Finnfund’s Chief Economist Kristiina Karjanlahti: “Developing Asia remains the growth engine of the global economy – despite the shock caused by tariffs”

Trump’s tariff policy has been a series of continuous surprises, the latest being the differing views of the courts on their legality. The legal disputes are likely to continue for a long time and, although the outcome is uncertain, they have already caused significant and long-lasting waves in the global economy.

“Last autumn, the economic outlook for emerging markets in Africa and Asia was positive for the first time in a long while, as interest rate cuts began, and the financial market revived. A few more years to recover from the shock years and enjoy stable growth would have been beneficial, especially for many more indebted economies, so the threat of tariffs came at a sensitive time,” says Chief Economist Kristiina Karjanlahti.

Unpredictable policies increase market uncertainty, while investment willingness grows only when uncertainty decreases.

“Southeast Asian countries with direct trade relations with the United States are the most vulnerable to the direct effects of tariffs. Still, we expect these countries to remain the engines of global economic growth. For example, Vietnam balances between the United States and China and will surely negotiate a suitable solution for itself. During the previous Trump administration, Vietnam benefited from tariffs imposed on China, as imports were routed to the US market via Vietnam. As a result, it is now at the top of Trump’s list, with a 46 per cent tariff.”

In this situation, it is difficult to estimate the final tariff level. According to one forecast by the credit rating agency Fitch, the basic tariff for all would remain around ten per cent, and reciprocal tariffs would be about half of what has been proposed. Different countries also have very different capacities to negotiate deals.

“If a country has a trade surplus with the United States, tariffs are likely to be higher than ten per cent.”

Finnfund has investments in 55 emerging market countries. The effects of tariff policies can be very different in different countries and investments. What can a development financier do in such an uncertain situation?

“We strive to find companies for our portfolio that have the capability to operate in this more challenging market. It is now particularly important that financing is still available for viable companies in developing countries, and our role is crucial in this regard.”

If the slowly recovering capital flows were to quickly turn away from emerging markets and the cost of borrowing rose, countries already significantly indebted, such as Kenya, Egypt, Ghana, and Pakistan, would be particularly vulnerable.

“In line with our strategy, our investments are strongly focused on infrastructure and digital solutions, which are less affected sectors, at least in terms of the direct effects of potential tariffs. Digitalisation is progressing rapidly anyway and has been able to grow as a sector even during previous economic shocks,” describes Karjanlahti.

Overall, new countries may also benefit as trade routes reorganize with the new tariff regimes. For example, for African countries with a textile sector, such as Ethiopia, it could open up markets to the USA.

More information and materials

Chief Economist Kristiina Karjanlahti, kristiina.karjanlahti@finnfund.fi tel. +358 50 525 7081

Chief Communications Officer Unna Lehtipuu, unna.lehtipuu@finnfund.fi tel. +358 40 624 0896