A likely increase in trade protectionist policies among major economies will hurt economic growth in most emerging markets over the next couple of years, stated S&P Global in its latest analysis. However, the magnitude of the impact will depend on the details of those policies, which will become clearer in the coming months.
“For now, we assume only a modest increase in tit-for-tat tariffs between the U.S. and China in 2025 and no new tariffs for the rest of the world. In this scenario, the impact on GDP in most major emerging markets outside of China is relatively modest. Emerging markets in Southeast Asia are among the most vulnerable to weaker demand from China,” stated S&P.
However, the risk of more aggressive trade protectionist policies, and consequently a greater hit to growth, is high. Trade-related uncertainty will likely result in a period of higher-than-normal volatility in emerging markets’ assets, potentially increasing risk premia and tightening financial conditions, especially among markets with weaker macroeconomic fundamentals.
Trade policies remain highly uncertain
It’s highly likely that U.S. President-elect Donald Trump’s administration will increase protectionist policies but the range of possible outcomes is wide and uncertainty is high. “We assume the U.S. will raise the effective tariff on Chinese imports to 25 percent from around 14 percent currently, starting in the middle of 2025. We expect China to reciprocate by also increasing its effective rate on U.S. imports to 25 percent,” added the report
As a result, S&P now forecasts Chinese GDP growth of 4.1 percent in 2025 and 3.8 percent in 2026, 0.2 percentage points and 0.7 percentage points less than the September baseline. In the U.S., the GDP forecast changes have been more modest. The hit to growth from tariffs is not as large as in China, given the larger size of the U.S. domestic market. This factor, combined with stronger-than-expected data over the past quarter and the likely extension of the Tax Cuts and Jobs Act next year, underpins GDP growth projections of 2 percent for both 2025 and 2026.
Southeast Asia more vulnerable
Because the GDP impact of S&P’s trade policy assumptions is larger in China than in the U.S., it expects emerging markets with closer trade ties to China to be more vulnerable to weaker demand. These are mostly in Southeast Asia and tend to have large shares of final goods exports that go to China. Their supply chains are also closely integrated with China’s, which means weakness in Chinese exports translates into weaker export performance in their economies.
However, tariffs could also have some positive ramifications for these economies. Higher U.S. tariffs on Chinese exports, in the absence of additional tariffs in Southeast Asian emerging markets, would make the latter more competitive and could attract more foreign direct investment, including from U.S. firms. However, this would likely take some time, especially in highly specialized sectors where delinking from Chinese production is complex and capital-intensive.
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Chinese exporters to expand into other markets
U.S. tariffs on Chinese exporters could accelerate their push into other markets, including emerging markets. When then-President Trump first announced tariffs on Chinese imports in January 2018, some Chinese goods that had been directed to the U.S. went instead to other markets. Since that time, the share of U.S. imports coming from China has noticeably decreased, while some emerging markets’ and other advanced economies’ shares of imports from China have increased.
Monetary normalization to slow
S&P now expects fewer interest rate cuts by the U.S. Federal Reserve. Continued strength in U.S. household spending and expected trade tariffs’ impact on inflation expectations will likely slow the Fed’s monetary policy normalization. “We now expect the federal funds rate to end 2025 at 3.50 percent, compared with our previous expectation of 3.00 percent,” added the report.
