Emerging markets face triple shocks

Source: The post Emerging markets face triple shocks has been created, based on the article “A time to reinvent” published in “Indian Express” on 15 September 2025. Emerging markets face triple shocks.

UPSC Syllabus Topic: GS Paper3-Economy

Context: Global disruption is not only a US–China story. Emerging markets face a triple shock from tariffs, trade diversion, and technology. These forces threaten trade-led growth and job creation, and they demand urgent policy choices on competitiveness, reform, and protection for workers.

What is the “triple shock” for Emerging markets (EM)?

1. Tariffs are choking trade-driven growth: International trade powered EM growth for 25 years. EM growth and global trade moved together. After the financial crisis and Covid-era barriers, US effective tariffs rose from 2.7% to almost 18%, levels last seen in the 1930s. Specialisation and exchange are under threat.
2. Trade diversion risks a China Shock 2.0: Since 2017, rising US tariffs on China have redirected Chinese exports toward developing economies. With US tariffs on China hiked from 10% to 42%, and China’s excess capacity creating deflationary pressure, EMs must brace for low-priced imports that local firms struggle to match.
3. Manufacturing faces import pressure inside EMs: Chinese import surges have weighed on industry in Thailand, Indonesia, and India. With higher US tariffs, these pressures will intensify. EMs must defend domestic manufacturing even as protectionism limits their export opportunities.
4. Technology is turning labour-substituting: Rising capital–labour ratios have squeezed blue-collar jobs. India’s capital intensity in manufacturing and exports rose despite labour abundance. Rapid AI diffusion extends pressure to white-collar roles. Job creation gets harder, especially in youthful regions.

How does this shock threaten growth and jobs?

1. Export-reliant economies lack large domestic demand: Small, open economies cannot easily replace lost external demand. The efficiency gains of trade are at risk. As economic balkanisation rises, growth engines weaken.
2. Youth unrest is an early signal: Youth protests in South Asia may be a warning sign. Reinforcing shocks can erode employment prospects unless policy acts decisively.
3. Economic balkanisation raises systemic risk: More protectionism fragments markets. EMs face weaker exports while absorbing redirected Chinese supply, stressing firms and workers.

Why turning inward would be a mistake

1. Tariffs act like export taxes: By the Lerner Symmetry Theorem, an import tariff is effectively an export tax. Import substitution will not reliably deliver growth or jobs.
2. Growth history favours outward orientation: Only 13 economies since World War II grew 7% for 25 years or more. All shared strong exports and global engagement.
3. The global market is bigger than the US: The US is under 15% of global imports. There is still scope for rules-based multilateral trade and diversified demand.
4. India can raise its share within a static pie: India’s global manufacturing share is under 2%. Even if trade wobbles, India can lift its share. External orientation boosts productivity, scale, and R&D.

How to bend the capital–labour ratio and protect people

1. Equip labour to compete with capital: Invest in education, health, and skilling to support job creation despite automation.
2. Reform labour laws wisely: Ensure stringent rules do not hurt workers. Balanced design supports formal jobs.
3. Fund transitions and safety nets: Invest in reskilling and continuing education. Build robust safety nets and a tax system to finance them.

What reforms can raise competitiveness?

1. Push foundational reforms: Competing abroad and at home requires progress on land, labour, power, health, and education. GST simplification and committees on deregulation and next-generation reforms are encouraging starts that should continue.
2. Compete with Chinese imports and higher barriers: Higher barriers and import pressure demand lower costs and greater efficiency. Competitiveness is the central lever.
3. Embrace creative destruction: Rewire economies so capital and labour move from sunset to sunrise sectors. Flexibility builds resilience.
4. Reform and reinvent, not retreat: EMDEs face reinforcing shocks. Use them to reform and reinvent. Turning protectionist and inward is tempting, simple, and wrong.

Question for practice:

Examine how tariffs, trade diversion (China Shock 2.0), and labour-substituting technology affect emerging markets and what reforms are needed.