Assessing the Impact on Emerging Market Equities and Commodity Exposure

The specter of protectionism looms large once again as former President Donald Trump’s rhetoric on tariffs dominates headlines. With his 2024 election campaign reinvigorating discussions about aggressive trade policies, investors are recalibrating portfolios to navigate the potential fallout. Emerging market equities and commodity-linked assets, historically sensitive to shifts in global trade dynamics, stand at a crossroads. Understanding the lessons from Trump’s 2018 tariffs and the U.S.-China trade war is critical for assessing risks and opportunities in today’s volatile markets.

The 2018 Tariffs: A Case Study in Commodity Volatility

When Trump imposed 25% tariffs on steel and 10% on aluminum in 2018, the immediate reaction was a spike in U.S. prices—steel jumped 5%, aluminum surged 10%. These tariffs were intended to shield domestic producers but instead triggered a chain reaction. Global commodity markets reacted with mixed signals: while prices initially soared, they later diverged sharply from U.S. levels due to retaliatory measures and supply adjustments. By mid-2019, U.S. aluminum prices had fallen, but the gap between U.S. and global prices persisted, creating inefficiencies for downstream industries reliant on these materials.

For emerging markets, the impact was twofold. Exporters like Brazil and South Africa faced declining demand for their steel and aluminum in the U.S. market, while importers such as India and China grappled with higher input costs. The MSCI Emerging Markets Index, which had already been under pressure from rising interest rates and geopolitical risks, saw further volatility as trade uncertainty deepened. Currency depreciation in commodity-dependent economies, like Brazil’s 10% drop in the real against the dollar, compounded the strain.

The U.S.-China Trade War: A Broader Economic Earthquake

The 2018-2021 trade war between the U.S. and China magnified these effects. Tariffs on $360 billion of Chinese goods and retaliatory measures on U.S. exports disrupted supply chains, reshaped trade flows, and eroded global growth. Emerging markets caught in the crossfire—Vietnam, India, and Mexico—initially saw investment inflows as companies sought alternatives to Chinese manufacturing. However, the long-term outlook darkened as trade tensions persisted.

The MSCI Emerging Markets Index tracked these dynamics closely. In 2019, the index fell 14% as investors priced in reduced demand for goods tied to U.S. supply chains. Countries like Vietnam, which had benefited from short-term FDI, faced overcapacity risks when demand for electronics and machinery waned. Meanwhile, commodity-exporting nations such as Brazil and South Africa saw their equity markets underperform as global demand for raw materials stagnated.

Commodity Exposure: A Double-Edged Sword

The interplay between tariffs and commodity prices remains a critical factor for emerging markets. During the 2018-2021 period, U.S. tariffs on steel and aluminum…