Donald Trump narrowly defeated Hillary Clinton on the 8th of November 2016 to become the United States’ 45th president. He takes office on 20 January 2017 but even before his first day as president the reaction from his victory has been ground-shaking. His campaign was filled with harsh rhetoric and during his short time as president elect he displayed an unconventional approach to foreign policy and trade issues.
Why would this impact Latin America?
Latin America is particularly sensitive to the actions of its powerful northern neighbour. Linked closely by trade, migration and geography, every election cycle in the U.S. brings intended and unintended consequences to the region. But this election is special. Trump singled out Mexico, Latin America’s second largest economy, for special treatment on the campaign trail. Three headline policies became integral parts of his rhetoric: building a wall along their shared 2,000 mile border, deporting all illegal immigrants in the U.S., and renegotiating the North American Free Trade Agreement (Nafta) or withdrawing from it if negotiations fail. Mexico is therefore particularly vulnerable to a Trump presidency. Major economies further south, such as Argentina and Brazil, are less bound to the U.S. and therefore less vulnerable.
What about financial markets?
The reaction of financial markets in Latin America offer clear indications of the effects of Trump’s election on Latin America. Fears about Trump’s impact on Mexico made it the worst affected economy in Latin America. A mass sell-off of the its peso immediately following the result on 8 November saw its value decline 13 per cent against the dollar, its greatest single day fall since the 1994 devaluation crisis when Mexico nearly went bankrupt. Its value has fluctuated since but remained close to its post-election value. Other currencies across the region fell by around 5% against the dollar. Equities were also hit. For example, JP Morgan’s Brazil Investment Trust fell 16% the three days following Trump’s election, while BlackRock’s Latin America Investment Trust plunged 15% over the same period. It is telling that these two funds are bellwethers of investor sentiment towards the region.
How will it affect trade between the US and LatAm?
It is probably worth separating the impact on Mexico, whose economy is inextricably linked to the US, and the consequences for the rest of the region. The impact from Panama downwards will probably not be that severe. Indeed Edward Glossop, the Latin America Economist at Capital Economics, notes that “outside of Mexico, exports to the US are small, equivalent to just 2% to 4% of GDP in most cases.” That’s because over the last decade China has replaced the USA as the major trading partner for most Latin American countries. Moreover Gossop believes it “unlikely that the US will impose protectionist measures on the region’s exports, given that most of them are commodities, rather than differentiated manufactured goods.” Commodity producers are also benefiting from higher prices post-Trump victory, as investors bet that the new president will implement an infrastructure stimulus that will boost demand for industrial metals. Meanwhile South America’s agro-exporters could gain ground in Asian markets if Trump protectionism leads to Chinese retaliation against US farmers.
“over the last decade China has replaced the USA as the major trading partner for most Latin American countries…”
It also helps that in South America, a political shift towards the centre-right and a subsequent turn to economic openness means that these countries are already looking new trade partners further afield, especially in Asia. Brazil, Argentina and Peru have pro-trade governments while Ecuador and Chile are likely to do the same in 2017 elections, means that declining trade with the U.S. can be met with growing trade internationally. Trade deals will be sought elsewhere, for example, Mercosur is expected to relax rules on its members signing bilateral trade deals. This may lead to Brazil signing a free trade agreement with Canada, Japan, India or Britain.
How big a hit for Mexico?
Mexico does not have the luxury to break so easily from the U.S. It is the most economically connected country to the US especially since the 1994 signing of Nafta, which encouraged interconnected manufacturing supply chains to spread across the border. The U.S. is the origin of 51% of Mexican imports and the destination for 73% of its exports. Exports to the US account for 26% of Mexican GDP, so if Trump scraps or changes Nafta it will cause a significant economic shock.
One of Trump’s key campaign pledges was to renegotiate or withdraw from Nafta and, worryingly for Mexico, he has the power to do so. Triggering Article 2205 of the agreement allows any member to withdraw from the agreement six months after giving written notice. The US executive has constitutional powers over foreign affairs and therefore Trump could deliver this crushing bow to the Mexican economy. However, a renegotiation is far more likely than an outright withdrawal. Trump, who is ultimately a businessman, knows that US companies need Mexican factories to help control costs.
It’s not all bad though as the weak peso has spurred Mexican exports. They have jumped since Trump’s election, hitting a US$200 million trade surplus for November, only the second monthly surplus of 2016. There weak peso means that Trump’s victory may create plenty of opportunities in Mexico for contrarian international investors. However, the driving theme is uncertainty. Until Trump makes his policies clear, Mexico’s outlook will be driven by market speculation on the impacts of Trump’s four years.
Does it change the geopolitics in Latam?
Trump arrives at the White House at a crucial moment in US-Latin America relations. During the last decade China’s voracious demand for Latin American commodities has turned it into a major trade and investment partner, which has given it growing political clout in the region. Indeed China has been quick to support Latin American countries, such as Venezuela, that were being shunned by traditional western lenders, such as the bond markets or the IMF. The rise of China’s influence in Latin America coincided with a steady withdrawal by the US, which has been scaling back from Cold War interests that had seen it attempt to install friendly governments across Latin America. Given that Barack Obama did little about either of these historical trends it seems unreasonable to expect that Trump will be any different.
If there is a reduced US role in Latin American politics it creates space for the countries themselves to take more responsibility. The local response to the humanitarian crisis unfolding in Venezuela has been poor. For a myriad of domestic political reasons Brazil, Mexico, Colombia and Argentina have all missed a chance to show leadership on this issue. However, there are signs that is starting to change and perhaps the process will be accelerated by a more isolationist US.
Of course there will be flashpoints. One is Cuba. During his campaign trail Trump adopted varying stances towards Cuba but generally seems keen to renegotiate the important steps towards rapprochement that Obama engineered in his second term. A tough stance on Cuba would play well to Republicans, especially in Miami in the key election state of Florida. However, the fact that most of Obama’s concessions were related to the hospitality industry (eased travel restrictions, hotel investments etc) may tempt Trump, who made his fortune in the sector, to leave things be.