US tariff decision transforms outlook for emerging markets amid evolving global trade landscape

One of the significant events that has occurred recently is the ruling made by the United States (US) Supreme Court on 20 February, which deemed former President Donald Trump’s extensive global tariffs as illegal. According to Sanisha Packirisamy, a Group Economist at Momentum Investments, this decision holds great importance for many countries as the previous universal tariff rate imposed during the Trump administration went beyond legal boundaries.

Now, in place of those tariffs, the US has implemented Section 122 of the Trade Act, which has introduced temporary across-the-board tariffs starting at 10% and now set at 15% for a 150-day period. Once Section 122 expires in mid-July, the US government will need to find other tariff instruments to prevent any legal voids. This shift has brought relief to countries like China, as their tariffs have decreased to levels below 15%. On the other hand, nations like the United Kingdom, which had negotiated more favorable bilateral terms, may now find themselves at a disadvantage under the new temporary regime.

Various emerging markets, including Brazil, India, Mexico, Indonesia, and Turkey, are adapting differently to these tariff adjustments based on their individual trade structures and exposure. Packirisamy discussed how many Asian economies have been benefiting from “transshipments,” where goods that originated in China are being rerouted through third countries to avoid higher tariffs when entering the US. She mentioned countries like Vietnam, Bangladesh, and Kazakhstan as examples of nations benefiting from this redirection of trade, although enforcing these measures proves challenging due to administrative complexities.

Despite some targeted US tariffs, broader supply-chain readjustments such as friendshoring and nearshoring initiatives aimed at reducing US dependence on China have created new trade prospects for nations like Indonesia and Vietnam. Looking forward, Packirisamy cautioned that the conclusion of Section 122 will steer Washington towards alternative mechanisms like Section 232 (national security tariffs), Section 301 (addressing unfair trade practices), Section 338 (combatting foreign discrimination), and Section 201 (temporary safeguards). She anticipates that the US administration will showcase creativity in their trade strategies now that the ruling has counteracted Trump’s previous policies.

The report also highlights the escalating geopolitical risks, particularly concerning the Iranian conflict, which poses threats to oil markets and global shipping routes. Accordingly, emerging markets heavily reliant on imported oil face increased risks related to inflation, currency fluctuations, and fiscal balances. Packirisamy expressed concern that despite being in a relatively stable position, emerging markets may face instability due to rising oil prices and escalating shipping costs in the future.