Recent tariff reductions on U.S. exports have broader global consequences, as outlined by JPMorgan economists. The direct impact on U.S. growth is expected to be minor, but global trade rules may redistribute benefits more widely.
The World Trade Organization’s Most Favoured Nation principle necessitates that any tariff cut for one country must be extended to all MFN partners. This means that countries reducing tariffs on U.S. goods also lower them for other nations, including emerging markets.
Effects on Emerging Markets
Economists highlight that this unintended effect of trade deals could benefit third countries. For example, lowering tariffs on U.S. agricultural imports might enhance exports from other MFN nations more than from the U.S., affecting markets and models.
We are seeing that recent tariff reductions on U.S. exports might not be the main story for traders. The real opportunity appears to be in the spillover effects created by global trade rules. Under the Most Favored Nation principle, these tariff cuts must be extended to many other countries, creating a wider impact than initially expected.
This isn’t just a theory; we’re seeing early signs in the data. Following recent trade negotiations that lowered tariffs on U.S. goods, emerging market export volumes have already shown a surprising 1.5% jump in the last quarter. Net inflows into broad emerging market ETFs also hit a six-month high in the first half of July, suggesting some capital is already rotating.
Opportunities in Derivatives and Currency Markets
In the coming weeks, we believe this presents a clear opportunity in the derivatives market. We are looking at call options on emerging market indices, like the MSCI Emerging Markets Index, as they appear underpriced. The market may not have fully factored in this boost to export-oriented economies outside the United States.
Historically, similar broad-based trade liberalizations, like the period following 2001, have led to sustained outperformance for developing nations’ assets. We anticipate that currencies of export-heavy emerging markets could strengthen against the dollar. Therefore, positioning through currency options or forwards could offer another way to gain exposure to this trend.
We are focusing on sectors in third-party countries that directly compete with U.S. exports, such as agriculture and manufactured goods. For example, a country reducing tariffs on U.S. soybeans also inadvertently makes Brazilian or Argentine soybeans cheaper for itself. This distributional effect seems to be a blind spot in current market pricing.
