The Global South will pay for Trump’s trade war

NEW DELHI — US President Donald Trump’s sweeping tariffs have unleashed economic chaos, roiling stock and bond markets and triggering panic around the world, especially in lower-income countries that rely heavily on exports to the United States. The result could be an entirely manufactured global recession, with the developing world bearing the brunt.

The brief calm in financial markets following Trump’s abrupt announcement of a 90-day “pause” on most of his “reciprocal” tariffs, excluding those on Chinese imports, which he raised to 145 per cent, has proven premature. While some billionaires and loyalists may have made a killing by correctly interpreting Trump’s social media posts ahead of his sudden policy reversal, the disruptions to global trade and finance caused by his tariffs continue to pose serious risks.

Moreover, despite the pause on some tariffs, a universal 10 per cent tariff on all US imports remains in effect, along with sector-specific tariffs of 25 per cent on steel, aluminum, automobiles, and auto parts. There are new exemptions for smartphones, computers, and other electronic devices, even as Trump has also threatened new duties on pharmaceuticals, semiconductors, copper and lumber. Taken together, these measures will reduce the availability of imported goods, raise prices for US consumers, and impose steep costs on exporting countries.

But ultimately, the tariffs imposed on each country will depend on future negotiations, where the US is expected to play hardball. Trump has already made clear his disdain for foreign leaders, boasting that many were “kissing my ass” and willing to “do anything” to reverse the tariffs. As a result, the final scope of Trump’s tariffs remains uncertain.

Most critically, Trump’s latest tariff hike on Chinese imports all but ensures that the Sino-American trade war will continue to escalate. The increase to 145 per cent is largely symbolic, a tit-for-tat move after China raised its own tariffs, since the previous 104 per cent rate had already made most Chinese imports commercially unviable. In effect, the administration has signaled its intent to shut down trade with China.

The implications for US consumers and domestic producers that rely on Chinese inputs are profound. Trump’s open distrust of goods from Chinese-owned factories, even when routed through third countries, has forced governments hoping to maintain access to the US market to scramble for alternative sourcing and production options. The mere expectation of such shifts has already severely disrupted global supply chains.

Uncertainty has always been a major deterrent to economic activity, and the unpredictability of the Trump administration’s policies, marked by erratic decision-making, sudden reversals, and on-again, off-again announcements, has made future developments nearly impossible to anticipate using standard risk models. Trump’s preference for shock-and-awe tactics, reminiscent of other “strongmen” like Indian Prime Minister Narendra Modi, compounds the problem.

Rising uncertainty will inevitably discourage investment, as businesses shelve new projects and postpone planned expansions while waiting to see how events unfold. The subsequent slowdown could weigh heavily on US growth and employment, with consequences that extend far beyond the direct economic impact of Trump’s tariffs.

Worse still, the US cannot win its trade war with China. The Chinese government clearly knows this and is playing the long game. At any moment, the two superpowers’ economic war of attrition could spiral into a major financial crisis or even a military confrontation.

The alarm bells are already ringing. The falloff in demand for US Treasury bills, long considered the world’s safest asset, signals diminishing confidence in America’s economic leadership. Moreover, the simultaneous drop in US stocks, bonds, and the dollar points to growing doubts about US Treasuries’ ability to serve as the global benchmark for asset prices, even as they remain the preferred vehicle for high-volume financial transactions.

As with previous self-inflicted economic crises, the US economy will undoubtedly suffer, but the heaviest burden will fall on the developing world. Canceled or delayed export orders are already undermining production and fueling unemployment. Meanwhile, financial volatility is threatening economic stability long before the full impact of Trump’s tariffs can be felt.

These developments are already reflected in the yield spreads on developing countries’ sovereign bonds, particularly those of lower- and middle-income economies. In the month leading up to April 9, emerging-market sovereign dollar debt values fell by an average of 2.9 per cent, while average yields rose to 7.4 per cent. The sovereign bonds of debt-stressed countries like the Maldives, Sri Lanka, Gabon, and Zambia dropped by more than 10 per cent.

Unfortunately, developing countries are all too familiar with this kind of financial and economic turmoil. For decades, many have been trapped in a cycle of currency depreciation, rising borrowing costs, strained public finances, forced spending cuts, and domestic market instability that constrained investment and private-sector activity.

The lessons for developing economies are clear. Not only is globalized trade being upended, but financial globalisation is bound to become even less appealing to countries seeking stable, long-term financing to support their development goals.

Trump is determined to dismantle the global economic order, which in his view allows other countries to take advantage of the US. In response, many developing economies will likely begin to reconsider their participation in, and subordination to, an unequal system that no longer serves their interests. But the road ahead will remain perilous until a credible alternative takes shape.

Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, is a member of the Club of Rome’s Transformational Economics Commission and Co-Chair of the Independent Commission for the Reform of International Corporate Taxation. Copyright: Project Syndicate, 2025. www.project-syndicate.org