A White House fact sheet following meetings between U.S. President Donald Trump and Chinese President Xi Jinping said the two leaders reached understandings to enhance stability and confidence for businesses and consumers. The document emphasized a “constructive relationship of strategic stability,” reflecting recognition of economic interdependence and the need to steady major-power economic ties.
For emerging markets and developing economies (EMDEs), these signals matter given the macroeconomic backdrop is closely tied to the U.S.–China relationship. Although EMDEs have contributed about 60% of annual global growth, they are highly exposed to debt stress, financial volatility, and external disruptions. These constraints are slowing economic expansion, and critically, limiting investments in health, education and infrastructure amid rising development needs.
After a year of higher trade barriers and elevated uncertainty, global activity faces renewed pressure from the war in the Middle East. According to the International Monetary Fund’s latest World Economic Outlook, the conflict-induced slower growth and rising inflation are expected to weigh heavily on EMDEs, with commodity-importing countries particularly exposed.
Energy markets are a key transmission channel. Disruptions in the Strait of Hormuz have pushed up oil prices, spiking import costs for energy-dependent economies. Rising energy costs have fed into inflation, widened financial and current-account deficits, and prompted monetary tightening. Governments are likely to respond with higher interest rates or spending cuts, which in turn will stifle growth and deepen instability.
Financial markets accelerate these spillovers. During periods of stress, capital tends to flee toward safe-haven assets, particularly the U.S. dollar. This phenomenon triggers currency depreciation, raises borrowing cost and lowers investment in development priorities such as infrastructure, health and education.
Debt vulnerabilities compound these challenges. Many low- and middle-income countries face heavy debt servicing burdens that constrain fiscal space for development spending. External shocks such as the Iran conflict further narrow fiscal buffers, forcing spending cuts or additional borrowing. This deepens fragility in EMDEs and slows their development trajectories.
The consequences won’t be contained within those countries. If these economies buckle under debt distress, capital flight, and fragmented infrastructure finance–American and Chinese exporters alike will lose markets.
Debt restructuring mirrors the fragmentation of global finance. China is now the largest bilateral creditor to many developing countries; Western economies wield an outsized influence over multilateral financial institutions. As coordination between major economic players becomes more difficult and mechanisms like the G20 Common Framework struggle to deliver – debt crises are likely to prolong, increasing uncertainty and suppressing global demand.
Trade is also being reorganized by geopolitical competition between the United States and China. Supply chains are not contracting; they are rerouted through intermediary economies. This raises compliance costs, reduces transparency and increases prices for consumers around the world. A relatively stable Washington-Beijing relationship could ease these pressures, reducing uncertainty and limiting further fragmentation.
Even in technology, cooperation is possible. The U.S.-China collaboration in areas such as public health, environmental science and basic research shows that engagement can coexist. Export controls alone are unlikely to determine technological leadership. The challenge is to balance safeguards with continued innovation and diffusion.
Despite deep distrust and strategic rivalry, there remains scope for cooperation between Washington and Beijing in areas that directly affect global economic stability. This does not require broad political alignment, rather pragmatic coordination where interests overlap — including energy security, crisis management, and resilience in global supply chains.
Neither the United States nor China can insulate itself from instability abroad. Emerging markets are central to global demand, commodity consumption, manufacturing expansion, and future growth. Instability there will inevitably feed back into both economies through weaker trade, financial volatility and disrupted supply chains.
The defining question is no longer whether fragmentation will shape the global economy — it already does — yet whether it can be managed without exporting disproportionate instability onto more vulnerable economies. Managed fragmentation may still allow strategic competition between major powers, but without coordination on shared risks, it will make the global economy including the two economies more volatile, more uneven, and less predictable.