While President Trump announced some unprecedented Tariff globally against all imports from rest of the world but people are only expecting the roll back of tariff either through Trade negotiation or voluntarily by US considering the interest of Country.
However, it is important to note that the seed for Trade war has started which will be prolonged.
What does reciprocal tariff stands for US and Global world?
The tariff imposed by US on rest of the world is a countermeasure to put the exporting country on its knees and pay the compensation for unjustified Countervailing duty imposed on US exports. If such countervailing measures are imposed by the US on the rest of the world then it can result in manufacturing of such goods in USA and create a robust economy. While the focus is more related to “MAGA”(Make America Great Again), but at the cost of Inflation which world is anticipating.
Hidden Interpretation for rest of the World
Before starting with the interpretation let us take an example:
Country X purchases goods from country Y for $100 where Country X does not impose Custom Duty or tariff while country Y purchases goods from Country X of 50$ wherein country X charges 100% custom duty on Country Y which makes cost of Purchase at $100.
X Purchases for $100 Y
Tariff:0%
Ultimate Cost of Purchase=$100
Y Purchases for $50 X
Tariff:100%
Ultimate Cost of Purchase=$100 (50 Basic +50 Taxes)
Proposal
X Purchases for $100 Y
Tariff:50%
Ultimate Cost of Purchase=$150
This goes on decades and Country X citizens in the name of Country Y goods got looted while the Government of Country X minted money to reduce fiscal deficit. One day Country Y imposed tariff @50 % which made cost of Purchase of Country X at 150$
Now what are the options left for Country X
Retaliate
Retaliation is nothing but provoking enemy to take further action. This is endless process and can also result in Inflation to Financial crisis to actual war. Big countries like US and China are elephant whose impact can cause chaos for rest of the world.
Suppose at present if ultimate tariff on Chinese Exports is 54%(Existing plus Increased) and China devalues Yuan then it will cause deflationary wave in rest of the world and ultimately increasing the risk f currency crisis while causing chaos in global currency market.
These heavy steps are nothing but protection of capital controls against the rest of the world. Things become more complex and inflation wave kills ultimately citizens. Since the Banks are more exposed to currency markets so derivative positions wind up creates systematic risk due to over leveraged trade and its ultimate winding up.
Renegotiate
The other option for rest of the world is to renegotiate against tariff and reduce the import tariff on Goods imported from US and do not disturb supply chain chaos.
In this case the ultimately citizens will be happy while the Central Banks and Government will be unhappy. It is estimated that the ultimate benefit to US against this tariff is $400 Billion Dollar which either consumers will pay if retaliation goes on or which the Government will loose by widening its scope of fiscal deficit by forgoing the ultimate duties on imported goods from China. The countries which have overdependency on US exports have ultimate currency chaos in this measure as the liquidity of central banks dries up and inflates the domestic currency to look more inflated. Taking the cumulative impact of this the value of US dollar increases by resulting in $400 Billion to the rest of the world in the form of Taxes
Conclusion
The times where China is in Deflationary mode while Japan is in Inflationary mode, the tariffs of US has ultimately made Global world aligned in same Direction i.e Deflation to Stagflation path whose images will be shown by Central Banks in upcoming future. The confusion still persists with the countries to either let it go or retaliate or renegotiate. This all depends on the overall dependency of Countries on US exports. But off course the main looser side can be Asia while the winning side will be Latin America.
At the end one can say the World likes Inflation which makes Debts smaller and people forgot the loss of purchasing power in the name of inflated growth.
It is at the end one realises that not only his/her income has increased but the cost of Purchase has also increased multifold.The winner in all the cases will be Government and Central Banks.
Disclosure: This article is for information only and should not be construed as a financial advice.
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