Smaller economies in Eastern Europe, Central Asia, and North Africa have weathered global trade turbulence better than expected, partly due to frontloaded imports ahead of US tariffs and their trade ties with nearby large markets like Germany. While inflation has impacted real wages, infrastructure investments and AI-driven demand offer growth opportunities. Geopolitical neutrality is attracting foreign investment despite challenges from China-US trade tensions.
Global trade has been marked by turbulence in recent years, with tariffs and geopolitical tensions reshaping economic landscapes. While much attention has focused on major players like the US, China, India, and Germany, smaller economies in regions such as Eastern Europe, Central Asia, and North Africa have faced unique challenges and opportunities. This article explores how these smaller countries have managed trade disruptions, the impact of tariffs, inflation, and the emerging influence of artificial intelligence (AI) on their economies.
Despite widespread concerns, the full impact of US tariffs has not yet been felt by many smaller economies. A significant factor has been the frontloading of imports before tariffs took effect, allowing many exports to enter the US market ahead of the new trade barriers. This strategy has delayed the tariffs' economic consequences, with some recent tariff changes expected to have minimal effects on countries where the European Bank for Reconstruction and Development (EBRD) operates.
Interestingly, some smaller countries, including those in the Western Balkans and Jordan, may even benefit from tariff reductions. However, the evolving nature of tariffs means that 2026 could present more pronounced challenges as the frontloading advantage diminishes.
Smaller economies tend to trade more with larger and geographically closer markets, a phenomenon often described as the "law of gravity" in international trade. For many countries in Eastern Europe, Central Asia, and North Africa, the US market is less significant compared to the German market, which serves as a key export destination.
Germany's economic struggles over the past few years have had ripple effects on these regions. The German automotive sector's weakness, for example, has reduced demand for exports and services from countries like Romania. This interconnectedness highlights the vulnerability of smaller economies to the economic health of their primary trading partners.
Inflation has eroded the purchasing power of wages across these regions. In Eastern European EU member states, real wages remain below pre-COVID trends, negatively affecting living standards. Conversely, in Central Asia and the Western Balkans, real wages have surpassed pre-pandemic levels.
This dynamic presents a trade-off: lower real wages can enhance export competitiveness but at the cost of reduced living standards, influencing public perception and sentiment toward the economy.
Looking ahead, forecasts for 2026 have been adjusted slightly upward for several economies. Continued inflation is expected to fuel consumption, while governments are investing in large infrastructure projects that will stimulate investment.
This shift suggests that internal sources of demand, rather than external factors, will primarily drive economic growth in these regions.
The AI-driven economic expansion, particularly in the US, is influencing smaller economies as well. The construction of data centers and increased demand for goods related to data processing and computer vision have benefited countries in Central Europe that produce these goods.
Thus, the AI boom presents an opportunity for these economies to capitalize on increased demand for their products.
The growing division between the US and China has raised concerns about trade deflection, where Chinese goods might flood other markets due to declining US imports from China. However, such an influx has not materialized in the regions where the EBRD operates.
Geopolitical tensions have made foreign direct investment (FDI) more influenced by political considerations. Countries pursuing multi-vector geopolitical strategies, especially in Central Asia, have become attractive destinations for investors from China, the US, Europe, and non-aligned nations. Their neutrality in the US-China conflict positions them to benefit from increased FDI flows.
Over the past two decades, these countries have diversified their exports. However, there is increasing overlap with China's export products, posing competitive challenges.
China's export structure is highly sophisticated, making it a formidable competitor not only for emerging European economies but also for Western Europe. While commodity exporters in these regions benefit from sales to China, countries in Central Europe find it increasingly difficult to supply goods demanded by the Chinese market.
Smaller economies in Eastern Europe, Central Asia, and North Africa have demonstrated resilience amid global trade disruptions. While the full effects of US tariffs are yet to be realized, strategic trade relationships, inflation dynamics, and investment in infrastructure and technology are shaping their economic trajectories.
The AI boom offers new avenues for growth, and geopolitical neutrality is attracting diverse foreign investments. Nonetheless, competition with China remains a significant challenge, requiring these countries to continuously adapt their economic strategies to thrive in an evolving global trade environment.
This analysis is based on insights from Beata Yavoic, Chief Economist at the European Bank for Reconstruction and Development, highlighting the nuanced realities faced by smaller economies in a complex global trade landscape.
