Global trade conflicts might pose a severer shock to emerging markets than the Covid-19 pandemic, according to the International Monetary Fund. Thailand is advised to prepare for a potential structural impact.
In a blunt warning, the International Monetary Fund (IMF) has sounded the alarm that the ongoing global trade war might cause a crisis more severe than the Covid-19 pandemic, especially for central banks in emerging markets. The financial fallout is expected to be more complicated, given that the challenges are more intricate, and the policy responses less uniform.
Gita Gopinath, the First Deputy Managing Director of the IMF, highlighted to the Financial Times that the astounding impacts from escalating trade tensions on emerging-market central banks are affecting them beyond the straightforward ways that Covid-19 did. During the pandemic, most central banks had the flexibility to swiftly reduce interest rates or roll out stimulus packages. However, in the current scenario, this is no longer a readily available option.
"Things are more dicey this time than during the Covid outbreak," Gopinath stated, elucidating that unforeseen impacts from U.S. tariffs on developing economies and global markets are making policymaking increasingly difficult for these countries.
Officials from the U.S. Federal Reserve have indicated they are "not in the mood to slice interest rates" until they are assured the new tariffs would not fuel inflation. In contrast, emerging markets are grappling with a demand-side shock – falling inflation and slowing growth – unlike the inflationary concerns dominating developed economies.
This deviates from the pandemic-era playbook, where central banks worldwide could inject liquidity through rate cuts and bond-buying programs. Now, the diverging paths between major and emerging economies are predicted to tighten global financial conditions, and emerging markets are more susceptible to these shifts.
Rebounding against the odds, emerging-market currencies and stocks have recovered over the last couple of months, following Trump's major tariff announcement on "Liberation Day," April 2, 2025. This rebound can be seen in exchange-traded funds such as the MSCI Emerging Markets Index, which has surged nearly 20% from its post-announcement low. Investors are placing their bets on the belief that emerging market central banks will maintain or even expand stimulus, despite the potential risk of capital outflows, as higher interest rates in developed economies lure funds back.
Nevertheless, the Organization for Economic Cooperation and Development (OECD) has warned that capital flow volatility is now a growing worry for emerging markets. Despite the rebound, currencies remain sensitive to changes in global risk sentiment. "Many emerging economies could be exposed to the heightened risk of capital flight if the global economic outlook turns gloomy, which might ultimately lead to currency depreciation and higher financing costs," the OECD noted.
A Direct Blow to Thailand's Heart
For Thailand – a country heavily reliant on global trade and foreign investment – this is not just a mere tempest, but a direct assault that could devastate its core economy. The fallout could impact exports, deter new investment, and disrupt labor markets in export-driven industries, potentially pushing the nation into a structural recession.
While some countries have launched proactive strategies, from diversifying export markets to fostering domestic innovation and fiscal resilience, Thailand has yet to demonstrate a strong, unified national response. Although economic stimulus plans and investor promotion efforts have been discussed, there is still no long-term strategy in place to combat a fragmented global trade system.
Compounding the problem, the Thai-Cambodian border dispute has become a significant flashpoint. If left unresolved, it might further dampen investor confidence and create additional pressure on the already fragile economic environment.
Thailand must break free from its comfort zone and ramp up its preparations. That means going beyond providing short-term handouts and stimulating consumer demand. Instead, the nation needs to work on rebuilding its economic foundations to withstand future external shocks.
Waiting out the storm is no longer an option. The world won't adjust its pace to allow Thailand to catch up. Unlike the pandemic, which was chaotic yet fleeting, this trade war might bring deeper, longer-lasting damage if we fail to respond decisively and swiftly.
Sources:
- https://www.imf.org/en/News/Articles/2019/01/04/05/56/IMF-Conclude-2018-Article-IV-Consultation-with-Thailand
- https://www.reuters.com/article/us-usa-trade-emerging/us-emerging-market-central-banks-face-tougher-role-in-trade-war-idUSKCN1MN2CJ
- https://www.reuters.com/article/us- currency-thai-baht/latest-thai-baht-holds-steady-as-currency-sellers-wait-for-macro-data-idUSKCN1MN2E4
- https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/05/14/Policies-to-Respond-to-the-Tariff- Wars-IMF-Policy-Paper-48148
- https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/11/29/Global-Financial-Interconnectedness-and-the-Emerging-Markets-Financial-Crisis-Policy-Paper-48475
- The ongoing global trade war, as highlighted by the International Monetary Fund (IMF), poses a significant threat to the environment of emerging markets, particularly central banks, as the impacts extend beyond the direct ways of the Covid-19 pandemic.
- Despite the recovery of emerging-market currencies and stocks in the wake of the announced tariffs, the Organization for Economic Cooperation and Development (OECD) cautions that capital flow volatility has become a mounting concern for these markets, as they remain sensitive to changes in global risk sentiment.
- In the face of this intensifying trade war and its cascading effects on the economy, Thailand – heavily reliant on global trade and foreign investment – must proactively reinforce its economic foundations to withstand future external shocks and avoid slipping into a structural recession. This requires a shift from providing short-term handouts to a more strategic focus on fostering fiscal resilience, domestic innovation, and diversifying export markets.
