Trump’s Trade War a Greater Challenge for Emerging Markets than Covid: IMF

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The trade war is inducing asymmetric economic shocks—unlike the globally synchronised slowdown of 2020—making coordinated monetary responses nearly impossible.

As global trade tensions reignite under former US President Donald Trump’s protectionist policies, Gita Gopinath, First Deputy Managing Director of the International Monetary Fund (IMF), warned in an interview with the Financial Times that emerging market central banks now face a more complex and fractured policy challenge than during the Covid-19 pandemic. The trade war is inducing asymmetric economic shocks—unlike the globally synchronised slowdown of 2020—making coordinated monetary responses nearly impossible.

A Tale of Two Shocks

During Covid, central banks worldwide slashed interest rates in tandem to revive collapsing demand. But the 2025 trade war, with tariffs disproportionately affecting sectors and regions, is creating a policy divergence. Developed economies such as the United States face tariff-driven inflation, while emerging markets suffer from demand destruction and currency volatility.

“This time the challenge is going to be greater for them compared to the pandemic,” said Gopinath. “During Covid, central banks were moving in the same direction… easing monetary policy very quickly.”

Business Standard reports that India’s Reserve Bank, for example, is widely expected to reduce the repo rate by 25 to 50 basis points at its Monetary Policy Committee (MPC) meeting on 6 June, in what would be its third consecutive rate cut this year. The move reflects efforts to stimulate weak domestic demand, even as global monetary conditions tighten.

The real dilemma lies in interest rate asymmetry. While emerging markets may want to cut rates, rising US yields—fuelled by inflation fears and Trump’s aggressive tariff posture—could force them to hold or hike rates to protect their currencies and prevent capital outflows. Gopinath warned that such constraints could “tighten global financial conditions and constrain the policy space for emerging economies.”

OECD Raises Red Flags

The Organisation for Economic Co-operation and Development (OECD) echoed these concerns in its latest economic outlook, warning of growing capital flight risks and rising borrowing costs in emerging markets if investor sentiment worsens.

“Many emerging markets are at risk of experiencing capital outflows… which could lead to depreciation pressures and higher financing costs,” the OECD stated. This was cited by Business Standard as a major risk to policy autonomy.

The OECD also lowered India’s FY26 growth forecast to 6.3 per cent, though UBS countered with a more optimistic 6.4 per cent projection.

Trade Truce Proves Fleeting

Although a brief truce was reached between the US and China during negotiations in Geneva, tensions resurfaced after Trump accused Beijing of breaching the agreement. He subsequently announced plans to double tariffs on steel and aluminium to 50 per cent, escalating the standoff.

Gopinath described the global economic outlook as “steering through the fog,” with Trump’s retaliatory trade moves adding layers of unpredictability to central bank decision-making. For emerging market economies that rely on foreign capital and stable trade flows, the threat of currency depreciation, imported inflation, and reduced growth forms a dangerous economic cocktail.

With former President Trump’s protectionist rhetoric back in focus ahead of the US election season, monetary policymakers across the developing world find themselves wedged between the conflicting goals of currency stability and domestic economic support. Unlike in 2020, there is no consensus roadmap—only volatility, risk and a narrowing window for effective intervention.