QRC Letter April 2025- Tarrifs

Dear Investor,

Trust you are well.

While the recent events in the global financial markets are highly complex, below is our humble attempt at trying to make sense of the key moving parts and their implications.

How did we get here?

Post World War II, the US Dollar (USD) was established as the reserve currency of the world. Global trade flourished post the formation of WTO strengthening the USD which led to a proliferation of consumption culture in the US → think supersized coffees, eat all you can buffets, unlimited colas, gas guzzling trucks etc.

To consume those goods and services, US paid the rest of the world with USD who have in turn saved and invested. This reflects the fundamental nature of trade: consumers receive products, while producers receive payment. Countries like China chose to save and invest these USD reserves, while the US prioritized consumption.

As the US economy matured and labour costs rose, many labour-intensive industries relocated to Asia and other low-cost regions. This led to an increased reliance on imports, resulting in foreign entities holding substantial USD reserves.

Foreigners invested these US$ into US government debt which increased the governments borrowings significantly. As of December 2024, US government debt stands at approximately $34 trillion, about 1.25x of GDP, with roughly 25% held by foreign investors.

What is USA doing to mitigate this?

Since Donald Trump took office, they have announced several strategic initiatives:

- Deficit Optimization and Government Efficiency (DOGE) → Aim to save US$50bn+
- Pushing Europe and NATO allies to increase their defence spends so the US can cut back
- On April 2nd, announced global reciprocal tariffs ranging from 10% to 50%+

Why have they imposed such high tariffs?

The aim is to reduce the trade deficit (exports – imports) especially with countries like China, Europe, India etc

Increase the cost of imported goods so that local industry gets protection, and more manufacturing can happen in the US, especially of critical products like semi-conductors, defence, robotics etc

As of now, it seems most likely as a negotiation tool so that the US Govt. can get better terms on their debt and generate revenue to cut fiscal deficit and keep the election promise of income tax cuts

What are the implications of these tariffs?

USA imports US$4.1trn of goods and services (~25% of the global imports (UNCTAD)). The ambiguity surrounding tariff pass-through effects and consumers’ ability to absorb price increases creates substantial uncertainty for global businesses – back to the production planning drawing board.

Global supply chains deeply intertwined – any break in supply due to unviability caused by the tariffs has a far-reaching disruptive impact – as we observed during the covid 19 pandemic.

As of now, given the sheer scale of the tariffs announced, the best-case outcome seems to be a rise in inflation with the worst case being demand destruction across industries leading to a global recession.

What does this mean for India?

US exports account for 2-2.5% of India’s GDP and overall exports are ~21%. Given India’s history of non-alignment, if the Govt. makes the right policy moves and signs balanced trade treaties with its major trade partners, we could come out of this better than others.

Escalation of trade tensions could lead low-cost producers to offload excess inventory into India, potentially harming domestic industries.

~80% of India’s GDP is domestic consumption driven. While this may provide some protection, it is unlikely that India can escape a global recession unscathed.

Since covid 19 and the first round of China tariffs, some businesses have strengthened and diversified their supply chains and may prove to be more resilient in an emerging new world order.

More questions than answers

How does the US consumer and economy respond to these tariffs? Trump is trying to change deep rooted behaviours in a short period of time by shocking the system – will these changes stick or will his popularity suffer enough for him to negotiate?

China needs to tilt from a ‘savings’ economy to a ‘consumption’ economy – again these are behavioural changes that may take time and need large doses of incentives and stimulus. How quickly can this happen?

A lot of US businesses like Apple, Nike, Ford, GM, GAP, Walmart, Costco etc depend heavily on global supplies – how will they respond to the tariffs and what does it mean for their profits and the consequent impact on the US economy/jobs. What will be the impact on global growth and interest rates?

While global companies may start factories in the US bringing employment and investments, this is a long-drawn process and will take its time. Will labour and other costs make it viable?

Given the complexities and far-reaching consequences, one hopes that a middle path will be chosen and there will be an adequate transition period for the global economies to rebalance.

Thank you for trusting us with your investments. As always, please feel free to reach out to us in case of any queries.

Best regards,

Team QRC

Note: This letter is based on information available as of April 8, 2025. The global financial landscape remains fluid and is continually evolving.

Note: The LLP has received approval for change in control of the LLP from SEBI vide letter dated 11th May 2023. Subsequently a re-registration application was filed with SEBI. SEBI vide email dated 26th February 2024 confirmed the same and granted the SEBI PMS registration certificate dated 27th February, 2024.

Disclaimer: This communication is intended only for the use of the addressee(s) and contains information that is privileged and confidential. The information presented: (1) includes data proprietary to QRC Investment Advisors LLP; (2) may not be copied or redistributed except with express permission of QRC; (3) does not constitute investment advice; (4) is presented for informational purposes only; and (5) is not warranted to be complete, accurate, or timely. The performance related information provided herein is not verified by SEBI. Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved. Past performance of the Portfolio Manager does not indicate its future performance. Investors are not being offered any guaranteed or assured returns i.e., either of principal or appreciation on the Portfolio. As with any investment in securities, value of the Client’s Portfolio can go up or down depending on the factors and forces affecting the capital market. This document does not constitute an offer to sell, or a solicitation of an offer to invest with QRC Investment Advisors LLP. External risks such as war, natural calamities, and policy changes of local / international markets may affect stock markets. The Portfolio Manager is registered with the Securities & Exchange Board of India with registration number INP000005892.[/vc_column_text][/vc_column][/vc_row]