 |
| Emerging markets face economic headwinds as global trade barriers rise and policy uncertainty deepens, leading to downgraded growth forecasts.(Representing AI image) |
Trade Barriers Hit Hard: Why the World Bank Slashed Emerging Markets’ 2025 Growth to 2.3%
- Dr.Sanjaykumar pawar
Table of Contents
- Introduction: A Stark Revision in Global Growth
- The World Bank’s New Forecast: What Changed
- Anchors of the Drop: Trade Barriers & Policy Uncertainty
- Disaggregating the Impact: Emerging Markets & Developing Economies
- Key Channels: How Trade Friction Slows Growth
- Empirical Evidence: Trade, Tariffs, and Growth
- Regional Effects & Country Cases
- Risks, Offsets, and Policy Options
- What This Means for India & Other Big EMs
- Conclusion: The Way Forward
- FAQs
- References & Further Reading
1. Introduction: A Stark Revision in Global Growth
In June 2025, the World Bank made headlines by slashing its global growth forecast to 2.3%—a sobering figure it labeled as “the weakest outside a global recession since 2008.” This sharp downgrade caught the attention of economists, investors, and policymakers worldwide. But beyond the headline number lies a more troubling trend: rising trade barriers and intensifying policy uncertainty are now weighing heavily on emerging markets and developing economies (EMDEs), reversing decades of progress driven by globalization.
For years, EMDEs benefited from falling tariffs, trade liberalization, and deeper integration into global supply chains. However, we are now witnessing a clear shift. Escalating protectionism, reshoring strategies, and fragmented trade policies are creating friction across borders. These forces are stifling investment, slowing exports, and eroding the economic momentum many developing nations once enjoyed.
So why did the World Bank make such a dramatic adjustment? And what does this mean for regions that once relied on open trade to fuel their rise?
In this blog series, we’ll unpack the underlying reasons behind the forecast downgrade, explore the real-world impacts of trade tensions on global growth, and highlight regional variations. We’ll also examine the few policy levers still available to help cushion the blow.
Our goal is to simplify complex economic shifts, present clear insights backed by data, and offer a forward-looking perspective. As the global economy enters uncertain terrain, understanding these dynamics is more important than ever.
Let’s begin by exploring the mechanics of the forecast and the warning signals it’s sending.
2. The World Bank’s New Forecast: What Changed
2.1 The Revision in Numbers
In its June 2025 Global Economic Prospects report, the World Bank delivered a sobering update: global growth is now projected at 2.3% for 2025, down from its earlier estimate of 2.7%. This seemingly small shift has far-reaching implications, especially given the broad scope of the downgrade. More than 70% of economies across the globe saw downward revisions, signaling a widespread loss of economic momentum.
Emerging markets and developing economies (EMDEs), once the engines of global growth, are forecast to grow by 3.8% in 2025. This is not only lower than previous estimates but also reflects a slowing trend — even though a modest rebound to 3.9% is projected for 2026–27.
Meanwhile, low-income countries, which are often the most vulnerable to external shocks, are expected to grow at 5.3% in 2025 — a 0.4 percentage point drop from earlier projections. While this may still appear relatively strong, it’s below what these economies need to reduce poverty and build resilience.
2.2 Why the Cut?
So, what’s driving this broad-based revision? According to the World Bank, two main forces are at play.
First, rising trade tensions and tariffs, particularly involving major economies like the U.S., have pushed up costs, disrupted global supply chains, and dampened cross-border trade flows. These tensions have shifted the landscape for EMDEs, many of which relied on exports and integrated supply chains to drive development.
Second, policy uncertainty and fragmentation — in trade, fiscal, monetary, and regulatory policies — has further eroded business confidence. When investors and companies cannot predict the rules of the game, they hesitate to commit capital or expand operations. This hesitation is translating into weaker investment and slower economic activity worldwide.
The World Bank also modeled a scenario in which global trade disputes were de-escalated — specifically, by halving tariff levels. The result? Global growth could be up to 0.2 percentage points higher in 2025–26.
This insight makes one thing clear: while the current forecast paints a cautious picture, it also offers a window of opportunity. If policymakers act to reduce trade friction and rebuild economic trust, the global economy could find its footing again.
3. Anchors of the Drop: Trade Barriers & Policy Uncertainty
The World Bank’s bleak global growth revision for 2025 didn’t come out of nowhere. At the heart of the downgrade lie two major culprits: rising trade barriers and persistent policy uncertainty. Together, they form a toxic combination that disrupts global supply chains, dampens investor confidence, and weakens long-term economic prospects — especially for emerging markets and developing economies.
3.1 Tariffs, Non‑Tariff Barriers, and Fragmentation
When most people hear “trade barriers,” they think of tariffs — and rightly so. Tariffs directly raise the cost of imported goods, from raw materials to high-tech machinery, making it more expensive to produce and compete globally. But tariffs are just the tip of the iceberg.
Increasingly, non-tariff barriers (NTBs) are becoming the bigger obstacle. These include quotas, licensing requirements, differing product standards, origin rules, and cumbersome customs procedures. While less visible than tariffs, NTBs often create more friction, adding costs, delays, and complexity to international trade.
Worse still is regulatory fragmentation. As countries move toward more protectionist policies, we’re seeing a rise in incompatible standards and diverging regulations. Companies are being forced to design, produce, and certify products differently for each market — raising costs and reducing efficiency. This fragmentation doesn’t just affect big multinationals; it disproportionately hurts small and mid-sized exporters who lack the scale to adapt.
All of these factors increase what economists call the “iceberg cost” of trade — where a portion of economic value simply melts away due to hidden inefficiencies.
3.2 Policy Uncertainty & Investment Dynamics
Trade thrives on predictability. But when trade rules change unpredictably — whether through sudden tariff hikes, shifting bilateral agreements, or ambiguous regulations — it shakes investor confidence.
Businesses make long-term decisions like building factories or signing multi-year supply contracts based on stable rules. Rising policy uncertainty reduces expected returns, making investors hesitate or hold back. Capital that might have gone into job-creating projects sits on the sidelines instead.
In this way, trade barriers and uncertainty deliver a double hit: they slow down today’s trade and choke off tomorrow’s growth by discouraging investment. For emerging economies that rely heavily on foreign capital and export-led development, the risks are especially severe.
Understanding these dynamics is key to addressing the slowdown — and shaping smarter, future-ready policy.
4. Disaggregating the Impact: Emerging Markets & Developing Economies
When global growth slows, the effects aren’t evenly distributed. Emerging markets and developing economies (EMDEs) are not a uniform group—they differ widely in economic structure, resource dependency, and financial exposure. The World Bank’s June 2025 downgrade of global growth to 2.3% is especially concerning for EMDEs, many of which are facing stronger headwinds than their developed counterparts.
4.1 Vulnerabilities of EMDEs
A closer look reveals several key vulnerabilities that make EMDEs more susceptible to today’s shifting global landscape:
-
Commodity Dependence: A large number of EMDEs are commodity exporters, relying on oil, minerals, or agricultural products for a significant portion of their GDP and government revenue. With trade tensions and protectionist policies disrupting global supply chains, commodity prices have become more volatile. This not only dents export earnings but also worsens terms-of-trade, making imports more expensive and squeezing national budgets.
-
Trade-Intensive Economies: Many emerging markets are deeply integrated into global trade networks, especially in manufacturing and agro-export sectors. Rising tariffs, export bans, and shifting sourcing patterns—often tied to geopolitical realignments—have made it harder for these countries to maintain competitiveness. This disproportionately affects jobs, income, and industrial growth in regions that depend on trade-intensive industries.
-
Foreign Currency Debt: A persistent vulnerability is the high level of external debt denominated in foreign currencies, especially U.S. dollars. In times of global uncertainty, capital often flees to “safe haven” assets, leading to weaker local currencies and higher debt servicing costs. This limits fiscal space and often forces governments to cut back on essential spending, just when stimulus is most needed.
These compounding vulnerabilities are putting EMDEs in a precarious position. The World Bank starkly noted that, outside of Asia, the developing world is becoming a “development-free zone.” That’s not just rhetoric—it reflects a deeper truth that the globalization tailwinds EMDEs once relied on are no longer pushing them forward.
4.2 Regional Outlooks (Per World Bank)
While the global drag is widespread, regional outcomes vary, depending on domestic resilience, policy space, and exposure to external shocks. Here's what the World Bank forecasts for key EMDE regions:
-
South Asia: Still the bright spot among developing regions, South Asia is projected to grow at around 5.8% in 2025. That’s a moderation from the higher growth rates seen in recent years, reflecting weaker global demand and tighter financial conditions. Yet, strong domestic consumption and infrastructure investments—particularly in India and Bangladesh—are expected to cushion the blow and drive a modest rebound beyond 2025.
-
Sub-Saharan Africa: The region continues to struggle with stubborn structural challenges, from high debt burdens to fragile governance in some states. Growth is expected to inch up to 3.7% in 2025, from 3.5% in 2024. However, rising debt service costs, limited fiscal space, and weak export demand are serious constraints. Additionally, climate-related shocks—such as droughts and floods—are increasingly disrupting agriculture, a mainstay of the region’s economy.
-
Other Emerging Regions:
- Latin America faces slowing growth due to persistent inflation, tight monetary policy, and political uncertainties. Export-driven economies like Brazil and Chile are particularly exposed to China’s cooling demand.
- The Middle East and North Africa experience mixed fortunes. Oil exporters may benefit from price spikes, but non-oil economies face tighter budgets and social pressures.
- Eastern Europe and Central Asia deal with the ongoing fallout from geopolitical tensions and shifting energy trade dynamics, which have disrupted traditional economic linkages.
EMDEs are confronting a perfect storm of trade friction, commodity volatility, capital outflows, and limited policy room. While each region faces its own set of challenges, the overall picture is one of heightened fragility. The global slowdown, in combination with growing protectionism, is steadily eroding the progress many of these nations made over the past two decades.
As the global economic environment continues to shift, the question is no longer just how EMDEs will grow—but how they will adapt. In upcoming sections, we’ll explore the policy options that could help these economies regain stability and avoid long-term stagnation.
5. Key Channels: How Trade Friction Slows Growth
Trade friction doesn’t just stop at borders — its effects ripple across economies, touching production, investment, exports, and even inflation. When countries raise tariffs or pursue protectionist policies, the consequences are far-reaching, especially for emerging markets and developing economies (EMDEs) that rely heavily on trade integration. Let’s break down the specific ways these trade disruptions translate into slower global growth.
5.1 Disruption to Global Value Chains (GVCs)
In today’s economy, production is no longer confined within national borders. Products — from smartphones to cars — are assembled through Global Value Chains (GVCs) that stretch across continents. A single trade barrier in one country can create cascading effects throughout the chain.
When tariffs or regulatory hurdles are introduced, manufacturers face higher costs, delays, and inefficiencies. Supply chains may need to be rerouted or localized — often at significant expense. For instance, if a factory in Vietnam faces new U.S. tariffs, components might have to be sourced from another region, disrupting established logistics.
Moreover, this volatility prompts firms to rethink their global footprint, leading some to prematurely reshore or relocate operations. While this may offer long-term resilience, the short-term impact is often negative: higher production costs, reduced competitiveness, and capital loss.
Smaller firms are especially vulnerable. Unlike multinationals, they lack the resources to quickly adjust supply chains or absorb cost increases. The result? Less competition, stifled innovation, and slower productivity growth — all of which weigh on overall economic output.
5.2 Lower Investment & Capital Formation
Investment is the engine of long-term growth. But when trade policy becomes unpredictable, firms tend to hold back.
Capital allocation decisions rely heavily on predictable policy environments. When companies face uncertainty about tariffs, market access, or future regulations, they either delay or scale back investments. This hesitation is particularly damaging in EMDEs, where sustained investment is critical for catching up in technology, infrastructure, and productivity.
Foreign Direct Investment (FDI) is also sensitive to trade policy. Data from the G20 shows a strong positive link between trade openness and growth. Conversely, rising tariffs have a negative lagged effect — meaning the real damage shows up months or even years later.
Recent research using ARDL (Autoregressive Distributed Lag) modeling further supports this. It finds that logistics efficiency and trade openness are key drivers of long-run growth in major economies. When trade is hindered, it not only affects physical flows but also erodes investor confidence, reducing capital formation and future productivity.
5.3 Reduced Exports & Weaker External Demand
Another major channel through which trade friction slows growth is by dampening exports. Higher tariffs and stricter rules directly raise the cost of exporting, which hits firms’ profit margins and global competitiveness.
For export-dependent economies — like many in Southeast Asia, Sub-Saharan Africa, and Latin America — this is especially damaging. These countries rely on strong external demand to drive domestic production, create jobs, and generate foreign exchange.
As global trade slows, the ripple effects are clear: falling export volumes reduce GDP, while weaker global demand shrinks growth opportunities. This, in turn, feeds back into lower consumer and business confidence, creating a cycle of weak momentum that’s hard to reverse.
5.4 Higher Inflation & Real Income Compression
Tariffs function like a hidden tax. When countries impose import duties, the added cost is typically passed on to consumers in the form of higher prices.
This leads to inflation, especially for economies heavily reliant on imported goods — including food, fuel, and intermediate manufacturing inputs. As inflation rises, real incomes shrink, leaving households with less purchasing power. Consumption slows, and businesses see reduced demand.
To combat inflation, central banks may raise interest rates — a move that can further constrain credit, raise borrowing costs, and depress private investment. In effect, trade friction creates a dual challenge: higher prices and lower growth, often referred to as stagflation.
5.5 Financial Spillovers & External Vulnerability
Finally, trade uncertainty doesn’t stay confined to the real economy. It spills over into financial markets, especially in emerging economies that are more exposed to capital flows.
During periods of heightened global risk — like trade wars or policy shocks — investors often adopt a “risk-off” approach, pulling capital from emerging markets and reallocating to safer assets. This can lead to currency depreciation, capital outflows, and rising bond yields in vulnerable economies.
Moreover, as global interest rates rise — either due to inflation control or tighter monetary policy in advanced economies — the cost of borrowing for EMDEs increases, adding pressure to already strained budgets. Many developing countries also hold debt in foreign currencies, so a depreciating local currency amplifies repayment costs, increasing financial stress.
This global financial cycle acts as an accelerant: when trade frictions rise, so too does the risk of currency crises, liquidity shortages, or even sovereign defaults, especially in countries with weak fiscal buffers.
A Broader Economic Drag
Trade barriers are more than just policy tools — they are potent economic disruptors. While some measures may aim to protect domestic industries or address geopolitical concerns, the collateral damage is widespread and systemic.
From broken supply chains to reduced investment, from weaker exports to rising inflation, and from financial market volatility to long-term growth stagnation — the effects are felt across all sectors.
For emerging and developing economies, the stakes are even higher. The very forces that once powered their rise are now turning into obstacles. Reversing this trend will require coordinated global action, stable trade frameworks, and a renewed commitment to multilateralism.
Until then, the drag from trade friction will remain a defining feature of the global economic landscape.
6. Empirical Evidence: Trade, Tariffs, and Growth
While the theoretical case against trade barriers is strong, it’s the empirical evidence that solidifies the narrative. A growing body of research shows — with statistical clarity — that trade openness is a powerful driver of economic growth, while tariffs and protectionist policies act as clear impediments. Let’s look at some key findings that ground this discussion in data.
Sowrov (2024) analyzed a panel of G20 countries and found a strong negative relationship between tariffs and future GDP growth. Even after controlling for other variables like inflation, investment, and institutional quality, higher tariffs consistently predicted weaker economic performance. Conversely, trade openness showed a significant positive correlation with growth, reinforcing the long-standing belief that open economies perform better over time.
Building on this, Wang & Sua (2025) used advanced econometric techniques — specifically bootstrap ARDL modeling — to evaluate the short-run and long-run impacts of trade-related factors. Their study concluded that trade facilitation, logistics performance, and openness significantly influence GDP growth, not just immediately but in persistent, long-lasting ways. These findings are especially relevant for policymakers in G20 nations where global supply chains and trade infrastructure are deeply interconnected.
The vulnerabilities are even more acute for emerging markets. According to Carrera, Montes-Rojas & Toledo (2021), commodity-exporting EMDEs are particularly exposed to shifts in the global financial cycle and terms-of-trade shocks. Their research showed that fluctuations in trade patterns often translate into higher financial volatility and wider spreads, underlining how trade barriers can indirectly affect financial stability.
Lastly, the World Bank’s own modeling offers a pragmatic illustration: in simulations where global tariffs are halved, global GDP growth improves by 0.2 percentage points. This modest-sounding boost is meaningful on a global scale and highlights how reducing trade barriers can unlock investment and productivity.
In sum, the evidence — from panel regressions to structural macro models — is consistent: trade friction dampens growth, not just through direct trade channels but also by disrupting investment, increasing uncertainty, and amplifying financial risks.
7. Regional Effects & Country Cases
As the World Bank’s revised forecast for global growth in 2025 sinks to 2.3%, the regional and national fallout is becoming increasingly clear. While the causes—rising trade barriers, global fragmentation, and policy uncertainty—are broadly shared, their impacts vary widely depending on each country’s trade exposure, economic structure, and policy resilience.
Below, we explore how different parts of the world are navigating these headwinds, and what their outlooks suggest about the road ahead for emerging markets and developing economies (EMDEs).
7.1 Latin America & the Caribbean
The World Bank has downgraded Latin America and the Caribbean’s growth forecast to 2.3% in 2025, mirroring the global average but reflecting deep divergences within the region.
Mexico, a key player in the U.S.-linked supply chain, is feeling the sting of escalating tariffs and trade friction with its northern neighbor. As a major exporter of manufactured goods and auto parts to the U.S., Mexico’s growth potential is now under serious pressure. Export growth, which has long been a pillar of the economy, is projected to slow sharply, straining industrial output and employment.
In contrast, Argentina presents a rare bright spot. Following years of economic instability, the country is now projected to grow at 5.5% in 2025. This surprising upgrade is driven by a mix of favorable commodity prices, fiscal reforms, and improved macroeconomic policy. A surge in agricultural exports, coupled with currency stabilization and debt restructuring, is helping Argentina attract renewed investment interest.
Overall, the region’s outlook is shaped by its exposure to external markets, internal political shifts, and dependence on commodity cycles—all of which are highly volatile in today’s global environment.
7.2 East Asia & Southeast Asia
East Asia and Southeast Asia, historically among the fastest-growing regions, are not immune to the new global trade reality.
Vietnam, long seen as a rising star in global manufacturing, is now forecast to grow 5.8% in 2025—down from previous estimates near 6.5%. Weaker global demand, especially from Western markets, is dampening exports of electronics, garments, and furniture. As one of the key beneficiaries of supply chain diversification away from China, Vietnam now faces both opportunity and risk.
Meanwhile, China continues to grapple with both external and internal challenges. Although still a global growth engine, China’s export-driven model is under increasing strain due to U.S. tariffs, trade decoupling, and geopolitical tension. The World Bank’s revised outlook reflects this vulnerability. China is now being pushed to rely more on domestic consumption and service-led growth—a structural transition that takes time and comes with growing pains.
Supply chains are indeed shifting, with manufacturers relocating to ASEAN countries like Indonesia, Malaysia, and the Philippines. However, this shift is neither seamless nor inexpensive. Building new logistics infrastructure, training labor forces, and managing regulatory environments introduce delays and complexity.
7.3 South Asia and India
South Asia offers a somewhat brighter picture. The region is expected to grow at 5.8% in 2025, making it the fastest-growing EMDE region. Much of this strength is anchored in India, whose large domestic market and services sector provide insulation from external shocks.
India’s export profile is less concentrated on goods vulnerable to U.S. tariffs, unlike China or Vietnam. Instead, sectors like IT services, digital commerce, and pharmaceuticals continue to show resilience. Strong domestic consumption, infrastructure spending, and a burgeoning startup ecosystem are bolstering growth.
However, not all is smooth sailing. South Asia still faces structural challenges—infrastructure gaps, policy uncertainty, and inflationary pressures that can hinder long-term investment. Moreover, rising interest rates and external borrowing costs can strain fiscal balances if not managed prudently.
Countries like Pakistan, Sri Lanka, and Bangladesh also face unique vulnerabilities, including debt overhangs, political instability, and energy shortages.
7.4 Sub‑Saharan Africa & Commodity-Dependent Economies
For Sub-Saharan Africa, the global trade slowdown comes at a precarious time. Many countries in the region are heavily dependent on commodity exports—oil, copper, cobalt, and agricultural goods—which makes them extremely vulnerable to volatile global demand and prices.
With weak commodity prices and reduced foreign exchange inflows, growth projections are under severe downward pressure. At the same time, high public debt across many African nations limits the ability to engage in counter-cyclical fiscal measures, such as stimulus or infrastructure investment.
Climate shocks, such as droughts and floods, continue to affect food production and energy access, while political instability in parts of the Sahel and Horn of Africa adds further risk.
Even more concerning is the infrastructure deficit—from ports and power grids to digital connectivity. Without substantial investment, the region risks falling further behind in the race to diversify economies and attract manufacturing or service-based industries.
A Complex and Uneven Global Picture
What these regional snapshots clearly demonstrate is that the current global trade shock—driven by protectionism, policy fragmentation, and weakening demand—is not evenly distributed. While some countries like India and Argentina are navigating the turbulence with relative resilience, others—especially export-reliant or commodity-dependent nations—face far steeper challenges.
Emerging and developing economies must now grapple with a new world order where trade is no longer a guaranteed engine of growth. The ability to adapt—through domestic reforms, trade diversification, investment in human capital, and regional integration—will determine which countries can weather this storm and which remain mired in stagnation.
As the World Bank’s forecasts show, 2025 may not bring a global recession—but for many countries, the line between stagnation and contraction is getting dangerously thin.
8. Risks, Offsets, and Policy Options
As global growth projections dim, emerging markets and developing economies (EMDEs) find themselves at a critical inflection point. The World Bank's sharp downgrade of its global growth forecast to 2.3% in 2025 isn’t just a numerical revision—it’s a signal of deeper structural and geopolitical headwinds facing the global economy. In this section, we dive into the core risks threatening further deceleration, the offsetting forces that could help soften the blow, and policy strategies that EMDEs can adopt to future-proof their economies.
8.1 Risks That Could Push Growth Lower
The World Bank has cautioned that “downside risks remain decidedly tilted,” meaning there’s more potential for things to get worse than better. Here are five key risks that could further undermine global and regional growth:
🔥 Escalation of Trade Wars
Rising protectionism continues to destabilize trade flows. If countries impose new rounds of tariffs or expand non-tariff barriers, global value chains could suffer further fragmentation. According to World Bank estimates, additional tariffs alone could shave off another 0.5 percentage points from global growth. For EMDEs reliant on exports, this would be particularly damaging.
💸 Financial Tightening & Capital Flight
In an environment of high global debt and tightening monetary policy in advanced economies, sudden capital outflows could trigger financial instability in EMDEs. Countries with high external debt, limited reserves, or weak financial institutions are especially vulnerable to shocks in global liquidity.
🛢️ Commodity Price Shocks
Many EMDEs depend heavily on commodity exports. Volatile oil, gas, or food prices—whether due to supply disruptions, geopolitical tensions, or climate events—can quickly erode fiscal balances and stoke inflation, leading to social unrest or deeper economic slowdowns.
🌍 Climate & Conflict Shocks
The increasing frequency of climate-related disasters—floods, droughts, hurricanes—poses a direct threat to agriculture-dependent and low-income economies. In addition, rising geopolitical tensions, including regional conflicts, can displace populations, disrupt trade, and strain fragile institutions.
⚠️ Policy Missteps
Implementing austerity measures during weak growth, or delaying needed reforms, could worsen outcomes. Poorly timed or overly rigid policies can magnify vulnerabilities rather than solve them, especially in politically sensitive or fragile economies.
8.2 Offsetting Forces & Potential Upside
Despite the gloomy outlook, there are still glimmers of hope. Several forces, if leveraged well, could help offset current headwinds and even unlock modest growth upside:
🤝 Resolution of Trade Disputes
If major economies de-escalate trade tensions—for instance, by reducing tariffs or removing restrictions on key goods—growth could receive an immediate boost. The World Bank estimates that halving existing tariffs could add 0.2 percentage points to global growth, offering much-needed relief to EMDE exporters.
🏗️ Domestic Reforms
EMDEs have room to improve trade facilitation, customs efficiency, and logistics. By investing in better port infrastructure or streamlining cross-border procedures, countries can reduce costs and enhance competitiveness—even amid external drag.
💰 Fiscal Support & Targeted Stimulus
Governments that have space for fiscal expansion should consider targeted stimulus, particularly in infrastructure and climate-resilient sectors. Green investments, in particular, offer a dual benefit—stimulating short-term demand while building long-term sustainability.
🌍 Export Market Diversification
Reducing reliance on a narrow set of trading partners or commodities is critical. Diversifying export markets, value chains, and supply bases can shield economies from external shocks and open up new sources of demand.
🌐 International Cooperation
Renewed multilateral engagement, whether through the World Trade Organization (WTO), regional trade blocs, or climate finance mechanisms, can restore confidence and provide platforms for coordinated solutions to global challenges.
8.3 Policy Recommendations for EMDEs
In light of both risks and opportunities, here are five pragmatic policy actions that emerging and developing countries should prioritize:
1. Strengthen Trade Infrastructure
Investment in logistics, port facilities, customs modernization, and digital trade platforms can dramatically reduce transaction costs and improve competitiveness. Resilient supply chains are now a strategic imperative.
2. Pursue Trade Diversification
Joining new regional trade agreements, exploring South–South cooperation, and entering non-traditional markets can help EMDEs hedge against bilateral trade tensions and over-reliance on specific partners.
3. Enhance Domestic Resilience
Strengthening institutions, rule of law, domestic revenue mobilization, and building fiscal buffers can equip EMDEs to respond more effectively to external shocks. These are also essential for attracting foreign investment.
4. Implement Selective Industrial Policies
Rather than blanket subsidies, EMDEs should pursue smart industrial strategies—supporting sectors where they hold a competitive edge and promoting value addition over raw commodity exports.
5. Engage in Multilateral Diplomacy
Re-engaging in global trade governance is key to ensuring fair and predictable rules. EMDEs must push collectively for the rollback of extreme protectionism, stronger WTO enforcement, and greater voice in setting global norms.
Final Thoughts
While the 2025 global growth outlook is sobering, it is not a foregone conclusion. Emerging and developing economies still have agency—and a toolkit—to navigate this turbulent period. By addressing vulnerabilities, embracing reform, and engaging constructively in global systems, EMDEs can not only weather the storm but lay the groundwork for more resilient, inclusive, and sustainable growth in the years ahead.
By acting now, policymakers can turn risk into opportunity—and keep their economies on the path to long-term prosperity.
9. What This Means for India & Other Big EMs
As global growth slows and trade tensions rise, emerging markets are feeling the pressure. But not all EMs are affected equally. India, in particular, stands out for its relative resilience—and its unique position offers both opportunities and challenges in navigating this uncertain landscape.
Unlike East Asian economies that are heavily export-dependent, India’s growth is driven more by domestic demand. This large internal market acts as a natural buffer against external shocks, such as falling global trade or rising tariffs. While countries like South Korea or Taiwan are more exposed to disruptions in U.S.-China trade, India’s lesser dependence on exports to the U.S. gives it some insulation.
Additionally, India has made significant public investments in infrastructure, logistics, and digital connectivity—critical areas that boost long-term productivity. Reforms in trade facilitation, customs processes, and the development of industrial corridors are starting to yield returns, making the Indian economy more competitive in the long run.
However, India is not completely immune to global headwinds. Inflation management, fiscal discipline, and ensuring macroeconomic stability remain key. With commodity prices volatile and global capital flows uncertain, keeping public finances in check and controlling inflation will be essential to maintain investor confidence and sustainable growth.
Outlook for Other Major EMs
Other large emerging economies—Brazil, Mexico, Indonesia, and Vietnam—face a more complex mix of challenges. Many of these nations are more reliant on exports, particularly commodities or low-cost manufacturing. This makes them vulnerable to global demand shifts, commodity price swings, and rising trade protectionism.
Moreover, countries with high external debt or limited fiscal space may struggle if global financial conditions tighten. Reforms in governance, infrastructure, and industrial policy will be critical—but politically challenging—in these contexts.
India is better positioned than many peers, but the broader EM landscape remains fragile. No emerging market can afford complacency. Continued reform, regional cooperation, and investment in resilience will determine who thrives in a slower-growth, more fragmented global economy.
10. Conclusion: The Way Forward
The World Bank’s decision to downgrade global growth to 2.3% in 2025, with emerging markets caught in the crossfire of trade friction, is a jarring signal. What was once a tailwind — globalization and trade integration — is now a brake on momentum.
Yet, this moment need not spell permanent stagnation. While trade barriers and policy uncertainty pose powerful headwinds, evidence and modeling suggest that prudent policy, structural reform, diversification, and diplomatic recalibration can alleviate the blow. The upside scenario is not automatic, but with coordinated action, the loss can be minimized.
Emerging markets must recalibrate for a more contested global trade regime. The path forward lies in resilience, flexibility, and reinvigorating the gains of open trade — but with smarter safeguards and domestic strength.
11. FAQs
Q1. Does 2.3% growth mean a global recession?
No — the World Bank explicitly avoided declaring a recession. Rather, 2.3% is historically low (outside recessions).
Q2. Will rolling back tariffs fully reverse the damage?
Not fully — the structural drag, lost investment, and policy shifts mean some damage is lasting. But easing trade friction could recoup part of the loss (~0.2 pp, per World Bank).
Q3. Which region is worst hit?
Regions with heavy export dependency, high commodity exposure, or fragile fiscal space (e.g., parts of Latin America, Sub‑Saharan Africa) are more vulnerable. But no region is untouched.
Q4. Can digital trade or services offset goods trade loss?
Yes, to some extent. Services and digital exports may be less tariff-prone, but they still depend on connectivity, regulatory openness, and competitiveness.
Q5. What’s the timeline for recovery?
The World Bank projects mild recovery in 2026–27 (growth ~2.5–2.6%) but warns that the 2020s may be the weakest decade since the 1960s.
12. References & Further Reading
- World Bank — Global Economic Prospects (2025) press release & report
- World Bank — “Global Economy Stabilizes, But Developing Economies Face Tougher Slog”
- World Bank — Global Economic Prospects publication page
- Investing.com / Reuters summary: “World Bank cuts global growth forecast as trade tensions heighten”
- CNBC: “World Bank cuts 2025 growth outlook to 2.3% as trade tariffs weigh”
- A. Huq Sowrov, “Trade Openness, Tariffs and Economic Growth: An Empirical Study from Countries of G‑20” (arXiv)
- H. Wang & L. Sua, “Exploring Trade Openness and Logistics Efficiency in the G20 Economies” (arXiv)
- J. Carrera et al., “Global Financial Cycle, Commodity Terms of Trade and Financial Spreads in Emerging Markets” (arXiv)
Comments
Post a Comment