Growing uncertainty in global trade is exacerbating the already serious problems of rising debt and sluggish growth faced by emerging market and developing countries. But cutting their own tariffs could provide a significant boost to their economies, according to the World Bank’s chief economist.
Economists are revising down their growth forecasts for advanced economies, while estimates for developing countries are being cut, but to a lesser extent – at least for now. The trend follows the wave of tariffs announced by US President Donald Trump.
The spring meetings of the International Monetary Fund and World Bank this week in Washington are dominated by concerns about the economic impact of U.S. tariffs, which are at record highs, and retaliation announced by China, the European Union, Canada and other countries.
Debt woes in emerging markets
As trade deals are negotiated, high debt levels mean that about half of the 150 developing countries and emerging markets are either unable to service their debt or are at risk of doing so. That’s double the rate in 2024 and could rise further if the global economy slows, according to Gill.
Net interest payments as a percentage of GDP – a measure of how much countries are spending to service their debt – are now 12% for emerging markets, up from 7% in 2014, returning to levels last seen in the 1990s. The rates are even higher for the poorest countries, where debt service costs now absorb 20% of GDP, up from 10% a decade ago.
This means countries have fewer resources for education, health and other programs that could boost growth. Interest rates are also expected to remain high, due to rising inflation expectations, meaning countries’ debt could rise further if they have to refinance their existing debt.
Developing countries should negotiate deals with the United States quickly and effectively to reduce their own tariffs and avoid high U.S. tariffs, while extending reduced tariffs to other countries. Now is the time to do so, he said, as pressure from the United States can reduce domestic resistance. World Bank analysis shows such initiatives could significantly boost growth.
Economic outlook
The IMF on Tuesday cut its economic forecasts for the United States, China and most countries, warning that further trade conflicts would further slow growth. It forecast global growth of 2.8 percent in 2025, half a percentage point lower than its January forecast.
The World Bank will not issue its own six-month forecast until June, but the consensus among global economists is pointing to significant cuts in growth and trade forecasts. Uncertainty indicators, already much higher than a decade ago, have risen further since Trump’s tariff moves on April 2.
Unlike previous shocks, such as the 2008-2009 global financial crisis and the COVID-19 pandemic, the current shock is driven by government policies, meaning it could also reverse.
The current crisis will further worsen growth in emerging markets, which have already suffered steady declines from the 6% levels of two decades ago. Global trade is now forecast to grow by just 1.5%, well below the 8% seen in the 2000s.
Portfolio flows to emerging markets and foreign direct investment (FDI) are also falling, as they have in previous crises. Foreign direct investment used to account for 5% of GDP in emerging markets in good times. Now it is just 1%, so both portfolio flows and FDI have fallen overall.
