Trump’s tariff war and aid cuts threaten poorest nations’ recovery

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The world’s poorest countries are being hit by a “double whammy” of Donald Trump’s tariffs and deep cuts to international aid budgets, undermining global efforts to eradicate poverty and tackle climate change, senior trade experts have warned. 

The toxic combination of “a trade war and an aid war” is squeezing smaller developing countries that are still recovering from the Covid-19 pandemic and the rising costs of servicing international debt.

“This is a perfect storm because when aid has been cut in the past, trade has generally been sustainable and predictable, there has not been this double whammy,” said Pamela Coke-Hamilton, executive director of the International Trade Centre in Geneva, a joint agency of the World Trade Organization and the UN.

Trump’s threat of 40 to 50 per cent tariffs on countries such as Lesotho, Madagascar and Mauritius risked severely damaging those economies, she said.

Coke-Hamilton, a former Jamaican diplomat, was speaking to the Financial Times ahead of a UN conference opening in Seville, Spain on Monday designed to renew global support for the 2030 Sustainable Development Goals.

It is the first such conference in a decade but the US formally withdrew from the summit earlier this month. The Trump administration stated in March that it “rejects and denounces” the goals, which were agreed in 2015 and aim to eradicate poverty and promote sustainable development by the end of the decade.

The Trump administration has also announced massive cuts to its aid budgets, with USAID expected to fall from $60bn in 2024 to less than $30bn in 2026, according to calculations by the Center for Global Development, a Washington-based think-tank.

Other countries, including France, Germany and the UK, are also cutting aid spending.

Charles Kenny, senior fellow at CGD, said the combination of tumbling aid contributions and uncertainty about the world economy would make it harder to attract international investment into developing countries. 

“If this is not the actual death of the sustainable development goals, it is definitely taking us further away from them,” he added.

Aid industry analysts warned that the communiqué to be agreed at the Seville conference had suffered several last minute dilutions in key areas, including commitments to phase out fossil fuels and a UN process to create an inter-governmental mechanism for managing developing country debt.

Bodo Ellmers, director of sustainability at Global Policy Forum Europe, a German think-tank, said the summit risked turning into a missed opportunity to steer the global development agenda.

“In developing countries the share of public revenues going to debt service has increased massively in recent years, often with expensive loans from private developers. The UK or Germany borrows at 3 to 4 per cent, developing countries at 6 to 8 per cent,” he said.

Joseph Stiglitz, professor at Columbia University and co-chair of the Jubilee Report commissioned by the late Pope Francis, said the interest rates private sector lenders were charging developing countries were “higher than can be justified by the risk”.

Many countries were unable to properly fund essential public services because of their high debt burdens, he said. The Jubilee Report calculates that 750mn Africans, or roughly 57 per cent of the continent’s population, live in countries that were spending more on external debt service than on either health or education.

The International Chamber of Commerce, which is present in 170 countries around the world, will propose reforms at Monday’s conference aimed at addressing the higher barriers for lending to projects in developing countries.

When issuing credit for projects in lower-income countries, lending institutions typically need to hold between four and seven times the amount in collateral under the Basel III financial stability requirements.

The ICC will argue at the conference that “targeted clarifications” to the Basel framework could unlock significant volumes of private investment for developing countries that represent 25 per cent of global GDP.

“The development assistance-led model is diminished, if not broken. The question now is what will replace it? Surely it should be a private sector model that can create an environment for local pools of capital to emerge,” said John Denton, secretary-general at the International Chamber of Commerce.

Additional reporting by David Pilling in London. Data visualisation by Amy Borrett