By Steven T. Kargman (Kargman Associates)
The tariffs announced by the Trump administration are widely expected to lead to slower global economic growth in 2025 as well as slower growth for emerging markets and developing countries (EMDEs). A key question that has thus far not received adequate attention is whether the tariffs and any resulting tumult in the global trading system will adversely impact the economies of EMDEs in such a way that these countries might experience heightened sovereign debt distress (i.e., increased difficulty in their ability to service their outstanding sovereign debt).
Tariffs, trade tensions, and the associated policy uncertainty could potentially make it more difficult for EMDEs to service their outstanding sovereign debt through several different channels. First, reduced exports to the US by EMDEs could reduce their foreign exchange earnings needed for servicing their dollar-denominated debt and could also result in a range of other negative effects for the affected EMDE economies. Second, weaker demand in the US for the final products produced by global supply chains could lessen demand for intermediate goods produced by EMDE economies. Finally, a broader global slowdown could depress global commodity prices and thereby potentially diminish export revenues and foreign exchange earnings in commodity-dependent EMDEs.
EMDEs enter the current period with much greater vulnerabilities to sovereign debt distress than they faced prior to the COVID-19 pandemic. Many of these economies have greatly elevated levels of outstanding sovereign debt, their debt servicing costs as a percentage of government revenues are much higher, and their debt-to-GDP ratios are also at much higher levels.
Nonetheless, whether individual countries that suffer economic harm from the tariffs will experience heightened sovereign debt distress will depend on the extent to which they have built up sufficient buffers to protect themselves against external pressures, including having adequate foreign exchange reserves, manageable debt servicing costs, a tolerable debt-to-GDP ratio, a good balance between foreign and domestic debt, and adequate ‘fiscal space.’
Finally, there are two potential ‘wild cards’ that could affect how the developments discussed above could unfold. The first is whether the relatively sluggish Chinese economy resumes its growth trajectory anytime soon (which is important since in the past Chinese economic growth has helped buoy global economic growth), and the second is whether the Trump administration, pursuant to a review announced in February, ends up curtailing the level of support that the US government provides for the IMF and the World Bank.
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The foregoing issues are discussed in a new article entitled “Tariffs, a Trade War, and Tumult in the Global Trading System: Yet Another Potential Economic Shock to Emerging Economies,” that first appeared in May in International Insolvency & Restructuring Report 2025/26. A newer, updated version of the article appeared in the latest edition of AIRA Journal (the publication of the Association of Insolvency & Restructuring Advisors (AIRA)), Vol. 38, No. 3 (2025), and is reprinted with permission of AIRA.
A version of this post previously appeared in Columbia Law School’s CLS Blue Sky Blog on June 13, 2025 and the Oxford Business Law Blog (OBLB) on June 20, 2025.