U.S.-Turkey Trade Relations and the Re-Rating of Emerging Market Equities: A Geopolitical Risk Mitigation Play

The evolving U.S.-Turkey trade relationship in 2025 has emerged as a pivotal factor in reshaping emerging market (EM) equities, offering both geopolitical risk mitigation and re-rating potential. As U.S. President Donald Trump's administration imposes a 15% tariff on Turkish imports—up from 10% in April 2025—Turkey's strategic recalibration of its trade policies and export diversification efforts are creating a unique intersection of economic opportunity and geopolitical stability. This dynamic is particularly relevant for EM investors, who are increasingly seeking assets that balance growth potential with risk hedging in a fragmented global economy.

A Tariff-Driven Reset in U.S.-Turkey Trade

The U.S. tariff hikes, while modest compared to those on China, have been interpreted by Turkish officials as a recognition of Turkey's “white list” status due to its balanced trade relationship with the U.S. Trump raises tariffs on Turkey to 15 percent in global trade policy shift^[1]. Despite the added costs, Turkish businesses in sectors like textiles, automotive, and steel have viewed the tariffs as an opportunity to capture market share from competitors facing steeper duties. For instance, Turkish textile exports to the U.S. surged by 14% year-on-year in early 2025, reaching $2.68 billion, even as tariffs loomed Turkey Tariffs 2025 | US Tariffs on Turkey – The Global^[2]. The Turkish Ministry of Trade has responded by revising its joint action plan with the U.S., aiming to boost bilateral trade to $100 billion through sector-specific strategies and supply chain collaboration Turkish trade ministry convenes to set path toward $100b goal with U.S. amid looming tariffs^[3].

This recalibration is not without precedent. The 2018-2019 U.S.-Turkey trade spat, which saw tariffs on steel and aluminum escalate to 50%, triggered a 35% depreciation of the Turkish lira and a 17% stock market decline Turkish Lira crisis and its impact on sector returns^[4]. However, the current environment differs: Turkey's 2025 trade surplus with the U.S. ($614.2 million) contrasts sharply with the $1.37 billion deficit in 2024, signaling improved economic resilience Turkey Tariffs 2025 | US Tariffs on Turkey – The Global^[5]. The Turkish central bank's aggressive interest rate hikes and fiscal consolidation efforts have also stabilized investor confidence, positioning the country as a more attractive EM destination Turkey is back for emerging market investors^[6].

Emerging Market Equities: A Re-Rating in Progress

The MSCI Emerging Markets IMI Index surged 12.7% in Q2 2025, outperforming both the S&P 500 and MSCI World indices Turning Tides: EM Equities Are Surging in 2025^[7]. This re-rating is driven by EMs' favorable demographics, improved macro fundamentals, and their role in global supply chain realignments. Turkey, with its strategic location and industrial capabilities, is emerging as a key player in this narrative. U.S. firms are increasingly viewing Turkey as a nearshoring hub to circumvent EU and U.S. tariffs, particularly in sectors like automotive and steel US tariffs could be a boon for Turkey, exporters say^[8].

The geopolitical dimension further amplifies this potential. Turkey's balancing act between NATO ties and BRICS aspirations—while maintaining economic and defense reliance on the West—has created a unique position in global trade. Analysts note that Turkey's flirtation with BRICS is more of a strategic bargaining chip than a path to full membership, given its continued dependence on Western financial and military support Turkey’s Geopolitical Balancing Act: Navigating BRICS and NATO Ties^[9]. This duality allows Turkey to hedge against geopolitical risks while maintaining access to critical markets.

Geopolitical Risk Mitigation: Lessons from the Past

Historical tensions, such as the 2018 lira crisis, underscore the vulnerability of EMs to U.S. trade policy shifts. However, Turkey's recent reforms—such as macroprudential tightening and interest rate hikes—have mitigated some of these risks. A study using a Threshold Vector Auto Regression model found that geopolitical risks from Saudi Arabia and Russia have asymmetric effects on Turkey's financial stability, with regional risks (e.g., Saudi) increasing vulnerability while global risks (e.g., Russian) paradoxically enhancing stability The role of geopolitical risks on the Turkish economy opportunity^[10]. This nuanced understanding highlights the importance of tailored risk management strategies for EM investors.

The Road Ahead: Re-Rating Potential and Challenges

While Turkey's trade surplus and strategic positioning suggest re-rating potential, challenges remain. High inflation (projected at 25% by year-end 2025) and foreign currency debt exposure could dampen investor enthusiasm Turkey Country Risk Report & Analysis | Allianz Trade US^[11]. However, the Turkish government's focus on export diversification and supply chain resilience—such as targeting $100 billion in U.S. trade—offers a counterbalance. For EM equities, the key lies in sector-specific risk assessments. The energy and basic materials sectors, for example, are particularly sensitive to geopolitical shifts, while the financial sector benefits from improved macroeconomic stability US sectors and geopolitical risk: The investor's perspective^[12].

Conclusion

The U.S.-Turkey trade relationship in 2025 represents a microcosm of broader EM dynamics: geopolitical risk mitigation through strategic policy shifts and re-rating potential driven by supply chain realignments. For investors, Turkey's recalibrated trade policies and improved macro fundamentals present a compelling case for EM exposure, albeit with careful sectoral and geopolitical risk management. As global trade tensions persist, Turkey's ability to navigate these challenges could serve as a bellwether for EM re-rating trajectories.