The much-awaited Liberation Day arrived two days ago, and the scale of tariffs imposed globally has taken many by surprise. The impact of these measures—both direct and indirect—is complex and not easily decipherable. They ripple across industries, countries, and supply chains. For instance, a company may not export directly to the USA but could be supplying inputs to another that does, thereby feeling the effects of reduced demand.
After analyzing various commentaries, one conclusion emerges: this is a high-risk gambit aimed at addressing the USA’s twin deficits, which have spun out of control. The first is the federal government debt, now at $36 trillion—approaching 130% of the USA’s GDP. To understand the gravity, consider a developed country growing at 2–3% in real terms and 4–6% nominally. Even assuming a 4.5% average cost of debt, annual interest payments could reach $1.6 trillion—potentially exceeding nominal GDP growth. This is clearly unsustainable. The fiscal deficit stands at 6% of GDP and must fall below 4% for the debt-to-GDP ratio to begin declining. The longer this is delayed, the worse the ratio becomes.
On the trade front, the USA imports around $3.2 trillion annually and runs a trade deficit close to $1.4 trillion. This, too, is unsustainable, propped up primarily by the US dollar’s status as the global reserve currency. With an average 25% tariff, the USA could theoretically collect up to $500 billion in import duties—after accounting for exemptions. However, this assumes the status quo holds. In reality, demand may collapse due to price spikes, and many imports may become unviable. Some will be replaced by domestic sourcing. A more realistic estimate for additional tax revenues might lie in the range of $200 to $300 billion.
Over the past four decades, manufacturing—especially of consumer goods—has shifted from the USA to lower-cost countries. With these new tariffs, the US administration is attempting to make “Made in America” viable again. Given the extraordinary level of protection now in place, domestic production could indeed become competitive, spurring economic activity and employment. But the cost is significant. For instance, a factory worker making shoes for Nike in Vietnam earns about $300 per month; in the USA, that’s barely two days’ pay at minimum wage. Even if manufacturing returns, the consumer will bear the burden through higher prices. This comes at a time when consumers, post-Covid, have already faced significant inflation.
Interestingly, it’s possible that other countries will not follow suit with retaliatory duties, thereby experiencing relatively lower inflation. Since the USA accounts for nearly 25% of global GDP, this divergence could create a paradox: products from major US multinationals may end up more expensive in the domestic market than overseas, given that much of their production is still offshore.
Manufacturing ecosystems, however, take years—even decades—to build. A US manufacturing revival won’t happen overnight. If these measures lead to recessionary pressures, companies will hesitate to invest significantly. Consider India’s own PLI-funded “Make in India” program—it has barely moved the needle on self-sufficiency.
Where the USA could benefit is in the weakening of the US dollar—which, fundamentally, should occur. A country with such large deficits should not have a strong currency policy. A weaker dollar could reduce the trade deficit more effectively than tariffs. However, a weaker dollar would also dampen overseas demand for US Treasuries—vital to funding the swelling debt.
Globally, the impact of these measures is net negative. Everyone gets hurt, though the severity varies. How each country responds will be crucial. For India, with its largely domestic-driven economy, this could be an opportunity. The RBI and the Monetary Policy Committee can consider injecting liquidity and sharply cutting rates to stimulate growth. The rupee’s weakness is less of a concern given the dollar’s relative decline.
Then there’s the issue of retaliation. As of now, China has responded with 34% tariffs on US imports. Many of these—such as soybeans and corn—are politically sensitive, affecting farmers’ incomes. To offset this, the US government may resort to subsidies, further dragging down export volumes and growth.
Asset prices will also be impacted. Firstly, rising risk premiums may lead to lower equity valuations in the near term. Secondly, there’s the actual impact on corporate earnings. On the flip side, falling bond yields and lower risk-free rates could provide some support.
In the Indian equity space, technology firms are likely to be hit—indirectly—due to global growth concerns. Pharma has been exempted for now but remains at risk. While some sectors haven’t been disproportionately affected compared to peers in other countries, a 27% tariff is significant in absolute terms. This could squeeze demand and margins. That said, several large domestic sectors—financials, cement, infrastructure, capital goods, and autos—can still perform well if backed by supportive policies from the government and RBI.
In summary, the current US administration’s tariff war is a high-stakes attempt to fix unsustainable deficits. Since the primary goal is to reduce the fiscal deficit, it’s unlikely that negotiations will lead to tariff rollbacks unless domestic pressure builds—as it might, if stagflation takes hold. It’s difficult to compile an exhaustive list of all potential consequences at this early stage. We will likely gain more clarity in the coming weeks.
Once the dust settles, capital may begin shifting away from US assets. Emerging markets with low exposure to US trade—relative to their GDP—could benefit. For India, this could be a golden opportunity for the government and RBI to leverage falling crude and commodity prices and launch aggressive expansionary policies. There may be no better time than now.