US President Donald Trump, on his campaign trail, had declared that he would use the tariff weapon to ‘Make America Great Again.’ Many dismissed it as campaign rhetoric and argued that it would be difficult for President Trump to walk the talk since it would impact the US, too. Now, all doubts have been laid to rest. President Trump is biting as hard as candidate Trump barked.

The 25 per cent tariff on Canada and Mexico kicked in on 4th March. And additional 10 per cent tariffs have been imposed on China taking the tariffs to 20 per cent. Mexico and Canada have retaliated by imposing tariffs on US goods. China has acted quickly by imposing tariffs on select US goods, particularly on agricultural produce where it hurts the US most.

Is this the beginning of a full-blown trade war? Will negotiations enable a settlement? Can markets tame Trump?

Trump, mercurial and unpredictable, and enjoying the support of both the Senate and the US House of Representatives, is a powerful president. But he cannot tame the laws of economics and dictate market trends. There is a probability that markets will tame Trump. Let us look at the fallout of this trade war and try to speculate on how things will unfold.

Trump’s tariff policies will drive up inflation

It is estimated that Trump’s tariffs on China, Mexico and Canada will impact trade worth $1.5 trillion. Higher tariffs will push up the landed costs of imports. The higher costs will be passed on to consumers, pushing up inflation.

US inflation, already high at 2.6 per cent against the Fed’s target of 2 per cent, can rise further by 0.5 per cent to 0.7 per cent. Retaliatory tariffs by China, Mexico and Canada will raise inflation in these countries, too.

Global growth will be impacted

Trade war will impact global trade and global growth. IMF’s projection for global growth in 2025 is 3.3 per cent. This growth is unlikely to be achieved if the trade war continues. US growth, too, will be impacted. It is possible that the US might tip into recession by the end of 2025.

Trump-Fed clash in the offing?

The latest data indicate that consumer confidence in the US has been impacted. Since consumption accounts for around 68 per cent of the US economy, a growth slowdown is inevitable.

With the economy slowing down, Trump is likely to demand rate cuts from the US Fed. The Fed, which prioritises inflation control, is unlikely to oblige. A higher probability is the Fed raising interest rates when inflation is set to increase.

Can markets tame Trump?

The US stock market is now priced to perfection. Equities are expensive. That’s why Warren Buffet is sitting on cash of $ 300 billion.

The year 2025 began with the market expecting two more rate cuts of 25 bp each in 2025. In the present macro scenario, rate cuts are off the table.

The Fed might even turn hawkish and raise rates, leading to a stock market crash. Trump will not like this.

The negative wealth effect of a sharp stock market correction will further aggravate the slowdown in the growth of the US economy.

The US tipping into a recession by the end of 2025 is probable.

Trump’s popularity rating will slump with the market. The probability of this scenario unfolding may tame Trump. We will have to wait and watch.

India, too, will be impacted

India, too, is likely to be targeted by Trump in the next round of tariff hikes.

Perhaps the tariffs on Indian exports to the US will be less severe, but India is unlikely to be spared.

More importantly, the slowdown in global growth will impact India’s growth, too.

India’s strong economy, driven by domestic consumption, can weather the storm. However, our export and GDP growth in FY26 will be impacted.

Uncertainty will weigh on markets

The market doesn’t like uncertainty. Since uncertainty is ruling supreme, this will weigh on markets. 

The positive for Indian markets is that there are indications of growth and earnings rebound in FY26. 

More important, valuations are fair, though not cheap. The decline in the dollar index is a positive development, and if this trend persists, it will be good for emerging markets like India. 

In the near term, investors may focus on fairly-valued domestic consumption-related stocks like financials, telecom, and aviation, as well as growth segments like digital platform stocks. 

President Trump has turned out to be Mr. Chaos. How global trade and the global economy will emerge from the chaos remains to be seen.

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(V K Vijayakumar is Chief Investment Strategist at Geojit Financial Services. Views are personal.)

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of the expert, not Mint. We advise investors to check with certified experts before making any investment decisions.