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Info Service on UN Sustainable Development (Jul25/05) Penang 10 Jul (Kanaga Raja) — Some of the least-developed countries (LDCs) currently graduating from LDC status are among the potentially most affected by the impact of United States President Donald Trump’s current unilateral tariff war and might face the prospect of declining export possibilities, according to the United Nations Department of Economic and Social Affairs (UN-DESA). In a paper ,titled “Tariff shocks and graduation from the least developed country category”, UN-DESA said that following the unprecedented changes in the trade policy of the United States, LDCs must contend simultaneously with significantly higher bilateral tariffs, policy uncertainty, lower growth prospects in many importing countries, a potential re-alignment of supply chains, and a disruption to the existing multilateral order. It also said the LDCs not yet in the graduation pipeline might see their aspirations to graduate further delayed. UN-DESA further suggested that the chances of benefiting from trade diversion remain but are difficult to assess with certainty. The paper assesses the possible impacts of President Trump’s current tariff shock on LDCs, with a focus on their graduation. It pointed out that the LDC category was created by the United Nations in 1971 to focus attention on a subset of developing countries that faced greater challenges to progress based on a multi-dimensional assessment. International support to LDCs, intended to facilitate their graduation from the category, has sought to strengthen their integration into the global economy, it said. In this regard, support has come from preferential market access, flexibility within World Trade Organization (WTO) agreements, preferences in the allocation and modalities of official development assistance, access to (a limited number of) LDC-specific funds and mechanisms, and assistance for participation in international forums. “With trade-related measures being a vital component of such support, the unprecedented shock to established trading relationships from the unilateral escalation of United States tariffs announced in April 2025 have raised significant concerns about LDCs’ development and graduation prospects,” said the paper. It said aside from the tariff rates themselves – with some of the highest placed on LDCs – selective temporary suspensions and bilateral negotiations have injected uncertainty, in itself a source of additional adverse impacts. As of May 2025, the average effective United States tariff rate was estimated to be around six times higher than the 2.5 per cent of early 2025, and policy uncertainty as well as market volatility have been simultaneously at unprecedented highs, the paper noted. Following the escalation, LDCs face a range of tariffs – from a floor of 10 per cent, to over 50 per cent, albeit some of these have been stayed until 9 July 2025 to allow for negotiated reductions, it said. (Since 7 July, President Trump has sent letters to a number of countries, including several LDCs, listing the new tariff rates that they are now required to pay, with the deadline extended to 1 August 2025.) ROLE OF TRADE Examining the role of trade in LDC graduation, as well as the importance of the United States as a destination for LDC exports, the paper said since the creation of the LDC category, trade-related support has aimed to increase the demand for products exported by the LDCs. Consequently, duty-free quota-free (DFQF) access to the markets of developed and major developing countries has been the most prominent international support measure, it pointed out. The paper said more than $70 billion worth of LDC merchandise exports benefited from LDC-specific DFQF market schemes in 2022, marking substantial, albeit incomplete, progress towards international commitments such as those expressed at the WTO or the Sustainable Development Goals (SDGs). Participation in the global economy has been essential for LDC graduation. It has enabled these countries to expand economic activities, thereby boosting income levels towards the income threshold for graduation, it underlined. “Improved integration provides resources as well as incentives for investments in health and education, enabling countries to progress towards meeting the human assets criterion.” When integration allows for the export of a more varied set of products and access to a diversified set of markets, it also helps reduce economic vulnerability, the paper suggested. Taken together, a robust integration into the global economy facilitates progress along all three LDC graduation criteria, it said. Other benefits include the provision of foreign reserves, critical for meeting import needs that can be substantial given the low productive capacity of LDCs, it added. The paper said merchandise trade, whether for low-skilled, labour-intensive manufacturing or commodities, has been an important form of integration into the global economy for many LDCs, particularly those in advanced stages of graduation. “At the same time, several other LDCs have benefited from the export of services, such as tourism; receiving remittances from migrant workers; or generating revenues through licenses for natural resource exploitation by foreign firms.” These countries are typically less affected by adverse tariff shocks than those highly reliant on merchandise exports, said the paper. Overall, it said the share of LDCs in world merchandise exports is still only slightly above 1 per cent, though it has more than doubled between 2000 and 2023. The share of LDCs in services trade is even smaller with 0.6 per cent in 2023 and shows a lower growth rate. Notably, the six graduating LDCs experienced a considerably faster growth rate of 158 per cent since 2000, so that they now account for 37 per cent of all LDC merchandise exports, it added. Overall, the paper said that the United States is the third largest market for LDCs with a share of 8.4 per cent of their total exports, ranking behind the European Union (20.1 per cent) and China (18.9 per cent), but ahead of the United Arab Emirates (7.8 per cent) and India (6.8 per cent). It said in 2023, the latest year for which complete data is available, the United States was the largest market for the exports of only two LDCs (Cambodia and Haiti), while China is the largest market for 12 LDCs, the United Arab Emirates for 10 and the European Union for 7. “This pattern is partly due to the dominance of commodities in many LDCs’ exports, for which developing countries are key markets.” Moreover, garments, the main sector of manufacture-exporting LDCs, has been excluded from the preferential trade agreements offered by the United States to all developing countries, though it is covered by the specific preferential scheme for African countries (AGOA), said the paper. Hence, Asian LDCs face more difficult market access conditions in the United States than in other developed countries, leading to smaller market shares, it added. Among graduating LDCs in particular, Cambodia is the most directly exposed, due to both its overall export dependence and the prominent role of the United States market, the paper pointed out. Bangladesh and Lao PDR are also exposed quite significantly, the former due to the relatively large share of exports to the United States and the latter due to its overall trade dependence. The remaining three graduating countries are somewhat less exposed: merchandise exports play a small role for Nepal, while Senegal and Solomon Islands mainly serve other markets, it said. All three recently graduated countries have low exposure: Sao Tome and Principe and Vanuatu mostly export tourism services rather than merchandise, whereas Bhutan relies predominantly on India as its export market, it said, adding that among other LDCs, Lesotho, Haiti and Madagascar are particularly exposed. Graduating and recently graduated countries often see expansion into the United States market as one of the ways to mitigate the impacts of losing LDC-specific market access arrangements after graduation, said the paper. It said that analysis has shown that for LDCs in Asia, graduation does not significantly impact market access to the United States, whereas major providers of LDC-specific DFQF schemes such as the European Union, India, China, United Kingdom, or Japan withdraw access to these schemes (some immediately after graduation; several after a transition period of typically three years) Hence, exporting to those countries often becomes costlier for LDCs at some point after graduation, though in some cases they may have access to alternative duty-free regimes, it added. NEW US TARIFFS The paper goes on to review the potential impacts of the announced tariffs on LDC exports, as well as broader impacts on these economies. Pointing out that the potential impact of tariff increases depends on both the relative exposure of a country to the United States market and on the actual hike in United States rates, the paper said that the decision announced on 2 April 2025 brought rates up by 10 percentage points for all countries, with an additional amount proportional to the size of the United States bilateral merchandise trade deficit with each individual country. Average tariffs would increase to levels not seen for over a century. Subsequently, on 9 April tariff increases beyond 10 per cent were paused for 90 days, while tariff rates for China were raised to 145 per cent for most goods, though these were subsequently reduced to 30 per cent. Separately, product-specific tariffs – such as for steel, aluminium and automobiles – were also announced, it added. Notably, in 2024, most LDCs faced an average effective rate of zero, but several others, mostly in Asia, already faced relatively high tariff barriers. This was due to the fact that their major export to the United States was garments, which face relatively high tariffs and are excluded from preference schemes available to Asian LDCs, said the paper. Highlighting the eventual scale of the tariff increases, including both the “universal” 10 per cent hike, as well as those proportional to the merchandise trade deficit, currently in abeyance, the paper pointed out that graduating LDCs on average face higher United States tariffs than non-graduating LDCs. The trade-weighted average of tariffs imposed on graduating LDCs would increase from a relatively high 9.8 per cent to 53.6 per cent if all announced tariffs were fully implemented, while for the non-graduating LDCs it would increase from a relatively low 1.5 per cent to 28.4 per cent, it said. It said effective tariff rates are especially high for those LDCs that have been relatively successful in leveraging existing systems of preference to develop low-skilled manufacturing as part of the structural transformation of their economies. These LDCs are mostly competitive in low-skilled labour-intensive manufacturing such as garments or footwear, which are no longer produced in large scale in developed countries, the paper noted. “At the same time, these LDCs are still poor and have, therefore, limited demand for high-skilled manufactures typically exported by developed countries such as the United States.” The paper also stressed that LDCs faced with higher additional tariffs could also be impacted by changes in tariff rates compared to competitors. For example, in the garment sector, some competitors of LDCs, such as China and Viet Nam potentially face new tariff rates that are even higher than those faced by graduating LDCs, it said. Should such differentials persist, garment-exporting LDCs may find their products relatively competitive in the United States, although they would need to contend with Central American producers who may be facing lower rates. “The net effect, though, remains unclear as the highest tariff increases are yet to be finalized, and businesses would find it difficult to invest in scaling up or moving production until there is some certainty,” the paper said. Such trade diversion was observed in 2018 after the imposition of United States tariffs on Chinese-made solar cells and panels. Cambodia emerged as a significant exporter of these products, with its share in United States imports of these products rising from zero in 2017 to 9 per cent in 2023, while the share for China fell from 20 per cent to 2 per cent, it noted. The paper said that Southeast Asian economies such as Viet Nam and Thailand saw even larger gains in market share. In its trade forecast from 16 April 2025, which assumes that the current pause of tariff increases beyond 10 per cent remains in place, the WTO increased its growth forecast for overall exports from LDCs from 3.5 to 4.8 per cent, highlighting the possibility of trade diversion in garments and electronics from China. While changes in relative tariff rates are just one of the factors behind this market dynamic, the experience from 2018 demonstrates that LDCs may benefit from rising tariffs imposed on competitors. However, the current uncertainty and the possibility of massive tariff increases on LDCs in the near future may limit or preclude trade diversion, the paper suggested. IMPACT OF TARIFF SHOCK Using a conventional modelling tool for direct impacts of the tariff increases on exports from LDCs to the United States, the paper said that according to these simulations, the 10 percentage point increase in tariffs would result in LDC exports to the United States decreasing by 21 per cent from the 2024 aggregate of around $24.4 billion. However, if the additional increases that are currently on hold were implemented, there could even be a decline as large as 77 per cent in the aggregate value, it added. With a 10 percentage point increase, Bangladesh and Cambodia would see the largest absolute declines, of $1.8 billion and $1.6 billion, respectively. With the additional tariff increase, exports from these two countries could decline by $6.7 billion and $7.7 billion, respectively, said the paper. The overall export performance of LDCs will depend not only on the reduced demand from the United States but also on possibilities to redirect exports to other countries, the paper further said. For example, it noted that the European Union partially suspended Cambodia from its DFQF scheme in 2020. Subsequently, between 2019 and 2021, European Union imports from Cambodia in the garment and textile sector fell by 17 per cent (whereas competitors such as Bangladesh saw an increase of 6 per cent), before rebounding. However, imports by the United States from Cambodia increased by 39 per cent over the same period. The paper said that while there continues to be uncertainty about the eventual set of new tariffs, another risk looms large – the likelihood of non-renewal of US African Growth and Opportunity Act (AGOA) beyond its current validity until September 2025. Currently, 20 of the 32 African LDCs have preferential access to the American market thanks to AGOA, for a variety of products including apparel. Some local industries, such as the textile industry in Lesotho, have grown largely thanks to the AGOA preferences. Non-renewal of AGOA would make all eligible African LDCs subject to most-favoured-nation (MFN) tariffs, as well as the additional tariffs (if enacted), limiting their competitive advantage, the paper suggested. Reduced exports from LDCs can have significant social consequences, increasing unemployment and poverty, it warned. The paper said there can also be a differential impact on women: for example, workers in the garment sector, the dominant export-oriented manufacturing sector in LDCs, tend to be mostly female, and a sharp fall in exports can significantly exacerbate gender inequality. Employment and poverty impacts can reverberate through the economy through a number of different channels, it added. IMPACT BEYOND TRADE Apart from the effects on United States-LDC trade, the tariff increases and the attendant uncertainty are expected to slow growth prospects across the world, said the paper. In May 2025, UN-DESA reduced its forecast for global GDP growth in 2025 and 2026 by 0.4 percentage points each year. “The two largest markets for LDCs, the European Union and China, are now expected to grow in 2025 by 1 per cent and 4.6 per cent, respectively, both below the average of the 2010s (1.6 per cent for the European Union and 7.7 per cent for China).” The paper pointed out that lower growth prospects can further dampen the demand for exports from the LDCs by other countries. Overall, the paper said the trade channel (combining the impacts on exports to the United States and the impacts on exports to third countries) has the potential to impact current and future graduation processes, though impacts would be highly country-specific and difficult to predict. It said some graduating countries might observe declining exports, even as growth prospects are diminished. “An evolving global trade landscape may require additional adjustments to strategies for ensuring a smooth transition,” it suggested. The negative impacts of tariff increases also affect domestic and foreign investment. The increased uncertainty on future market access conditions and global demand may generally delay or reduce investments in LDCs and other countries, the paper further said. The possibility of redirecting investments to other countries could also impact investments in LDCs positively or negatively, it added. However, it said while some re-alignment in global supply chains happened during the trade tensions between the United States and China in 2018, with Cambodia emerging among a favoured destination of investments, such impacts may be more difficult to realize at the current juncture due to prolonged policy uncertainty. Investment in LDCs may also be affected by a transmission of global interest rates. The inflationary impacts of tariffs can slow down the rate at which the Federal Reserve proceeds to reduce interest rates, it added. While the possibility of a further slowing of the United States economy may impel the Federal Reserve to instead reduce rates, the ongoing interest rate uncertainty also dampens investments, it said, noting that the impacts on trade and investment both have consequences for growth rates. UN-DESA recently reduced its GDP growth forecasts for LDCs from 4.6 per cent in 2025 and 5.1 per cent in 2026 to 4.1 and 3.8 per cent, respectively, further below the agreed target of 7 per cent GDP growth in LDCs. For graduating and recently graduated countries that surpass the income graduation threshold, this could reduce resources to finance investment and social protection in support of graduation, while for non-graduating LDCs it may prolong the time needed to reach graduation thresholds, the paper said. It also said that exchange rates would be impacted by interest rate moves as well as trade policy. Standard trade theory implies that an increase in tariffs would lead to an appreciation of the United States dollar vis-a-vis impacted countries, as higher tariffs reduce the demand in the United States for imports from impacted countries and, thus, for non-United States currencies, the paper observed. How exchange rates will react in the current situation, however, remains to be seen as exchange rate movements are also impacted by expectations of future economic growth, inflation, trade and investment flows (and hence future demand for foreign exchange), it pointed out. Importantly, it said unexpected market reactions to the tariff announcements have drawn attention to the bond market and the possible impacts to the role of the United States treasuries as a global safe haven, based on their perceived risk-free nature and the high liquidity of the treasuries market. In fact, the paper said that the immediate reaction of exchange rates has been a depreciation of the dollar against most developed country currencies, defying standard trade theory, whereas bond yields rose contrary to earlier instances of instability in global financial markets. During April and May, 16 LDCs experienced a slight depreciation against the dollar, while currency appreciation was most pronounced in LDCs whose currencies are effectively fixed vis-a-vis the Euro, such as the CFA francs in West and Central Africa. The paper noted that several LDCs, including graduating countries, have faced significant currency depreciation in recent years, after the shocks caused by the war in Ukraine and the global interest rate shocks, highlighting the importance of closely monitoring exchange rate developments. It said over the 2022 2023 period, eleven LDCs saw their currency depreciate by more than 30 per cent against the United States dollar. “While depreciation can in principle have a positive impact on exports, negative impacts on the trade balance, inflation and debt payments dominated in most LDCs.” The financial transmission mechanism of the tariff shocks would be of particular concern for countries that face significant external debt repayment at a time of a significant decline in export earnings, the paper said. CONCLUSION & WAY FORWARD “LDCs must contend simultaneously with bilateral tariff shocks, policy uncertainty, lower growth prospects in many importing countries, a potential re-alignment of supply chains, and a disruption to the existing multilateral order,” said the paper. These shocks come on top of an already tardy recovery from prior shocks of the past half-decade. At the same time, in many LDCs, challenges such as climate change impacts or armed conflicts are mounting, it added. According to the paper, LDC graduation prospects are impacted primarily through three channels. First, trade with both the United States and other partners is impacted. Impacts are country-specific, depending on future tariffs on both the LDC and its competitors, the importance of merchandise exports overall and of the United States market, in particular. “On average, graduating LDCs are affected more than LDCs that are not yet graduating. However, looking forward, effects can also be discerned on the prospects of several LDCs that are approaching the graduation pipeline.” Second, the growth channel reduces the future income of LDCs, not only because of reduced exports but also because of increased uncertainty affecting economic activity more broadly, possibly further delaying future graduations, said the paper. “As a third channel, the reduced export earnings affect the balance of payments position of LDCs, possibly creating financial risks, especially for LDCs with high external debts.” The potentially grave impacts on the development pathways of LDCs, including those graduating from the LDC category, require close monitoring in the months and years ahead, the paper underlined. The tariff shock underscores the importance of further diversifying export markets and accelerating structural transformation, it said. Supporting LDCs’ access to export markets could be achieved through further expansion of existing DFQF schemes for LDCs, it suggested. While product coverage of existing schemes has already improved, often almost or fully reaching 100 per cent of tariff lines, further liberalization of rules of origin could provide scope for additional preferential liberalization, it said. “Moreover, more developing countries could introduce LDC-specific DFQF schemes. Recognizing the growing importance of other channels such as remittances and trade in services, joint efforts could be made to strengthen the contribution of these sectors to LDC economies.” According to the paper, to pursue a collective approach, solidarity will be critical, both within LDCs and between LDCs and other countries and country groupings in various forums. Individually, even larger LDCs have only a marginal economic or political weight in the international arena, it said. Hence, the paper said despite the heterogeneity among LDCs on trade issues, acting as a group and using their established group structures under the United Nations and WTO, would increase their leverage in international discussions. Solidarity by other country groupings, particularly other developed countries and major developing countries, with the group of LDCs would be even more important, it added. The longstanding understanding that support to LDCs is a common objective that is central to the multilateral system and advances shared objectives such as eradicating poverty and building resilience, should help anchor such solidarity, the paper concluded. +
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