Key takeaways
- The US election results will have major implications for the emerging market (EM) outlook, affecting both the future economic backdrop and geopolitical landscape. • A Harris presidency with a divided Congress (40% probability) would present the most limited shock to both the US and EMs.
- That leaves a 60% probability across four scenarios, which involve a wide range of larger policy shocks. There are important differences between them, but one common feature is that they exert more inflationary pressure and imply a higher federal funds rate, which could reduce the likelihood of EM central bank cuts.
- A ‘market friendly’ Trump presidency, for example, would be good for EMs: the Fed may cut by less, but a stronger global economy and ‘risk on’ market sentiment would mitigate the impact of USD pressure.
- By contrast, a second trade war would be much harder to navigate, creating a wide range of winners and losers across EMs. This is a particular risk for China, but could ultimately benefit countries that are able to capture the reshoring of manufacturing.
- A tougher US stance on migration and deportations would be felt most in Latin America, complicating the 2026 USMCA review. But, ultimately, the more the US decouples from China, the more it will need Mexico. • A wider range of foreign policy aims and outcomes is possible under a second Trump presidency. Resolutions to the Ukraine-Russia and Middle East conflicts remain unlikely in the near term, but a more isolationist and transactional approach could recast relations with both friends and foes.
While a Harris presidency would most likely deliver policy continuity, we believe a Trump win would open the door to a wide range of positive and negative shocks for EMs.
The most important election of 2024
The US election will prove a major event for EMs, impacting their future economic and geopolitical paths. On the one hand, we view a Kamala Harris presidency as most likely offering broad continuity from the Biden administration. Conversely, a second Donald Trump term could mean significant domestic and foreign policy uncertainty.
While we see the presidential race as effectively tied, our work splits the possible election outcomes into four scenarios to highlight different presidential and congressional control combinations. We also present the implications for EMs following the same structure.
Given the uncertainty around the election, we complement the analysis by looking at the impact on EMs through the lens of four broad channels:
- The path for the US economy and monetary policy
- Changes to global trade
- The impact on migration to the US
- The administration’s approach to international relations
1. US economic policy changes are skewed towards fiscal largess and higher inflation
We believe the US economy is most likely on a path to a soft landing. The US Federal Reserve (Fed) began its cutting cycle with a 50 basis points (bps) reduction, starting what should be a prolonged easing of external financing conditions for EMs as the Fed continues to cut rates.1
That said, policy could become more inflationary under several potential combinations of presidential and congressional control. More fiscal spending and other policies, such as tariffs or deportations, risk raising inflationary pressures and tempering the Fed’s ability to cut rates.
We believe a Harris presidency with a divided Congress would present the most limited shock to the economy’s current trajectory, as much of Harris’ policy agenda would be curtailed. The fiscal deficit may widen modestly as Republican interest in extending the Tax Cuts and Jobs Act, expanding the child tax credit, and restoring R&D tax credits for businesses makes some bipartisan agreement possible.2
That leaves additional scenarios involving a wide range of larger policy shocks. There are important differences between them, but one common feature is that they exert more inflationary pressure and imply a higher path for the Federal funds rates, which are less likely to lead to EM central bank cuts.
We believe a blue wave would allow Harris to implement more of her policy agenda and significantly increase the US fiscal deficit.3 However, we believe a Trump presidency would open the door to even larger US deficits, and – unlike a Harris presidency – a split Congress could still lead to inflationary policies being pursued, this time via tariffs.4
A market-friendly Trump, who sees his administration focus on regulation and tax cuts, would not be plain sailing but should benefit EMs. While this pro-business approach might temper the pace of Fed rate cuts, EMs would still benefit from expectations of stronger corporate profits and a risk-on environment, which would take pressure off via the US dollar (USD).
Central banks that tend to be sensitive to the Fed, such as Mexico or Indonesia, would be pushed to keep policy spreads high. But they would still benefit from stronger exports and reduced market premia, lessening drag.
In contrast, the economic shock from a second trade war or the implementation of Trump’s full agenda on the US economy would be much harder for EMs to navigate, potentially creating a wide range of winners and losers.4
Should Trump win the presidency and the Republicans unify Congress, he could enact sweeping changes in trade, immigration, fiscal, and regulatory policy. This full-fat scenario could amplify the inflationary impulse as a larger fiscal deficit comes alongside weaker potential growth from reducing migrant flows and a starker decoupling from China.
Many EMs would still benefit from stronger US imports, but risk sentiment and a stronger reaction by the Fed could force a less favorable adjustment on EM central banks. Moreover, even if some countries (Mexico, India, and APAC ex-China) could benefit in the long run from a tougher US approach to China via the reshoring of manufacturing, many could face heightened hurdle rates for investment as trade policy uncertainty rises
2. US-China decoupling may benefit some EMs
China would face the bulk of Trump’s trade ire.
The threat of 60% tariffs could be a negotiating tool, designed to bring China to the table. However, the failure of the Phase One trade deal – which only saw Chinese purchases of US goods rise by $20 billion, rather than the $200 billion agreed upon – makes this less likely. Instead, higher tariffs on previously targeted goods may be motivated by a desire to reduce the bilateral deficit and reliance on Chinese-made products.
The economic shock on China – and indirectly on its EM trading partners – could be significant. Even if tariffs are only increased on goods previously targeted, the average bilateral tariff rate could more than double (Chart 1).
Chart 1. EM policymakers may follow China’s response to tariffs by devaluing their currencies
The effects of the first trade war on China are hard to judge, given the emergence of the de-risking policy agenda simultaneously. As with the first bout of tariffs, the renminbi could weaken, effectively offsetting the loss of export competitiveness. Chinese policymakers have already shifted to a more aggressive easing, which could be dialed up further – this should reduce the chances that China weighs down growth elsewhere.
Other EMs could navigate a unilateral rise in tariffs – or the indirect effects of Chinese depreciation on their trade-weighted baskets – via foreign exchange devaluation. However, India and Brazil could be singled out for their high tariffs on US imports.5 The risk would still be high for EMs with large trade surpluses, especially those – such as Vietnam and Malaysia – that could be accused of re-exporting Chinese goods to circumvent tariffs (Chart 2).6
Chart 2. China is not the only trade partner at risk
Accusations of currency manipulation, which could be met with additional tariffs or other trade actions, may limit the scope for maneuver.7 Indeed, despite the policy contradiction, there is a risk that Trump will push for a weaker USD. Bilateral trade agreements, like those agreed with Japan and South Korea during Trump’s first presidency, are at least still possible for other EMs, even if it is a long shot for China.
Ultimately, many EMs are still likely to benefit from US-China tensions as a driver of reshoring.8
Harris would likely persist with Biden’s small-yard, high-fence national security approach to export restrictions and tariffs, which would be a more gradual and subtle driver.9
Trump’s trade policy could cause a dramatic rupture, forcefully realigning supply chains across geopolitical lines. This could create a lot of uncertainty even for allies, but the US will need other countries more as its actions against China scale up.
Significantly, this implies that, while a Trump administration may threaten a renegotiation rather than a review of the United States-Mexico-Canada Agreement, it is not clear that ripping it up – or changing it in a way that reverses the tailwinds to Mexican manufacturing – is plausible.10 Instead, such threats may be aimed at extracting other concessions, such as migration and border security.
3. Poor, huddled masses? No, thanks.
Immigration is a key sticking point for US voters, and both candidates will seek to limit it, especially across the southern border.11 However, their approaches will differ significantly.
Harris will look to pass the compromised immigration reform bill negotiated with Senate Republicans in 2024.
Trump will try to ramp up deportations, even if this likely falls well short of threats to remove millions of people and beef up border security to stem the inflow of migrants. Tensions with new Mexican president Claudia Sheinbaum are likely to rise, adding to a challenging policy backdrop in Mexico, at least temporarily.
The cost of this policy will go beyond mass deportations and border security. The Pew Research Centre estimates that 75% of unauthorized migrants work.12 As such, deportations and restrictions will tighten the labor market in the US (Chart 3), particularly in cost-sensitive sectors such as construction.
Chart 3. A migration surge into the US helped ease labor market pressures in 2023
Relative to the size of their populations and economies, Mexico and Colombia rely most on their migrant workers residing in the US.13 Indeed, their 2023 remittance receipts totaled 3.7% and 2.8% of GDP in 2023, respectively, versus the Latin America (LatAm) aggregate of 2.6%.14
In the long run, fewer migrant workers will weigh on US potential growth, while a weaker endogenous labor supply will make the Fed’s job harder. For the wealthier LatAm economies, managing an increase in migrants and deportees from the US will add to social tensions and put more strain on public finances.
4. US foreign policy will shape crisis risk
The US approach to geopolitics, particularly to conflicts (either live or potential), will be a significant factor driving market perceptions of tail risk. How the next president approaches conflicts in Ukraine-Russia and the Middle East will be crucial.
Under Harris, more support for Ukraine can be expected, assuming it can gain congressional approval, while pressure for a ceasefire between Israel and Hamas, and Hezbollah would mount.
Trump has promised to end the Ukraine-Russia war as soon as he becomes president and has shown skepticism towards aid for Ukraine. We believe a ceasefire would undoubtedly be positive for markets.
During his first term, Trump was a strong supporter of Israel. He moved the US embassy to Jerusalem (where it has stayed) and took a hawkish approach to Iran. We would expect Trump to continue to firmly back Israeli Prime Minister Benjamin Netanyahu, the Israeli Defense Forces’ military operations, and increase sanction threats on Iran.
Tensions in Asia’s contested maritime channels, the Taiwan Strait and the South China Sea, are also highly contingent on the approach of the next US administration. Biden sought to build better lines of communication with Beijing while broadly maintaining strategic ambiguity surrounding Taiwan. Harris may prove a better communicator of this approach, even if steps to strengthen regional partnerships – such as with the Philippines, which is locked in a maritime dispute with China – add some tension.
At his rallies, Trump has sometimes aired a grievance about the cost of US support for Taiwan. There is some risk that this will undermine strategic ambiguity.15 The US reliance on high-end semiconductors for its military suggests that the status quo will likely be maintained.16
1 "Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years." CNBC, September 2024. https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html.
2 The Tax Cuts and Jobs Act of 2017 allows a tax credit for employers that provide paid family and medical leave to employees.
3 "Kamala Harris’ 2024 campaign promises: Here are her plans for the presidency." PolitiFact, September 2024. https://www.politifact.com/article/2024/sep/30/kamala-harris-2024-campaign-promises-here-are-her/.
4 "Donald Trump’s 2024 campaign promises: Here’s his vision for a second term." PolitiFact, September 2024. https://www.politifact.com/article/2024/sep/30/donald-trumps-2024-campaign-promises-heres-his-vis/.
5 "Trump vows reciprocal tariffs on India, calls it the biggest tariff charger." Business Standard, October 2024. https://www.business-standard.com/external-affairs-defence-security/news/trump-vows-reciprocal-tariffs-on-india-calls-it-the-biggest-tariff-charger-124101100207_1.html.
6 "US Senator proposes barring Chinese firms using third countries to evade tariffs." Reuters, September 2024. https://www.reuters.com/markets/us/senator-marco-rubio-seeks-bar-chinese-firms-evading-us-tariffs-by-manufacturing-2024-09-19/.
7 "Trump reveals which US rival will be his first phone call if re-elected." Fox News, September 2024. https://www.foxnews.com/politics/trump-reveals-which-us-rival-his-first-phone-call-re-elected.
8 "How U.S.-China competition is benefiting the world—and reshaping the global economy." Fortune, July 2024. https://fortune.com/2024/07/02/us-china-competition-benefiting-worldand-global-economy-supply-chains-politics-leadership/.
9 "‘Small Yard and High Fence’: US National Security Restrictions Will Further Impact US-China Trade and Investment Activity in 2024." Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, December 2023. https://www.skadden.com/insights/publications/2023/12/2024-insights/other-regulatory-developments/small-yard-and-high-fence.
10 "Trump vows to renegotiate USMCA free trade agreement with Canada and Mexico." CTVNews.ca, October 2024. https://www.ctvnews.ca/mobile/politics/trump-vows-to-renegotiate-usmca-free-trade-agreement-with-canada-and-mexico-1.7070224?.
11 "Why Immigration Is Now the No. 1 Issue for Voters." The Wall Street Journal, April 2024. https://www.wsj.com/politics/elections/election-2024-immigration-issue-voters-84916a17?.
12 "What we know about unauthorized immigrants living in the U.S." Pew Research Center, July 2024. https://www.pewresearch.org/short-reads/2024/07/22/what-we-know-about-unauthorized-immigrants-living-in-the-us/.
13 "What the data says about immigrants in the U.S." Pew Research Center, September 2024. https://www.pewresearch.org/short-reads/2024/09/27/key-findings-about-us-immigrants/.
14 "Largest recipients of inflow remittances in Latin America in 2023, by estimated value of remittances received from anywhere in the world." Statista, August 2024. https://www.statista.com/statistics/439126/value-of-remittances-received-latin-america-by-country/.
15 "Taiwan and the Perils of Strategic Ambiguity." The Cipher Brief, October 2022. https://www.thecipherbrief.com/taiwan-and-the-perils-of-strategic-ambiguity.
16 "Taiwan elections: Status quo, not dire straits." abrdn, Feb 2024. https://www.abrdn.com/en-us/investor/insights-and-research/taiwan-elections-status-quo-not-dire-straits-us.