and long run as more and more global firms would like to have their production unit shifted to India in order to leverage cheap labor and high skilled human resource. This would be a windfall opportunity for ‘Make in India’ scheme that was aimed to make India as a second factory for the world. This would help accelerating the Indian economy growth rate by increase in investment and export, even if domestic consumptions remain at the same level.

To summarize, the risk of tariff war resulting in global recession is an exasperated claim to start with. The winner of this trade war would be the country which has capability to reduce the production cost through innovation and improvement in the production technology, a world class infrastructure to attract foreign investment and a stable and democratic political environment. Without any doubt, India ticks all these checklists and should take this as an opportunity rather than threat to its growth trajectory. As far as US economy is concerned, only time can judge if the tariffs are able to achieve multiple targets set by President Trump in his remaining years in office. 

(The writer is serving as Director in Risk Management department, Barclays India and views expressed here are personal.)