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Trump’s Tariff Musical Chairs

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Good morning. In today's edition — the threat of US president-elect Donald Trump’s tariffs has got the world in a forced game of musical chairs; a good year for agrochemical companies; and India’s wholesale price inflation cools.

THE TAKE

Donald Trump’s Tariff Threats Are Already Unravelling

So far, we have heard of United States president-elect Donald Trump’s wide-ranging threats regarding tariffs on imports into the US and varying tariffs on countries like China, Mexico, and Canada.

Trump has also said there will be 100% tariffs on the BRICS countries like Brazil, Russia, India, China and South Africa among others for dreaming of — for lack of any other term for the present — a BRICS currency to take on the dollar.

Countries like India have chosen the wait-and-watch strategy, perhaps the wisest to follow at this point. Others like Mexico and Canada have reached out to Trump and quite likely even won some temporary peace. But businesses and affected industries are beginning to fight back, even as countries like Canada have revealed their strategy.

Tariffs To Tackle Tariffs? 

The US agriculture industry has started talks with Trump’s transition team in a bid to advocate for the food business as the president-elect pledges tariffs and mass deportations, Bloomberg reported. It is also becoming clear that tariffs will not be easy to impose particularly since resistance starts building from the point where the rubber meets the road, so to speak.

Groups including the National Grain and Feed Association — which represents agriculture powerhouses in the US such as Archer-Daniels-Midland Co. and Cargill Inc — and the International Fresh Produce Association were among those involved in the discussions. The National Council of Agricultural Employers also has a meeting on the books.

Attention is also being drawn to immigration issues as US agriculture has been increasingly reliant on foreign labour. Some industry advocates are lobbying for the expansion of a visa programme for temporary workers, said Bloomberg.

On the other hand, Canada is examining the use of export taxes on major commodities it exports to the US — including uranium, oil and potash — if Trump imposes his tariffs. But that would be the last resort, according to people familiar with discussions inside Prime Minister Justin Trudeau’s government. Retaliatory tariffs against US-made goods and export controls on certain Canadian products are more likely to come first. 

Imposing Tariffs Won’t Be Easy

But here is the interesting part — economies today are exceedingly interconnected. The Bloomberg report said that Canada was by far the largest external supplier of oil to the US with refineries dependent on buying cheaper Canadian heavy crude. There are few alternatives to it. 

The US Midwest would be hit particularly hard by higher costs. Fuel makers in the region rely on Canada for almost half of the crude they turn into gasoline and diesel. Canadian uranium is also the biggest foreign source of fuel for US nuclear power plants, and potash from the country’s western provinces is a huge source of fertiliser for American farms. 

There is a twist in the tale. The US Department of Defense has been investing in Canadian projects to secure sources of cobalt and graphite to reduce reliance on Chinese supply chains.

Now the belief is that the Trump administration will exempt commodities from his threat to place 25% levies on goods from Mexico and Canada. They will instead focus on using tariffs against their manufacturing industries.

This shows that imposing blanket tariffs as promised a few weeks ago will not be simple and one can expect much resistance along the way, including from quarters least expected.

America’s National Retail Federation last month pointed out that American consumers could lose between $46 and $78 billion in spending power each year if new tariffs on imports to the US are implemented on apparel, toys, furniture, household appliances, footwear, and travel goods.

Retailers feel that they cannot pass on all price increases to consumers and will also lose their margins. The US has already seen very high retail inflation in the last few years. 

What Does India Plan? 

Back in India, the government is considering a proposal to impose safeguard duties on steel imports. Union Steel Minister HD Kumaraswamy said on Thursday that discussions were on to impose these duties on steel imports. On December 2, the steel ministry in a meeting with the commerce department had proposed for a 25% safeguard duty on certain steel products imported into the country. 

A final decision might be a halfway solution, with a lower figure on some types of steel, but it would be a success on the part of the Indian industry in its efforts to sway the government. India’s steel industry has for some time lobbied for import duties as cheap steel from countries like China and Vietnam has flooded Indian markets. But it is also a fact that cheaper steel would benefit end users like the construction and infrastructure industry.

Business leaders have often told me privately that the Indian industry always prefers a higher tariff regime. This combined with the government’s Make in India programme, has seen a rise in import duties in recent years. 

The flip side of the argument is also important. While India can slap high import duties on goods like toys and succeed to a large extent, it cannot do the same with mobile phones or mobile phone components if it wants to provide cheap telephony to hundreds of millions of citizens and also encourage a domestic manufacturing industry, including for exports.

So India’s strategy of waiting and watching to see is a good one. Businesses will do their bit as will industry associations like they already are in the United States. Business respects political imperatives but also has shareholders to answer to.

Trump or his advisors quite likely know this and how some of the pulls and pushes work in global trade. But the threat of tariffs has got the world in a forced game of musical chairs not knowing whether there are enough chairs or when the music will stop..

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CO:RELATION

Selecting The Right Agrochemical 

Share prices of significant agrochemical companies like Coromandel International, Rallis India and PI Industries have done better than the Nifty 50 in 2024. While farmers in India are grappling with the aftermath of excess rainfall, export markets face fierce Chinese competition. Rural India may be celebrating a good monsoon, but for agrochemical companies, it is challenging if the rainfall is in excess. There are critical moments when companies need farmers to buy pesticides and herbicides after the monsoon. The prolonged monsoon season stalled the sale of agrochemicals. 

Investors are optimistic about a turnaround in the rural economy but are selective about the companies they pick. They want businesses with a resilient balance sheet. Coromandel, PI Industries have over Rs 4,000 crore in cash or cash equivalent on their books. Shares of these two companies have done better than the rest. Credit rating agency CRISIL expects debt-equity ratios to remain stable in the next financial year. “Control over debt and gradual improvement in operating profitability will lead to sustenance of stable debt protection metrics over the near to medium term,” the agency said in a release.

CORE NUMBER

Rs 12.3 lakh crore

This figure represents the total value of loans written off by Indian commercial banks between FY15 and FY24, according to data shared by the government in the parliament. Public sector banks accounted for Rs 6.5 lakh crore in write-offs over the past five financial years (FY20-24). Write-offs were the highest at Rs 2.4 lakh crore in FY19, dropping to Rs 1.7 lakh crore in FY24, representing 1% of outstanding bank credit. As of September 30, 2024, gross non-performing assets (NPAs) for public sector banks were Rs 3,16,331 crore (3.01% of outstanding loans), and Rs 1,34,339 crore (1.86% of outstanding loans) for private sector banks, The Economic Times reported

FROM THE PERIPHERY

—📉 India’s wholesale price inflation eased to a three-month low of 1.89% in November, led by a sharp drop in food prices, especially vegetables. The Wholesale Price Index (WPI) was 2.36% in October and 0.39% a year ago. Food inflation fell to 8.63%, with vegetable prices dropping to 28.57% from 63.04% in October, Business Standard reported. Onion prices slipped 2.85%. Fuel and power saw a deflation of 5.83%, while manufactured goods inflation rose to 2%. Retail inflation cooled to 5.48%, boosting hopes of a Reserve Bank of India (RBI) rate cut in February’s policy review.

—🧑‍⚖️ Despite strong evidence of alleged payments made to Indian government officials, Gautam Adani is unlikely to be extradited to the US for prosecution, Reuters reported on Monday. For example, Adani could argue that he was not personally involved in crafting the misleading statements provided to investors about the company's anti-bribery practices. Furthermore, Adani is not currently in custody and has made public appearances in India since the indictment, including at an event attended by Prime Minister Narendra Modi. However, in a separate development, the Bombay High Court dismissed a petition challenging a power contract awarded to the Adani Group by the Maharashtra government, terming the petition "unsubstantiated and reckless."

—✈️ Air India, the flag carrier of India, is set to revamp its international network flights in 2025, deploying upgraded aircraft like the A350 and B777 to key destinations in Southeast Asia and Europe. Recently merged with Vistara, it will launch a retrofitted A320neo on the Delhi-Bangkok route in January, with increased frequency from three to four daily flights. Air India says that it is optimising schedules and better connectivity on major routes like Frankfurt, Singapore, North America, Europe, Australia and other routes with upgraded interiors and improved schedules. However, Air India continues to face challenges in maintaining service consistency and operational efficiency amidst fierce competition and internal restructuring efforts.

—🔼 India's office real estate market surged in 2024, with 58 million square feet (msf) leased in the first three quarters, surpassing the total demand for 2018. CRE Matrix forecasts an all-time high of 80 msf by year-end. The growth is fueled by expanding global capability centres, co-working spaces, and the IT sector. Bengaluru, Mumbai and Hyderabad lead in demand, while rents in major cities have exceeded Rs 100 per square foot. Vacancy rates are at 16.8%, the lowest since the last 14 quarters. On the supply side, India’s market is experiencing a robust pipeline, with around 100 msf of office space currently under construction..

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