As the world’s largest economies—the United States, China, and the European Union—edge closer to a full-blown trade war, the repercussions are set to ripple across global markets. Emerging economies in Latin America, Asia, Africa, and the Middle East stand at the crossroads of opportunity and risk, as rising import duties disrupt trade flows, shift supply chains, and recalibrate investment strategies. This blog explores the potential economic impact of a looming trade war on these regions and how they can navigate the changing global trade landscape.

The immediate impact: disruptions and uncertainty

One of the most immediate consequences of increased import duties is the decline in trade volumes. The U.S., China, and the EU account for a significant portion of global imports and exports, and any increase in tariffs on goods traded among these powerhouses will reduce demand for products sourced from emerging economies.

Key impacts include:

• Supply chain disruptions: Many emerging markets serve as critical links in global supply chains. If tariffs push businesses to relocate production, countries dependent on manufacturing exports may face declining orders and factory closures.
• Commodity price volatility: Countries reliant on commodity exports, such as oil, copper, and soybeans, may see price fluctuations due to shifting global demand.
• Investment slowdown: Rising trade barriers can dampen foreign direct investment (FDI), as companies hesitate to commit capital to regions vulnerable to economic instability.

Shifting trade routes

While a trade war between the U.S., China, and the EU will likely result in economic headwinds, it may also create new trade opportunities for emerging markets. As major economies impose tariffs on each other, businesses will seek alternative suppliers, potentially benefiting countries with competitive industries. Also, companies from affected regions may want to relocate production facilities to other countries.

Latin America

• Agricultural exports: Brazil and Argentina, for example, could gain from China’s reduced dependence on U.S. soybeans and other agricultural products.
• Nearshoring trends: Mexico, already benefiting from U.S. nearshoring efforts over the last few decades, could see increased manufacturing investments as companies shift production from China to mitigate tariff impacts. However, that will only hold if Mexico itself does not become part of the trade war, which currently is far from certain.

Asia

• Diversification from China: Countries like Vietnam, India, and Indonesia could attract more manufacturers seeking to escape U.S.-China tariffs.
• Increased regional trade: Initiatives like the Regional Comprehensive Economic Partnership (RCEP) could help cushion the blow by fostering intra-Asian-Pacific trade.

Africa

• Commodity dependence risks: Nations reliant on exports of mining products to China, such as South Africa, Nigeria, Congo, Angola and Zambia, could face revenue losses if China reduces imports.
• Industrialisation potential: Countries with emerging manufacturing sectors, such as Ethiopia, Kenya, Nigeria and Ghana, might attract new investments as companies seek alternatives to China.

Middle East

• Oil market volatility: The region’s heavy reliance on petroleum exports makes it highly sensitive to shifts in global demand caused by economic slowdowns in major economies.
• Diversification challenges: Efforts to move away from oil dependency may stall if FDI slows down due to trade war uncertainties.

How emerging markets can adapt

Government institutions and companies in emerging markets must act proactively to mitigate risks and capitalise on new opportunities. Strategies that could be considered are:

1. Optimising regional trade agreements: Enhancing trade pacts within Latin America (MERCOSUR), Africa (AfCFTA), and Asia (ASEAN) and tapping the benefits of regional trade can help reduce reliance on volatile global markets.
2. Improving investment climate: By reducing bureaucratic hurdles, enhancing physical and IT infrastructure, and providing attractive investment incentives, countries can attract companies seeking stable manufacturing hubs.
3. Diversifying export markets: Reducing dependency on single trade partners by expanding into new markets and building a more diversified partner base can provide more stability and absorb shocks in affected supply chains.
4. Driving innovation and digitalisation: Investing in digital transformation and the application of Artificial Intelligence in business processes can boost efficiency and competitiveness in a shifting global landscape.

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