The Effect of Trade Tariffs on Emerging Markets: A Case Study of the US–China Trade War (2018–2025)

The US–China trade war represents one of the most significant disruptions to the global trading system in recent decades. Initiated in 2018 under President Donald Trump, tariffs were deployed not merely as economic instruments but as strategic political tools. Although framed as a bilateral dispute between the world’s two largest economies, the real spillovers were transmitted through emerging markets (EMs), which sit at the centre of global supply chains, commodity flows, and international capital markets.

From the outset, US tariff implementation was erratic. The early rounds were broad and blunt; effectively blanket tariffs applied across large categories of Chinese imports under Section 301 of the Trade Act. Rates escalated quickly, often with little warning, and threats of additional increases were used as negotiation leverage. The actual tariff rate itself varied repeatedly, as President Trump adjusted percentages, delayed implementation, or expanded coverage depending on political developments and bargaining dynamics.

This variability mattered. Tariffs became both an economic and political tool. Economically, they acted as taxes on imports, raising costs for firms and consumers. Politically, they were used as leverage, not only against China, but at times against other countries. Done to pressure trading partners into concessions. Access to the US market became conditional and transactional.

The initial phase was undeniably haphazard. Announcements were abrupt, exemptions were inconsistent, and financial markets reacted sharply. Equity markets sold off during escalation periods, safe-haven flows strengthened the US dollar, and emerging market currencies depreciated. Capital flowed out of EM bond and equity markets as investors repriced geopolitical risk. Countries with large current account deficits or substantial dollar-denominated debt were particularly exposed. In macroeconomic terms, the trade war functioned as a global risk shock: higher uncertainty increased risk premia, weakened EM exchange rates, and constrained domestic policy flexibility.

However, over time the market impact moderated. The repeated threat of tariffs gradually lost some of its edge. Firms diversified supply chains, investors differentiated rhetoric from implementation, and emerging market policymakers strengthened foreign exchange reserves. While volatility did not disappear, financial markets became more desensitised to announcements relative to the sharp reactions of 2018–2019. Uncertainty shifted from episodic shocks to a structurally embedded risk factor.

One of the clearest economic transmission channels was trade diversion. As US importers sought alternatives to tariffed Chinese goods, production shifted toward other emerging economies. Vietnam, Malaysia, Thailand, and Mexico saw measurable increases in exports to the US, particularly in electronics and manufacturing components. This “China+1” strategy allowed multinational firms to reduce concentrated exposure to China while maintaining cost competitiveness. For some Southeast Asian economies, the trade war accelerated industrial upgrading and foreign direct investment inflows.

Yet the effects were uneven. Commodity exporters reliant on Chinese industrial demand, such as Brazil or South Africa, faced volatility when Chinese growth expectations softened. Slower Chinese manufacturing activity translated into fluctuations in commodity prices, including copper and energy products. Tariffs therefore reallocated trade flows rather than generating net global gains. Some emerging markets benefited; others absorbed second-round shocks.

Tariffs directed at China evolved differently from tariffs used more broadly. While the initial implementation was politically driven and erratic, China-specific measures gradually became embedded within a wider strategic and national security framework. Concerns shifted toward semiconductors, advanced manufacturing, green technology supply chains, and critical minerals. Notably, successive administrations maintained many of the China-focused measures, reflecting a degree of bipartisan continuity. For emerging markets, this distinction matters: participation in sensitive supply chains now carries geopolitical alignment risk.

The 2025 escalation marked a further institutionalisation of protectionism. New tariff rounds targeted advanced manufacturing sectors, including electric vehicles, battery inputs, and strategic technologies. Crucially, as part of the 2025 measures, the United States scrapped the $800 “de minimis” tax exemption, which had previously allowed low-value imports to enter without duties. This change is more significant than it initially appears. By eliminating the exemption, the tariff base expanded substantially, particularly affecting cross-border e-commerce and small-scale shipments—many of which originate from Chinese platforms.

For emerging markets, the removal of the de minimis threshold represents a tightening of trade frictions at the margin. Smaller exporters and digital commerce channels face higher compliance costs and reduced price competitiveness. What might seem like a technical adjustment effectively broadens tariff coverage and deepens the structural shift away from frictionless global trade.

The 2025 measures also reinforce the strategic reorientation of tariff policy. Protectionism is no longer framed solely as correcting trade imbalances; it is embedded within industrial policy and national security considerations. Emerging markets rich in critical minerals, such as lithium producers, may benefit from supply-chain diversification and foreign investment. However, they also face increased geopolitical balancing pressures between major powers.

Ultimately, the US–China trade war illustrates how tariffs function as both economic distortions and geopolitical instruments. The early phase was broad and haphazard; later phases became more targeted and strategic. Financial markets reacted severely at first, but over time adapted to a world in which tariffs are recurring policy tools rather than temporary bargaining tactics. The scrapping of the de minimis exemption in 2025 underscores how even technical policy shifts can materially deepen trade fragmentation.

For emerging markets, the consequences are mixed. Some gained from trade diversion and supply-chain relocation. Others faced capital flow volatility and commodity price shocks. What is clear is that tariffs have not reversed globalisation but reshaped it into a more fragmented, politically contingent system. In this new environment, resilience depends less on low labour costs and more on macroeconomic credibility, export diversification, and strategic positioning within an increasingly bifurcated global trade order.

Bibliography

Fajgelbaum, P.D. and Khandelwal, A.K., 2021. The economic impacts of the US–China trade war. NBER Working Paper No. 29315. Cambridge, MA: National Bureau of Economic Research. Available at: https://www.nber.org/papers/w29315

International Monetary Fund (IMF), 2019. The impact of US–China trade tensions. IMF Blog, 23 May. Available at: https://www.imf.org/en/blogs/articles/2019/05/23/blog-the-impact-of-us-china-trade-tensions

World Bank, 2022. The US–China trade war and global reallocations. Washington, DC: World Bank. Available at: https://documents1.worldbank.org/curated/en/735611641482672239/pdf/The-US-China-Trade-War-and-Global-Reallocations.pdf

World Trade Organization (WTO), 2025a. Tariff data portal. Available at: https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm