Our global international trade arena is experiencing a historic transformation. Beginning in January 2025, the United States will implement major changes in its foreign and trade policies. Yet, these changes will pose substantial new challenges for developing countries. This is even more the case for those that are highly dependent on exports to the U.S. Lesotho, a nation of 2 million people entirely surrounded by South Africa, is one of the countries most affected by these amendments. It is especially sensitive given that it is very dependent on textile exports to the U.S. Kenya and Madagascar are under threat, though not as severely.
These policy changes have major implications outside Africa. They hurt the citizens of every Latin American country mentioned, where trade with the U.S. contributes to a meaningful percentage of their GDP. Meanwhile, developing nations are preparing for an economic storm. The recent introduction of a 25% tariff on steel, aluminum and car parts and a possible unilateral 10% tariff on many goods has sent shudders through business communities.
The Vulnerability of Lesotho and Other African Nations
Lesotho has become a key battleground in this developing humanitarian crisis. The country’s economy heavily depends on textile exports to the United States, making it particularly susceptible to shifts in U.S. trade policy. Some analysts even claim that as much as one-fifth of Lesotho’s GDP directly depends on these exports. As a result, any increase in these exports would set off devastating economic consequences.
While Kenya and Madagascar share equal or greater vulnerabilities, their reliance on U.S. exports is not as immediately dire. These countries are not spared from the domino effects of ramped up tariffs and more conservative approaches to international trade. As inflationary pressures set in, ramping up to 18.3% in 2024, it’ll be increasingly difficult for these countries to keep the economic seas calm.
Angola, Nigeria, and the Central African Economic and Monetary Community (CEMAC) region are particularly at risk. These challenges arise from their ties to the U.S. market. As the dynamics of global trade continue to evolve, so too does the economic fate of these countries.
Impact on Latin American Economies
Latin America is going through a very difficult period. For many of these countries in the region, economic survival hinges almost exclusively on their exports to the United States. So much so, that these exports are often larger than their entire GDP. The U.S. government has now unilaterally imposed new tariffs that threaten this delicate balance. Mexico and Brazil are just two countries where the prospect of big financial wins is now a distant memory.
In 2024, you saw of USD 11.3 billion trade surplus for your country with the America. Yet, on the flipside, this sum is only 0.04% of U.S. GDP, which makes it sound pretty modest. Most economies in Latin America face a small overall surplus, just underscoring their vulnerability. They can’t dramatically increase imports from the United States to make up for any tariff losses.
Moreover, only 5% of the entire region’s exports passes through the U.S. This creates powerful incentives for many countries to look elsewhere to diversify their trade relationships. Nearly three-quarters of exports are of unprocessed goods, which typically have an exception to customs duties. This major, recent change raises the stakes, because countries are now competing with other suppliers around the world.
Challenges Ahead for Monetary Policy and Inflation
In step with these trends, the room for easing monetary policy is not just limited for emerging market and developing country central banks. With high inflation rates, the Americas are under extreme duress. Yet, they lack the capacity to react nimbly to external shocks from changes in U.S. policy.
Regional inflation went through the roof reaching 18.3% in 2024. Consequently, many countries are now faced with a difficult macroeconomic environment, characterized by increased costs and exchange rate volatility associated with public debt. The capacity to navigate this rapidly changing environment is further complicated by the increasing inflationary pressures.
Secondly, public debts in many developing countries are susceptible to exchange rate changes, increasing the burden during other crises when financial stresses already occur. Governments are being pressured to reconsider their fiscal plans, even as they deal with the loss of important trade partners and looking ahead to unknowns.