Can Emerging Markets Adapt to the Changing Face of Globalisation?

By Dr. Gaurav Ganguly, Head of International Economics, Moody’s Global growth is expected to remain remarkably resilient in 2026, even as the impacts of US tariffs continue to flow through. The worst fears of 2025 did not materialise. Not only did global trade avoid a collapse, but growth in emerging markets (EMs) held up. China posted a $1.2-trillion trade surplus in 2025 despite a decline in exports to the United States; Vietnam’s shipments to the US increased despite tariffs; and Brazil benefited from soaring agricultural exports to China. Even India, subject to 50-percent US tariffs, is expected to post gross domestic product (GDP) growth of more than 7 percent in 2025 and has secured a trade deal with the European Union (EU). This is all perhaps unsurprising, given that the push towards protectionism is not multilateral and, as the general feeling goes, it could have been much worse. The pain is also relatively evenly distributed. Most US trading partners have ended up with roughly the same tariffs, so no country is especially disadvantaged. India’s recent trade deal brings it more in line with its peers. However, the current geopolitical environment leads to multiple threats. First, US tariffs endanger the EM development model, which, over the past few decades, has relied on trade to power growth. Second, tariffs have upset the balance between demand and supply and are altering trade flows, with implications for growth prospects. Third, tariffs are being used as a broader policy weapon, and countries can therefore be targeted for several reasons and with little warning. Finally, what a country can trade in may be determined more by spheres of geopolitical influence than by comparative advantage. This can significantly impact development. But EMs are not powerless and, even now, are taking steps to improve their resilience. More needs to be done, but there is a good chance the EM growth model will survive. US tariffs threaten the EM growth model For EMs, the US push to deglobalise is worrying. If there is one thing we have learnt about globalisation over the past six decades, it is that trade helps growth. For EMs, the US push to deglobalise is worrying. If there is one thing we have learnt about globalisation over the past six decades, it is that trade helps growth. And it is not just access to other markets and the increase in jobs that matter; it is the benefits that accrue from engaging with the global economy and competing with the best, which, in turn, can improve productivity, spur innovation and ensure that the benefits from trade spread across the economy. Evidence shows that greater positive effects accrue from participation in global value chains. A rise in protectionism and a decoupling from international supply chains would be a meaningful blow to both global growth and EM development. EMs face significant challenges in finding replacement markets. The US is still a major purchaser of EM goods, but higher tariffs will diminish its demand for imports. The world’s other large economies, namely the EU and China, are not only smaller consumers than the United States, but both are also battling domestic problems, and domestic demand in these economies is unlikely to pick up the slack soon. More tariffs, and not just for trade Perhaps the easiest scenario to envisage is one in which the US threatens new tariffs because countries that signed deals in 2025 are unable to live up to them. Most of last year’s deals included unlikely purchase and investment pledges. Failure to deliver in 2026 could result in another round of tariffs or other coercive measures. South Korea, which was recently threatened with 25-percent tariffs for allegedly dragging its heels on ratifying its agreement with the US, is already an example. But tariffs have also become an instrument of broader US policy. China, Canada and Mexico were initially targeted in 2025 for allegedly failing to combat the drug trade. Unhappiness over the judgment against Brazil’s former president, Jair Bolsonaro, led to tariffs on Brazilian goods, and a few months later, India faced 50-percent headline tariffs because of its Russian-oil purchases. This broad-based use of tariffs is a clear feature of the current US administration’s foreign policy and will continue, as evidenced by the now-withdrawn threat of extra tariffs on countries that oppose US control of Greenland. In 2026, EMs could be subject to tariffs not because of their trade surpluses with the US, but because tariffs are a political tool. Might other countries also apply tariffs or take other economic measures to protect themselves? Mexico, for instance, has applied 50-percent tariffs on Chinese goods, ostensibly because cheap Chinese goods are flooding its market, but it could also be motivated by a desire to appease the US ahead of the renegotiation of the United States-Mexico-Canada Agreement (USMCA). EMs may find themselves either directly in the line of fire, as in India’s case, or just caught out if tariff escalation occurs between major economies. The China trade conundrum EMs, as they climb the manufacturing ladder, will increasingly have to compete with China’s overcapacity, the broad range of goods it produces and its cost advantages. Not many countries have successfully transitioned into advanced manufacturing nations with sophisticated exports, but those that have were small enough to be easily absorbed into the global system. China’s size and the variety of goods it produces make absorbing it unworkable. Marry its manufacturing prowess with its weak domestic demand and its declining trade with the US, and it is easy to see why Chinese goods are flooding the international market. From electric vehicles (EVs) to steel to mobile phones, China produces cheap, world-class goods at a scale that makes it hard for EMs to compete. Brazil’s steel industry, which has come under pressure from cheap Chinese imports, is a recent example. China has grown to become a larger trade partner than the US for many countries. Several small EMs have grown their exports by participating in China’s supply chain. They have managed to piggyback on China’s success, but being “conduits” for Chinese trade is dangerous. Chinese firms relocated parts of their manufacturing to countries such as Thailand, Vietnam and Cambodia in a bid to avoid US tariffs during Donald Trump’s first presidency. Chinese firms have also sought to relocate manufacturing to avoid EU tariffs. For these conduit countries, the decline in manufacturing exports could be as rapid as the rise if multilateral concern over cheap Chinese goods extends to these countries. China has the size and the leverage to negotiate; these small EMs do not. Fragmentation and spheres of influence Increasing fragmentation and the growing importance of “spheres of influence” could shift trade and investment dynamics with uncertain and potentially damaging results. For many EMs, lower-cost Chinese technology is a boon. Cheap Chinese renewable-energy equipment and electric vehicles help EMs not just decarbonise, but, crucially, reduce their reliance on fossil fuels. Uruguay, which now produces almost all its electricity needs using renewable energy, is a prominent example. Telecommunications equipment provides much-needed infrastructure, while consumer goods such as mobile phones enable connectivity at lower costs than US brands. At the same time, EMs also rely on the US, and being forced to choose between the two will be costly and complex. For instance, Malaysia, as part of its trade deal with the US, has agreed to consult the US before purchasing sensitive technology from any country, even though it relies on Chinese 5G technology. It is almost inevitable that this will create a pressure point. China’s recent policy paper on relations with Latin America builds on its Global Development Initiative (GDI) and includes technology cooperation. Several Latin American countries either use Chinese telecommunications equipment or are willing to do so. At some point, this may prove unacceptable to the US. Finally, defence and economics may become intertwined, as in Venezuela, and other EMs could find themselves either directly in the crosshairs or caught in the crosscurrents. On the other hand, while not assured, countries within the US sphere of influence could benefit from increased investments and lower tariffs. Geopolitical events are notoriously difficult to predict, and their economic ramifications can be manifold. It is clear that the risk of further geopolitical fragmentation is high, and EMs are vulnerable, as they may be targeted directly or become caught up in the broader rivalry between superpowers. What can EMs do? It is tempting to conclude that EMs face insurmountable challenges, but before throwing in the towel, it is worth considering their strengths and how countries are navigating these crosscurrents. It is tempting to conclude that EMs face insurmountable challenges, but before throwing in the towel, it is worth considering their strengths and how countries are navigating these crosscurrents. The obvious point is that EMs, by and large, are a self-sustaining growth engine with momentum that will continue to increase. Home to almost 85 percent of the world’s population, they sit on a staggering wealth of resources, perhaps the most important of which is their own human capital. As a group, they have made significant advances in institutional quality over the past few decades and have seen a material increase in their well-being. Continuing to deepen their financial systems, improve domestic markets, build infrastructure and ultimately increase incomes and wealth will serve them well. Continued EM development and growth can provide an impetus that will help, at least partly, offset the negatives of a retreating US, a slow-growing China and a sluggish EU. Trade has been an important part of this development story, and it is worth noting that despite the many risks, trade is not forecast to collapse any time soon. Increased interest among developed markets (DMs) in strengthening and shortening their own supply chains to protect themselves from shifting geopolitical sentiment places EMs plugged into global supply chains at risk. However, EM participation in the global value chain is vital to the global industry, and if anything, other DMs will be interested in securing strategic alliances. As the recent tariff rollback between Canada and China and the trade deal between the EU and India show, there is scope for deeper trade relations between EMs and DMs. EMs will have to continue to find alternative trade and investment partners. More and more global trade and investment is between EMs, and they can continue strengthening cooperation with each other as ASEAN (Association of Southeast Asian Nations) and RCEP (Regional Comprehensive Economic Partnership) seek to do. The membership applications of the Philippines and Cambodia to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) represent another example. In addition, EMs can leverage their participation in global value chains and reorient themselves towards more regional or EM-specific supply chains, thereby attracting investment from EM corporates. VinFast’s EV plant in India provides an example, as do China’s supply chains through Southeast Asia. But EMs also need smart industrial policies. They can learn from countries ahead of them on the development curve—South Korea, Japan and, more recently, China—all of which have benefited from global trade by being selective and strategic. Many EMs have industrial policies that push them towards the tech frontier; take India’s drive to become a player in space technology as an example. But they should not shy away from protecting their interests, either. Indonesia successfully stopped exporting nickel ore to China and instead encouraged Chinese firms to invest in setting up refining capacity in the country. Malaysia has been intentional in developing its semiconductor industry, and several EMs, such as India, have approached energy policy strategically. Finally, for several EMs, especially those at the lower end of the income scale and those with poorer fiscal space, improving resilience to commodity and climate shocks is essential. The Russian invasion of Ukraine showed countries such as Egypt how commodity shocks can lead to extreme imbalances. Building such resilience is not entirely unrelated to coping with shifts in globalisation, and new strategic alliances should include consideration of those that can assist in times of extreme need. EMs have the tools to cope with a shift in globalisation, but they will need to adapt to the new global environment.