How smaller countries are avoiding trade pains | DW News

Key Concepts

• Frontloading: The practice of importing goods ahead of anticipated tariff increases.
• EBRD (European Bank for Reconstruction and Development): A development financing institution focused on parts of Europe, Africa, and the Middle East.
• Law of Gravity (in trade): The tendency for countries to trade more with larger and geographically closer markets.
• Trade Deflection: The redirection of trade flows due to tariffs or trade barriers.
• Multi-vector geopolitical strategies: A foreign policy approach of maintaining relationships with multiple global powers.
• Foreign Direct Investment (FDI): Investment made to acquire lasting interest in enterprises operating outside of the investor’s home country.

Economic Resilience of Smaller Economies Amidst Global Trade Turbulence

Introduction

This discussion centers on the impact of US tariffs and broader global trade turbulence on smaller economies, particularly those within the regions served by the European Bank for Reconstruction and Development (EBRD). The analysis, presented by Beata Javoic, Chief Economist at the EBRD, challenges the initial expectation of significant negative consequences, highlighting unexpected resilience and emerging opportunities. The conversation explores the nuances of these impacts, considering factors like frontloading of imports, regional dependencies, and the influence of the AI boom.

1. Limited Initial Impact of US Tariffs & The Role of Frontloading

The initial impact of US tariffs in 2025 was less severe than anticipated. This was largely due to “frontloading” – a surge in imports before the tariffs took effect, allowing economies to stock up and delay the full impact. Beata Javoic states, “the impact of tariffs last year was limited and that’s because a lot of exports managed to enter the US market before tariffs were introduced.” However, she acknowledges that the full effect hasn’t been felt yet, and 2026 could see increased pressure as the ability to frontload diminishes. The recent changes announced in the past few days are not expected to significantly impact the economies where the EBRD operates, with some smaller countries like those in the Western Balkans and Jordan potentially benefiting from tariff reductions.

2. Regional Dependencies & The German Economy

While direct exposure to the US market is relatively low for countries in Eastern Europe, Central Asia, and North Africa, these economies are significantly affected indirectly through their trade relationships with Germany. The “law of gravity” in international trade explains this, stating that trade volume is directly related to the size and proximity of markets. Germany’s economic struggles over the past two to three years have created spillover effects throughout the region, impacting both goods and services exports, including those related to the automotive and machinery sectors, as well as IT services (specifically mentioning Romanian IT firms). The weakness of the German automotive sector has lowered demand for services exports from countries like Romania.

3. Inflation, Wages, and Public Sentiment

Inflation has eroded purchasing power across the EBRD’s regions of operation. Real wages in Eastern European EU member states are below pre-COVID trends, while Central Asia and the Western Balkans have seen real wages exceed pre-COVID levels. This creates a trade-off: lower real wages can boost export competitiveness but simultaneously reduce living standards. Javoic notes, “lower real wages boost competitiveness of the countries as as producers of exports. But of course lower real wages are eroding living standards.”

4. Forecasts for 2026 & Internal Demand Drivers

Despite ongoing tariff uncertainties (including the recent Supreme Court ruling), the EBRD has slightly adjusted its 2026 forecasts upward. This optimism is driven by two key factors: continued disinflation (falling inflation rates) which is expected to stimulate consumption, and increased government investment in large infrastructure projects. The expectation is that internal sources of demand will become the primary driver of growth, rather than relying on the external environment.

5. The AI Boom & Opportunities for Smaller Economies

The AI boom, particularly the demand for data centers and related technologies (computer vision, data processing), presents an opportunity for some smaller economies. Countries in Central Europe are positioned to benefit from increased demand for the goods required for these technologies. Javoic states, “The AI boom has increased demand uh for goods related to data centers, goods related to um computer vision, to data processing. And some of our countries uh including countries in central Europe tend to produce these goods.”

6. US-China Tensions & Geopolitical FDI

The growing tensions between the US and China have altered the landscape of foreign direct investment (FDI). Initial fears of “trade deflection” – Chinese goods flooding other markets due to US tariffs – have not materialized in the EBRD’s regions. Instead, the geopolitical climate has led to FDI being increasingly driven by political considerations. Countries pursuing “multi-vector geopolitical strategies” (maintaining relationships with multiple global powers) are becoming more attractive to investors from China, the US, Europe, and non-aligned nations.

7. Export Overlap with China & Competitive Challenges

A growing challenge is the increasing overlap between the export structures of these smaller economies and China. China’s export capabilities are more sophisticated than expected for its income level, making it a formidable competitor. While commodity exporters benefit from selling to China, countries in Central Europe are finding it increasingly difficult to supply the goods China demands. Javoic explains, “Chinese export structure is much more sophisticated than what you would expect given Chinese level of income per capita and that means that China is a formidable competitor not just for emerging Europe but also for Western Europe.”

Conclusion

The discussion reveals a nuanced picture of economic resilience in smaller economies facing global trade turbulence. While the full impact of US tariffs remains to be seen, initial effects have been mitigated by frontloading and limited direct exposure to the US market. Regional dependencies, particularly on Germany, are a key vulnerability. However, opportunities exist through the AI boom and a shifting geopolitical landscape that favors countries adopting multi-vector strategies. Ultimately, the forecast suggests a transition towards growth driven by internal demand and a need to navigate increasing competition from China.