Transcript: Ruchir Sharma On Trump Tariff, US-China Tensions & India’s Global Trade Future

I think the key thing, as you said, is that this has happened now. And my suspicion here is that these are very long term trends, which is that the US market and the US economy after the global financial crisis of 2008, 2009, had been on a tier, had dominated the world. The US stock market had come to be nearly 70% of the global stock market capitalization, 80% of all the incremental flows were just going into one market. And this process has only just started to reverse.

The dollar was about the most overvalued that it had been in its floating rate history, which dates back to the early 1970s. So, you know, when something is so overvalued, it is telling you that it is set up for disappointment. And I think that’s what’s happening under Trump.

And the other thing, which I think that a lot of people have underestimated is the fact that why is Trump doing what he’s doing? Right? So a lot of people think that this is all just madness and stuff. I sort of believe that there’s certain method to the madness, which is that what he’s doing in terms of some of the tactics he’s using are possibly wrong. But he sort of has identified that many Americans were not happy with the way the economy was performing.

Inflation had been very high for the last few years under Joe Biden in particular. And also the fact that for the average American, they were not seeing the benefits. The stock market is doing well, but who owns the stock market? It’s mainly the top 10 or 20%, the bottom 80%. They were not getting any benefit from this great tech boom, the stock market boom. So it was a very stratified economy.

Now, Trump as a populist has been able to identify that the average American is not happy with this and they want disruption. Now I think that disrupting it through tariffs is possibly the wrong way to go about it. Had he done more disruption by reducing the role of the government, which I think is a real problem for many Americans, I think that the results would have been better.

But at the core of it, I think we have to admit that the American economy was a bubble. It was artificially juiced up by the government and the average American was not happy with the way the American economy was performing. So identifying that was the key thing. And once you sort of identify that, then you can see that some disruptors want to come to office and sort of start doing stuff which is not acceptable to the status quo and the elites.

Forecasting Trump’s Tariff Strategy

RAHUL KANWAL: So here’s what I hope to do, Ruchir. I’ll pick different sectors of the global economy and get you to forecast. And wherever you think it’s too tough, you can say you don’t want to. But wherever you can give it a shot, let’s do that.

So let’s start with whether Trump stays the course on tariffs. And that’s really the big question, because he announces tariffs, there’s some kind of a blowback, the bond market freaks out, or his billionaire tech friends put pressure on him, he backtracks. And that’s the one critical question. Does he stay this course or does he pull back?

RUCHIR SHARMA: I think that he’s already pulling back. Someone who knows Trump very well once gave me an observation that really stayed with me. In fact, he said that he’s also been a developer and known Trump really from the early days. He says that Trump’s style of operation is such that every time somebody walks into a room, he loves to throw a bomb or a grenade and see what happens and adjust his style.

And the other related observation he made was that Trump’s style of bargaining tends to be that, let’s say he thinks that something is worth $100,000, he will start by telling you that it is worth a million dollars. It’s called the anchoring bias, right? Which is that you anchor the expectation such, and in the end, if he ends up getting $150,000, he thinks that’s the victory. It’s very far from what he said at a million, $100,000 is the true value. And he claims it’s a victory now, because all the critics will say, what a come down that you asked for a million and you only got 150. In his mind, he thinks, I asked for 100, I got 150 for this. That’s a victory for me.

So I think there’s some of that happening with the tariff negotiations as well, which is that in his first term, the tariffs went up very slightly. The average effective tariff rate in America went up, I think, from 1% to 2.5%, mainly directed at China. The average effective tariff rate, I think, under this presidency – there is a base case that you can take that the average tariff rate is going to be about 10%, which is still a significant shift, but it’s nowhere near the average of 25-30% type tariff rates that he has spoken about in that famous April 9th announcement.

That was the peak shock day when those tariffs – we woke up in the morning, those tariffs were there until he unbanned it that very day. So I think that that’s where we’re going to be at, which is that we saw peak tariffs on April 9th and we know what the base is, which is that we’re not going back to the 2.5% world either. He’s trying for something in the middle. The only risk with the strategy is often accident happening because you’re playing in some way a big gamble.

The China Risk Factor

RAHUL KANWAL: What could this accident be?

RUCHIR SHARMA: China. I think that’s what’s the real worry, which is that his sort of strategy is that, and this comes from a bit of hubris about America as well, which I think permeates both the parties out there at the top that, you know, we are the world’s largest economy, we are the world’s largest customer. Where else will people go? Where else will the money go? They have to come to us, right?

So he’s got that basic assumption. The biggest mistake that can happen here and lead to an accident is if China says, fine, you want to play this hardball, so will we. We are not going to come and negotiate with you. So that is where the danger happens. Because he wants a deal with China. He wants the negotiations to happen where he gets a deal with China and shows that they punished China to some extent. But at the end of the day, he wants some deal to happen.

RAHUL KANWAL: He seems to also be getting frustrated that China isn’t coming to the negotiating table just yet. It’s impossible to say for sure. But what’s your best sense? Does Xi Jinping plan to hold out or is he also just playing double bluff?

# China’s Retaliation and Global Market Impact

RUCHIR SHARMA: Well, it’s impossible to notice, as I said, but I think that in terms of the fact that already what China has done, I think has gone a bit against their calculations. That’s the accident which has sort of happened, therefore the nervousness in the markets. Because even if you look at what happened, it’s a very telling sign, which is that when he announced that tariffs on Liberation Day, the first reaction was bad, but not a panic. The real panic set in when China decided to retaliate. All the other countries in the world said, we will wait to retaliate, we will negotiate. The moment China said we are retaliating, that’s when the fear came in that maybe an accident here could happen.

So I think that that’s really the big risk out here. But having said that, what can we do today, which is that we can try and see what is going to emerge from this fog of war out here. Right. So we got tariffs are going to go up in America. I think the base case is that we’re going to be at least at 10% somewhere north of 10. But at least at 10% is the effective tariff rate into America.

Most economists calculate that for every 1 percentage point increase in the effective tariff rate in America, that slows down America’s economic growth rate by about 10 basis points, 0.1%. So just the fact that you have a tariff rate of north of 10% means that the American economy just from that effect may slow down by almost 1% just due to that.

Then he’s putting curbs on immigration in a serious way. So if you look at America before the pandemic, America used to sort of get about a million immigrants a year net. All immigrants put together, asylum seekers, illegal, legal, used to be like a million after the pandemic. And this was like the biggest failure under the Joe Biden administration, there was a massive surge in immigration which disturbed the social fabric of any country. And that average number went up to about two and a half million. So huge amount of immigrants coming in a million. Now your Trainville is running at two and a half million that is expected to collapse this year to possibly half a million, so below even what existed before the pandemic. So these are big shocks to the system because at the end of the day, like America also needs labor and a lot of the jobs which are being done by these immigrants, a lot of the local Americans do not want to do so. These are all shocks that are being given to the system at the same point in time.

# Recession Risks for America

RAHUL KANWAL: The next question is, what impact do these shocks have on America’s growth rate, which has massive bearing on global growth. Right. I was reading a lot of brokerage reports which say that the probability of recession is now at 60%. It’s almost 2 thirds. And some I think we already in recession. We don’t see it yet because it takes two quarters of the data to come out, but we’re already in recession. Is America almost certainly now hurtling into a recession?

RUCHIR SHARMA: But there’s no certainty because remember that every economist was convinced in 2022, the Fed increased interest rates. Every economist was convinced that America is going to have a recession. It did, because there was massive fiscal stimulus and other things offset it. So I think it’s too early to pronounce definitively that a recession is coming in America.

But I think that what I’m seeing around the world is the fact that, and this is what I sort of had written about as well, that whether Trump makes America great or again, is debatable. And the evidence is against that just now. But he may make the world great again. How? Because I think that many leaders around the world and countries are facing that we are now in an existential crisis. So what many countries around the world are doing is that they are beginning to carry out reforms and increase trade with each other.

So there’s a positive offset happening here. And the most talked about case this year has been Germany, that Germany went ahead and did this massive fiscal reform and is trying to back it up with some of the structured reforms in the labor markets and stuff. And Germany would have never done this had it not faced the threat of Trump and all this happening out there. That’s what galvanized Germany. And look at countries like India, too.

# Impact on India’s Growth

RAHUL KANWAL: So let’s spend some time on India, because the critical question from the perspective of all those watching is what impact does this have on India’s growth? Let’s just spend a moment on growth and then we’ll deal with regulatory cholesterol and what we can do in terms of cleaning up Iraq. But in terms of growth, a lot of economists I’ve been speaking to are knocking off at least half a percentage point from India’s growth. But some suggest that maybe it won’t be as bad. What’s your reading?

RUCHIR SHARMA: I think it may not be as bad for a separate reason, which I think that economists don’t quite calculate, because economists look at through the trade in the classical mechanism. But the other point, which is what I’d written about my earlier pieces as well, is the amount of money that America sucked in. Right. So all the capital in the world was just going to America this decade.

And if you look at the Indian market, too, or India in general, capital inflows were pretty poor into India. Foreign capital, foreign capital flows into India, even FDI slowed down, but especially stock market flows had dried up over the last couple of years. I suspect what can happen in this new environment is that India could attract greater capital flows over the next couple of years. Emerging markets in general could attract more capital flows and the dollar also could be weaker.

And a weaker dollar is generally a more conducive environment for emerging markets and other countries in the world because it promotes more capital flows. So it’s possible that some of the negative shock from trade, which comes because America’s higher tariffs, could be offset by more capital flows coming into countries relative.

# Indian Stock Market Valuations

RAHUL KANWAL: To other emerging economies. How do you view the valuations of the Indian stock markets at this time, which were hugely overvalued in the eyes of global investors, but now there’s been a substantial correction? Is this an opportunity that you think foreign portfolio investors will look to actually dive into the markets at current levels?

RUCHIR SHARMA: I think that there’s much greater interest because as I said, that so much of the money has been locked up in America. So barring any absolute collapse in America, that if, in terms of, if this environment continues where the capital slowly keeps coming out of America over the next few years, I think that this is a much better opportunity for emerging markets, including India. And the fact that we’ve had a correction over the last six months, I think is a positive because it’s.

RAHUL KANWAL: Where does India rank in your listing of the attractiveness of the Indian stock markets when compared with other peer economies?

RUCHIR SHARMA: I think that it’s a bit nuanced that from a pure valuation standpoint, India is clearly more expensive, but the growth opportunity here is much greater because of the size and the diversity of the market, which is that we still have more than 500 companies in India with a market cap of more than $1 billion. That kind of diversity and depth you don’t find in any other emerging market.

# India vs China for Foreign Investment

RAHUL KANWAL: Because the money is also heading a lot towards China, where. And you write about it in one of your pieces where you compare BYD with Tesla in terms of market cap, in terms of price earning ratios, the fact that Chinese companies are undervalued relative to their American peers. And now with deep seq, we’ve seen also out innovating some of the American companies. So is China going to suck a lot of the money or do you think Western money will now be wary of going to China?

RUCHIR SHARMA: No, I think that in general, the real place for where capital is going to come out is America. So don’t think of this as an India, China thing, that it is really America. Our market may almost become negatively correlated, I see, to the American market now, because in the past the whole thinking was. And something even I would sort of say all the time that, you know, when America goes up, it takes the rest of the world with it. When America goes down, it takes the rest of the world down with it.

That relationship broke down in the last few years because as the American market was surging, very few markets in the world went up with it. In fact, capital came out of other markets to fund the American boom in a way. Now I think what’s happening is that capital is beginning to flow to other countries. We’ve seen massive flows into Europe this year. It was unthinkable to say six months ago that Europe could attract capital flows from America. You know, like as, like in places like Davos. The complete consensus was exactly the opposite, which is that the only place in the world which can innovate is America. Europe is a Silicon Valley of regulation, not of innovation. Right. That was a common talk out there.

So I think that the single most important variable, if you want to look at for capital flow is how much a foreigner is going to put into India. Just look at the dollar exchange rate. That will tell you everything. And that’s something which I said even in November, that as long as the dollar is going up, don’t expect capital flows to come to India. Now that the dollar has turned. And it seems to me that this is a turn which is here to stay for a while to come. I think that we should expect more capital flows. Now, of course, if we carry out policies at home which are anti foreign capital, we make some silly decisions that’d be counterproductive. There’s no.

# India’s Trade Policy Direction

RAHUL KANWAL: What’s your reading of the mood in the government from the outside? I mean, do you think that we’ve set up a virtual deregulation committee which is supposed to try and ease business in India, and they’re also negotiating multiple bilateral trade agreements? Do you see the determination to push through? Do you think a trade deal is possible by far between India and the United States, for example?

RUCHIR SHARMA: Well, more than that, I think that a trade deal is happening with other countries. Right. So as I said, the focus can’t be just America, it’s the other country. So there’s definitely been a pickup in trade activity and trade deals. And this is a change because in some of my earlier sort of interviews, I said that India had turned to protectionist over the last few years and there’s been a turn for the better in terms of that. Now at least we’re doing more trade deals. We are getting more open again because we need that as a developing economy.

We can’t follow America’s policies currently of turning more protectionist, we still have to sort of follow the development model. So if you look at around the world, I think what India needs to do is to engage much more on trade. You know, one of the data that I keep quoting is that the 10 fastest growing trade routes in the world, eight of them don’t involve America anymore and five of them involve China. And India is only in one of them. Where the India China trade was increasing a lot right up until 2022, then things have slowed down. So one thing which I think India has to do also is to this distrust with China I think has to ease a bit.

# India-China Relations

RAHUL KANWAL: How can you trust China given what they did along the line of actual control?

RUCHIR SHARMA: I think so. I mean, you’re totally correct on that. I think that China’s actions on what they did were totally irrational. It’s something which baffled us also that what is China doing out here in terms of it after the kind of effort Mr. Modi had put in, to cultivate Xi Jinping, that they’d sort of spend so much time in Ahmedabad and everything. Right. So it was something which was like that. So but I think that you have to understand that China is also under pressure just now to change. So Xi Jinping’s been on a tour of all of Southeast Asia courting neighbors. So I think that China’s attitude is also changing under pressure.

RAHUL KANWAL: But the question is, can Modi trust Xi at this moment? Because the question is, are we drawing. And from the statements that we see from Jaishankar, from Piyush Goyal, the barbs on Beijing, it seems quite clear that India is drifting towards the Trump ecosystem, which is also what Trump wants very clearly. And at this moment India seems more.

# India’s Position in the Global Trade Landscape

RUCHIR SHARMA: India has been sending mixed signals compared to a year ago, with some tensions easing. We have to learn to trade with more people. The issue with being too invested in the Trump ecosystem is that Trump is a deal maker. If he suddenly cuts a deal with China, we could be left feeling isolated.

I think we need to trust and verify what China is doing. If China is beginning to change its attitude, we should respond accordingly. This comes from someone who has long been a China bear and suspicious of China on many fronts. But I’m seeing changes in China too.

Xi Jinping has been forced to change because of external circumstances. He’s changed in two ways. First, he’s reaching out much more to the private sector after launching a massive crackdown that damaged business confidence. This year he’s been meeting private sector leaders publicly, sending a message that the government is there to support them.

Similarly, on the external front, whether it’s the PLA or others who have been adventurous overseas—not just with India but in the South China Sea and other places—they’re showing signs of toning down their aggression. They realize they need other neighbors because they’re under real attack from the U.S.

For countries like India, this could be a good moment. I see more good coming from this situation than bad.

# China’s Economic Trajectory

RAHUL KANWAL: What’s your reading of the Chinese economy at this moment? Let’s war game. If tariffs announced by China stay the way they are, there are very real concerns of dumping in other countries with some of that reaching India. And secondly, the fact that there is an aging population, fewer younger people, advances in cutting edge technology—if things stay the way they are and there is no deal with Trump, what does the economic trajectory of China look like from your lens?

RUCHIR SHARMA: It depends how China responds. One of the big problems in China has been that its model, especially for such a large economy, has been far too export dependent. All economists will tell you it needs to do much more to increase domestic consumption. So does it use this opportunity to finally make its economy much more domestically oriented rather than being so export dependent?

My broad take on this trade war is interesting. When I try to map what the world might look like a few years from now, I feel that, contrary to the saying that when two elephants fight in the jungle everybody gets trampled, here the opposite might happen. The big losers are going to be both the US and China on a net basis in the next few years. The winners could be countries like India, Brazil, and some European nations where the domestic economy is large enough and trade plays some role, but not an oversized one.

Some of the smaller economies that have been very export dependent, particularly to the US, will find that model under threat. Even if the Trump administration backs down on tariffs, every business person in America is going to think twice before setting up factories abroad because they know the threat is now there.

# Manufacturing Shifts and Foreign Investment

RAHUL KANWAL: Do you think India is poised to benefit from Western MNCs looking to diversify out of the United States? Because there are two impulses at play. One is Trump saying “come here, make in America.” Modi is saying “come and make in India.” And those companies don’t want to get on the wrong side of Trump. So does India benefit? The other argument, of course, is that the United States simply doesn’t have the kind of workforce required for the kind of manufacturing that Trump is talking about. So how does this play out?

RUCHIR SHARMA: American companies are going to be much more reluctant in general to invest overseas. I think one of the single biggest losers of this trade war are going to be American companies. If you look at what’s happened since 2000, when globalization really took off with China entering the WTO, the profit margins of American multinationals and manufacturers exploded because they were able to set up supply chains wherever they wanted, lowered their costs, and paid people overseas much lower salaries for doing the same job.

Now, regardless of what happens, the calculation is not going to be purely about efficiency anymore. It’s going to factor in the risk of being overexposed to global supply chains. That’s going to hurt the profitability of American companies.

For India to rely too much on American capital to come here, especially in terms of foreign direct investment from these companies, I think that scope is limited. Where things can increase is with European, Japanese, and other companies that will still be looking to diversify.

The problem in India is not that the opportunity isn’t there. What keeps foreigners out of India often is that the domestic regulatory environment and ecosystem is so complicated. I think improvement is happening, but not fast enough. I still don’t see our regulatory agencies playing a supportive enough role for foreign capital. That’s what I’d like to see much more of to attract greater flows.

# India’s Trade Strategy

RAHUL KANWAL: It’s quite clear that while almost half the trade happens between China and the United States, trade between other countries and blocs is increasing. How can India benefit from that? What are the levers we should be pulling?

RUCHIR SHARMA: We should have been part of regional trade agreements and do more bilateral deals, even in our own region. One of India’s biggest development weaknesses is that South Asia trades the least with each other. Only parts of Africa have comparable intra-regional trade levels. All the booming economies around the world trade a lot with each other. Southeast Asia has shown that.

I think we just have to figure out how to become less America-dependent. Every leader and country in the world today is thinking about how to become less America-dependent. In the short term, everybody wants to deal with America because the shock of not doing so is too great. But over the long term, people are going to focus on reducing that dependence.

This started in a very clear way in 2022 with the sanctions America imposed on Russia. When Russia was completely thrown off the grid, many central banks around the world decided they didn’t want to put so much of their foreign exchange reserves just in the dollar. They started buying gold and other assets.

This was true even among Indian and Brazilian central banks. Even though they were on good terms with America, the fear was that if America could do this to Russia, what would prevent it from doing it to them under some pretext? Trust in America has been declining gradually, but it’s accelerated dramatically in the last couple of months. Companies and countries around the world are all thinking today about how to reduce their dependence on America.

# Future World Order

RAHUL KANWAL: As the confrontation between the United States and China escalates, is this going to be a war to the finish where ultimately there is one winner, or do you think that two massive giants have to find a way of making peace with each other, and the world then gets divided into two blocks? What’s your reading of what the future world order looks like?

RUCHIR SHARMA: I don’t think it’s easy to talk about two blocks forming as such. I think many countries, from India to Indonesia, want to remain as independent as possible. They don’t want to be seen in one camp or the other.

There are still a couple of things that could prevent this war from escalating further. In the short term, there could be obstruction from the courts about these tariffs. Trump will find some way of implementing them, but that may at least reduce their scope.

Then in 18 months, there’s a midterm election in America, and everything points to an anti-establishment wave continuing. The Republicans could lose some of their majority, and the Democrats could gain, which would put some checks and balances back in place.

As that old line goes, nothing is permanent—this too shall pass. But I think enough has been done to sow doubts that you cannot rely on America all the time. It is complete folly to put all your capital into America and ignore the rest of the world. That consensus has been badly shaken.

# Trump’s Focus on Tariffs

RAHUL KANWAL: It’s almost as if Trump’s second presidency has become entirely about tariffs. I don’t know what happens from here, but there’s so much disproportionate attention. It almost seems as if that’s the wand that he wants to wave, and there’s very little talk about anything else.

RUCHIR SHARMA: That’s a great point. It’s unfortunate because if you talk to people in the administration, they will tell you about how much they have done to close the borders. The level of illegal immigration into America has come down significantly, but there’s been collateral damage.

There are so many people on this trip of mine to India that I’ve spoken to who are fearful of traveling to America, not knowing what’s going to happen at the airports. So even where Trump is doing some things right, like cutting down illegal immigration, the tactics being used are so heavy-handed that the collateral damage is significant.

Tourism is about two and a half percent of GDP in America, and bookings are down about 25% for this season. That’s collateral damage. Why wouldn’t you want tourists? But because you want to stop illegal immigrants, you’ve given too much power to government agencies. And as we know in India, the moment you give the government too much power at any agency, they are bound to misuse it. That’s what’s happening in America today as well.

# Creative Destruction and the Future of Tech Giants

RAHUL KANWAL: I started this interview by quoting from one of your pieces. I’ll end with that as well. You know, you write that the global economy moves in cycles and that creative destruction, once a hallmark of capitalism, is either dead or dormant. If we are on the cusp of its return, as you suggest, what are the signs that a contrarian shift is finally taking hold? So here’s what you’ve written: “Creative destruction has been a defining and necessary feature of capitalism since its roots in the 18th century. Either it’s dead or dormant and poised for a comeback. My bet is on the comeback that would herald a belated return for contrarian investing, starting with the shift away from the US and its top tech companies.” This was earlier. If you had to take a contrarian bet now, what would it look like?

RUCHIR SHARMA: I think that you have to be very selective about when you take contrarian bets because of the fact that trends don’t keep turning every year. But in terms of variations every year, I feel that this is a multi-year trend. So in fact, the domination of these top tech companies around the world coming from America, I think it got too excessive – that how can these same companies dominate all the time? And we’re leading to all sorts of problems in America. There were so many towns in America dominated by just one employer of that one company. And then the labor was feeling very squeezed that, you know, if you have to only work for one company, we have no choice. This is very demeaning for us in the way we have to deal with it.

So I think the basic point of creative destruction is that the same companies, if you look at the top 10 companies in the world every decade, there should be churn. New companies come up. Very few are holdovers from the past. This decade, that was not happening.

Now, in a perverse way, what Trump has done is to have accelerated the decline of those companies. So I doubt very much if these companies, all these top tech companies, are going to regain their halo that they once had. At one point in time, it just seemed as if these companies are going to dominate the world. I think that that has been cracked, and it may be cracked the wrong way, but I think that the relative decline of these companies is a positive.

RAHUL KANWAL: Well, this has been a fascinating conversation and I think especially because you got all your past forecasts right, people are going to be latching onto every word. Try and find meaning and context in what you’ve said. Ruchir Sharma, for taking our time, thank you very much.

RUCHIR SHARMA: Thanks, Rahul. Thank you.

Related Posts

• Transcript: The Other Side of the Bitcoin – Crypto & Corruption w/ Ben McKenzie
• Tokenized Gold vs The Bitcoin Standard: Peter Schiff vs Saifedean Ammous (Transcript)
• Mel Robbins Podcast: w/ Shark Tank star Barbara Corcoran (Transcript)
• The SILENT Financial Collapse Nobody Sees Coming: Lyn Alden (Transcript)
• Is Another 1929 Crash Coming? w/ CNBC’s Andrew Ross Sorkin (Transcript)