Emerging Markets Under “America First Trade Policy”: What’s Next, Who’s Exposed?

In a new Citi Research note, a team led by Johanna Chua looks at what we’ve seen from the opening weeks of the second Trump administration through an emerging-markets lens: greater uncertainty, bolder trade tariffs, a more assertive U.S. foreign policy and signs China may want to negotiate. We then look at what’s next, assessing the impact of targeted tariffs on semiconductors, pharmaceuticals, steel and aluminum and assessing emerging-market vulnerabilities from the forthcoming America First Trade Policy review.

Four Lessons From the Opening Weeks

We draw four lessons from Trump’s opening weeks. The first is that policy initiatives are emerging with greater density and ambition; the speed with which executive orders have emerged is unprecedented in American history, and the use of the International Economic Emergency Powers Act to override existing legislation and/or agreements makes U.S. policy hard to predict.

Second, Trump 2.0 has seen bolder and more confrontational foreign-policy stances, including with traditional allies. For instance, Canada and Mexico received a heavier opening tariff blow (25%) than China (10%). We see the Trump administration as willing to deploy larger-scale tariff threats, such as in the case of Colombia, in part because of its expectations that concessions will be quickly offered. That’s a riskier approach with China, which arguably has more economic and policy leverage and is less likely to be pressured into quick concessions, in our view.

The Trump administration appears willing to pursue a more assertive foreign-policy approach to secure U.S. geopolitical and commercial interests, as high-profile disputes related to Greenland and the Panama Canal show. China’s rising trade and investment influence in Central and Latin America could face constraints, with Mexico, Central America and Colombia likely to face the strongest U.S. pressure.

We don’t see the freezing of U.S. foreign aid as having a significant impact in emerging markets. It’s possible U.S. foreign assistance will increasingly be linked to strategic or other concessions, with Ukraine standing out as relatively vulnerable: The Trump administration is reportedly seeking rare-earth resources from Ukraine in exchange for military aid.

An important issue for emerging markets would be if the Trump administration looks to withdraw U.S. support for multilateral institutions such as the International Monetary Fund and the World Bank, which are critical lifelines for many emerging-markets countries with fragile finances. No such actions have been mentioned, but the Project 2025 framework includes a proposal to do just that.

Third, China policymakers appear to prefer patience and negotiations, with investors seemingly sanguine about U.S. tariffs against China for now. China’s response to across-the-board 10% tariffs has been to use a broader set of policy tools instead of tariff-to-tariff retaliation, a response we think is meant to demonstrate its capabilities. These tools have been deployed only sparingly so far, though their use could be scaled up.

The market reaction to the U.S. tariffs was relatively muted following the Lunar New Year holidays. It’s not clear if China policymakers would prefer to negotiate issue by issue (such as offering concessions on fentanyl in exchange for a tariff reprieve) or seek a broader deal taking multiple issues into account.

Fourth and finally, the early use of tariffs seems less targeted than in the past. Despite reports of a flurry of lobbying, only Canadian energy exports secured a special carveout (a 10% tariff vs. 25%). While the Mexico and Canada tariffs have been suspended for a month, uncertainties may linger about them resurfacing. We’ve estimated GDP growth hits of 0.3 percentage points (ppts) in China and 0.7 ppts in Mexico if tariffs are maintained, as well as broad spillovers to emerging markets from weaker growth in China. Emerging markets may also be impacted by supply-chain linkages to U.S. imports from China, Mexico and Canada.

Examining targeted tariffs

The Trump administration has proposed tariffs on semiconductors, pharmaceuticals, steel and aluminum. Pursuing broad-based tariffs on exports of semiconductors to the U.S. could impact Malaysia, Taiwan, Costa Rica (if no carve-out emerges), Israel, Vietnam and Thailand. It’s not clear if the Trump administration will be more targeted with chip tariffs; the main motivation appears to be a desire to reshore production for national security reasons, which raises the possibility that the administration may target high-end chip fabrication in Taiwan and Korea and not more commoditized chips and related activities that are more predominant in Malaysia and Costa Rica. Broad tariffs on chips would likely raise costs for U.S. buyers, given capacity constraints and cost inefficiencies of shifting production to the U.S.

In the aftermath of DeepSeek’s AI announcements, we also see growing risks that U.S. controls could harden on chips and chip-related supply chains targeting China.

We see two major drivers for potential Trump administration tariffs on pharmaceuticals. First, in the wake of the pandemic, the U.S. has become increasingly aware of national-security risks associated with its vulnerabilities to pharma supply chains, an issue that was also of concern to the Biden administration. Second (and likely more important), the Trump administration may seek to scrutinize tax-avoidance strategies of U.S. pharma companies that have been offshoring production/jobs in high-income/low-tax jurisdictions so as to book profits offshore for goods sold in the U.S., with Ireland, Switzerland, Singapore and Belgium identified as offshoring destinations.

Motivations for tariffs on steel and aluminum are likely similar to what we saw during the first Trump administration: the view that steel and aluminum are strategically important for U.S. defense and the overall U.S. industrial base, and tariffs can be a form of industrial policy to nurture domestic production. But both metals are inputs to downstream manufacturing, with autos an example, and so could undermine competitiveness. Canada is the largest source of U.S. steel and aluminum imports by far; within emerging markets, Mexico, the United Arab Emirates, Brazil and South Africa are relatively more exposed.

(On Feb. 10, after our note’s release, Trump announced 25% tariffs on steel and aluminum imports, which are set to go into effect on March 12.)

Exposures to “America First Trade Policy”

Trump issued a memorandum outlining his “America First Trade Policy,” calling for agency evaluations of U.S. trade policy and reports due in April. We expect China and the European Union (EU) will bear the brunt of scrutiny of goods trade deficits, but Mexico and many parts of East Asia (including Vietnam, Thailand, Japan, Korea, India and Taiwan) likely remain vulnerable as well. While China and the EU are the largest sources of the U.S. trade deficit, we suspect the administration will also look at how this trade gap has evolved. The U.S. trade deficit has grown nearly 52% since before 2017 and the first Trump administration’s earlier tariff actions; with the biggest surges seen for Thailand (+343% since 2017), Canada (+298%) and Vietnam (+222%).

India has already taken preemptive steps to avoid being targeted for its significant tariff barriers: Its FY26 budget unveiled measures to lower tariffs, with cuts on key items perceived as key to American interests.

With most central banks having lost reserves to defend their currencies on a strong U.S. dollar, we don’t expect the Trump administration’s currency-manipulation review to translate to significant risk of a tariff backlash. But this does demonstrate U.S. sensitivity to significant FX depreciation among surplus countries, predominantly in East Asia.

Scrutiny of Chinese trade circumnavigation looms high, and we continue to think that beyond Mexico (where tightened Chinese investment screening is likely), Vietnam and Thailand are the countries most at risk of being targeted. Both have been significant recipients of Chinese foreign direct investment and have seen an above-world-average surge in reliance on Chinese imports in recent years. The Trump administration could target Chinese-owned exporting firms in Vietnam and Thailand; one likely option for those countries is to offer U.S. goods purchase deals, though it’s unlikely they could be meaningful enough to close the trade gap.

Looking at all these factors together yields an environment of heightened trade uncertainties that could create a drag on economic growth. Besides China, this raises the risk of damping growth in trade-dependent East Asia emerging-markets economies (Singapore, Malaysia, Taiwan, Vietnam, Korea and Thailand), in Central and Eastern Europe, and in targeted countries close to the U.S. trading orbit, such as Mexico.

More domestic-driven emerging markets that are arguably further from Trump administration scrutiny (such as Argentina, Brazil, Egypt, India, Indonesia, the Philippines and Turkey) or smaller countries that can “fly under the radar” appear less exposed to direct impact from the America First Trade Policy.