Following the escalation of the global trade war initiated in the early months of the second Trump administration, U.S. tariffs on imported goods from numerous countries worldwide have reached the highest levels in over a century. While the situation is fluid, the United States and its trading partners (excluding China) have now entered a 90-day pause period for potential negotiation of the tariffs before most of them are actually implemented.

Whatever the final outcome, the global macroeconomic landscape is likely to undergo a marked shift as a result of President Trump’s sweeping tariff plans. What seems immediately clear is that the extent of the measures, the steps that may be taken in response, and the potential drag on global growth will be sources of heightened market uncertainty and volatility for the foreseeable future.

The broad brushstrokes

The scope and magnitude of the Trump tariffs herald a structural change in geopolitical and trade policies, along with a fracturing of the decades-long globalization trends that have underpinned the 21^st century world economic order. The details are striking: All affected countries (again, ex China) currently face a blanket 10% tariff on any goods imported into the United States, with a higher rate of 25% to be applied to specific sectors such as autos and steel. For its part, China faces a 145% tariff on all goods exported to the United States and additional restrictions on access to critical technology components. In turn, China has retaliated by imposing 125% tariffs on imported U.S. goods.

While the myriad impacts of these tariffs on emerging markets (EMs) will take time to quantify, the most direct fallout will probably be widespread negative effects on key indicators like business demand, corporate capex, company earnings, and economic growth. These will vary across EMs depending on each country’s degree of exposure to manufacturing or service exports, as well as its propensity to negotiate with the United States and its ability to stimulate domestic growth, promote self-sufficiency, and realign broader trading relationships.

While the myriad impacts of tariffs on emerging markets will take time to quantify, the most direct fallout will probably be widespread negative effects on key indicators like business demand, corporate capex, company earnings, and economic growth.

A closer look at China

By some estimates, the steep tariff to be imposed on U.S. imports from China could cause a one to two percentage point hit to China’s GDP growth in 2025. After a brief period of relative restraint, the Chinese reaction to the U.S. announcement was “quick, direct, proportionate, and immediate,” according to government sources, with its 125% tariff on U.S. exports to China effectively bringing bilateral trade to an abrupt halt. For now, the global spotlight has swung squarely onto the U.S.-China trading relationship, with the world’s two largest economies seemingly implacably at odds with one another.

If the proposed U.S. tariffs stay in place, China can be expected to act to safeguard its own economic interests. Along with retaliatory tariffs and import restrictions of its own, the Chinese government’s response is likely to take several forms, such as providing additional fiscal stimulus aimed at bolstering the domestic economy (beyond what was already delivered in March), issuing new bonds to fund fiscal spending, easing monetary policy, stabilizing the property market, and boosting household consumption.

Modest depreciation of China’s currency (the RMB) could present a further option, but the government’s strategic intention is to maintain the RMB as a store of value and to prevent capital flight, making extreme currency devaluation unlikely.

The global spillover

Elsewhere, despite the 90-day reprieve, smaller Asian EM economies with heavy trade dependencies remain vulnerable to tariff-driven trade dislocations. Countries with a sizable share of exports, even if not fully exposed to the U.S. market, are at risk from second-order effects of a potential global economic slowdown. South Korea and Taiwan are both dependent on exports of high-end semiconductors and a wide range of technology components produced within a highly sophisticated, globally competitive supply chain that will be impossible to replicate efficiently in any imminent timeframe. Resulting higher prices will ultimately affect consumer demand.

Large and midsize EM economies with lower exposure to global trade, particularly U.S. goods exports, are generally better placed than their smaller counterparts. For instance, India’s economy is less reliant on either U.S or Chinese demand, buoyed instead by strong domestic demand and a supportive central bank, while also benefiting from today’s lower oil prices.

But few countries will be completely immune from the combined impact of the U.S. tariffs, the U.S.-China standoff, and associated supply chain disruptions. Indeed, the economic implications look poised to be significant and to reverberate globally, becoming increasingly apparent as the year progresses. Even for Europe (as well as for Asia), the rerouting of Chinese exports formerly destined for the U.S. market poses challenges. At the corporate level, anecdotal evidence already points to a pause in new orders and capital expenditures in an environment of heightened uncertainty.

South Korea and Taiwan are both dependent on exports of high-end semiconductors and a wide range of technology components produced within a highly sophisticated, globally competitive supply chain that will be impossible to replicate efficiently in any imminent timeframe.

A longer-term view

In the longer term, we believe global supply chains are likely to reconfigure over time to enable multinational companies to offset or minimize exposure to U.S. tariffs. In fact, we're beginning to see evidence of a developing U.S. ecosystem to create viable North American supply chains, potentially reducing U.S. dependence on Asian exports: A leading Taiwanese semiconductor firm plans to build new fabrication facilities in the United States and recently more than doubled its U.S. capex commitment.

However, Goldman Sachs has estimated that for 36% of U.S. imports from China, there are limited alternative suppliers, despite substantial tariffs. In China, the corresponding figure is 10%. Moreover, the development of a U.S.-based supply chain requires a highly trained labor force, and that companies be weaned off more efficient (i.e., cheaper) overseas manufacturing capabilities. Resulting higher costs, which may be passed on to the consumer, risk both stoking inflation and depressing demand.

In addition, the unintended consequences of a prolonged trade war may well result in the forging of unlikely trade ties that establish or reinforce intra-regional alliances, reducing dependence on the U.S. economy. 

Final thoughts for investors

Against this uncertain economic and investment backdrop, we believe EM equity allocators may be well served by actively managed strategies that pursue a country-by-country and stock-by-stock approach to defining risks and investable opportunities. With that in mind, our defensive, bottom-up focus continues to be on identifying EM companies with conservatively financed and resilient business models, secular growth thematic tailwinds, and domestic-oriented revenue streams.

EM equity allocators may be well served by actively managed strategies that pursue a country-by-country and stock-by-stock approach to defining risks and investable opportunities.