Tesla’s Gain, America’s Loss: The Butterfly Effect Of Donald Trump’s Tariffs

When a butterfly flaps its wings, it could cause a tornado someplace else, suggested MIT meteorologist Edward Lorenz 50 years ago, after noting that rounding off a number to three decimal places, in the computer model of 12 parameters he was running to forecast weather patterns over the next two months, produced a result vastly different from the one he had got when he used the full number running to six decimal places. What Lorenz failed to foresee was that if the insect flapping its wings was situated in the White House, the chaotic effect would be magnified many times over. Initial conditions really do matter.

US president Donald Trump has announced he would slap 25% tariffs on imports from any country that buys Venezuelan oil. Reliance in India has developed an allergy to the sour crude from Venezuela. Trump has announced a 25% import duty on imports of automobiles and auto-components from any country. Before anyone starts dumping Tata Motors stocks, given the lower likely US sales of Jaguar and Land Rover vehicles from the Tata Motors stable, they should consider the possibility that Trump could roll this duty back or put it in abeyance. American automobile producers have an integrated North American supply chain, spanning Mexico, the US and Canada. The duty would make cars more expensive, across the board.

Who’s The Biggest Loser?

The New York Times explained this, taking the example of three SUVs, the Chevrolet Blazer, imported from Mexico, the Toyota RAV4, imported from Canada, and the Nissan Rogue, assembled in the US. The value added in the US/Canada was the lowest for the Rogue assembled in the US, and the highest for the Blazer, imported from Mexico. Disassembling and reconfiguring this supply chain to manufacture everything in the US would be costly in itself, and would forgo the comparative advantage benefits embedded in the current sourcing pattern. The loser would be the average American, not just the new car buyer, but also those who carry on with old jalopies that need regular infusions of new parts. The only gainer would be Tesla, which has the least foreign-produced content. Battery inputs are unlikely to be classified as auto parts.

However, this American gain for Tesla comes in the wake of bad news for it from the rest of the world. Sales are down 40% in Europe, with Germany showing a 70% drop, where Elon Musk’s support for the far-right Alternative for Germany (AfD) has riled most Germans, while the AfD had doubled its vote share in the recent polls, 80% of Germans dislike the party. Meanwhile, Chinese carmaker BYD has beaten Tesla in overall revenues and technology. BYD has developed a new, one megawatt charger that can give the car battery, in just five minutes, enough juice to run 400 km. Tesla still takes 15 minutes for its fast charger. BYD has developed self-driving technology reportedly surpassing Tesla’s.

Another upset took place last week on European bourses. SAP, the German provider of enterprise software, has surpassed drugmaker Novo Nordisk to become Europe’s most valuable company. Novo Nordisk is, of course, one of the Goliaths of the new breed of weight loss drugs, semaglutides. SAP now offers its ERP software as a service rendered from the cloud, rather than as a licence that the buyer had to hire a consultant, like TCS or Infosys, to implement in its own enterprise. SAP has also started offering embedded AI capabilities. This has the potential to force Indian software service companies to actively scout for new pastures, leaving the comfort zone of traditional work.

If the German parliament voting to remove its debt brake to fund infrastructure and defence was a shot in the arm for European industry, there is more good news on the way. Denmark is building an 18-km undersea tunnel to Germany that will cut travel time and integrate Scandinavia with the rest of Europe more tightly. While the $8 billion project began in 2020 at the Danish end and in 2021 at the German end, it has gathered construction momentum now, with pre-fabricated structures being put together to build the three-lane tunnel rapidly, the third lane being for train tracks. European rearmament, Europe’s green energy transition and the building of new infrastructure, all financed by new European debt, together promise to bring new vigour to the continent and drive a larger share of the world’s footloose portfolio flows towards Europe.

Trump’s ‘Peacemaker’ Myth Blown Apart

In the Middle East, Israeli missiles have blown to smithereens the myth wantonly peddled to the world’s media that Trump the Peacemaker was responsible for the recent break in the war on Gaza that Israel has been waging since October 2023. This column had pointed out what had made Israeli prime minister Netanyahu pay heed to the US President was not so much President Trump’s superior force of will, in comparison with Biden’s, as the fact that the US presidential elections were over, giving the US President the freedom to use cessation of military aid as a lever to force Israel to stop fighting, without worrying if that would put off voters. Faced with the prospect of his far-right allies in the ruling coalition pulling out if he did not resume the war, Netanyahu has ended the truce and resumed bombing Gaza.

Moscow, too, has been doing its bit to undermine Trump’s hopes for a Peace Nobel. Instead of readily agreeing to the US proposal for a ceasefire in Ukraine, Russia has proposed conditions such as reinstating Russian banks’ access to the SWIFT messaging network for crossborder payments, to agree even to a deal to enable peaceful freight movements on the Black Sea, to enable vital wheat, corn, sunflower and fertilizer to move from Ukraine and Russia to the rest of the world. If these conditions are met, and Russia and Ukraine begin shipping all their regular exports of farm produce, world food prices would drop, and India’s anxieties on the wheat front would be addressed. But India would need to wait a little more for that.

The Trump administration set another world record in bungling. It roped in a journalist to join a high-level group that involved the US Vice President, the Secretary of State, the Defence Secretary and the National Security Advisor, as they met to discuss how to bomb the Houthis in Yemen, and how they hated the idea of the Europeans freeriding on the resultant resumption of shipping in the Red Sea. These worthies did so by carrying out their discussion on the messaging platform, Signal, rather than on secure US communication channels.

In India, the finance ministry has been hitting the headlines of the pink press with the astounding revelation that global trade uncertainties would affect growth. The ministry probably would like to count as its contribution to reducing uncertainty over global trade its defensive measures such as lowering assorted import duties, including on cars, and giving up its Google Tax, the pet name for the equalisation levy it puts on the bill for the advertising that Indian companies buy from the world’s digital majors such as Google, Meta and Amazon. Whether this tactic would prove effective will be known when Trump announces his reciprocal tariffs on April 2.

It would be a mistake to hold your breath for the tariffs to be announced. Wings and lips continue to flap in the White House.