Global markets breathed a sigh of relief on Tuesday after US President Donald Trump announced a 30-day pause on his proposed tariffs against Mexico and Canada, cooling fears of a tariff war spiraling out of control. US equity futures jumped, and the dollar pulled back its recent gains against the Mexican peso and Canadian dollar.
The decision to hold off on steep tariffs gave investors some temporary reassurance. In the US, the S&P Futures rose 0.4%, reflecting the market's optimism. Google Finance data showed that the euro had a bit of a rollercoaster day, briefly dipping to $1.0125 before bouncing back to $1.0320 within 24 hours.
Over in Asia, Hong Kong’s Hang Seng index also saw gains, despite an extra 10% tariff set to hit Chinese goods. Australian and Japanese stocks joined the rally as the pause in trade tensions rippled across global financial markets.
What is fueling trade war fears?
It all began when Donald Trump last week announced hefty tariffs on the US' three biggest trading partners, leaving investors scrambling to position themselves for a global trade war. Canada and Mexico face 25% duties on their exports to the U.S., with a lower 10% levy imposed on Chinese goods. Trump has also stated that the European Union will be next in the firing line, with the U.K. also under consideration.
Within minutes, China’s Finance Ministry said it would impose levies of 15% for US coal and LNG and 10% for crude oil, farm equipment and some autos. The new tariffs on US exports will start on 10 February. Separately, China’s Commerce Ministry and its Customs Administration said the country is imposing export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related item
Both Canada and Mexico have responded with retaliatory tariffs with Canada imposing 25% duty against $155 billion of U.S. goods. EU leaders meeting at an informal summit in Brussels on Monday have also clarified that Europe would be prepared to fight back if the US imposes tariffs but also called for reason and negotiations.
Why are tariff wars spooking markets?
Among the expected short- to medium-term impacts are a slowdown in global economic growth, particularly in countries with large manufacturing sectors, a spike in oil prices, higher prices for U.S. consumers and higher-for-longer U.S. interest rates, with a stronger U.S. dollar as a result.
Sectors/stocks likely to be hit by tariff wars?
1.Auto Sector: It faces significant risks as many car manufacturers and parts suppliers rely on international production, especially in Mexico. According to experts, companies like Volkswagen, which runs Mexico’s largest car factory, could see earnings fall due to tariffs. Stellantis, which owns Chrysler and Jeep, may also face a hit due to its Ram truck production being based in Mexico.
Investor concerns over these impacts were immediately visible, as European automakers on the Stoxx 600 index fell, and major parts suppliers like Valeo and Forvia saw declines as well.
2. Semiconductor industry: The sector is also highly exposed, given its complex global supply chains and cross-border manufacturing hubs in Mexico and China. Companies like Taiwan Semiconductor Manufacturing Co. (TSMC), which supplies semiconductors to U.S. tech giants such as Apple, Nvidia, and Intel, are particularly vulnerable. ASML Holding, a key supplier of chipmaking equipment used globally, could see its revenue take a hit as tariff-related slowdowns affect production. Nvidia, which relies on offshore factories, may also face disruptions, impacting its AI data centers and other chip-dependent technologies.
3. Consumer goods: The sector could experience rising prices on everyday items such as furniture, electronics, and clothing, as tariffs increase costs on imported goods. Diageo, a global drinks giant, is particularly at risk, as around 70% of its U.S. sales come from imported products like Canadian whiskey, Mexican tequila, and Irish Baileys, according to a CNBC report. With the U.S. accounting for 45% of the company’s operating profit, additional tariffs could further strain its financial performance, adding to existing challenges from weakening demand in North America.
4. E-commerce: Chinese giants, including Temu, Shein, and AliExpress, are facing a major setback as the U.S. removes the “de minimis” trade exemption. This policy had allowed products under $800 to enter the U.S. without duties, giving Chinese retailers a cost advantage. The removal of this exemption could lead to higher product prices and reduced demand in the U.S., significantly affecting their market competitiveness and profitability.
5. Green energy: The fast-growing sector may also witness cost escalations as machine parts used for renewable technologies which are often manufactured in Canada, Mexico, and China, become subject to tariffs. The American Clean Power Association has already warned that higher costs for machinery could slow down clean energy development.
Indian Investors: Caught between opportunity and risk
India is one of the key countries impacted by Trump’s trade policies. His recent comments on imposing tariffs on Indian goods and services created slight anxiety in the Indian stock market. One immediate impact of Trump’s tariff threats has been the depreciation of the Indian rupee to below ₹87 against the US dollar. While this makes importing goods and services costlier for India, there is a silver lining for investors with exposure to US stocks.
If you invest in US stocks from India, a weaker rupee translates to higher returns when converting those gains back into Indian currency. For example, if you had invested in the S&P 500 or US tech giants like Apple, Microsoft, and Tesla, any appreciation in these stocks would be amplified due to the favorable exchange rate. Although buying new US stocks becomes more expensive, the long-term gains could offset this initial cost.
Example 1: Investment in US index
Initial Investment: ₹1,00,000 at an exchange rate of ₹83 per USD
Amount in USD: ₹1,00,000 ÷ 83 = $1,204.82
Let’s assume the S&P 500 rises by 10% over the year.
New portfolio value in USD: $1,204.82 × 1.10 = $1,325.30
Exchange rate depreciation: The rupee weakens to ₹87 per USD.
Value in INR: $1,325.30 × 87 = ₹1,15,302
Profit in INR: ₹1,15,302 - ₹1,00,000 = ₹15,302
If the exchange rate had remained at ₹83 per USD:
Value in INR = $1,325.30 × 83 = ₹1,09,200
Profit in INR without depreciation: ₹1,09,200 - ₹1,00,000 = ₹9,200
Thus, the currency depreciation boosted your returns by ₹6,102.
Example 2: Investment in individual US Stocks
Let’s say you invested ₹5,00,000 in two US stocks under the old exchange rate of ₹83 per USD. Here’s a step-by-step breakdown of how your investment grows and how currency depreciation helps amplify your returns.
Initial Investment and Conversion to USD
- Initial Investment: ₹5,00,000
- Exchange Rate: ₹83 per USD
- Amount in USD: ₹5,00,000 ÷ 83 = $6,024.10
We’ll split this investment equally between Stock X and Stock Y, each getting $3,012.05.
Let’s assume
Stock X appreciates by 15%:
$3,012.05 × 1.15 = $3,463.86
Stock Y appreciates by 12%:
$3,012.05 × 1.12 = $3,373.50
Total Portfolio Value in USD:
$3,463.86 + $3,373.50 = $6,837.36
Now, let’s see how this portfolio value translates back into INR when the exchange rate changes:
| Exchange Rate Scenario | Calculation | Returns |
| New exchange rate (₹87 per USD) | $6,837.36 × 87 | ₹5,95,651 |
| Profit in INR (after depreciation) | ₹5,95,651 - ₹5,00,000 | ₹95,651 |
| If exchange rate had stayed at ₹83 | $6,837.36 × 83 | ₹5,67,500 |
| Profit in INR (without depreciation) | ₹5,67,500 - ₹5,00,000 | ₹67,500 |
| Extra profit due to depreciation | ₹95,651 - ₹67,500 | ₹28,151 |
Thanks to the weaker rupee, your profits increased by ₹28,151
Given the current environment, Indian investors should adopt a balanced approach. Trump’s second term is already proving to be a mix of opportunities and challenges for global investors. While US Stock rallied initially on tax reforms and infrastructure spending, Indian markets face risks from tariff threats and rupee depreciation. However, long-term investors can benefit from global diversification and strategic positioning in sectors poised for growth.
Disclaimer
The content is meant for education and general information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. The securities are quoted as an example and not as a recommendation. This in no way is to be construed as financial advice or a recommendation to invest in any specific stock or financial instrument. The Company strongly encourages its users / viewers to conduct their own research, consult with a registered financial advisor before making any investment decisions. All disputes in relation to the content would not have access to exchange investor redressal forum or arbitration mechanism. INDmoney Global (IFSC) Private Limited, Unit No. GA-02, Seat No. 1-4, Ground Floor, Pragya Accelerator Block-15 T, Road 11, Zone-1, Processing Area, GIFT SEZ, Gift City, Gandhinagar, Gujarat, India, 382355 IFSCA Broker Dealer Registration No. IFSC/BD/2023-24/0016, IFSCA DP Reg No: IFSC/DP/2023-24/010.