Analysis-Latin America prepares for impact of US election on trade, prices Via Reuters
Written by Rodrigo Campos
Latin America is counting down the days to November 5, when US voters will choose between relative continuity under Vice President Kamala Harris or a return to the policies that caused instability in the region’s markets and economies under former president Donald Trump.
Trade and tariffs, as well as the impact of monetary policy on global interest rates, are probably the biggest electoral factors that will affect the US neighborhood. Washington’s economic war with China could shake Mexico and boost Brazil, especially in a tit-for-tat situation.
On a broader level, Trump’s victory could cause shockwaves in the region, potentially boosting other currencies and central banks as countries with heavy supply or trade ties to China emerge unscathed.
While the Biden administration has not reversed Trump’s tariffs on China, Harris’ plan to keep them in place is dovetailing the country’s No. 2 economy. Under Trump, tariffs on Chinese products will jump to nearly 60%.
China will also look into negotiations to revise the US, Mexico and Canada trade agreement (USMCA), which is scheduled for 2026, as some goods including Chinese imports may no longer be treated as Mexican. The automotive industry’s content requirements, known as “rules of origin,” may be central to those discussions. Trump has said in recent weeks that he will pay tariffs of up to 200% on cars from Mexico.
“The trade war (with China) could intensify given the Trump presidency, and I think the most affected country in Latin America would be Mexico,” said Carlos de Sousa, emerging markets strategist and vertical portfolio manager at Vontobel. . “If Trump wins, he could try to use this (USMCA) sunset clause as a powerful negotiating position, which could change the rules of origin.”
He added that further scrutiny of Mexican trade rules could mean “We’re going to go back, in terms of Mexican commodity prices, to a higher level of volatility than we’ve seen in the last five or six years.”
Lazard (NYSE: ) said in a recent client note that a 10% global tariff similar to that proposed by Trump could be used as leverage to prevent countries from evading tariffs by setting up shop in US trading partners. Other cases of its use as an advantage may include policy regarding migration, as remittances make a significant contribution to the economy of several regions, especially in Central America.
South American countries may be in a better position to escape a tough US trade regime. The investment bank puts together lithium powerhouse Chile on the list of countries with high exposure to the US market that can be avoided based on the volatile nature of its exports.
Such statistics would not be very relevant in the context of Harris’ victory.
“If the Vice President of the Democratic Alliance Kamala Harris wins, probably with a different government, the tax risk may decrease and we can expect lower growth and investment conditions in the United States, which could lead to a permanent performance of EM assets,” the investment bank. said the October outlook for emerging markets, published last week.
While Mexico’s export-oriented economy may feel the pinch under a second Trump administration, other countries that are primarily exporters could benefit.
South America may also benefit from its lower dependence on money from the US, which under Trump’s scenario could be taxed at 10% if US Senator JD (NASDAQ:) Vance, a Trump ally, follows through on his proposed tax.
Some Central American countries such as Honduras and El Salvador derive more than 20% of their GDP from remittances, meaning that the tax could translate into a few percent of lost GDP per year. In the case of Mexico, the largest recipient of remittances in the region in dollar terms, it could lose more than six billion dollars in annual income based on the 2023 estimate.
As trade tensions with Beijing ballooned under Trump in 2018, China switched all its imports of US soybeans to Brazil. China is already Brazil’s largest trading partner, and South America’s largest economy will also benefit from more Chinese trade.
“There could be a tax effect that helps Latin America if, due to the tit-for-tat dynamic, it redirects the purchase of primary products away from the US to other suppliers such as Brazil and Argentina,” said Alejo Czerwonko, CIO at Emerging . Markets in the Americas for UBS Global Wealth Management.
“The statement that tax uncertainty can only harm Latin America may be too simplistic.”
A Trump presidency is expected to increase the US budget deficit more than the Harris administration, driving inflation, and interest rates, higher. Strong financial conditions around the world may weigh on Latin American assets.
“If Trump wins and the deficit is bigger, then the deleveraging process may slow down, and that could translate into a slight easing of monetary policy” in the US, said Vontobel’s De Sousa. Tight monetary policy in the US has historically translated into depressed financial asset prices across emerging markets, including Latin America.
Finally, Argentine President Javier Milei, who shared the stage with Trump earlier this year at a private rally outside Washington, was able to see his Trump-like style pay off. Milei may benefit from more US support if Trump is elected as the South American grain exporter seeking to extend or renew its loan program with the International Monetary Fund, the US’s largest shareholder.
Trump will have “a high decibel approach to different countries, which is not institutionalized and personal,” said Francisco Campos, chief Latin American economist at Deutsche Bank. “Due to the ideological harmony and similar style of governance between Milei and Trump, perhaps Argentina may find itself with a smaller tail under Trump.”
