Trump International: EM Countries

The incoming Trump administration international agenda will focus on tariffs and trade deal, plus deescalating wars/getting partners to spend more on defense spending. This will be dictated by the U.S. more than the EM partners, but the U.S. agenda differs by country. What are our initial thoughts so far?

Figure 1: Key EM Country Metrics (%) 

Source BEA/IISS 2024/Continuum Economics   

We have some initial thoughts on how key EM countries could be approached by the incoming Trump administration.  However, uncertainty exists on these initial baselines, due to differences of opinion on the pace and breadth of tariff increases and how much geopolitical threat exists from certain countries.  However, the focus will shift to bilateral discussions rather than multilateralism. We shall dynamically update our baseline views on new information from the Trump administration in late 2024 and H1 2025. Our December Outlook will also include analysis on the economic and market impact of likely Trump administration policies.  However, it is worth noting that even if bilateral trade deal were to reduce U.S. deficits with one country, that the overall trade deficit is a function of aggregate demand and supply and tax cuts could fuel demand more than tariffs prompt import substitution.

Mexico faces a trade and immigration challenge from the incoming Trump administration.  2025 will likely see the U.S. threatening Mexico with tariffs in 2026 on the review of the USMCA or worse ending the USMCA.  The Trump team are concerned about Chinese companies increasing production to reexport to the U.S.  This will likely see U.S. demands for increased production share of goods from U.S./Mexico and Canada via tighter rules of origin to reduce China content.  Additionally, the Trump administration will want significant cooperation from Mexico on stopping new illegal immigrants into the U.S. and deporting up to 1mln pa from the U.S.  Our Latam economist feels that Mexico will cooperate with these U.S. demands, due to the focus on sustaining the number one relationship with the U.S.  Elsewhere in LATAM, U.S. trade surplus exist with Brazil and Argentina and many countries and so the risk of tariffs is reduced, if the Trump administration targets countries with high bilateral deficits first (e.g., China/EU/Germany (here)).  However, the political leaning of governments and style of leadership will be important.  Argentina will be in with the Trump administration (due to Trump and Milei great relationship), but Brazil will be under pressure to be less friendly with China.

While the key focus on trade in Asia will be China (here), the U.S. will also look at reducing the bilateral trade deficits with a number of countries.  China will weaken the Yuan and threaten to sell more U.S. Treasuries.  However, China will likely agree a revised Phase 1 trade deal or a Phase 2 in H2 2025. In EM Asia after China comes Vietnam (Figure 1), then Taiwan and S Korea (USD 54.5bln and USD50.3bln YTD trade surplus) -- Japan reached a trade agreement in 2019, but the U.S. will likely ask for an improvement.  Vietnam could be hit with U.S. tariffs early, given the surge in the trade surplus since 2019 as supply chains have been shifted into Vietnam and China remains the dominant importer.  The U.S. will likely demand a trade deal to reduce the surplus and reduce China’s content in Vietnam’s exports to the U.S. via rules of origin like Mexico.  This will be difficult for Vietnam’s government to agree and a path to resolution is not clear.  

S Korea and Taiwan will also likely see tariff threats to get a trade deal, though geopolitics will curtail the size of any actual tariffs.  The China hawks (Rubio/Waltz) will argue that S Korea and Taiwan are defence partners against China, but Trump himself wants Taiwan to spend more on defending itself.  While trade tensions could rise by summer 2025, Taiwan will likely agree to buy a large package of military hardware from the U.S. in a bilateral win-win.  However, Trump will likely not be as consistently supportive of Taiwan, both given his recent and 2016-17 comments that reflect a reluctance to support Taiwan if attacked by China.  However, we remain of the view that China is highly unlikely to invade Taiwan in the next 2 years, given the huge logistical risks involved.  The U.S. could also S Korea to enhance the 2012 trade deal.  India and Thailand could also face some tariff threats but less urgency, with YTD trade surpluses with the U.S. of USD33.3bln and USD32.9bln respectively.

Elsewhere in Asia, our EM Asia economist notes that trade surpluses with the U.S. are smaller in magnitude and so the geopolitical angle will be important.  Trump has a strong personal relationship with India’s PM Modi and strategic interest in the rise of India within Asia as a geopolitical counter to China.  However, it is uncertain whether that will translate into material favouritism, as India wants to remain a key player in BRICS and have a foot in the West and Global south camps. Key appointments, military cooperation and technology transfers are likely, as U.S. attempts to counter China in the Indo-Pacific. Trump’s aggressive stance towards China could create opportunities for India, as companies seek alternatives to Chinese manufacturing. Finally, the Trump administration has too many issues to look at North Korea directly for now, but Trump still claims a good relationship with Kim Jong Un.  In the coming years this could led to new negotiations to freeze North Korea nuclear program, though of course they failed in Trump first term.

For EMEA, the critical issue are the wars in Ukraine and Gaza.  We will provide a deeper Ukraine scenario analysis next week from our EMEA economist, but we feel that the U.S. administration will not be soft on Russia for fear it could show Donald Trump as weak.  Meanwhile, reports suggest that president elect Trump is keen to see the Gaza and Hezbollah wars end by January, which could see the near-term military conflict escalate before the main operations is declared over. This could lead to a ceasefire to try and return Israeli hostages, but is not a precursor to two state solution talks.  Israeli opposition to a two-state solution has increased since the start of the Gaza war and Mike Huckabee nomination as U.S. ambassador to Israel backs a more pro-Israel stance from the U.S.  This makes a Saudi Arabia-Israel accord difficult. The U.S. will also put maximum pressure on Iran as well, but stop short of U.S. military attacks on Iran.  However, it is unclear whether the Trump administration will curtail Israel from attacking Iran nuclear and oil facilities if Israel saw the opportunity. Elsewhere in EMEA, Trump has a close personal relationship with Turkiye President Erdogan and this could reshape U.S.-Turkiye ties. Taking into account that bilateral relations were marked by tough times during Trump’s first term and Biden-Erdogan relations were not at its best, serious disagreement remain over Syria, U.S. support to YPG/PKK and Turkiye’s removal from the F-35 fighter jet program. It is likely that Trump may revisit the U.S. stance in Syria (despite not a priority for Trump for now), and Turkiye playing a role in negotiating a cease-fire in Ukraine could probably strengthen Trump-Erdogan relationship in the medium term.