The Global South Will Bear the Brunt of Trump’s Trade War
The world’s developing countries are still recovering from the commodity shock and debt crisis that followed the pandemic and Russia’s invasion of Ukraine. The disruption of global trade caused by Trump’s tariffs now threatens to reignite the crisis.
An American President Lines (APL) container ship at the Port of Seattle in Seattle, Washington, on Wednesday, April 16, 2025. (David Ryder / Bloomberg via Getty Images)
The trade war escalated by President Donald Trump this April is set to cost the American economy dearly. The dollar has continued to weaken relative to most other major currencies, while bond yields, which usually move in lockstep, have risen steadily, even for long-term debt. While a stagflationary shock (short-term inflation and economic contraction) is now underway, the odds of a genuine US financial crisis are rising.
Meanwhile, Trump has questioned the position of Federal Reserve chair Jerome Powell, publicly pressuring him to cut interest rates to accommodate the effects of the administration’s tariff policy. This has led investors and commentators to consider the possibility of a full blown “emerging market” (EM) crisis playing out in the United States: an accelerating run on the dollar; the dwindling of the capital inflows that “fund” the federal government; ballooning deficits and borrowing costs; the imposition of capital controls, and ultimately a default on US bonds.
At present, a fully-fledged US fiscal crisis still seems like a remote contingency. But elsewhere, the outlook is more dire. Many of the countries subjected to the “reciprocal tariffs” are developing countries of the Global South. These are nations that have, over the years, built trade surpluses with the United States. Even after the ninety-day “pause” announced on April 9, these countries are still subject to a universal tariff rate of 10 percent, as well as in some cases (autos, auto parts, aluminum) sectoral tariffs of 25 percent.
The headline economic data in these countries may still paint a rosy picture. But this is misleading. The GDP and export figures of the first quarter of 2025 reflect the “front-running” of tariffs, that is, firms rushing to export before the levies came into effect. Import orders into the United States from these countries are already being canceled and are projected to fall more sharply, as reflected in the data on shipping container bookings. Moreover, the uncertainty of how the trade war will play out is deterring new investment.
A Refresher on Emerging-Market Debt Crises
But much of the trade war’s disruptive effects are transmitted through the financial channel. This is because nothing in the global economy is without a cost; and the cost of trade integration is financial integration.
A stable trading system requires a stable currency in which to invoice trade. This currency is the dollar, the world’s key funding currency. But trade needs to be financed. And since countries other than the United States don’t issue dollars and cannot issue much debt in their own (relatively unstable and weak) currencies, trade is financed by “offshore” dollar-denominated debt (so-called eurodollars).
As a result, around 80 percent of emerging market debt is denominated in dollars. This pile of offshore sovereign dollar bonds grew significantly during the era of low interest rates, with most of the new debt being variable. This exposes EMs to higher debt servicing costs should the Fed choose to hike interest rates in response to the tariffs’ inflationary impacts.
This debt is serviced with foreign exchange earnings, that is, through exports. Yet now that trade levies render many goods commercially unviable on the US market and global policy uncertainty is deterring new investment and export orders, these earnings are set to dwindle.
Of even greater concern are financial balance-sheet effects. Ordinarily developing economies suffer when the dollar strengthens relative to their currency. When this happens, dollar-denominated imports become more expensive — as does servicing and refinancing dollar debt. The consequence is an inversion of sovereign and corporate balance sheets. That is to say, the rising cost of servicing dollar debt increases the value of liabilities in their domestic currencies relative to their assets.
All of this is compounded by the fact that dollar appreciation often occurs during crises, when investors are rushing into benchmark safe assets such as US Treasuries. A sudden stop of capital inflows followed by a flight of capital out of economies deemed more risky puts further downward pressure on EM currencies. The beneficial effect of more competitive (cheaply priced) exports is outweighed by the vicious spiral of higher borrowing costs, withheld credit and investment, rising unemployment, imported inflation, goods shortages, and the contractionary and socially disruptive effects of tighter monetary and fiscal policies.
This is the precarious reality of developing countries in the global trading system. The structure of their balance sheets expose them to shifts in their relative foreign-exchange position.
The result is that even when the dollar is on the way down, these economies experience distress. And with a major shift in sentiment around the dollar seemingly underway, the long structurally overvalued greenback is experiencing an overdue correction. As of April 9, the day the ninety-day tariff suspension was announced, the value of sovereign dollar debt was down an average 2.9 percent across emerging markets.
The “junk-rated” debt of particularly vulnerable countries such as Zambia, Sri Lanka, Gabon, and the Maldives was down more than 10 percent, according to reporting done by Bloomberg. And since bond prices and yields move inversely, borrowing costs are rising steeply. As of April 25, yields on EM bonds had risen to over 7 percent.
A Rug Pull of World-Historical Proportions
By following the commonly accepted (and deeply flawed) playbook of trade integration — structural reform, capital account liberalization, reserve accumulation, restrictive fiscal and monetary policies, and wage restraint — many economies in the Global South traded generational social hardship for a valuable share of global demand. It was in fact the United States that, throughout the age of the Washington Consensus, was the most aggressive proponent of this policy mix. Now that this system is deemed to no longer work to its benefit, the US is pulling the rug from under its most successful trading partners, on the supposition that their success is somehow the cause of the malaise facing American manufacturing.
These punitive measures reflect Trump’s long-held belief that trade deficits constitute a form of indebtedness. America is getting “screwed,” we are to believe. But Vietnam, Bangladesh, Angola, and Indonesia can hardly be held responsible for the industrial ruins of Gary, Indiana. For one, the decline in US manufacturing employment long precedes their rise in the global trading system. More important, their own protective barriers (for which they are supposedly being punished) exist for good reasons. They do not reflect what the economist Joan Robinson called a “beggar-thy-neighbor calculation,” but instead the difficult fiscal and institutional conditions that prevail in developing economies. These conditions render poor nations vulnerable to shifts in trade and capital flows.
For now, it seems the brunt of the trade war will be borne by the United States. But in the longer run, it is likely that the effective decoupling of the American economy from a large part of global trade will play out much like it did for the United Kingdom after its exit from the European single market. After Brexit, the effects of depressed private investment materialized gradually. But for the world’s most vulnerable countries, prospects are bleak. When the global economy expands, they benefit the most; yet in times of crisis they suffer the most. For those economies still recovering from the dual shock of pandemic and war, the consequences of what might be the first tariff-induced global recession will be felt sooner — and more acutely.