Priya Mehta runs fixed-income allocations at the Abu Dhabi Investment Authority. Her Q2 2026 decision looks straightforward: Indonesia and Kenya both offer growth stories, fiscal consolidation underway, and sovereign spreads that look attractive against historical norms. Her credit committee keeps surfacing the same question. How much of the current emerging market risk premium is structural versus cyclical?
The answer determines everything. Cyclical premiums compress when global conditions normalize. Structural premiums do not. If a country’s spread reflects supply chain exclusion, diplomatic misalignment, or the absence of a U.S. trade agreement, that premium does not compress. It becomes the permanent cost of being outside the friend-shoring network the policy of directing trade and investment toward politically trusted partners.
We have built the empirical answer. The 2025-2026 data is now rich enough to say something precise: the economic security premium is real, measurable across four distinct cost channels, and distributed in ways that standard pricing models miss. Developed-market firms pay it in margin compression that never appears as a labeled line item. Emerging-market countries outside trusted partner networks pay it in permanently diverted foreign direct investment. The headline estimate range 0.2% to 7% of global GDP is not a modeling disagreement. It is a description of the policy spectrum: from where we are today to where we are heading if controls escalate.
The Range Conceals a Decision
The GDP cost range runs from 0.2% to 7% of global output. Treating it as a single interval obscures the most important distinction: trade fragmentation alone versus trade plus technology decoupling.
The IMF’s Finance and Development analysis (June 2023) anchors the lower bound at 0.3% permanent global GDP loss from moderate trade fragmentation blocs that trade less with each other while maintaining cross-bloc investment and technology flows. This scenario most closely describes today’s partial decoupling: elevated tariffs, selective export controls, supply chain diversification incentives, but no full rupture in capital or knowledge flows.
Add technology to the disruption and the number moves sharply. The IMF’s World Economic Outlook Chapter 4 (April 2023) modeled a 50% reduction in cross-bloc investment flows and produced a long-run loss of 2% of global GDP. This is the friend-shoring scenario fully realized: not just reduced goods trade but investment locked into politically designated corridors rather than flowing to the most productive uses.
The European Stability Mechanism’s October 2024 discussion paper closes the range at the top. Full technological decoupling between U.S.-aligned and China-aligned blocs produces losses of up to 7% of global GDP in aggregate. In the ESM’s most severe scenario, selected economies particularly those without bloc alignment lose up to 12% of GDP. The ESM analysis confirms what the IMF modeling implies: severity of fragmentation, not transition speed or number of blocs, is the pivotal variable.
The PIIE Spring 2026 Global Economic Prospects update, released April 8, puts the cyclical context in numbers. Global growth is now forecast at 3.0% for 2026, down from 3.3% in 2025, with trade tensions identified as a structural drag alongside energy price volatility. U.S. PCE inflation the Federal Reserve’s preferred price measure is projected at 3.2% in Q4 2026, against the Fed’s 2.0% target, consistent with tariff costs embedding in domestic prices. The IMF’s April 17 Spring Meetings panel, “The Future of Economic Integration in a Fragmenting World,” addressed these dynamics directly; full session outputs are forthcoming.
The fragmentation cost is no longer a projection. It is arriving in real-time economic data.
Semiconductors: The Most Legible Ledger
No sector makes the economic security premium more analytically transparent than semiconductors. Export controls create a direct, auditable revenue impact that most industrial policy costs conceal inside aggregate supply chain and margin data.
NVIDIA’s China exposure provides the cleanest arithmetic available. China revenue in fiscal year 2024 was $17 billion approximately 13% of total revenue of $130.5 billion already halved from pre-restriction levels as earlier export control rounds eliminated higher-performance GPU sales. This was the managed-down baseline before the April 2025 H20 chip ban.
The H20 chip was NVIDIA’s compliance workaround: a product architecturally modified to fall below export control thresholds, preserving a legal China revenue channel while satisfying the letter of U.S. policy. The April 2025 ban closed that channel entirely. Analyst estimates model the H20 ban as approximately $15 billion in foregone 2025 revenue, reducing projected growth from 54% to 43% and cutting 2025 earnings per share by approximately $0.35. That number represents the direct cost of a single export control escalation event on a single firm.
ASML’s exposure is structurally different but equally legible. ASML makes the specialized machines that manufacture semiconductors its equipment sits at the foundation of every advanced chip supply chain. China represented approximately 33% of ASML’s total 2025 revenue, roughly $11.5 billion of a $35 billion top line. ASML’s own forward guidance projects China’s share falling to approximately 20% by 2026, a 13-percentage-point compression representing $4.5 billion in at-risk revenue. The April 2026 U.S. Congressional proposal to restrict servicing of deep ultraviolet lithography tools already installed in China introduced a new dimension: controls on installed-base maintenance, not just new equipment exports. On announcement day, ASML shares fell over 4%. Analyst Michael Roeg of Degroof Petercam estimated additional servicing restrictions could weaken total ASML sales by a “single-digit percentage point” of annual revenue.
The CHIPS Act adds a structural layer that extends beyond individual export control events. UNCTAD has documented the Act’s 10-year guardrail provision: any firm accepting CHIPS Act subsidies is prohibited from expanding semiconductor capacity in “countries of concern” for a decade. This is not an export control. It is a permanent FDI restructuring mechanism embedded in subsidy conditionality, rerouting capital from China to U.S.-aligned hubs the U.S., Taiwan, Japan, South Korea, and India as the price of accessing public funding. The semiconductor supply chain is not being diversified in the traditional sense. It is being consolidated around a narrower set of politically designated partners.
The aggregate revenue and investment impact across the semiconductor sector quantifies one component of the economic security premium with unusual precision: approximately $15-20 billion per major firm per control escalation cycle, plus a structural FDI reorientation that will take a decade to fully price into supply chain geography.
Supply Chain Relocation: Margin Compression Disguised as Strategy
The policy framing for supply chain friend-shoring presents relocation as strategic risk management. Firms willingly pay a cost premium to reduce geopolitical exposure, and the diversification benefits justify the higher unit costs. The USC Marshall School’s partisan friendshoring study, published October 2025, provides the most rigorous firm-level test of that assumption. Its finding cuts against the framing.
Firms that realigned supply chains under politically motivated pressure experienced higher input costs and lower profit margins than peer firms that did not realign. Shareholders treated politically motivated friend-shoring as negative net present value: realigning firms showed incremental equity value decline relative to non-realigning peers across the study period, controlling for firm size, industry, China exposure level, and prior supply chain geography.
The behavioral driver matters for pricing. CEO partisanship drives firm-level friend-shoring decisions in ways that standard country risk models do not capture. Firms led by executives whose personal political alignment matched the administrations pushing for realignment were significantly more likely to make the move and more likely to absorb the resulting value destruction. That means geopolitical alignment between corporate leadership and the political administration creates a contingent premium that varies with electoral cycles, not just economic fundamentals.
On absolute unit cost premiums, industry consensus for production relocated from China to Vietnam, India, or Mexico typically ranges from 5% to 25%, varying by sector. Electronics sit near the high end; textiles near the low end. The World Bank‘s IRA Inflation Reduction Act investment analysis confirms the directional shift: clean energy and critical mineral FDI into U.S. FTA (free trade agreement) countries increased tenfold post-IRA versus fivefold for non-FTA countries. The cost of that directional constraint is embedded in corporate income statements as “supply chain restructuring costs” or “operational resilience investment.” It never appears as a labeled geopolitical premium.
Vietnam, India, and Mexico have emerged as the primary destination corridors. Each faces a structural ceiling. Vietnam lacks formal U.S. FTA status despite the November 2023 Comprehensive Strategic Partnership upgrade, meaning it captures electronics and manufacturing FDI but faces greater uncertainty than FTA-holding peers under IRA clean energy provisions. India’s domestic processing requirements and regulatory complexity add friction costs that partially offset wage advantages. Mexico benefits from USMCA but faces political risk from domestic content disputes and periodic U.S. administration pressure on labor and environmental standards.
The aggregate picture is that supply chain friend-shoring costs are being absorbed primarily in U.S. and multinational firm margins, not passed efficiently to consumers or suppliers. The USC study evidence suggests that absent government subsidy sufficient to offset the unit cost premium, this relocation is destroying shareholder value. Investment committees should weight that finding heavily when evaluating capital allocation under continued friend-shoring pressure.
The IRA and CHIPS Diversion: Capital That Left Without a Forwarding Address
The IRA’s supply chain investment effects are most tractable in critical minerals, where World Bank data provides a before-and-after comparison precise enough to quantify the friend-shoring exclusion penalty.
Canada (50%), Chile (18%), and Morocco (16%) captured the largest shares of post-IRA clean energy and critical mineral FDI directed at U.S. FTA partner countries. The critical variable is the denominator: non-FTA countries which includes nearly all of Sub-Saharan Africa, most of South Asia, and significant portions of Southeast Asia received the fivefold post-IRA FDI increase. FTA partners received the tenfold increase. The 2x differential is the quantified friend-shoring exclusion penalty for countries without U.S. trade agreements. It is not cyclical. It is a policy design outcome baked into IRA implementation.
China’s circumvention response is instructive about both the policy’s reach and its limits. Chinese firms’ share of total FDI flowing into U.S. FTA countries jumped from 4% pre-IRA to 31% post-IRA. Chinese capital is now the dominant foreign investment force inside the friend-shoring perimeter that was designed to exclude it producing inside the FTA boundary to access the clean energy supply chain premium. This does not mean the IRA failed. It means the IRA created incentives strong enough to redirect Chinese corporate strategy, while the geopolitical objective of supply chain separation from Chinese firms is operating through a longer and more complex mechanism.
The CHIPS Act’s FDI impact operates differently through prohibition rather than positive incentive. The 10-year guardrail makes subsidy conditionality a permanent investment constraint. Every firm that accepts CHIPS funding is committing a decade of non-expansion in China. TSMC’s Arizona fabs, Samsung’s Texas expansion, and Intel’s domestic build-out are simultaneously IRA-scale investments and China-exclusion commitments. The geopolitical binding agent is embedded in the grant agreements, not in the legislation itself.
For emerging market policymakers, the combined IRA-CHIPS dynamic creates a specific strategic imperative: the window for securing FTA status or MOU-based preferential access is constrained by the U.S. legislative cycle. IRA provisions expire without reauthorization. The CHIPS guardrails expire after 10 years. Countries that secure FTA positioning before the next authorization debate gain durable access to the clean energy supply chain investment premium. Countries that remain outside the FTA perimeter in the next reauthorization cycle may find the structural exclusion compounds.
Tariff Pass-Through: Absorbed, Not Avoided
The tariff pass-through evidence across the 2018-2025 period is unusually consistent across methodological approaches. That consistency makes it among the most reliable data in this analysis.
The Federal Reserve’s September 2025 FEDS Note on 2025 tariff effects documents a 0.3% increase in core goods PCE prices from the 2025 China tariff rounds, contributing 0.1 percentage points to overall PCE. The pass-through coefficient to U.S. import prices sits at 1.0-1.75 importers bear the full tariff and slightly more as they hedge forward exposure. Consumer pass-through is lower than the 2018-2019 episode, partly because China’s share of U.S. imports has declined from approximately 18% in 2019 to approximately 13% in 2024 as earlier diversification reduced the base.
The Federal Reserve’s March 2026 FEDS Note provides the most granular consumer transmission estimate: Chinese imported goods prices increased 8.5% year-over-year by December 2025, with conservative consumer pass-through estimates at 28-32% of the statutory tariff rate. Cavallo et al. (2025) produce a range of 20-35% across methodologies. NBER Working Paper 34620 (January 2026) synthesizes both episodes and produces the canonical finding: near-100% pass-through to import prices; 28-50% pass-through to consumer prices; the remainder absorbed in importer margin compression.
U.S. importers are absorbing approximately 70 cents of every tariff dollar in margin compression and passing approximately 30 cents to consumers. The firm-level cost is invisible as a labeled line item but directly reduces investable margin. Goldman Sachs has quantified the equity market implication: geopolitical risk compresses S&P 500 EPS by 3-4% per percentage point of GDP growth lost. At 2026 projected EPS of approximately $260, a 1 percentage point fragmentation-induced growth reduction represents $7.80-$10.40 per share in geopolitical risk premium. That amount does not appear on any earnings call as “geopolitical cost.” It is visible only in the aggregate EPS trajectory relative to pre-fragmentation growth paths.
The 2018-2019 versus 2025 comparison is methodologically instructive. Pass-through rates are similar across both episodes despite very different tariff levels and economic contexts. That stability suggests the 70/30 importer-to-consumer split is a structural feature of the U.S. import market rather than a cyclical artifact making it a reliable input for modeling the ongoing margin cost of sustained elevated tariffs.
The EM Cost of Exclusion: Applying the Friend-Shoring Leverage Index
The most consequential asymmetry in economic security policy is not developed-market margin compression. It is the structural exclusion of emerging-market countries from the friend-shoring investment network and the fact that this exclusion now carries a quantifiable FDI cost.
The Friend-Shoring Leverage Index (FSLI) scores EM countries by their bargaining power in supply chain relocation negotiations. Five variables determine leverage: U.S. FTA status (binary, with a documented 2x IRA FDI premium for FTA partners relative to non-FTA countries); critical mineral endowment relative to the USGS Critical Minerals list; World Bank CPIA Rule of Law score (a governance quality rating on a 1-6 scale); Logistics Performance Index ranking (a World Bank measure of trade infrastructure quality); and UN General Assembly voting alignment with the United States.
For more on FSLI scoring methodology, see: https://juncturepolicy.org/frameworks/friend-shoring-leverage-index
Applying this framework to four EM cases reveals structural divergence that spread models rarely capture.
Morocco FSLI score: 72/100
U.S. FTA in force since 2006, capturing the full IRA clean energy and critical minerals premium. Significant phosphate, cobalt, and manganese reserves directly on the USGS Critical Minerals list. CPIA Rule of Law score approximately 3.5/6, above EM median. LPI rank 60/160, reflecting functional port infrastructure at Tanger Med. UN voting alignment moderate. Morocco captured 16% of all post-IRA critical mineral FDI directed at FTA partners third globally, behind only Canada and Chile validating the FSLI score’s direction. Morocco is the clearest case of FTA status translating directly into friend-shoring FDI capture.
Vietnam FSLI score: 58/100
No U.S. FTA, but the Comprehensive Strategic Partnership signed November 2023 creates partial preferential access. Rare earth deposits and an expanding electronics manufacturing base provide critical mineral and value chain relevance. Rule of Law score approximately 2.5/6, below EM median. LPI rank 43/160, reflecting port and logistics infrastructure that has developed rapidly to absorb supply chain relocation FDI. UN voting alignment moderate-low. Vietnam has captured significant electronics manufacturing FDI the largest EM beneficiary in consumer electronics but faces a structural ceiling from the absence of formal FTA status under IRA clean energy provisions. The Comprehensive Strategic Partnership does not unlock the 2x FDI multiplier.
Indonesia FSLI score: 54/100
No U.S. FTA. World-class nickel and bauxite reserves place Indonesia among the highest-endowment non-FTA countries on the USGS list. Rule of Law approximately 2.5/6. LPI rank 63/160. UN voting alignment low. Indonesia’s domestic processing requirements a ban on unprocessed nickel ore exports implemented in 2020 demonstrate the double-edged nature of resource leverage. The policy increased domestic value-add and FDI into Indonesian nickel processing but triggered WTO disputes and friction with U.S. and European trading partners. The Institute for Economics and Peace’s Great Fragmentation report (January 2026) identifies Indonesia alongside India, Brazil, UAE, Turkey, and Saudi Arabia as “middle powers” using non-alignment as positive leverage, capturing FDI from both blocs. Indonesia’s FSLI score understates its optionality value as a swing player.
Ghana FSLI score: 31/100
No U.S. FTA. Limited critical mineral endowment relative to USGS priority list. Rule of Law approximately 3.0/6, above Sub-Saharan Africa median but below the threshold for preferred supply chain partner designation. LPI rank 95/160. UN voting alignment moderate. Ghana completed a $30 billion external debt restructuring in 2024 and is actively seeking FDI to service post-restructuring obligations. It receives neither the IRA FTA premium nor the resource leverage of nickel or rare earth-endowed peers. The Columbia Center on Sustainable Investment’s March 2026 critical minerals governance analysis formalizes the mechanism: countries negotiating bilateral agreements cannot preserve policy space for domestic industrial development, while countries participating in collective frameworks such as the African Continental Free Trade Area retain more policy autonomy. Ghana’s FSLI score is not destiny. It is a governance design choice.
The FSLI framework is built from observed patterns across post-IRA investment data, USGS endowment mapping, and diplomatic alignment metrics. It explains the 2022-2026 FDI distribution well but requires validation across different policy regimes to demonstrate predictive power.
For methodology and country scoring across 40 EM cases, see: https://juncturepolicy.org/frameworks/friend-shoring-leverage-index
For the companion analysis on EM investment diversion from IRA and CHIPS Act implementation, see: https://juncturepolicy.org/analysis/ira-chips-act-em-investment-diversion
Forward Scenarios
Managed Divergence: Blocs Stabilize, Costs Plateau (45%)
The U.S. and China reach sector-by-sector implicit accommodations. Semiconductor controls remain but escalation pauses at current levels. IRA and CHIPS incentives continue redirecting investment toward trusted partners at current multiplier rates. The economic security premium stabilizes at the 2% GDP cost range embedded in corporate margins and EM spread differentials but not moving toward the 7% scenario.
Implications for investors: EM spread compression remains structurally limited for non-FTA countries. Morocco, Vietnam, India, and Indonesia continue capturing disproportionate supply chain FDI relative to their credit ratings. Ghana and most of Sub-Saharan Africa remain outside the relocation wave.
Implications for corporate strategists: Supply chain realignment costs stabilize at 5-15% unit cost premiums for electronics. Margin compression is real but bounded. Firms that aligned early absorb the cost; latecomers face less urgency as the policy environment clarifies.
Implications for EM policymakers: FTA negotiation with the U.S. is the highest-leverage single action available to non-aligned countries. The window before the next U.S. administration review is constrained. Countries that secure agreements in the current cycle gain durable access to the clean energy supply chain investment premium before IRA reauthorization debates restructure the incentive architecture.
Escalation: Technology Decoupling Accelerates (35%)
The April 2026 DUV deep ultraviolet lithography servicing restriction proposals on ASML are the leading indicator of this scenario. If the U.S. moves to restrict not just new equipment sales but servicing of existing Chinese semiconductor infrastructure, the technology decoupling scenario moves from the 2% toward the 5% GDP cost range.
S&P 500 EPS faces a 15-20% reduction from geopolitical risk alone, per Goldman Sachs sensitivity estimates applied at scale. China retaliates through critical mineral export controls on gallium, germanium, and graphite, disrupting the battery and EV supply chains that the IRA is building. The Vietnam and India supply chains face capacity constraints as too much relocating FDI chases infrastructure that has not yet caught up to demand.
Implications for investors: Developed-market equities reprice significantly. EM bond spreads for non-aligned countries widen as both blocs reduce cross-bloc capital allocation. Middle powers India, UAE, Brazil, Saudi Arabia, Turkey, Indonesia are the clearest beneficiaries as both blocs compete for their alignment. The FSLI score for high-endowment, non-aligned countries improves as optionality value increases.
Implications for corporate strategists: Unit cost premiums for relocated supply chains rise toward 20-30% as the available qualified supplier base narrows and capacity constraints bite. IRA subsidy capture becomes the primary mechanism for making relocation economics viable at scale.
Implications for EM policymakers: Non-alignment becomes a positive strategic asset for countries with genuine optionality. Collective bargaining frameworks become essential for preserving policy space in critical mineral agreements, as bilateral negotiations lock in asymmetric terms. The CCSI finding that bilateral negotiators cannot preserve domestic industrial policy space becomes the defining constraint for countries entering critical mineral agreements under bilateral pressure.
Negotiated Stabilization: Bilateral Deal Reduces Controls (20%)
U.S.-China economic dialogue produces a sector-specific semiconductor agreement, partially restoring chip exports in exchange for Chinese concessions on fentanyl precursor supply chains, Taiwan statement de-escalation, or financial market access. The economic security premium partially reverses.
NVIDIA recovers $8-10 billion in China revenue over 18 months. ASML China share stabilizes near 25%. Global growth recovers toward 3.3-3.5% over 24 months as trade tension drag eases and tariff levels partially reduce. The IMF Spring 2026 session outputs on economic integration will signal whether the institutional conditions for this scenario are strengthening.
Implications for investors: EM spreads compress broadly as friend-shoring urgency recedes. Countries that invested in FTA positioning retain the IRA premium. The structural bifurcation narrows but does not disappear because the IRA subsidy architecture is now embedded in domestic clean energy investment and is politically difficult to reverse.
Why This Matters
The economic security premium is real, quantified, and distributed across four distinct cost channels that pricing models typically fail to disaggregate:
- Supply chain unit cost increases: 5-25% by sector for production relocated from China to trusted partner countries, absorbed primarily in corporate margins
- Tariff pass-through: 70% absorbed by U.S. importers in margin compression; 30% passed to consumers, representing approximately $0.30 in consumer price impact per tariff dollar levied
- Semiconductor revenue loss: $15-20 billion per major firm per control escalation event, with structural FDI redirection embedded in CHIPS Act guardrail conditionality
- EM FDI exclusion: A 2x differential between FTA and non-FTA countries in post-IRA clean energy and critical mineral investment; effectively a permanent discount for every country outside the trusted partner perimeter
“Fragmentation costs are not theoretical they are $0.35 per NVIDIA share, $4.5 billion in at-risk ASML revenue, and a permanent 2x FDI disadvantage for every EM country without a U.S. trade agreement.”
For Priya Mehta and her Q2 2026 allocation decision: Indonesian and Kenyan sovereign spreads are pricing different structural risks, not just different cyclical exposures. Indonesia’s nickel leverage and non-aligned optionality give it genuine bilateral positioning across both blocs that spread models systematically underweight. Kenya’s exclusion from U.S. FTA networks and limited critical mineral endowment means spread compression depends on cyclical improvement alone no structural friend-shoring tailwind, no IRA FDI multiplier.
The distinction has direct portfolio construction implications. Disaggregating EM sovereign exposure by FSLI score alongside standard credit metrics is not a theoretical refinement. It is the analytical tool that separates the countries capturing the relocation wave from those that watch it pass.
Policy Recommendations
For investors: Disaggregate EM sovereign exposure by FSLI score alongside standard credit metrics. FTA-status countries with critical mineral endowments have structurally different risk profiles from non-FTA, non-resource countries regardless of comparable credit ratings. The 2x IRA FDI premium for FTA partners is durable through at least the current U.S. administration and likely through the IRA reauthorization cycle. Overweighting high-FSLI EM sovereigns at current spreads is the clearest actionable implication of the fragmentation data.
For corporate strategists: The USC partisan friendshoring evidence is the most important data point for capital allocation committees in 2026: politically motivated supply chain relocation destroys value without sufficient government subsidy. Before approving any production move, model whether IRA tax credits, CHIPS grants, or host-country investment incentives fully offset the 5-25% unit cost premium. Most subsidy packages do not close the gap without additional policy assumptions. Build the subsidy dependency into the investment case explicitly, and stress-test it against policy discontinuation.
For emerging market officials: The FSLI score is movable within a policy cycle. The variables most immediately within EM control are Rule of Law (CPIA score) and Logistics Performance Index ranking both of which improve supply chain FDI attractiveness independent of FTA status. Countries that cannot immediately enter U.S. FTA negotiations should accelerate participation in collective bargaining frameworks such as ASEAN and the African Continental Free Trade Area, which preserve policy space in critical mineral agreements. The CCSI evidence is unambiguous: bilateral negotiators surrender domestic industrial policy flexibility. Regional frameworks do not.