How Might Trump Tariffs Affect Emerging Markets ETFs?

While Tesla and crypto are “Trump Trade” winners, the president-elect's tariff plans for China are looming heavily; the iShares MSCI China ETF (MCHI) is down 9% since the election. 

In contrast, since Donald Trump’s win, emerging markets ETFs that do not invest in Chinese stocks are off by only 4%, as measured by the iShares MSCI Emerging Markets ex China ETF (EMXC). 

Tariffs, which impose duties on imported goods, can significantly affect emerging markets ETFs by altering trade dynamics, manufacturing costs, and global economic conditions. Emerging markets often rely heavily on exports for economic growth, particularly to developed economies like the U.S.

The greatest negative impact on China ETFs would include those holding Chinese stocks of companies in export-driven sectors like manufacturing, technology, and consumer goods. Tariffs increase the cost of Chinese goods for U.S. buyers, reducing demand and pressuring corporate revenues. This could lead to lower earnings growth, dampened investor sentiment, and stock price declines.

Furthermore, prolonged tariffs might accelerate supply chain shifts to competing nations, further eroding China's competitive edge in global trade and affecting market performance. Broader economic uncertainty could exacerbate these effects across Chinese equities. 

Ex-China Emerging Markets ETFs to Benefit?

Some emerging markets could benefit if trade shifts away from tariff-affected countries like China, potentially increasing the need for diversification within ETFs. Several emerging markets are primary trade competitors of China, particularly in industries like manufacturing, electronics, textiles, and agriculture.

If Trump does not expand tariffs to other emerging markets countries, these nations stand to benefit when companies diversify supply chains away from China:

• Vietnam: Rapidly expanding as a manufacturing hub, especially in electronics and textiles. 
• India: Competes in technology, pharmaceuticals, and increasingly in manufacturing sectors. 
• Indonesia: A rising exporter of commodities and consumer goods. 
• Thailand and Malaysia: Key players in electronics and automotive industries. 

For investors, the key is to monitor geopolitical developments and understand the sectors and emerging markets countries most impacted by tariff policies.

Diversified ETFs, such as those holding a mix of countries or sectors, may help mitigate risk during such periods of uncertainty.