Latin America, First Test of Trump 2

Donald Trump, with his America First approach, even as he seeks to increase North American hegemony in Latin America, does not seem intent on reviving the strong North American political interventionism in the region that operated in the 1960s and 1970s. In practice, these interventionist policies imply economic costs that do not help achieve the goals Trump has set for his current policies.

There will no doubt be ideological support for right-wing leaders, allies like Bolsonaro in Brazil and Milei in Argentina. We can also expect increased opposition to what he calls the “Troika of Tyranny” (Cuba, Nicaragua, and Venezuela). But these will be primarily rhetorical actions as part of a diplomacy that is not very involved in the internal dramas of other countries. On the other hand, Colombia may suffer more than these countries because of the aggressive anti-drug policies promised by Trump. However, the America First approach will have a strong impact on Latin American economies, particularly those with the largest trade with the United States: Mexico and Brazil, respectively, the second and tenth largest US trading partners in 2023.

True to what he said during the campaign, Trump promises robust economic growth that can restore the American Dream. To this end, he proposes raising barriers to imports, mainly – but not only – from China, to replace them with domestically produced products. He wants to cut immigration, including expelling illegal immigrants. He also intends to cut taxes for companies and possibly individuals, as well as ease regulations in sectors such as energy, paying less attention to climate.

Analysts have warned of the risk, as these actions could have medium to long term consequences that could differ from the ones expected. Raising customs duties could lead to inflation; expelling immigrants could lead to a shortage of workers in sectors unattractive to Americans; tax cuts would lead to fiscal imbalance. And the dramatic consequences of ignoring the climate issue are already being felt.

But one of the most characteristic and dangerous features of populism is precisely the voluntarism that refuses to accept the dynamics inherent in the economy, society, and the environment. In theory, raising import barriers will be the first major challenge Latin American countries will have to face if Donald Trump’s new administration confirms expectations. Brazil, Mexico, Argentina, Colombia, and Chile (the five largest economies in the region, accounting for more than 80% of total GDP) have China and the USA as their main trading partners. However, the trade balance for these South American countries is much more favorable than for the USA (a balance of $67 billion in 2023) or China (a balance of $25 billion in the same year).

Mexico, in particular, is experiencing a period of economic growth dependent on increased exports of manufactured goods to the United States. This growth is largely due to the US policy of reducing imports from China. Trump, however, has said he always favors North American goods and is expected to also create tariff barriers on Mexican imports. Brazil is another major exporter of agricultural and semi-finished steel products, which could be significantly affected by higher import tariffs in the USA. But a trade war between Washington and Beijing could have additional consequences. If Trump’s plan is implemented, it could lead to a slowdown in China’s growth and its imports from mainland countries. Moreover, the North American government could impose tariff advantages on its products over Chinese competitors, increasing the cost of importing those products, which could lead to potential inflationary effects in Latin American countries.

However, events can also develop in a completely different direction. High taxes on products imported for popular consumption will increase inflation and hurt middle-class Americans who voted for Trump. That way, popular products, such as Brazilian coffee and meat, Mexican tomatoes and fruit, and Peruvian seafood, could avoid Trump’s proposed import tax hike. On the other hand, a trade war between China and the United States could benefit Latin American exporters in the case of certain products, such as soybeans, which the Chinese currently purchase from both Brazil and the United States.

In another plan of action, Trump, by lowering the tax burden and deregulating various sectors, would give a strong boost to economic activity, but would also increase the deficit and national debt, leading to higher inflation. This would force the Fed (the US central bank) to adopt a more restrictive monetary policy, leading to higher interest rates, which along with a rising stock market would attract capital to the United States, increasing the value of the dollar in emerging markets.

This is a negative scenario for Latin American countries, which are likely to be affected by the dollar and higher interest rates, making it more difficult to raise funds on the international market.

Brazil is currently facing many difficulties in achieving fiscal balance, despite optimistic forecasts. Argentina is experiencing a deep and well-known economic crisis. Colombia is also facing a difficult financial situation. Mexico is looking to increase its revenues and improve its financial efficiency… Overall, Latin American countries are not well prepared for the financial problems that Trump’s economic policies will bring.

Finally, Trump’s most controversial proposal, the one with the greatest social impact on Latinos, is the mass deportation of illegal immigrants. Today, the Hispanic population in the United States, including legal immigrants, US-born Hispanics, and illegal immigrants, is estimated at 75 million. There are about 11 million illegal immigrants, most of whom are Mexicans. It is estimated that about 4 percent of Mexico’s population currently resides in the United States as illegal immigrants, and Mexicans – legal or illegal – send $63 billion dollars to Mexico. Which is about 4.5% of Mexico’s GDP. These numbers give an idea of the social impact that the Trump administration’s anti-immigration policies could have, especially for Central America.

To summarize, there are three elements that will determine the Trump administration’s impact on Latin America:

1) The final form that the campaign proposals will take after implementation;

2) The ability of Latin American governments to adapt to a more complex international context, which will mainly require a good balance of public finances;

3) China’s behavior, which represents a real destabilizing factor in US-Latin America relations.

It is interesting to note that in an interview with the Brazilian newspaper Folha de São Paulo on October 19, 2024, Simon Johnson, one of the winners of the 2024 Nobel Prize in Economics, said that the USA is becoming like Brazil, referring to Donald Trump’s populist profile. This means that in the next 4 years, Latin America will face a way of doing politics that it has always coexisted with, but it is now being applied by the largest economic power on the planet…