Trade Woes for Emerging Markets: Insights from Indermit Gill

By Andrea Shalal
WASHINGTON (Reuters) – Spiking trade uncertainty is compounding rising debt and sluggish growth problems facing emerging markets and developing countries, but cutting their own tariffs could provide a big boost, according to Indermit Gill, the World Bank’s chief economist.

Gill noted that global economists were rapidly lowering growth forecasts for advanced economies, while doing so less dramatically for developing countries at least for now, following a wave of tariffs announced by U.S. President Donald Trump.

The recent International Monetary Fund (IMF) and World Bank spring meetings in Washington largely focused on the economic repercussions of historic U.S. tariffs and the retaliatory tariffs imposed by China, the European Union, Canada, and others.

On Tuesday, the IMF reduced its economic forecasts for the U.S., China, and most other countries, warning that continued trade tensions would further hinder growth. The IMF now projects global growth of 2.8% for 2025, reflecting a half-percentage point reduction from its earlier January forecast.

Although the World Bank will not issue its own semiannual predictions until June, Gill indicated a consensus among economists showing significant cuts in growth and trade forecasts. Uncertainty indices have spiked following Trump’s tariff announcements, with levels far exceeding those from a decade ago.

Gill argued that unlike previous shocks, such as the 2008-2009 financial crisis and the COVID-19 pandemic, the current downturn emanates from government policy, suggesting that it could be reversed.

He mentioned that the current crisis could further stifle growth in emerging markets, with global trade now expected to grow by only 1.5%, sharply less than the 8% seen in the 2000s. “It’s a sudden slowdown on top of a situation that wasn’t particularly good,” he stated, highlighting a decline in portfolio flows and foreign direct investment (FDI) similar to patterns during past crises.

“FDI was 5% of GDP in emerging markets during good times. Now it’s actually 1% and so both portfolio flows and FDI flows are down overall,” Gill explained.

High Debt Levels

High debt levels mean that approximately half of around 150 developing countries and emerging markets are either unable to meet debt service payments or are close to that point, a rate that is double the level seen in 2024. This situation could worsen if global economic conditions deteriorate. Gill remarked, “If global growth slows down, and trade slows down, more countries will find themselves in debt distress, including some commodity exporters.”

As net interest payments as a share of GDP currently sit at 12% for emerging markets, compared to 7% in 2014, this trend is reverting to levels last observed in the 1990s. Poorer countries experience even steeper rates, with debt servicing costs consuming 20% of GDP now, up from 10% a decade ago. Consequently, countries face reductions in spending on essential areas such as education and healthcare, which are critical for development.

Interest rates are expected to remain high amidst rising inflation expectations, indicating that the debt burden may increase if these nations need to refinance their existing debts. Gill urged developing countries to swiftly negotiate agreements with the U.S. to lower tariffs and prevent high U.S. tariffs, while also extending these lowered tariffs to other countries.

Such actions are timely, as U.S. pressures may alleviate domestic resistance. World Bank modeling indicates that these tariff adjustments could lead to substantial growth improvements, Gill concluded.