Global Growth at Risk? Jahangir Aziz weighs in on tariff impact

"If VAT tax is included in the reciprocal tariffs, then first of all the level of the tariffs obviously is going to be much higher and the countries that will be most affected are also going to be different," says Jahangir Aziz, JPMorgan.

Big night tonight for us here in India. The Trump administration is set to unveil the reciprocal tariffs. Tell me, will US reciprocal tariffs directly match other country tariffs or will the scope be wider you think? And which countries, according to you, are likely to get impacted the most?
Jahangir Aziz: So, we are looking at various variations of this. So, one of them obviously is that it just matches the reciprocal tariffs, in which case the countries that will be most affected are countries like India and Brazil, who have very large tariffs differential with the US. But at the same time, there is a sense that the reciprocal tariffs will not just be about tariffs differential, but it will also include what the US administration calls non-tariff barriers.

And one of the things in the non-tariff barriers is the VAT rates. US does not have a VAT tax in the US. It has state level sales tax. Most other countries, most of its major trading partners have VAT tax. And if VAT tax is included in the reciprocal tariffs, then first of all the level of the tariffs obviously is going to be much higher and the countries that will be most affected are also going to be different.

What are your thoughts on the impact of reciprocal tariffs on global growth and will global growth be meaningfully impacted?
Jahangir Aziz: Look, it depends again on the degree of taxes. So if the reciprocal tariffs are going to include VAT and other non-tariff barriers like digital service taxes and other things that the US administration may have, so that the actual tariffs imposed is much higher, let us say, in the 15%, 20% range across the US' major trading partners, then clearly the impact is going to be much larger.

But in terms of what the global impact is, we are looking at two sort of places. One, of course, is in the US' own neighbourhood, which is what happens to the taxes or what happens to tariffs on Mexico and in Canada.

And if VAT is going to be included, then Europe also gets included in it, in which case four of US' major trading partners will all be part of a trade war. Again, we have already seen tariffs in China being raised from the 20% at the beginning of the year average tariff rate to another 20%, so China already has 40% tariffs and we will have to wait and see whether, as separate from the reciprocal tariffs, will there be a further increase in tariffs on China.

And let us not forget that reciprocal tariffs are the only thing that this administration is looking at. They are also looking at specific tariffs to be imposed on semiconductors, pharmaceuticals, and autos globally, which will probably come in a couple of weeks.

From a tactical standpoint though, what is it that you are recommending to your clients? Which economies or markets are likely to see increased outflows and which are likely to see inflows?
Jahangir Aziz: So, that is a very difficult question. So, one of the key questions is, how does this set of tariffs affect the US? First of all, we began the year with a sense of US exceptionalism actually strengthening. Now, obviously, that has been tarnished and has been put on pause. The question is whether or not this damages the US economy, and it damages the US economy whether or not in a global risk off environment, does the US dollar strengthen or weaken?

In previous episodes of global risk off environments, we have seen the dollar typically strengthen, but this time around because the shocks are emanating from the US itself and it is based on US policies, it is quite likely that as we have seen over the last four or five weeks, the dollar might actually weaken in a global risk off environment, in which case the damage and the impact on different asset class and how you tactically play it will obviously be different.

So, again, from a point of where we should find a hiding place or protection, that very much depends upon these two factors, the size of the tariffs that will be imposed and on top of that whether or not in this risk off environment the flight to safety is the US dollar and not to euro and yen, it could well be that in this case the flight to safety is the euro and the yen.

So, finally, amid uncertainty around reciprocal tariffs, how are FIIs viewing emerging markets like India?
Jahangir Aziz: So, again, look, India most likely will not be spared from the reciprocal tariffs and even if it is spared from the reciprocal tariffs, there are other tariffs that are coming in terms of sectoral tariffs.

So, clearly, one has to see what is going to happen to India. Again, on emerging markets as a whole and on India, more than the tariffs there are two other factors that we play in mind.

As I said earlier, it has to do with whether or not if there is a global risk off event.

In the global risk off event, do we get a dollar strengthening or a dollar weakening, that will obviously determine which direction capital flows go into.

But more than that, it also will tell us how much space emerging markets have in terms of providing support through monetary policy by cutting rates.

And lastly, I would say that, as a general rule of thumb if US equities get hit, it is very unlikely that the rest of the world equities are going to perform well, that typically has not been the case that whenever US equities have been hit, it has usually been the case that global equities also get hit.

How is it that you view the Indian economy right now? And do you think that India's structural growth story is intact?
Jahangir Aziz: I look at macroeconomics, I am not really looking very much at sectors. But look at what has happened over to the Indian growth story, growth has been slowing down, has been slowing down for quite some time, belying the recorded numbers.

We have been pointing this out and that has led to our view that there is going to be a significant amount of rate cuts that are coming, not just because growth is slowing down, but also because core inflation is slowing down, which, of course, is a reflection of significant amount of slack in the economy and the slowdown in growth.

But a real concern has been and this has been for quite some time that India has been running on just two growth engines, one is public infrastructure and the other is services export and that even after three-four years after the COVID, after the pandemic shock, India still is searching for alternative sources of growth and the broadening of sources of growth.

Private sector capex which was the key driver of growth for India for a while that still has not fired up and we still do not see any real signs that that is going to pick up. So, again, in the case of India, it is a question of not just support that can come from the RBI in the form of rate cuts, that might ease the pain a little bit but ultimately it goes down to whether or not India is able to broaden its drivers of growth away from just infrastructure and services export to private sector, corporate investment particularly in manufacturing, and again that has not happened and we do not really see signs of that happening in the near term.