U.S.-China Geopolitical Tensions and Emerging Markets: Trump's Alliances Reshape Risk Appetites and Capital Flows

The U.S.-China rivalry has entered a new phase under President Donald Trump's second term, marked by a strategic recalibration that blends economic pragmatism with geopolitical competition. Trump's alignment with anti-China leaders in key economies-such as Singapore, Australia, Japan, South Korea, and Israel-has created a coalition aimed at countering China's dominance in critical sectors like rare earth materials and technology according to Politico. This alignment, coupled with a 2025 National Security Strategy (NSS) that downplays ideological confrontation while emphasizing trade rebalancing, has sent ripples through global capital markets, reshaping risk appetites and capital flows in emerging economies.

Strategic Alliances and the New Geopolitical Framework

Trump's coalition to challenge China's rare earth and tech dominance reflects a broader effort to secure supply chains and reduce dependency on Beijing. The December 2025 alliance, which includes nations with advanced manufacturing capabilities and strategic geographic positions, signals a shift toward "friendshoring" and economic security over pure free trade as reported by Politico. Meanwhile, the November 2025 U.S.-China trade deal-where Beijing agreed to suspend retaliatory tariffs on U.S. agricultural goods and lift export controls on rare earths-demonstrates a pragmatic balancing act. This deal, while easing short-term tensions, does not resolve deeper structural issues, such as technology restrictions and supply chain vulnerabilities according to the White House.

The 2025 NSS further underscores this duality. By omitting the "One China" policy and emphasizing a more flexible realism, the strategy signals a nuanced approach to Taiwan and Indo-Pacific allies. While it avoids overt confrontation, it also pressures U.S. partners to bolster self-defense capabilities and share the burden of regional security as The Diplomat notes. This recalibration has implications for emerging markets, particularly those caught between U.S. and Chinese economic and political influence.

Capital Flows and Risk Appetite Shifts

Emerging markets have experienced divergent capital flows in response to these developments. Before the pandemic, China attracted robust foreign direct investment (FDI) and portfolio inflows, but these have weakened since 2020, while other emerging economies have seen stronger inflows according to Brookings. This decoupling reflects investor caution amid U.S.-China tensions and a search for alternatives to China-centric supply chains.

Financial markets have also reacted to Trump's protectionist policies. The imposition of a universal 10% tariff on imports and increased duties on specific partners have raised average effective tariffs from 2.5% in 2024 to 16.5% in 2025 according to InterEconomics. These measures, coupled with China's retaliatory actions, have heightened volatility. For instance, in October 2025, threats of U.S. tariff hikes and China's expanded rare earths export controls pushed gold to record highs as investors sought safe-haven assets as Atlantic Council reports.

Regional Case Studies: Winners and Losers

India: The Trump-Modi relationship has been strained by U.S. tariffs on Indian goods-reaching 50%-due to India's continued imports of Russian oil amid the Ukraine war. These tariffs have disrupted supply chains, weakened the rupee, and raised concerns about capital outflows. Experts estimate that prolonged tensions could reduce India's GDP growth by 0.5 percentage points according to CNBC. Despite this, India's domestic-oriented economy and favorable demographics have kept it attractive to investors, albeit with a premium on risk management.

Vietnam: As a key beneficiary of friendshoring, Vietnam has attracted $186 billion in Chinese investment in 2025, driven by its strategic position in U.S. and European supply chains. The July 2025 U.S.-Vietnam trade agreement, which imposes tariffs but offers preferential access for certain goods, has further solidified Hanoi's role as a manufacturing hub. However, Vietnam's reliance on Chinese inputs for 19% of its U.S.-bound exports exposes it to U.S. tariff risks, prompting efforts to boost local content and diversify sourcing according to ISEAS.

Latin America: The region is navigating a complex landscape. Mexico's alignment with U.S. tariffs on Chinese goods contrasts with its reliance on Chinese components for manufacturing. Brazil, meanwhile, has welcomed Chinese investments in sectors like automotive and construction but faces challenges in modernizing supply chains. Chile's open trade policies have deepened integration with China but left it vulnerable to sector-specific shocks, such as the closure of its last integrated steel mill according to AmericasMI.

Investor Sentiment and the Road Ahead

Investor sentiment in emerging markets has been shaped by a mix of optimism and caution. The MSCI Emerging Markets Index rose nearly 30% in 2025, driven by strong earnings, falling U.S. interest rates, and a weaker dollar according to Goldman Sachs. However, geopolitical uncertainties-such as the Trump-Xi meeting in October 2025-have been viewed as tactical pauses rather than structural resets, with unresolved issues like technology restrictions and rare earths trade remaining key risks as Reuters reports.

For investors, the key challenge lies in balancing growth opportunities in emerging markets with the risks of prolonged U.S.-China tensions. Countries like Vietnam and India offer compelling long-term prospects but require careful hedging against policy shifts. Meanwhile, Latin American markets present sector-specific opportunities amid fragmented responses to global trade dynamics.

Conclusion

Trump's alignment with anti-China leaders has created a new geopolitical framework that is reshaping risk appetites and capital flows in emerging markets. While the U.S. seeks to secure supply chains and reduce dependency on China, the resulting volatility and protectionist measures have forced investors to recalibrate their strategies. Emerging markets that can navigate these tensions-by diversifying supply chains, strengthening domestic industries, and maintaining geopolitical flexibility-are likely to outperform in the long run. For now, the path forward remains fraught with uncertainty, but the resilience of emerging markets suggests that they will continue to play a pivotal role in the evolving global economy.