Emerging Markets and MAGA 2.0

Challenges to Stability

A second Trump administration is likely to have a broadly negative impact on Emerging Markets and Developing Economies (EMDEs) through several channels: macroeconomic, and structural/institutional.  Of course, not all EMDEs will be affected in the same way and to the same extent, and some of them might benefit from some aspects of MAGA 2.0  economic policies. 

The Macroeconomic Channel will impact the global economy and EMDEs through three channels:  inflation and interest rates, currencies and tariffs

Inflation and interest rates:  As I argued in an earlier piece, (ttps://raeconomics.substack.com/p/macroeconomic-color-maga-20)  MAGA 2.0 is likely to usher a period of renewed inflation and higher-for-longer interest rates.  In the absence of the traditional Republican commitment to fiscal discipline, deeper tax cuts should lead to a widening of already dangerously high fiscal deficits.  In addition, the threat of higher and potentially punitive tariffs will be reflected in higher prices, reversing gains made on inflation in the past year.  These concerns have been reflected in unease in the bond markets, with the 10-year yield remaining in around 4.40%  since the election. Furthermore, concerns about higher inflation could slow down or even reverse the pace of monetary easing by the Fed. 

Dollar  Strength:  The greenback has been enjoying a long bullish stretch, with the dollar index rising by 6% since its 2024 trough on September--and 17% since its four-year trough in May 2020.  In combination, higher interest rates and a strong dollar puts additional pressure on EMDE debt servicing costs.

Tariffs:  The incoming Trump administration has made tariffs the centerpiece of  its economic policy.   Tariffs have two opposite impacts on global trade: trade creation/destruction and trade diversion.  Trade creation/destruction means that tariffs will cause a slowdown in trade volumes, affecting all countries.  Trade diversion means that trade will be directed from countries subject to tariffs to those who are exempted.  In the longer  term, these effects become stronger as global businesses react to the new environment by shortening their supply chains and “friendshoring” or “reshoring”. 

Furthermore, a trade war complicates the trade strategy of EMDEs, as they come under pressure to choose sides and suffer the economic and political consequences.

The Structural/Institutional Channel will impact EMDEs in multiple ways, but mainly through geo-economic fragmentation and climate change.

Geo-economic Fragmentation:  The Trump administration’s hostility to global rules and preference for disruptive actions on the global financial scene is likely to intensify the pace of geo-economic fragmentation, as well as weaken the main institutions of the global financial architecture of the past 80 years.  Policies undermining international financial cooperation, in combination with the expected chaos in global financial markets will have three broad impacts on EMDEs.  First, the increased volatility is likely to disrupt financial and investment flows to EMDEs. Second, a Trump administration is likely to undermine the multilateral financial institutions, putting at risk their efforts to address financially distressed EMDEs. Finally, these actions are likely to widen the rift between the Global North and Global South, which will paradoxically strengthen the hand of players considered to be the main adversaries of the United States

Climate Change:  It is a well-established fact that EMDEs are particularly exposed to the negative impact of climate change.We are in the middle of two global conferences with a focus on climate change: the COPE 2024 and the G20.   Over the past decade, the global community has struggled to find agreement on mitigating the impact of climate change—more specifically to limit the temperature increase from  the pre-industrial era to 1.5 degrees centigrade.   In addition to the commitments by the major economic powerhouses (the United States, the European Union, China and India) to reduce carbon emissions, the global community has been discussing directing massive financial resources to mitigate the effect of climate change on EMDEs. The advanced countries had pledged $100 billion dollars/year over the next decades—more recent estimates call for$1 trillion per year.  Admittedly, reaching consensus on such large sums, and keeping the advanced countries to fulfill these pledges is already a formidable task.  However, Trump and the MAGA 2.0 world has called  climate change a hoax and once again promised to exit from the Paris Accord.  A second U.S exit from the Paris Accord would be a major blow to the efforts to contain the impact of climate change.  such a change would affect all EMDEs, but most particularly the poorest EMDEs, which already bear the brunt of the impact of climate change.

In conclusion,  the policy choices of the second Trump term and its promise of disruptions at both the U.S. and global level pose significant challenges to the EMDEs.   It will be incumbent on other major players such as the European Union, major G20 nations and the multilateral financial institutions to navigate an increasingly fraught global economic and financial environment over the next few years.