The Impact of U.S.-India Tariff Tensions on Emerging Market Exports and Geopolitical Risk Premiums

The imposition of a 50% tariff on Indian goods by U.S. President Donald Trump in August 2025 marks a pivotal moment in the evolution of U.S. trade policy. This punitive measure, ostensibly targeting India's continued purchases of Russian oil, is emblematic of a broader shift toward protectionism and geopolitical weaponization of trade. For emerging markets (EM), the implications are profound: tariffs not only disrupt supply chains but also elevate geopolitical risk premiums, reshaping investment dynamics across equities, commodities, and currencies.

The Broader U.S. Trade Policy Shift

Trump's re-election in 2024 has accelerated a reflationary agenda characterized by steep tariffs, tax cuts, and immigration restrictions. The U.S. average effective tariff rate has surged from 10% to over 23%, with China facing a staggering 104% tariff. These policies aim to reduce the U.S. trade deficit and revive domestic manufacturing but come at a cost. For EMs, the result is a recalibration of global trade flows, with countries like Mexico and Vietnam emerging as beneficiaries of U.S. near-shoring initiatives. However, nations reliant on U.S. markets—such as India—face acute vulnerabilities.

India's case is illustrative. The 50% tariff threatens $48.2 billion in exports, disproportionately affecting labor-intensive sectors like textiles and leather goods. Small and medium enterprises (SMEs), which lack the scale to absorb such shocks, risk collapse. The Indian government's response—GST reforms, tax cuts, and a “Made in India” push—aims to stimulate domestic demand and reduce reliance on foreign markets. Yet, these measures may not offset the immediate blow, particularly as global demand weakens.

Geopolitical Risk Premiums and EM Equities

The U.S. trade strategy under Trump has elevated geopolitical risk premiums, a metric that quantifies the cost of uncertainty in global markets. Tariff escalations, coupled with U.S. sanctions on Russia and Iran, have created a fragmented trade landscape. For EM equities, this volatility is a double-edged sword. On one hand, trade tensions with China have spurred diversification into EM markets less exposed to U.S. retaliation, such as Brazil and Mexico. On the other, countries like India and Indonesia face higher risk premiums as they navigate U.S. pressure to align with Western geopolitical goals.

The MSCI Emerging Markets Index has outperformed the S&P 500 in 2025, driven by structural reforms in India and Brazil and a weaker U.S. dollar. However, this outperformance masks underlying fragility. For instance, Indian textile stocks have underperformed due to the tariff shock, while Vietnamese electronics firms have gained from U.S. near-shoring. Investors must discern between sectors insulated from U.S. policy and those exposed to retaliatory measures.

Hedging and Capitalizing on Trade Barriers

For investors, the key lies in active diversification and strategic positioning. Here are three actionable strategies:

1. Sectoral Diversification: Prioritize EM sectors less reliant on U.S. demand. For example, India's pharmaceutical and IT services industries, which are less exposed to tariffs, offer defensive opportunities. Conversely, avoid sectors like textiles and gems, where margins are already compressed.

2. Regional Overweights: Allocate capital to EM economies benefiting from trade diversion. Mexico, now the largest U.S. import partner, and Vietnam, which secured a 20% tariff deal with the U.S., are prime candidates. These markets are likely to see sustained inflows as U.S. manufacturers seek alternatives to China.

3. Currency and Commodity Exposure: The U.S. dollar's strength has waned in 2025, creating tailwinds for EM currencies. Investors should consider hedging against dollar overvaluation by overweighting EM bonds and equities. Additionally, commodities like copper and lithium—critical for the energy transition—are likely to see demand from EM producers, offering inflation-hedging benefits.

The Role of Policy and Valuation

India's fiscal stimulus and structural reforms, such as the two-tier GST, aim to bolster domestic consumption. While these measures may stabilize the economy in the short term, long-term growth hinges on manufacturing sector reforms. Investors should monitor policy execution and corporate earnings in sectors like automotive and construction materials, which are central to India's “Swadeshi” agenda.

Valuation metrics also favor EM equities. The MSCI Emerging Markets Index trades at a 42% discount to the S&P 500 on a forward P/E basis, a historically wide spread. This discount reflects macroeconomic uncertainties but also presents a compelling entry point for long-term investors.

Conclusion

The U.S.-India tariff dispute is a microcosm of a broader trend: trade policy as a tool of geopolitical influence. For EM investors, the challenge is to navigate this volatility while capitalizing on structural opportunities. By diversifying across sectors and regions, leveraging favorable valuations, and hedging against currency and commodity risks, investors can position portfolios to thrive in an era of fragmented globalization. The key is to remain agile, recognizing that the new normal is not a return to free trade but a recalibration of global economic power.