Contours of US tariff shock

The US tariff shock has elicited much analysis and commentary.

- RENU KOHLI

Summarily, this posits slower growth through the trade channel, with indeterminate effects upon inflation, subject to trade diversion and export substitution. A majority see limited growth damage because of a relatively smaller export share and the superior shield of domestic demand.

Optimism has also arisen because of opportune openings from the dislocation of Chinese exports to the US, with whom a bilateral deal expects to occupy some of the vacated spaces. The confidence and financial channels, the more immediate and powerful transmitters of the tariff shock, have attracted limited attention. The attempt here is to broaden the analytical framework to all three—trade, financial, and confidence channels—for evaluating the potential macroeconomic consequences for India.

The uncertain layers are many. Trade policy uncertainty, which escalated months before "Liberation Day" in early April, has soared and spilled to financial markets, raising contagion risks. It continues to mount each day with more imponderables like counter-retaliations, especially by China, and ultimate trade deals among the three major demand blocs, including the European Union (EU). Continuous US policy shifts create endless speculation about the endgame. Rapid morphing of the trade war to US bond and currency markets with hefty rise in yields and the unpredicted fall of the dollar has damaged credibility of the reserve issuer and anchor of the international monetary and financial system. Crisis risks have risen. Trade policy uncertainty is no longer just that, but larger. There is a broader loss of confidence with a trust deficit. The uncertainty can only be described as infinite!