The vulnerability of emerging countries as Trump returns to the White House

In general, the trend in emerging countries this year was “a certain slowdown,” says Eduardo García Castro, senior economist at MAPFRE Economics. While this dynamic has been more marked in Latin America and emerging Europe, Middle East, and Africa (EMEA) than in Asia, “it has served to exacerbate regional differences and highlight local vulnerabilities.”

In Latin America, countries like Brazil, Mexico, and Peru have continued to sustain the economic performance of the region, holding a clear advantage from an investor perspective, while others, such as Argentina and Colombia, have not fully leveraged the potential of the export market boom in the global South. In Asia, China’s slowdown stands out, a consequence of the shift in production and diversification of supply chains, a process that benefits other markets in the area, such as India, Indonesia, and Vietnam.

In the emerging EMEA countries, the economic crossroads are conditioned by the ongoing conflicts in Ukraine and the Middle East, which reduces opportunities for a more favorable expansion due to the risk of intensification of the wars.

Although the general environment remains consistent, these nations are facing trends such as a structural fiscal deficit, high indebtedness, lean economic growth sustained over time, and dependence on raw materials. They are also affected by higher geopolitical and regulatory risk premiums. On the other hand, their relatively strong performance has continued to be supported by the pace of the manufacturing sector, where the differential compared to developed economies shows a favorable balance.

Where might they be hit?

Against this backdrop, an aggressive U.S. trade policy under the next Trump administration, which it already adopted during its previous mandate and has promised to reactivate in the next four years, could be a hugely destabilizing factor for emerging countries.

The chart below shows the weight of the United States on foreign trade in a number of emerging countries. Mexico’s high dependence on its northern neighbor stands out, making it clear that the country is vulnerable to potential tariffs. China also relies on the United States as its major export market, the destination of a high percentage of its foreign sales, far exceeding the relative weight of its U.S. imports—one of Trump’s biggest gripes. The third-most-U.S.-dependent markets are the countries of Central and South America, a region where, unlike China, the weight of imports far exceeds that of exports. 

Regarding trade, Trump is likely to impose tariffs of 60% on China, and between 10% and 20% on other countries, according to MAPFRE Economics. “While this may benefit the United States in the short term, it will be punitive for that country and the rest of the world in the long run, by reducing trade and global activity while adding pressure to imported inflation,” according to Eduardo García Castro.

The consensus is that, in the long term, these measures could cost between 1 and 1.5 basis points of GDP. They could also lead to equivalent decisions by the affected nations, multiplying the impact on global economic activity.

Beyond the U.S. economy itself, this sort of scenario would leave the world with a lower capacity for long-term growth, higher inflation, and the intensification of some imbalances, which would particularly undermine the emerging markets facing headwinds.

As Eduardo García Castro of MAPFRE Economics points out, a U.S. protectionist trade policy “would exacerbate portfolio investment flows, together with possible tariff actions,” redirecting the much-needed investment of emerging economies. At the same time, it would “rewrite the narrative of monetary policy easing of both the Federal Reserve and its peers, with implications for currencies and capital flows that have the potential to trigger risk-off events and destabilize markets,” he says.