(Bloomberg) -- Assets across the developing world tumbled after President Donald Trump announced steep tariffs on export-driven nations, with the smallest and weakest economies targeted alongside China.

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The MSCI index for developing-world stocks fell 0.8% as of 11:43 a.m. in London. Meanwhile a currencies equivalent was steady, even as the dollar weakened against developed counterparts. The Chinese yuan, an anchor for Asian currencies, dropped the most worldwide.

Asian economies were heavily targeted by the US president’s so-called “discounted reciprocal” tariffs, with Thailand facing a 36% levy on its exports and Vietnam slapped with a 46% duty. Some of the poorest countries were punished for their trade imbalances with the US, with Cambodia’s tariffs set at 49% and the tiny African kingdom of Lesotho charged 50%. Even Israel, despite its status as America’s closest ally in the Middle East, had a 17% levy placed on its exports.

“It is hard not to see last night’s events as a body blow to EM exporters - and for many, there is no obvious substitute to US consumer demand,” said Nick Rees, head of macro research at Monex Europe Ltd. in London. “We think markets have underestimated just how disruptive this could be - but that will likely only become apparent as second-round impacts emerge in the coming days and weeks.”

A Bloomberg gauge of Asian emerging-market stocks fell 1.1%, with Vietnam’s benchmark plunging more than 6% and South Korean shares sliding almost 3% before paring losses. Consumer discretionary and financial shares were the worst-performing sectors in the region.

Negotiations Begin

Eastern European currencies gained against the dollar, mirroring the euro’s rise against the greenback. But regional currencies weakened against the single currency due to their economies’ dependence on exports to the euro area, with the Czech koruna and the Polish zloty among the worst performers.

“Countries like Poland, Romania, and the Baltics offer a lower-cost, EU-aligned alternative, with good infrastructure and an increasingly skilled workforce,” said Kasparas Subacius, head of fixed income at SB Asset Management, based in Vilnius. “They’re also already embedded in the EU single market, which makes the switch smoother.”

Story Continues

Public reaction from governments in developing nations was muted in the immediate aftermath of Trump’s announcement Wednesday, and the tariffs are now expected to set off negotiations with the White House to try and reduce the blow.

Thailand is devising short-term measures to help cushion the impact on manufacturers and exporters, Prime Minister Paetongtarn Shinawatra said. Vietnam planned to dispatch another delegation to the US after an earlier charm offensive failed.

The tariffs have shown little distinction or favor for close US allies or leaders friendly with Trump.

Hungary, where Prime Minister Viktor Orban has a close rapport with the US president, will see its fragile economy hit particularly hard because it relies heavily on car production. The nation’s Foreign Minister Peter Szijjarto blamed the European Union for missing an opportunity to reach a deal with the US before it was too late.

Dollar Buffer

The blowback to the dollar, however, provided some reassurance for emerging-market specialists, particularly fixed-income investors.

“So far the USD weakening provides a welcome buffer, especially for EM local debt,” said Guillaume Tresca, global EM strategist at Generali Investments. “I still prefer EM external debt over local debt given the level of uncertainty, but I have to admit that the weakening of the USD makes local debt more attractive than before.”

Emerging-market dollar bonds edged lower on Thursday in their second day of declines, according to the iShares J.P. Morgan USD EM Bond UCITS ETF. Both hard-currency and local-currency EM bonds have seen gains this year, with total returns on a Bloomberg hard-currency index approaching 3% year-to-date, the best start to a year since 2019.

The Mexican peso gained 0.5% after the nation was spared from Trump’s reciprocal tariffs alongside Canada.

“Clearly the Mexican door is still not shut and that’s a big opportunity,” said Chetan Sehgal, a portfolio manager at Franklin Templeton Investments, who said the firm increased its exposure to Mexican stocks. “Trying to bypass trade by shifting manufacturing locations may not be the best strategy any more. Mexico still offers that opportunity but there’s a lot of localization requirements, which makes it more difficult and therefore more acceptable to the US.”

Questions Abound

Many analysts questioned the rationale and effectiveness of the tariffs, with Deutsche Bank’s George Saravelos saying in a note that the simplistic method of calculating them raised questions about US policy credibility.

“The market may question the extent to which a sufficiently structured planning process for major economic decisions is taking place,” Saravelos said. “After all, this is the biggest trade policy shift from the US in a century.”

One particularly salient example was Lesotho, one of the world’s poorest countries, which now faces one of the world’s highest tariffs. The tiny African kingdom exports mostly diamonds and apparel to the US, while its economy is too small to import much in return.

“African countries are being penalized for having trade surpluses, some of them achieved by pursuing export-driven development policies, as advised by the US,” said Yvonne Mhango, Africa economist for Bloomberg Economics. “One of Trump’s arguments for these tariffs is to bring back manufacturing jobs to the US. Slapping high tariffs in Africa is not going to help this narrative.”

--With assistance from Andras Gergely.

(Updates with comments on Mexico and eastern Europe)

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