Tariff Turbulence: US Policy Uncertainty Clouds Emerging Market Prospects Despite Short-Term Gains

Emerging markets are caught in the crossfire of unpredictable US trade policies, with credit agencies split on the true impact. While S&P sees only modest effects so far, Moody’s warns of deeper, more pervasive risks as sectoral pain and global uncertainty mount.

• Short-Term Export Gains Mask Deeper Risks: Some emerging markets, such as India, Taiwan, and Thailand, have seen temporary export boosts from tariff-driven trade shifts, but these gains are expected to be fleeting as US inventories normalize and sectoral distress—such as plunging electronics and semiconductor exports—becomes more evident.
  
  
• Credit Agencies Divided on Impact Severity: S&P Global Ratings maintains that the direct impact of US tariffs on EM growth has been modest, aided by recent tariff de-escalation with China and less severe tariffs than feared. In contrast, Moody’s highlights widespread credit risks, including slower growth, weaker currencies, and heightened investor caution, with negative effects rippling across sectors and financial systems.
  
  
• Uncertainty and Geopolitics Weigh on Outlook: Persistent unpredictability in US trade policy, compounded by regional geopolitical tensions, continues to dampen business confidence and investment in EMs. Both agencies agree that downside risks remain significant, with future data likely to reveal the full extent of economic and credit strain as the year progresses

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses—specifically with regard to tariffs—and the potential effect on economies, supply chains, and credit conditions around the world. As a result, its baseline forecasts carry a significant amount of uncertainty, magnified by ongoing regional geopolitical conflicts. Nevertheless, it believes that the direct impact of shifting U.S. trade policy on economic growth in emerging markets (EMs) has so far been modest amid lower-than-feared effective tariff levels. The most immediate growth implications for EMs have been through trade; a front-running of tariffs has led to sharp spikes in exports to the US, benefiting some EMs, such as India, Taiwan, and Thailand. However, this boost to EM growth will prove fleeting, given that US inventories have already built up.

S&P’s views of a modest impact of U.S. tariffs on EMs is countered by Moody’s which says; “Tariffs have direct and indirect effects on emerging markets. Companies exporting tariffed goods to the US face the most immediate risks. However, the broader impact extends to sectors across emerging markets, as tariffs contribute to slower economic growth, declining commodity prices, weaker currencies, and increased investor caution.” 

A deeper research shows that  real-time export data reveals severe distress in strategic industries. For instance, Vietnam’s electronics exports to the U.S. plunged 14% YoY in May 2025 according to customs data. Semiconductor shipments from Malaysia collapsed 18% in Q2 2025, while Zambia’s copper exports to China crashed 40% (H1 2025 | IMF). The challenge with the S&P report is that the aggregate data masks sectoral crises.

S&P, meanwhile, has revised up our 2025 GDP growth projections for most EMs from our April update, in large part due to less severe U.S. tariff assumptions than what we had previously incorporated in our projections. The tariff de-escalation between the U.S. and China, consisting of a steep reduction in tariffs between both countries on May 12 and a 90-day pause on reciprocal tariffs, has improved our macroeconomic outlook for EMs.

However, U.S. trade negotiations with the rest of the world remain fluid, and the uncertainty over U.S. tariff rates will, in S&P’s view, temper fixed investment in most EMs. Furthermore, despite the moderate improvement in the 2025 growth projections, risks to our outlook are significant, and mostly to the downside. These include the potential for higher oil prices amid the escalation of the conflict in Iran, a weaker-than-expected U.S. economy, more upside pressure on long-term U.S. treasury yields, and challenging fiscal dynamics across several EMs.

The indirect impact of shifting U.S. trade policy, per S&P, will likely show up in economic data over several quarters. The data so far does not yet fully reflect that dynamic, but the ratings and market intelligence firm expects it to show up in weaker economic data as the year progresses. One key variable will be the development in U.S. demand, as it is a key driver of exports from EMs, and by consequence of manufacturing output in those countries. So far, the impact of tariffs on U.S. demand has been relatively subdued, potentially due to low levels of pass-through of prices from producers to consumers. The uncertainty over tariffs’ final levels may be encouraging producers to hold off on price increases. However, producers are expected to increase prices, and employment dynamics in the U.S. to continue softening. Moodys; viewpoint is rather opposite as it writes that U.S. tariffs. “ are creating new challenges for emerging markets, disrupting businesses, governments, and financial systems alike. Companies that depend on exports to the US are feeling the immediate strain, but the ripple effects — slower economic growth, currency volatility, and shifting investor sentiment — are impacting nearly every sector.