Markets Flip Flop as They Settle Down for Extended Trade Wars
Investor uncertainty and concern about America's economy is getting transferred to its bond market
On Episode 556 of The Core Report, financial journalist Govindraj Ethiraj talks to Priyanka Kishore, Director and Principal Economist at Asia Decoded.
SHOW NOTES
(00:00) The Take
(07:14) Markets flip flop as they settle down for extended trade wars.
(09:35) Gold prices shoot to fresh highs, dollar dips again.
(11:35) Crude oil prices edge up on US threats to Iran.
(11:49) Asia and the Trade Wars
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday, the 14th of April, and this is Govindraj Ethiraj Headquarters and broadcasting and streaming from Mumbai, India's financial capital. It is a market holiday today, but we are, as you can see, out with an addition.
The Take: Why Celebrating A Tariff Advantage Is Dangerous
U.S. President Donald Trump on Friday exempted smartphones, computers, and other tech devices and components from his reciprocal tariffs. The U.S. Customs and Border Protection Guidance issued late Friday evening comes on the heels of that 145% tariff on products from China, a move that would have crippled companies like Apple, which makes iPhones and many of its products in China. So the guidance includes exclusions for other electronic devices and components, including semiconductors, solar cells, flat panel, TV displays, flash drives, and memory cards.
The White House said on Saturday the exemptions were made because Trump wants to ensure that companies have time to move production to the United States. Excellent news. Actually, maybe not.
None of this obviously changes the uncertainty that has now gripped global businesses and investors and is keeping everyone from small entrepreneurs to Fortune 100 business leaders worldwide uneasy and tossing and turning in their beds. And that includes India and everyone in it, by the way, which is why some of our early celebrations around tariff twists should concern us. When the first round of reciprocal tariffs was announced two weeks ago, the government and apparel industry, for one, pointed out that India was being hit with a 26% tariff, while close competitors like China and Vietnam were being hit with higher rates.
But when it comes to the United States, reciprocal tariffs on Bangladesh stood at 37% compared to India's 26%. Meanwhile, Sri Lanka, another major garment-exporting nation, faced tariffs of 44%. Needless to say, we appear to have an advantage in a duty structure that even the sharpest economists have struggled to explain or justify.
And when I say duty structure, I mean the U.S. tariff duty structure. The electronics industry put out a similar statement yesterday. The India Cellular and Electronics Association rightly pointed out that imports of smartphones and laptops to the United States from China will still be hit with a 20% tariff even after those new exemptions.
On the other hand, India and Vietnam will continue to enjoy zero tariffs on smartphones, laptops, and tablets exported to the U.S. The world being what it is, tariffs exist at various borders, some apparent, some not, at least to us. If the U.S. kept tariffs low for many years, it did so to make its industry globally competitive, and arguably it has. It's not clear how the current strategy will change all of that, but I'll come to that, or at least part of that in a bit.
Now take this example which I've heard cited before. Bangladesh enjoys a 9-12% preferential tariff advantage on its exports to the European Union, which makes a big difference because some 60% or more of its apparel exports head to the EU, according to some estimates. Now this advantage is offered to Bangladesh as the least developed country.
However, as things stand, it is set to graduate to developing nation status next year. But Bangladesh has won a great spirit and will now graduate only in 2029, meaning it will continue to enjoy tariff benefits on exports to the EU, according to many reports. Now, what have Indian apparel companies done about this whole competitive advantage that Bangladesh has?
Well, they've set up factories in Bangladesh, though tariffs are not the only reason for doing so because Bangladesh does have a strong ecosystem when it comes to low-cost, high-scale apparel production. Speaking of ecosystems, The Wall Street Journal recently carried an interesting insight from a professor at Arizona State University who worked on organisational development for Apple in China. It took China 40 years to build a complex manufacturing supply chain.
We used to have that. It's a disaster that we let it go, he said. According to him, over time, Apple had built an ecosystem of more than 1,000 suppliers in China.
It taught them how to operate more efficiently, so they competed with each other and driving down Apple costs. Apple's manufacturing partner, Foxconn, built a compound so large in Zhengzhou that it's known as iPhone City. The professor also told Wall Street Journal that when he looked for alternatives, other countries didn't offer the same promise as manufacturing hubs.
India did show some promise with its vast workforce, but things moved slowly. And that's why Apple focused most of its Foxconn investments near Chennai, which it may have found most suited to its objectives. The shift has begun.
Apple assembled about $22 billion worth of phones in India in the 12 months ending March, increasing production by nearly 60% year on year, according to Bloomberg. India now accounts for about 20% or one in five of Apple's global iPhone output. And these are likely factory gate values and not retail, according to that report.
But there's nothing to say that the current deadline for American companies to shift manufacturing back to the US won't be moved up maybe next month or even next week. There was no clear timeline in Friday's announcement of pushing those tariffs. So where would that leave India?
The reason China hasn't blinked in this ongoing trade war is because it knows what it takes to build real manufacturing capacity. India has its own strengths and is in a reasonably good negotiating position with the United States. We can offer to open up, we can afford to open up select sectors for cheaper imports, even as we hold firm on sensitive areas like agriculture and dairy.
But the bigger problem is assuming even temporarily that India can score easy wins like Bangladesh is doing or has been doing for a while. Thanks to tariff differentials. Now, this is unlikely to work in the real world, especially when other major importers like the European Union apply uniform tariff treatment to all countries or many countries.
So India must compete evenly with China and others in those markets. The US is a major importer, but it's not the only one. As the Corp pointed out last week, India is yet to articulate a clear strategy for navigating the shifting global trade landscape, something that could have been laid out as early as the union budget speed as on February 1st, 2025.
The absence of a formal roadmap suggests that we are currently banking on short-term tariff gains as a policy approach. Now, this is not to diminish the back-channel discussions between trade officials in Washington and New Delhi. These conversations are important and will likely yield results in coming months.
But if India wants to hold its ground in global trade, it must focus on reducing factor costs and becoming genuinely competitive and productive, whether in electronics, apparel, or any other sector. And at the least, lay out very comprehensive roadmaps and do so formally. Ease of doing business is important.
Cost of doing business is critical. Bangladesh, as a smaller economy, finds it useful to maintain its least developed country status, at least for the sake of tariff benefits. India, on a very different economic trajectory, has no choice but to fight this battle on the terms set by the biggest and perhaps the baddest players in the game.
And that brings us to the top stories and themes for the day.
The stock markets flip-flop as they settle down for extended trade wars.
Gold prices shoot to fresh highs.
The dollar dips again. Crude oil prices edge up on U.S. threats to Iran.
And what does the tariff trade war mean to Asia as seen from within Asia?
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The Indian markets are closed today because of a bank holiday, and we will have to wait till tomorrow to see where things land and whether Trump's latest reversal and gift to tech companies like Apple will have a positive impact on Wall Street when it opens on Monday morning. The answer is most likely it should, but if you've not noticed already, all the investor uncertainty and concern about America's economy is getting transferred to its bond market and the currency itself, both of which are flashing alarm bells. The bond market sell-off, thanks to Trump's trade war, has already sent 10-year treasury yields to their biggest weekly surge in over two decades as investors pulled back from U.S. assets according to a Bloomberg report. The scale of the move, with the benchmarks rate jumping a half a percentage point over the past five days to 4.49%, threatens to deal another blow to the U.S. economy by pushing up borrowing costs more broadly, according to that report, which also said that treasury status as the world's safe haven is doubtful, or rather, the scale of the move, with the benchmarks rate jumping a half a percentage point over the past five days to 4.49%, threatens to deal another blow to the U.S. economy by pushing up borrowing costs more broadly. The recent developments have also cast doubt on treasury status as the world's safe haven as they fell along with the stock market for much of the week, sending investors into other assets like the Swiss franc, gold, which we'll come to, and the Japanese yen. A chief fixed-income strategist at Charles Schwab told Bloomberg that the issue facing the markets is a loss of confidence in U.S. policy. The abrupt changes in tariff policy have caused leverage trades to come undone and sent buyers to the sidelines. The drop in treasury prices was also accompanied by a drop in the dollar, which is obviously an indication that overseas investors are pulling back from the U.S. Meanwhile, foreign investors have sold close to $4 billion in India's equity markets in April. They bought a similar amount in just the last week of March, incidentally.
So it was gonna be a rollercoaster of a week in any case. For 2025 as a whole, foreign investors are still negative, and it stands at about $17 billion for 2025. That's negative.
What matters now is not the past, but the future. Capital will desperately seek safety and growth. Without overthinking this, it's clear that the parameters for both are now shifting.
Where does India stand in this? Well, I'm just leaving it as a question for now.
Gold Hits A Fresh Record
Gold prices shot past the $3,200 mark on Friday thanks to the escalating trade war, which in turn could mean tough times for the world's two largest economies. Spot gold hit a record high of $3,245 an ounce on Friday and has been up over 6% last week. An analyst told Reuters that gold is clearly seen as the favoured safe haven asset in a world upended by Trump's trade war.
The U.S. dollar is depreciated and U.S. treasuries are selling off hard as faith in the U.S. as a reliable trading partner has diminished. Meanwhile, the dollar fell against its peers, which also makes dollar-priced bullion cheaper for overseas buyers. For example, the euro, which has strengthened against the dollar.
So the Indian rupee has logged its worst week since February amidst all this tariff volatility, but the dollar also fell. The rupee closed out the week about 0.9% weaker, though it ended up 0.7% to Rs. 86.04 per U.S. dollar on Friday, according to Reuters. The dollar sentiment is so weak that the offshore Chinese yuan actually rose, though marginally, despite that escalation in the China-U.S. trade war. Reuters said that the dollar index was down 0.7% on Friday after touching a three-year low as trade policy shifts have ignited fears of a U.S. recession and shaken confidence in U.S. assets. The dollar is also lost out against the euro and safe-haven currencies like Japanese yen and Swiss franc, as we mentioned today.
MUFG Bank said in a note quoted by Reuters that in this environment, it's hard to see any near-term revival in U.S. dollar confidence.
Crude Edges Up
Crude oil prices rose after U.S. Energy Secretary Chris Wright said the United States could end Iran's oil exports as part of an effort to bring the Islamic Republic to terms over its nuclear programme. Brent crude futures were holding around $64.76 a barrel or just under $65, and markets will now have to weigh between geopolitical risk, which has obviously cropped up again, and on the table, thanks to this move, versus the prospect of lower demand and higher supply from OPEC-plus countries, among others.
Asia And The Trade Wars
The trade wars we are seeing to a large extent are between the East and the West. Goods are manufactured in Asia and sent all over the world, including, of course, America. Even countries like Vietnam and Mexico are being targeted for housing Chinese manufacturing who moved production lines there precisely to avoid this situation.
So if the tariff war prolongs in whatever shape and form on a particular day, what could all of this do to trade flows within Asia? What kind of reordering could we see? I reached out to Priyanka Kishore, our Director and Principal Economist at Singapore-based Asia Decoded, and I began by asking her how she was reading the situation both within Asia and between Asia and other economies.
INTERVIEW TRANSCRIPT
Priyanka Kishore: The topmost thing, and I think it's the word of the year, is uncertainty, because whether you get a 90-day pause or you get liberation day tariffs, the thing is you just don't know how to plan beyond that period. Is there any guarantee that there even will be a 90-day pause? We've had comments overnight that some companies, not countries, companies might even get exemption from the 10% tariff rate.
And so that makes it very difficult for businesses to go about their work. They don't know if their orders stand. They don't know how their import duties are going to get impacted.
You don't know if suddenly there'll be a focus on the content, the Chinese content of your products, as opposed to just the finished goods being hit by tariffs at this point of time. So there's a general question mark It's true for businesses. It's true for politicians.
Prime Minister Lawrence Wong of Singapore put it across pretty succinctly in his recent address. And that just is sort of paralysing the situation out here, I would say.
Govindraj Ethiraj: So if I were to now ask you about competitive advantage, you know, a lot of manufacturing takes place in Asia, East Asia, and moves towards the West. I mean, that's how it's been in the past, which is clearly the problem for the West, or at least North America and the United States specifically. So how are you seeing all of this evolve as things stand today?
I mean, what is sort of jumping out to you as warning signals, if one may say so?
Priyanka Kishore: So I think one thing I want to highlight is that there is a lot of talk about whether this accelerates supply chain diversification. Of course, China is staring at 145% tariff from the US. That is the latest figure as of now.
And a lot of the supply chain within Asia is dependent on Chinese components and also in the US. The finish was directly coming from China. So there's definitely, you know, talk about opportunity and what kind of supply chain diversification from China, the rest of region might benefit from.
Even at 46%, Vietnam is much lower. 27%, I think, for India, although I don't know, I've seen 24, 26, 27, so whichever. It is quite lower than Vietnam.
But my bigger point comes back to the first thing that we spoke about. And for businesses, if they do not have clarity, they do not plan expansions. They do not plan their entry into new markets, be it for production or sales.
I would say if they do not have clarity on the growth outlook or the tariff outlook, what is going to prevent precedent from from tomorrow, raising the tariff rate on India if suddenly the trade deficit with India worsens a lot because of supply chain shift leading to a surge in exports from India to US. So I think at this point of time, what we are seeing is that over 2025, 26, massive downside risk to growth, investments going to a crawl. And that really should be the priority focus, in my view.
Govindraj Ethiraj: In your Asia Decoded report, the last one, you said China plus is collateral damage of America first. So you've already alluded to that. But can you expand on that a little more?
Priyanka Kishore: Sure. So I've actually looked at, I've tried to look at the supply chains of two exemplary companies to make it more grounded. I looked at Apple and I looked at Nike because they are present across the region and have Apple as a growing footprint in India.
Nike has a very small footprint in India. And I've made the case that, you know, A, the tariff headlines are sea swine. You don't know what is the tariff rate from today to tomorrow.
And why would you base any decision on that number? The second, if you choose to look away from that number and you look at the fundamental drivers of diversification, is there a justification for gradual diversification? Yes.
De-risking, rising costs in China, plenty of reasons that there will be a diversification and on a gradual basis that is going to continue. Is there a reason, fundamental reason for accelerated diversification? That's where, you know, there's a big question mark.
And I really don't think it's a question mark, because even if I look at India, does, is India prepared to absorb a large shift of high tech manufacturing from China on the shores? Do we have the resources? Do we have the skilled labour?
Do we have the productivity? And do we even match up to China's assembly margins, given the fact that we are importing the component supply chains for these things are sitting in China and India has trade barriers against China. So when you take these things to account, it becomes very difficult to argue that in the short run, you're going to see a massive pickup in some of these production shifts and some countries benefiting as opposed to others.
In the long run, of course, you know, diversification remains into play, but there also competition has intensified and Asia needs to work harder. Asia, China needs to work harder to maintain its lead.
Govindraj Ethiraj: And within Asia, is there something that stands out more in the context of low cost, low margin manufacturing businesses?
Priyanka Kishore: With context to the US, yes, definitely. Actually, thanks for raising that, Govind. My view is that the aim ultimately of all these tariffs, it's not near shoring or French shoring anymore.
We are not under Biden administration. It's pretty much on shoring. The President Trump always alludes to McKinley tariffs of the 1890s, which is what, you know, his claims that led to strong industrialisation and growth in the US.
And that is what he wants to emulate. He's applying 19th century solutions to 21st century challenges. And that doesn't work.
That doesn't work because McKinley was not dealing with production networks globally and he was not dealing with intermediate goods imports and things like that work in Asia's favour, as you rightly said, for the low value added manufacturing, especially where we have advantages in terms of labour costs and other costs as well. So I think on shoring is a very, very challenging concept for the US at this point of time and probably also in the future. Whenever it happens to whatever degree it happens, it's a story of years and not months.
So there's definitely an opportunity for the countries in Asia to continue capitalising on their well-placed networks, their existing manufacturing supply chains and clusters and the low cost advantages that they have.
Govindraj Ethiraj: Therefore, I'm guessing you're advising people, let's say businesses, that do not react in haste or in panic in terms of any expansion or any capex and so on.
Priyanka Kishore: It's not so much as I'm advising them as they're telling me, but you can read it both ways. If they tell me that they would rather stand on the sidelines, I would say that is the right thing to do at this point of time, because jumping too quickly could prove costly in terms of bottom lines.
Govindraj Ethiraj: If I were to bring you to India, because you've written about the latest credit policy as well, how are you seeing India's own moves to credit accessible through liquidity, through reduction of interstates and more interstate cuts are likely from what is being discussed? Is that all going to help and set off or at least partially balance all of this from an India perspective?
Priyanka Kishore: So from a domestic growth perspective, I think India has been proactive. We started easing rates at the start of the year. We were also proactive in terms of managing Trump tariffs, although, of course, it did not end up as well as we thought.
It did not end up anywhere as anybody thought for anyone. So I don't think India is particularly at fault here. I think the policy makers in India have done a good job, but they have to keep at it.
This is not over. You cannot think that after the 90 day pause, we just go back to 10 percent tariff and things are as it is because it is still an additional 10 percent tariff. The risks still remain in terms of labour intensive manufacturing exports getting hit and the knock on impacts happening and global trade shrinking.
And there's massive uncertainty from U.S. China decoupling. We have not really even started talking about that yet because everybody is expecting some sort of deal to happen. But these countries are really heading in different directions.
And to the extent even India, given its less friendlier relationship with China than let's say Southeast Asia, but even India has to deal with both U.S. and China. So those things, those preparations have to keep happening for growth to be sustainable. For yes, yes, India's growth was slow, but I guess it will take a lesser hit than some of the other countries in this region.
Govindraj Ethiraj: Right. And one reason I guess the markets are also withstanding whatever has been happening on Wall Street, for example, is the perception the economy is more insulated and it is a domestic economy. But if I were to ask you from your vantage point again, the one reason why that is the case and one reason why it's not, what would your thoughts be?
Priyanka Kishore: You know, markets always look at relative performance, even if, you know, your growth is slowing from 8% two years back to 6% now, but the rest of the world is growing at 4%. The world's second largest economy, China might grow even lower than 4%. It makes sense for markets to come in.
So they are from a different perspective. It's a much shorter term perspective. And yes, India does has the domestic consumption buffer.
The negative for me is that all this has implication for India's medium term implications and its aspirations to become a high income country. You keep taking one hit after another. So we are still recovering, you know, from the COVID led erosion in our growth prospects, if I may say.
There's this total level shift downwards in GDP that we have still not completely recouped as opposed to several other countries. And then again, you have these challenges coming into play that feed into that, you know, how will your future growth drive? If you cannot get enough of manufacturing, can services alone lift you to a high income country?
And I think that's a tough proposition. You need both manufacturing and services to work. Manufacturing has the ability to create jobs at a low value added level, which are productive, which are highly productive compared to low value added jobs in the services sector.
And India should not really give up on that opportunity. I'm not sure subsidies are the best way to do it. So we need to go back to the drawing board and we need to focus on fundamentals like human capital development, education and, you know, keep up the infrastructure drive.
I think that's what's needed.
Govindraj Ethiraj: I think that's most comprehensive. Thank you so much for joining me.
Priyanka Kishore: Thank you for having me.
