Donald Trump has made a remarkable political comeback by being re-elected as the 47th President of the United States. Further, with control of both the House and Senate, the Republicans have gained significant influence over the US policy agenda.
Markets’ initial reaction was to sell EM currencies, with the US dollar strengthening sharply. The bond market reaction was most evident through the bear steepening of the US treasury curve as longer-dated bond yields rose and a higher federal funds rate path was priced in, which put pressure on some EM rates.
In the days since, two-year US yields have risen slightly more than the 10-year as near-term price expectations have picked up.1 Meanwhile, foreign exchange (FX) moves have been mixed. Initial gains for the dollar were reversed within a day but have since resumed to bring the US Dollar Index 2% higher compared to on Election Day Eve, resuming some pressure on EM currencies.2
The market reaction highlights the uncertainty around US policy for emerging markets, even if the initial consensus is broadly pricing higher US nominal growth and potentially less scope for the Federal Reserve (Fed) to cut policy rates.
Significant known unknowns around Trump’s domestic and foreign policy agenda will take time to become clear. And even as the broad contours take shape, ongoing noise is likely to make judging the implications for emerging markets far from easy.
Given this uncertainty around Trump 2.0, we consider the impact on EMs through the lens of four broad channels:
- US monetary and fiscal policy’s impact on EMs
- Shifts in global trade
- Implications of Trump’s immigration policy
- US foreign policy’s impact on global conflicts
1. Trump’s reflationary agenda may slow the pace of EM central bank rate cuts
Key parts of Trump’s agenda – namely tax cuts, higher tariffs, and reduced immigration – will be inflationary for the US, tempering the Fed’s scope for rate cuts. Only a desire to drill for more oil will provide a partial relief.
Our base case for the Fed’s rate path is one more 25 bps cut in December, followed by quarterly reductions of the same magnitude over 2025. But the risks are clearly weighted to a slower and more gradual cutting cycle. This could restrict EM central banks’ ability to push ahead with their easing cycles, which only began conclusively across all regions in September (Chart 1).
Chart 1. Trump’s reflationary agenda for the US and uncertainty for EMs will restrict central bank cuts
More Fed-sensitive central banks, such as Mexico’s and Indonesia’s, will therefore limit their rate cuts over the short term to maintain favorable differentials against the US. That said, there are important differences depending on the President Trump we get with 2.0.
A more market-friendly delivering-for-markets Trump 2.0 with a mix of policies could be less constraining for EM policymakers. US tax cuts and deregulations could provide an ongoing tailwind to corporate earnings and bolster global risk-on sentiment. If the worst of Trump’s proposed tariff increases are avoided, this may offer relief for currencies versus USD, while stronger US nominal growth would boost global trade.
However, with the Republicans taking both the Senate and the House, there is also the possibility of more sweeping changes across trade, immigration, fiscal and regulatory policy. This idea, or theory, of a Trump unleashed scenario could amplify the inflationary impulse as a larger fiscal deficit comes alongside weaker potential growth from the mass deportation of illegal migrants – a starker decoupling from China and stronger attempts to onshore manufacturing back to the US.
In such a scenario, high levels of trade uncertainty would likely push up on risk premia and hurdle rates, keeping EM market sentiment cautious and constraining firms’ investment.
2. US-China decoupling will benefit some EMs
Trump has threatened a 60% tariff on all Chinese trade, alongside a universal 10% tariff on all other imports, partly as a means of financing his planned tax cuts.3
The first Trump term saw tariffs either being threatened or applied as a means of gaining concessions from trading partners. This time around, we think that a meaningful and lasting increase in US tariffs on China is likely, but that the threat of a universal baseline tariff is being used primarily as a negotiating mechanism.
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 – leads us to believe a deal this time around is less likely, albeit still possible. Instead, higher tariffs on previously targeted goods appear motivated by a desire to reduce the bilateral deficit and reliance on Chinese-made products as part of a broader economic decoupling.
The economic shock on China – and indirectly on its EM trading partners – could be massive.
The economic shock on China – and indirectly on its EM trading partners – could be massive. Even if tariffs are only increased on goods previously targeted, the average bilateral tariff rate could more than double (Chart 2).
Chart 2. Higher tariffs will be hard for China to avoid
We expect that stimulus measures from Chinese policymakers will ramp up somewhat following Trump’s election victory, helping to cushion the negative effects on China and spillovers for other EMs. Nonetheless, we recently downgraded our China 2025 and 2026 GDP growth forecasts by 0.2% in each year.
While we think a universal baseline tariff may be avoided, the likes of India and Brazil could be singled out for their high tariffs on US imports. Risks will also be high for EMs with large trade surpluses, especially those – such as Vietnam and Malaysia – which could be accused of reexporting Chinese goods to circumvent tariffs (Chart 3).
Chart 3. China not the only trade partner at risk
Many EMs could navigate a rise in tariffs – or the indirect effects from Chinese depreciation on their trade-weighted baskets – via FX devaluation. However, US accusations of currency manipulation, which could be met with additional tariffs or other trade actions, may limit the scope for maneuver.4 Indeed, there is a risk that Trump pushes for a weaker USD.
The re-routing of Chinese exports could ultimately prove disinflationary for other EMs as Chinese goods seek new markets. There is a risk that economies competing at similar levels to China’s manufacturing value add – such as Thailand or the emerging Europe economies tied to German supply-chains – face prolonged pressure.
Bilateral trade agreements, like those 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. And many emerging markets are still likely to benefit from US-China tensions as a driver of reshoring. The US will need other countries more as its actions against China scale up.
Mexico stands out in this regard, having become the US’ largest source of imports in 2023 (Chart 4).
Chart 4. North American trade ties have deepened since the first trade war with China
Significantly, this implies that, while the 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. Instead, such threats may be aimed at extracting other concessions, for example on migration and border security.
3. Poor, huddled masses? No, thanks.
It is uncertain how much Trump will follow through with his proposals regarding immigration, owing to economic and logistical hurdles. That said, Trump’s base will almost certainly expect action.
We think Trump will try to ramp-up deportations, even if this likely falls well short of threats to remove millions of people. He will also beef-up border security to stem the inflow of migrants. We expect H.R.2 to be passed, which would crack down on use of illegal migrant workers, restrict the asylum process and allocate funding to extending the border wall with Mexico. In addition, legal migration may also be slowed.
The cost of this policy will go beyond mass deportations and border security. The Pew Research Centre estimates that 75% of unauthorized migrants work.5 As such, deportations and restrictions will tighten the labor market in the US, particularly in cost-sensitive sectors such as construction.
All of this means that tensions with new Mexican President Claudia Sheinbaum are likely to rise, adding to a challenging policy backdrop in Mexico. Relative to the size of their own populations and economies, Mexico and Colombia are most reliant on their migrant workers residing in the US (Chart 5). Indeed, their 2023 remittance receipts totaled 3.7% and 2.8% of GDP, respectively.6
Chart 5. An estimated 11 million unauthorized migrants resided in the US in 2022
For the wealthier Latin American economies, having to manage an increase in migrants and deportees from the US will add to social tensions, put more strain on public finances and add a disinflationary impulse from increased labor supply.
4. US foreign policy will shape conflict risk
The US approach to geopolitics, particularly to conflicts (either live or potential) will be a major factor driving market perceptions of tail risk. How the next president approaches conflicts in Ukraine and the Middle East will be crucial.
Trump has promised to end the Ukraine-Russia war as soon as he becomes president and has shown skepticism towards aid for Ukraine. A ceasefire would be positive for markets, but we think he is overestimating his ability to secure peace quickly (or indeed at all).
During his first term, Trump was a strong supporter of Israel, moving the US embassy to Jerusalem (where it has stayed) and took a hawkish approach to Iran. While relations between Trump and Israeli Prime Minister Benjamin Netanyahu may remain a work in progress, we would expect him to strongly back Israeli Defense Forces’ military operations and increase sanction threats on Iran.
The tensions in the Taiwan Strait and South China Sea are also highly contingent on the approach of the next US administration.
At his rallies Trump has sometimes aired a grievance about the cost of US support for Taiwan. And we see some risk that strategic ambiguity is undermined. That said, US reliance on high-end semiconductors for its military suggests that the status quo will likely be maintained.
Final thoughts
We believe that Donald Trump's re-election could lead to significant policy changes that might disrupt emerging markets. and while we do not know the exact policy mix that Trump will follow the second time round in office, if he follows through on his campaign promises, we expect to see an emphasis on tariffs, an increase in immigration restrictions, and a more expansive fiscal policy. This could result in a considerable inflationary shock, further complicated by potential interference with the Federal Reserve. While some emerging markets may benefit from trade diversion or bilateral agreements, the overall situation is characterized by heightened uncertainty.
1“US Bond Yields Ratchet Higher Before Influential Inflation Data.” Bloomberg, November 2024. https://www.bloomberg.com/news/articles/2024-11-12/us-bond-yields-ratchet-higher-before-influential-inflation-data.
2 The U.S. Dollar Index (DXY) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.
3 "Everything we know about Trump’s policies on tariffs, trade, and taxes." Fortune, November 2024. https://fortune.com/2024/11/06/trump-tariffs-trade-taxes-economy/.
4 "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.
5 "What the data says about immigrants in the U.S.” Immigration & Migration. Pew Research Center, September 2024. https://www.pewresearch.org/short-reads/2024/09/27/key-findings-about-us-immigrants/.
6 "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/.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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