The next thermo-nuclear explosion Freezing Russian assets and throwing them out of SWIFT was a defining moment for the world. It showed the US and Wests willingness to weaponize the financial system and punish those whom they deem are out of line, on a whim!

This was noted by the world at large and countries wanted to protect themselves from arbitrary decisions of a few, which is why the de-dollarisation trend started. Countries started exploring trading in their bilateral currencies or third currencies, tried barter, wanted to come up with an alternative to SWIFT etc. That is work in progress.

Now the US is weaponizing the Trade system. Trump has worked up a self-righteous anger against the whole world, which according to him is ripping off the US. It has not occurred to him that US is the one that has enjoyed an exorbitant privilege by having the dollar as the global reserve currency.

This status has allowed US to import real goods by giving paper dollars and enjoy exceedingly high quality of life for its citizens. In the process, the world had to work hard, use resources, absorb the inflation exported due to the artificially strong dollar, pollute their environment and sell goods at dirt-cheap prices. US was not doing any favour to anyone by keeping the import duties low. It benefitted its own people.

Tariff war -

This tariff war which Trump has initiated can totally emasculate countries which export a good portion to the USA.

However, most countries are not levying counter tariffs; they want to negotiate a meaningful settlement that will let them off relatively unscathed. It has dawned on everyone that there are no winners in such trade wars.

That is, except China, US and a handful of countries.

For those who do not pay taxes, the burden of the tariff will fall on them fully. This means it will have a disproportionately adverse effect on the bottom 40% of the US population.

Eurozone was mulling graded tariff and for now, on its part, has proposed to engage in discussions where they will offer free entry to US products and in turn seek no tariff when they export. But US has rejected it!

US bristled at the counter tariff that China levied and has now hit it with cumulative sanctions of 104%! China claims it will fight to the finish and hit US with 84% tariff. For lack of sensitivity and respect to the World on part of China, Trump has now hit it with 125% tariff. At the same time, he has lowered the tariff for the rest of the world ( excluding Mexico & Canada ) to 10%, for a 90 day period.

India on its part is already engaged in Bilateral Trade discussions with the US which are expected to iron out differences and ensure that the trade is conducted smoothly. Other countries will seek to do the same.

At stake is the livelihood of millions of people working across the world. If the trade war intensifies there will be an employment crisis and a recession in many parts of the world.

The question most want to know an answer to is, how will it pan out?

What does the future hold -

The present is turbulent with stock markets across the world tumbling and investors aghast at what is happening. Stock market is the least of the problems.

The tariff war initiated by the US is a trade war that will disrupt & cause upheaval in global trade and is expected to cause misery and consternation to the world at large. This will cause disruptions in supply chains and throw a spanner in the manufacturing plants setup in various countries.

There will be instances where US corporations may themselves be affected, like the US car companies in Mexico facing tariffs. This can cause large-scale unemployment, poverty, recession, inflation, scarcity of goods, economic stagnation etc. in the globe.

However, no one knows how the future will unfold, for it is dependent not only at Trump's capriciousness but also on how the world itself chooses to adjust to this new reality. It would do no justice to the wisdom of the world to think that they will mutely stand by and wring their hands.

Different countries are going to chart out different paths. 16% of China's exports is to the US. It could be more if one counts Chinese factories in Thailand, Vietnam, Indonesia, Mexico etc. Since these Sinosphere countries have a tariff of just 10% ( for now), we can expect China to use this facility for ninety days. But, if US finds such round-tripping, these countries may have to face hell hence, they may be very circumspect even in this period. It can be assumed that this pathway for Chinese exports has been closed for most part.

US will also insist on 30%-40% plus value add from the country of origin to consider that the product is from that country.

US is making demands of EU to import fuel from it. It has made similar demand to India along with purchasing Agricultural goods. They may make many other demands too. For instance, the Make in India is seen as an initiative to shut out American companies!

Some deft negotiation and delicate handling would be needed to assuage the indignant American sensibilities of being wronged!

It should settle down probably by the end of the year. But, this is not going to be without bruises for the various countries and for US citizens, who will face inflationary pressures.

China's response -

It is difficult to estimate what could be their response. However, there are things which China has outlined - restrictions on Rare earth exports, of which China controls 90%. They also can cause mayhem by dumping US Treasuries, though it may hurt them too.

On its part, China can work with various countries and secure bilateral deals and further diversify export destinations. If they are successful at it, the effect of US blockage will be minimal ( for their exports to the US is only 16% ).

China is working on CBDT and has launched their platform with digital Yuan. A lot of trade can shift to that and undermine the dollar trade. China may also take the cyber warfare to a new level, which it has been engaging in for decades now ( read the book - This is how they tell me the world ends by Nicole Perlroth ). This can create a lot of problems for the US.

China is great at propaganda and can create anarchy in the US, like it has done in various countries across the world, including India.

It can indulge in indirect and direct help to countries and groups which are in conflict with the US. China has sent a small number of its troops to fight for Russia. Russia supports Houthis and various other rebel/ terrorist groups which can inflict a lot of damage to US assets and personnel.

So there are a whole lot of things in it's playbook that China can unleash to undermine the US. It is going to be a bruising and bitter war that would not be in the interest of the world at large.

Rebuilding Supply chains -

One of the stated ambitions of Trump is to bring manufacturing back to US. This cannot be done except in case of high value products. Considering the people costs in the US, there will be a high level of automation and hence job creation will be low. US also will need to have high-skilled workforce capable of operating such factories. This is a huge challenge that cannot be corrected in a jiffy. Hence, US will need to allow such workforce to come in from other parts of the world, which Trump is not exactly ready for.

For low skilled, low paying jobs, US citizens are not prepared and hence is done by undocumented immigrants for the most part. There are some 11-15 million of them as per some estimates and these are the ones working in blue collar and brown collar roles.

What probably is a plausible strategy is to friend shore ( to countries friendly to US, including India ) and near shore ( to countries like Mexico, Canada etc. ) factories to surmount the supply disruptions from tariffed countries like China. This may take 1-3 years and hence there will be some short-term pain.

Also, China manufactures the machinery needed for setting up most factories. Now, they may have to be sourced from South Korea, Japan, Taiwan, Germany and others at significantly higher costs. US may have to subsidise these costs in the larger interests of establishing alternate supply chains.

Note - It is rather difficult to even conclude the direction in which the world is moving. If this stalemate continues or escalates, it will be troubling times for all. We need to wait and watch the evolving situation to make sense of where this is all going. Interesting times!