Strategies for investors amid US-India trade war tensions
The Impact of the US Trade War on Global Stock Markets: A 2025 Perspective
In 2018, the US and China engaged in a trade war that caused a 22% correction in the US stock market, lasting roughly 11 months. Now, in 2025, we are witnessing an escalation of trade tensions, not just with China but also with major partners like Canada and Mexico. The US has recently imposed tariffs on these countries, which is intensifying the trade conflict. The Federal Reserve is also concerned that this trade war could harm the economy, leading to questions about whether the US stock market could fall further. While the short answer is yes, whether it represents a great buying opportunity depends on the investor's time frame.
In this article, we will explore the economic dynamics of the trade war, its potential impact on stock markets, and the effect on both the US and Indian markets. If you’re an investor, understanding these dynamics is key to making informed decisions in this uncertain environment.
The Economics Behind the US Trade War
The US’s three biggest trading partners—China, Mexico, and Canada—are critical players in the global economy. However, the US is a net importer, meaning it imports more from these countries than it exports to them. For example, the US exports $334 billion to Mexico but imports far more. This trade imbalance has been at the core of President Trump’s policy. He has argued that the US is being taken advantage of, as foreign countries face low tariffs when exporting goods like electronics and consumer products to the US.
To remedy this, Trump’s administration has imposed tariffs, effectively raising the cost for foreign exporters to sell their goods in the US. While this approach may seem beneficial for the US in the short term, it has complicated consequences. Higher tariffs result in price hikes, pushing inflation upwards, especially since the US relies heavily on imports. Major global players, like Musk, are forecasting that inflation will rise in the US due to this trade war. This could further exacerbate the economic challenges.
Three Possible Scenarios for the Market: Pessimistic, Baseline, and Optimistic
Pessimistic Scenario: Inflation Spirals Out of Control
In the worst-case scenario, the trade war escalates, and inflation rises sharply. The US has already been battling inflation for several years due to high government spending and monetary policies that have pumped more money into the economy. If this trade war leads to further inflationary pressures, it could lead to a substantial drop in stock markets.
In this case, we could see a 10-12% correction in the US stock market. Historical trends show that inflationary concerns have caused corrections in the past, such as the 20% drop in the market between 2021 and 2022. Although a 25-30% drop might seem unlikely, inflation could push the market down another 10-12%.
Baseline Scenario: GDP Growth Slows
In a more likely scenario, the US could experience a slowdown in GDP growth over the next six to twelve months. The US economy has been growing steadily, but a prolonged trade war could slow GDP growth, leading to a period of sideways consolidation in the market. This would mean that the market won’t experience drastic drops but will fluctuate as the trade war continues.
If the conflict drags on, we could see a moderate correction, but it is unlikely to be as severe as the pessimistic scenario.
Optimistic Scenario: Quick Resolution
In the most optimistic scenario, the trade war de-escalates quickly, and tensions are resolved. Trump is known for his theatrical approach to politics and negotiations, and it's possible that this trade war could be wrapped up sooner rather than later. If that happens, the negative impact on the stock market could be minimal.
In this case, we might also see the Federal Reserve cut interest rates, which would likely boost the market. A small correction of 5-7% could occur, but it would likely be followed by a recovery as the trade war resolves and the Fed takes action.
Impact on India’s Stock Market
Turning to India, the impact of the trade war is less direct. While the US is a major global player, India’s market is primarily driven by domestic consumption. This makes India less vulnerable to the US-China trade war. In fact, India has already seen a market correction, with Nifty falling by 16-17%. This has already priced in some of the global risks.
India’s market has been relatively resilient, particularly in sectors like financials. In fact, financial stocks have performed better during the recent market downturn compared to other sectors. India’s economic fundamentals, based on domestic consumption, continue to look strong despite global uncertainties. For investors, focusing on consumption-driven sectors like banking and consumer goods will likely offer better opportunities than speculative sectors such as defense or infrastructure.
Long-Term Outlook for the US Stock Market
Despite the short-term volatility created by the trade war, the US stock market remains an attractive option for long-term investors. Key sectors like artificial intelligence, semiconductors, and technology continue to thrive. The US is a global leader in these industries, and this strong foundation provides substantial growth potential.
Investors should approach the US stock market with a long-term perspective. While there may be further corrections, buying during these dips offers an opportunity to accumulate stocks at lower prices, setting up for long-term growth. The key is to avoid making all your investments at once and to be strategic about positioning yourself during these market fluctuations.
Conclusion: Investing in the US or India?
From a long-term investment perspective, the US stock market still offers substantial growth potential despite short-term challenges. The key sectors driving global growth, such as AI and technology, remain strong in the US, and any market corrections provide an opportunity to buy quality stocks at lower prices.
India, on the other hand, has already experienced much of the market correction, and its economy is driven by domestic consumption, which provides stability amid global uncertainty. While short-term fluctuations may continue, India remains a solid investment opportunity, especially in consumption-driven sectors.
In conclusion, while the US market may face volatility in the short term, its long-term prospects remain strong. Meanwhile, India offers a good investment opportunity for those focusing on domestic consumption. Consider your time horizon, risk appetite, and investment goals as you navigate these uncertain times.