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The Tariff Trap: Why the US Can’t Go Too Far with Import Duties...

The world is once again watching as the specter of trade wars looms over global markets. US President Donald Trump, never one to shy away from economic brinkmanship, has revived tariff threats on European, Canadian, and Mexican imports. 

While these aggressive trade policies may sound like a strong-arm tactic to protect American industries, the reality is far more complex. Photo: The Business Standard.

The US cannot afford to impose excessive import tariffs without running the risk of waking up an old and dangerous enemy—inflation.

Inflation: The Sleeping Tiger

The American economy has been benefiting from decades of cheap imports, especially from Asia. Back in Ben Bernanke’s time as the Federal Reserve Chairman, low-cost goods from China, India, and other manufacturing hubs played a crucial role in keeping inflation within reasonable limits. 

Even as the US pumped liquidity into the system post-2008, inflation remained largely subdued due to the availability of affordable imported goods.

If Trump aggressively pushes through a 25% tariff hike on European and North American imports, it could set off a chain reaction. The price of everyday goods, from cars to household essentials, would rise sharply. 

Companies reliant on foreign supply chains will pass these costs onto consumers, fueling inflation just when the Federal Reserve is trying to keep it in check. The inflationary spiral would force the Fed to maintain higher interest rates, stifling economic growth and hitting consumer demand—something that would be particularly painful in an election year.

Following the 2018–19 the US - China trade war, Asian economies deepened regional trade ties. A renewed tariff push might further redirect trade flows, benefiting manufacturing hubs like India, Mexico, and Southeast Asia. Companies could pivot from US - centric supply chains, fostering new trade alliances and reducing reliance on American markets.  

Crude Oil: A fragile buffer:

The U.S. shale production has reduced reliance on foreign oil, stabilizing energy prices—a key inflation driver. However, targeting Canadian crude with tariffs could backfire. Many U.S. refineries depend on Canadian oil; disruptions could raise fuel prices, inflating transportation and logistics costs across sectors. Energy market stability remains critical to avoiding broader inflationary shocks.

Hence, one factor that could help counterbalance inflation is the relative stability of crude oil prices. The US, once dependent on foreign oil, has significantly ramped up domestic production over the past decade. As a result, oil prices have remained in check despite geopolitical tensions. A stable crude market means that one of the biggest inflation drivers—energy costs—may not skyrocket even if import tariffs disrupt other sectors.

However, the risk lies in Trump's hostility toward Canadian crude oil imports. If his tariff threats extend to energy products, it could disrupt US refinery operations and push fuel prices higher. Higher fuel costs would translate into higher transportation costs, feeding inflation across multiple sectors, including logistics and retail.

Boosting Global Trade Instead of Breaking It :

Rather than engaging in trade wars, a more balanced policy could actually boost global trade. 

If the US continues its aggressive stance, countries like India, China, and even Latin American economies stand to benefit as alternative sourcing destinations for global businesses. 

Companies that traditionally relied on American markets may diversify toward Asia, Africa and Europe, opening up new trade corridors.

Moreover, the world has learned to hedge against US trade uncertainty. After the Trump-China trade war in 2018-19, many Asian economies strengthened intra-regional trade partnerships, reducing dependency on US imports. This trend could accelerate if the US overplays its hand with tariffs.

Impact on Indian Stock Markets: A Silver Lining

Despite Foreign Institutional Investors (FIIs) selling large-cap stocks in India and moving funds into small caps, the Indian stock market stands to benefit from US policies in multiple ways:

1. Export-Oriented Sectors: If US companies seek alternate supply chains, Indian manufacturers, IT firms, and pharmaceuticals could see a surge in demand.
2. Rate-Sensitive Sectors: With RBI cutting the repo rate and conducting Open Market Operations (OMOs), liquidity in the system is improving. Sectors like banking, real estate, and construction will continue to see strong momentum.
3. Export Oriented Sectors like, Indian pharmaceuticals, IT, and manufacturing could attract demand as global firms diversify suppliers.  
4. Domestic Growth Story: As global capital flows shift, Indian mid-cap and small-cap stocks are attracting interest. FIIs may have exited large caps, but domestic investors are stepping in, ensuring market resilience.

Conclusion: The US Can’t Go All-In, and India Stands to Gain:

For all the rhetoric, Trump’s tariff threats have their limits. Excessive import duties will stoke inflation, hurt consumer demand, and possibly backfire on the US economy itself. A moderate approach, rather than outright trade wars, is more likely—something that global investors recognize.

Meanwhile, India is emerging as a stable and attractive market. The RBI’s monetary easing, coupled with strong domestic demand, will continue to fuel growth in key sectors like banking, real estate, and infrastructure. Even if FIIs shuffle their portfolios, the underlying fundamentals of the Indian economy remain robust.

The US faces inherent limits to tariff hikes due to inflation risks and supply chain complexities. Meanwhile, India’s stable monetary policies, domestic demand, and export capacity position it to capitalize on global trade realignments. While FIIs may rebalance portfolios, India’s structural strengths offer enduring appeal in a fragmented trade landscape.  

In the grand chessboard of global trade, India is playing the long,