Indrani De, CFA, PRM
Sayad Reteos Baronyan, PhD
- US trade policies, particularly tariffs, have far-reaching consequences, potentially disrupting trade flows, investor sentiment, and global equity markets. Recent trade policy shifts, alongside ongoing uncertainty, highlight the potential for significant economic and financial market disruption.
- We analyse three key channels of transmission to understand the effects of trade policy shifts: US revenue exposure of different geographic equity markets, export dependence of various economies, and volatility spillover effects from increased US equity market volatility. Our analysis is for the G-20 countries.
- Countries with both high US revenue exposure and export dependence, such as Germany, the UK, Canada, and France, face the greatest risks. Conversely, economies with diversified trade partnerships and lower export-intensity are likely more resilient to US trade shifts.
The interconnectedness of global supply chains means that trade policies, particularly tariffs, can have far-reaching consequences beyond the countries directly involved. Recent shifts in US trade policies highlight the potential for economic disruption, affecting trade flows, investor sentiment, and global equity markets. In this piece, by examining key data points, we assess some of the potential impact of these policy shifts on G-20 economies.
To better understand the potential effects of trade policy shifts, we analyse three transmission channels. First, we examine US revenue exposure, as countries with high revenue dependence on the US are at greater risk from disruptions in access to American markets. Second, we assess export-dependent countries within the G20, as export-heavy economies may suffer significant economic shocks if global trade flows are impeded. Third, we consider equity volatility spillover effects, analysing how increased volatility in US markets due to these trade policies could impact other countries.
Who is most directly exposed in terms of revenues from the US?
In the context of US trade policies, the foremost concern is the direct impact on access to American markets. Therefore, the initial metric we consider for each country is the index-level revenue exposure to the US, expressed as a percentage of total revenue. For this analysis, we utilize the FTSE GEIS index series to measure the equity index for each country.
According to the geographic revenue exposure data:
- FTSE Canada and FTSE UK have the highest exposure to US revenues, at 32.8% and 27.7%, respectively.
- Germany, France, and Mexico also have substantial revenue dependencies, reflecting strong trade linkages with the US.
Chart 1: Index Level Revenue Exposure to the US as % of Total Revenue
Source: FTSE Russell, Corporate Announcements, LSEG. Data as of January 31, 2025. Please see the end for important disclosures.
Export Dependency of Countries within G20
The broader ramifications of counter-tariffs and ensuing ripple effects constitute second-order impacts, transcending bilateral trade to influence global commerce. To gauge the vulnerability of various economies, it is imperative to scrutinize their macroeconomic frameworks, particularly their export intensity—measured as the proportion of GDP generated from exports. Economies with elevated export intensity are intrinsically more vulnerable to these secondary ripple effects, given their economic vitality is intricately linked to the fluidity of global trade flows.
The data (Chart 2) shows,
- Germany and South Korea are highly dependent on exports, with over 42% of GDP tied to trade flows.
- Mexico (38%), Saudi Arabia (35%), and France (32%) also exhibit high export dependence.
- In contrast, Japan (18.1%), Brazil (15.1%), and the US (11.8%) have significantly lower export contributions to GDP, making them somewhat less vulnerable to trade shocks.
Chart 2: Export % of GDP – 10 Year Average (2014-2023)
Source: FTSE Russell, LSEG. Data as of January 31, 2025. Please see the end for important disclosures.
Combining both the analysis above would suggest that economies whose equity markets (companies in their equity indices) have high US revenue exposure, and their macroeconomic model has high export dependence could face the greatest risks from tariff-induced disruptions. To further investigate this, we build a scatterplot of export % of GDP vs. index-level US revenue exposure to categorize economies into three groups:
- High-tariff-risk economies (both high export dependency and high US revenue exposure). Germany, UK, Canada, and France fall into this category. These nations face direct trade barriers and potential supply chain fragmentation.
- Moderate-tariff-risk economies (high exports but lower US revenue dependence). Countries like South Korea, Mexico, and Saudi Arabia fit this profile. While they may not depend on US corporate revenues as much, they are deeply embedded in global trade, making them vulnerable to supply chain shifts and secondary effects.
- Lower-tariff-risk economies (lower than 25% export dependency and diversified trade exposure). China, India, Brazil, and Indonesia fall in this bucket. These economies may be more resilient to US trade shifts due to diversified trade partnerships and presence of non-export dependent key economic growth drivers.
Chart 3: Export % of GDP vs Index Level Revenue Exposure
Source: FTSE Russell, LSEG. Data as of January 31, 2025. Please see the end for important disclosures.
Financial market reactions: Volatility and beta effects
Financial markets are acutely sensitive to the tremors of trade policy shifts, frequently reacting with increased equity volatility. Given the substantial trade uncertainty emanating from the US, it is plausible that US equities could experience heightened volatility. Consequently, countries whose equity markets exhibit a higher beta to US equities are more likely to be affected by this transmission channel. A five-year beta analysis of global equity indices against the FTSE USA reveals:
- South Africa, Germany, and Brazil exhibit the highest beta values, indicating a strong reactivity to US market movements.
- Canada, France, and Mexico also show elevated beta exposure, underscoring their sensitivity to US trade and economic policies.
- Conversely, markets with lower US beta exposure, such as Saudi Arabia, China, and India, may enjoy relative stability but are not entirely insulated from broader macroeconomic impacts.
Chart 4: 5 Year Beta of FTSE GEIS Country Level Indices vs FTSE USA
Source: FTSE Russell, LSEG. Data as of January 31, 2025. Please see the end for important disclosures.
Trade policy uncertainty versus economic policy uncertainty
Periods of heightened economic policy uncertainty do not always translate into market turmoil – the source of the uncertainty matters! The U.S. presidential elections of 2016 and 2024 stand out as moments of significant uncertainty, yet neither appears to have led to a notable rise in equity market volatility. Investors may have anticipated the political shifts, allowing markets to absorb uncertainty without severe dislocations. By contrast, other political shocks, such as Brexit in 2016 and the European debt crisis in 2011, saw uncertainty accompanied by more pronounced market reactions, as they introduced direct economic disruptions rather than political transitions alone.
Trade policy, however, has proven to be a more potent driver of volatility. In 2018, escalating trade tensions between the United States and China led to a surge in market swings, reflecting investor unease over the potential economic fallout. This pattern suggests that markets react more forcefully when uncertainty is tied to structural economic risks rather than political events. Similarly, systemic shocks such as the global financial crisis of 2008 and the COVID-19 pandemic in 2020 triggered sharp spikes in volatility, reinforcing the idea that uncertainty alone is not enough to unsettle markets—what matters is whether it carries real economic consequences.
Chart 5: Uncertainty shocks vs Volatility
Source: FTSE Russell, LSEG. Data as of January 31, 2025. Please see the end for important disclosures.
These findings suggest that equity investors need to consider various transmission channels – revenue exposure of their equities to the US market, trade dependencies and equity market beta, when assessing risks tied to US trade policy. While some markets may appear resilient from a trade perspective, their high beta exposure to the US means they could still experience significant volatility.
Conclusion: A new trade order?
The global economy is at an inflection point as trade policies reshape market dynamics. Countries most exposed to the US market—whether through revenue dependence, or financial market sensitivity, and those with heavy export reliance—must brace for potential disruptions.
An economically uncertain environment argues for greater role for diversification, defensive assets, and risk monitoring for portfolio construction. While trade shifts create near-term volatility, they also open opportunities for strategic positioning in more resilient markets. In a world of evolving trade policies, adaptability might be the key to navigating uncertainty and preserving long-term returns.
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