Tariffs have been front-page news for the last few months, virtually since the moment that the Trump Administration came into office. Along with this news has come considerable commentary on the impact the tariffs may have on the U.S. and the global economy and relations between the U.S. and important trading partners such as China, Canada, Mexico, and the European Union (EU).  What has not been as widely discussed is the impact that the new tariffs and related trade tensions might have on the economies of emerging markets and developing economies (EMDEs) and, in particular, the extent to which the economic fallout from these developments creates the potential for heightened sovereign debt distress among these countries.

As I discuss in a new article, that impact and distress could be major if the final tariffs imposed by the Trump administration remain at high levels after the administration’s self-imposed 90-day “pause” ends.  Indeed, just as the recent tariff and trade developments have significantly dimmed the economic growth prospects for the global economy, as reflected in an updated “World Economic Outlook” report released by the International Monetary Fund (IMF) in late April, these developments have also led to reduced economic growth projections for EMDEs.  In January the IMF was forecasting growth in 2025 of 3.3 percent for the global economy and 4.2 percent for EMDEs. In late April, after the announcement of the Trump administration’s planned tariffs, those projections for growth were revised downward to 2.8 percent for the global economy and 3.7 percent for EMDEs.

To the extent that EMDEs suffer adverse economic effects as a result of the tariffs and the related trade tensions between the U.S. and China, Canada, Mexico, the EU and many other nations, the EMDEs may also experience increased heightened sovereign debt distress, i.e., greater difficulties in servicing their outstanding sovereign debt.  In the last five years, these countries have confronted huge economic shocks resulting from, first, the Covid-19 pandemic, and then, the Ukraine war, which seriously strained their sovereign finances as they adopted fiscal and other measures to mitigate the impact of these developments.

Thus, as EMDEs enter a new period of uncertainty for their economies resulting from the tariffs and trade tensions, they do so with public debt, and debt-servicing costs for their outstanding sovereign debt, that are much higher than in the pre-COVID era.  Importantly, this could limit their room for maneuver as they seek to cushion their economies from the adverse economic fallout of these trade developments, i.e., they have much more limited fiscal space to address these problems than was available to them prior to the onset of the Covid-19 pandemic.

There are several ways the tariffs and trade war could hurt the economies of emerging economies and developing countries. First, with the very high level of reciprocal tariffs that the Trump administration originally announced for many nations on its so-called Liberation Day on April 2, emerging economies and developing countries that rely heavily on exports to the U.S. could see substantially reduced export revenues, which could lead to contracting economies, higher unemployment, and lower tax revenues.   Other adverse effects could include depreciation (or even devaluation) of national currencies, higher levels of inflation, and, with reduced foreign exchange earnings, a diminished ability to service foreign currency-denominated debt.

Second, with a large percentage of global trade conducted through global supply chains, countries whose economies depend on those supply chains could find that there is less demand for the intermediate products that they produce if the end products face prohibitively high tariffs in the U.S.  Third, to the extent that the tariffs and trade tensions lead to a global economic slowdown, there may be less demand for exports of commodities such as agricultural items and minerals/natural resources, which could lead to lower prices for such commodities. This could hurt the economies of commodity-exporting nations (of which there are many among EMDEs) whether such economies export directly or indirectly through global supply chains to the U.S.

In my article, I explore these issues and  situate them within a broader historical context. I note that, like the outbreak of the COVID-19 pandemic in 2020 and the Ukraine war, the severity of Trump tariffs is unprecedented in recent decades.  In fact, the so-called average effective tariff rate for the Trump tariffs as originally proposed in early April is higher than the corresponding rate for the infamous Smoot-Hawley tariffs of 1930, which contributed to the duration and the severity of the Great Depression. In fact, according to Fitch Ratings, the new tariffs represent the highest average effective tariff rates since the early 1900s.

As the article notes, there are two wild cards that could affect the severity of and the policy response to any economic downturn and related sovereign debt distress that EMDEs might experience.  The first is whether China, which bolstered global growth during the financial crisis of 2008-2009 when economies around the world were faltering, will emerge anytime soon from its current, relative economic stagnation.  The second is whether the Trump administration, pursuant to a previously announced review, will reduce or even eliminate the U.S. government’s participation in the International Monetary Fund and the World Bank. These two international financial institutions have traditionally played a critical role in responding to economic crises in EMDEs, but their ability to do so may suffer if the U.S. reduces or completely eliminates its financial support.

This post comes to us from Steven T. Kargman, founder and president of Kargman Associates/International Restructuring Advisors. It is based on his recent article, “Tariffs, a Trade War, and Tumult in the Global Trading System: Yet Another Potential Economic Shock to Emerging Economies,” published in International Insolvency & Restructuring Report 2025/26 (IIRR) and available here.  The article is reprinted with the kind permission of the publisher of IIRR, Capital Markets Intelligence