The economic shockwaves from U.S. President Donald Trump’s intensifying trade war are presenting an even more difficult challenge for emerging markets than the Covid-19 crisis did five years ago, according to a top official at the International Monetary Fund. The warning comes as global markets react to heightened tariff threats and rising financial instability.
Gita Gopinath, the IMF’s first deputy managing director, told the Financial Times that the uncertainty and uneven impact of the tariffs are placing emerging market policymakers in a far tougher position than during the early days of the pandemic.
“In the early stages of the pandemic, central banks everywhere were moving in the same direction—easing monetary policy quickly,” Gopinath said. “But this time, the shock has differential effects. The challenge is going to be greater for them compared to the pandemic.”
Unlike in 2020, when global monetary policy was broadly synchronized, emerging markets now face a more fragmented economic environment. While the U.S. Federal Reserve holds off on rate cuts to monitor the inflationary effects of tariffs, developing economies are grappling with weaker exports and reduced demand—conditions that usually call for policy easing.
“This is more like a demand shock for them,” Gopinath noted, warning that countries could face “tightening global financial conditions,” which emerging markets are especially vulnerable to.
Financial markets have responded with mixed signals. An MSCI index of emerging markets (excluding China) has surged nearly 20% since the April 2 announcement of Trump’s sweeping “reciprocal” tariffs, dubbed “liberation day” by the administration. Currencies such as the Mexican peso, Korean won, and South African rand have also posted solid gains, buoyed by investor optimism that central banks can still ease policy despite global headwinds.
However, a new report from the OECD cautions that emerging markets remain at risk of disruptive capital outflows. As currencies have appreciated and investors pulled money from the U.S. dollar, the risk of depreciation and higher financing costs looms if global sentiment sours.
“Many emerging markets are at risk of experiencing capital outflows if relative economic prospects and global risk sentiment deteriorate,” the OECD wrote in its latest economic outlook.
Compounding the pressure is Trump’s recent vow to double tariffs on steel and aluminum imports to 50 percent, reigniting tensions just weeks after a temporary U.S.–China tariff truce. Trump accused Beijing of breaching the agreement in a fiery speech in Pennsylvania last Friday, signaling further trade escalations may be imminent.
These tensions, combined with stubbornly high long-term interest rates in the U.S., are weighing heavily on developing economies that rely on external financing.
“Traditionally, a weaker dollar boosts emerging market exports and lowers borrowing costs,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. “But now you have weaker exports and still-expensive funding because the long end of the sovereign bond curve remains very high.”
Adding to the complexity is the growing influence of crypto assets in emerging markets. Gopinath pointed to the rising use of stablecoins—cryptocurrencies pegged to fiat currencies or assets—as a new area of concern. While still in early stages, their rapid adoption in some regions could lead to currency substitution and threaten traditional banking institutions.
“The risk of disintermediation of financial institutions and currency substitution is rising,” she said. “Emerging market central banks have built up credibility over time, but global factors remain bigger drivers for them than for advanced economies.”
Despite inflation-targeting frameworks and improved institutional credibility in many developing countries, the volatility of U.S. trade policy and global financial markets could make it difficult for these economies to maintain stability.
“Emerging markets are steering through the fog,” Gopinath said. “And when we’re entering this environment of major shifts in global economic policy, the uncertainty is going to present a serious challenge.”
As global policymakers brace for further turbulence, the IMF’s message is clear: the economic playbook that worked during Covid-19 may not be enough to shield developing economies from the storm created by an escalating trade war.
