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Scrapping NAFTA or breaking its covenants by introducing punitive import tariffs -- like President-elect Donald Trump has vowed -- risks a trade war between Mexico and the US, the author argues. (Photo: GOP)
Monday, November 14, 2016
Perspectives

Trump: The New Yankee Threat


Latin America braces for a Trump era.

BY JOHN PRICE

 

On Wednesday, November 9th, the world woke to the shocking news of a Trump Presidential win.  Almost as surprising was the sudden and positive rebound of US equity markets, where investors decided Trump will be an economic expansionist.  Investors in Latin American bourses were less sanguine.  The Mexican Peso plummeted as much as 12 percent in the first day of post-election trading and the Brazilian Real tanked 5.3 percent on Thursday, November 10th. 

 

As market pricing illustrates, Mexico is America’s most vulnerable economic partner at the start of the Trump Presidency, which begins officially on January 20th, 2017.   The promise to renegotiate, if not scrap NAFTA has already interrupted billions of dollars of planned investment in Mexican factories, as American companies look south for customers or cheaper product sourcing. 

 

In varying degrees, NAFTA has been polemic in each of the signatory countries – as most free trade agreements are.  Before NAFTA, all three countries had multiple protected, weak and declining industries that the trade agreement helped destroy.  In all three countries, labor displacement has been significant, most dramatically in Mexico, whose mid-size industrial base was the least prepared (vis-à-vis Canada and the US) for the more equal playing field created by NAFTA.

    

Two days after the US election, Canada’s Prime Minister boldly announced his willingness to “discuss” the NAFTA, subtly calling the President-elect’s bluff.  Mexico’s leaders are more circumspect.  The trade intelligencia in Mexico is busy calculating how it can counter any US efforts to undermine NAFTA.  Mexico knows what US imports are made in which US congressional districts and have in the past selectively stopped or taxed imports from those congressional areas whose political leaders aimed to punish Mexico, as was proven when the US failed to meet its NAFTA obligations to open the border to truckers. 

 

Scrapping NAFTA or breaking its covenants by introducing punitive import tariffs risks a trade war between Mexico and the US, with Canada an indirect additional victim.  No country will win a trade war but Mexico will suffer the most, both in terms of trade and by signaling to the world that assembling in Mexico does not guarantee US market access.   Since NAFTA was first conceived 25 years ago, Mexico has built its growth strategy on export manufacturing and will not let NAFTA go without a fight.  But Trump is compelled to his voters and his newfound friends inside the UAW (who helped him win the rust-belt states) to renegotiate NAFTA so the risk of an escalated bi-lateral dispute is very real.  The Mexican government, an effective lobbyist in Washington, will marshal support from large US companies whose supply chains reach deep into Mexico.  It remains to be seen if Republicans will temper their attacks when confronted by worried US corporations.

 

Less threatening to lobbyist armed US business interests is Trump’s campaign promise to tighten illegal immigration crossing the southern border.  To be sure, the low skill labor supplied by undocumented workers from Mexico, Central America and even Asia coming across the Rio Grande does fulfill a vital role in the US economy.  Without those hard workers, wage inflation will impact US service and agricultural industries.  However, most US companies employing illegals are small to mid-size enterprises without a lobbying voice in Washington.  For that reason, many in Washington expect the Republican controlled congress to support plans to build a wall – though it will be the American tax payer, not Mexico, who foots the bill.  It remains to be seen whether a US funded wall will be coupled by an expansion of America’s limited temporary worker visa programs, which would help keep wage inflation in check.

 

US-CUBAN RELATIONS

 

Trump’s victory in Florida was owed in large part to Cuban Americans, whose voting patterns were (once again) very distinct from other Latino-Americans.  While only an estimated 22 percent of non-Cuban Latino voters in Florida supported Trump, more than half of Cuban-American voters chose the Republican.

    

Trump

Clinton

Others

Total

Total Florida vote

4,605,515

4,485,745

295,490

9,386,750

 percent

49 percent

48 percent

3 percent

100 percent

Total Florida Latino vote

      523,781

   1,132,042

         33,792

   1,689,615

 percent

31 percent

67 percent

2 percent

100 percent

Cuban-American vote

      272,366

      235,701

         15,713

      523,781

 percent

52 percent

45 percent

3 percent

100 percent

Non-Cuban Latino vote

      251,415

      896,341

         18,079

   1,165,834

 percent

22 percent

77 percent

2 percent

100 percent

If Cubans had voted like other Latinos

      112,954

      402,704

           8,122

      523,781

The Cuban difference

      159,412

-     167,003

           7,591

Trump victory

119,770

 

There is a long-standing tradition in Florida of Cubans voting Republican but the trend was waning - Obama won a slight majority of the Cuban-American vote in 2012.  The surprising announcement to improve relations with Cuba in December, 2014 set in motion a wave of diplomatic overtures that may have impacted Hillary’s standing among Cuban Americans.  While most Cuban Americans welcome the eventual end to the embargo, they are not pleased with Obama’s negotiation style, which they perceive as unilaterally generous.  Seizing upon Cuban American discontent, Trump launched a late but apparently effective charm offensive in Miami, promising to be much tougher on the Castros than Hillary. 

 

If the Trump administration makes the same electoral calculation as above, they will be indebted to Cuban Americans.  At the same time, Cuban-US relations never became a national issue in the Presidential campaign.  Outside of south Florida, where 70 percent of Cuban Americans live, Washington-Havana relations either played no role in the national political debate or were viewed neutrally by a US electorate who supports an end to the embargo.  For that reason, many believe that Trump will not try to reverse all of Obama’s “concessions” to the Cubans but instead will alter the pace and tone of negotiations in an effort to placate Cuban-American interests. 

 

It is naïve, however, to think that Washington will dictate the reform agenda in Havana.  Cuban leadership is embracing capitalism as a matter of economic survival, not due to a shift in ideology.  The rapid demise of Venezuela’s economy puts enormous strain on Cuba, who must seek foreign currency income from new sources including American tourists.  Without Venezuelan petro-dollars, Cuba cannot afford to subsidize unprofitable labor intensive enterprises and will therefore continue to privatize portions of the economy. 

 

The election of Trump will add another layer of skepticism to Havana’s views of American intentions and may stymie efforts by reformists in Havana who face their own hawkish opposition within the Communist party.  In contrast to the Mexican administration who may choose to wait before reacting to the Americans, Havana will prefer to chart its own course by making announcements designed to prod Washington into action. 

THE TRUMP COMMODITIES PLAY


Will US actions against Mexico and possibly Cuba create a unified diplomatic backlash across Latin America against the US?  It is doubtful.  Though there may be popular disdain for Donald Trump in most Latin American countries, politics remains a local concern.  Much of South America has recently rejected left wing populist leadership in exchange for a more transparent, fiscally prudent, free enterprise model of government.  For new governments in Argentina, Brazil, Peru and Guyana, strong US ties figure prominently in their plans for economic growth.  Colombia, Chile and Peru will work diligently to preserve their trade agreements with the US. 

 

The initial market reaction to the Trump election may even spark enthusiasm in some South American circles.  President-elect Trump’s desire to spend $1 trillion on new infrastructure provided a massive boost to copper prices last week.  Iron ore and zinc will rebound further once the US congress begins drafting plans for public and privately funded infrastructure.  Chile, Peru and Brazil will all benefit. 

 

Latin America’s oil and gas industry may not do as well as industrial metals.  Trump plans to lift what the energy sector claims are onerous regulations on oil and gas production and exports.  The swing-producer role achieved by US shale will likely grow, keeping global prices muted and curbing investment plans in costly deep water drilling across Latin America.  The construction of the Keystone pipeline, a priority for congressional Republicans, will flood American refineries with Canadian crude oil, placing downward pressure on Mexican and Venezuelan oil deliveries to the US. 

 

Just as dramatic could be the eventual lifting of export restrictions that effectively lock US gas into the domestic market.  US natural gas sells for a fraction of European and Asian prices, which helps fuel America’s downstream industries but frustrates the gas lobby.  Should US LNG producers begin shipping higher volumes overseas, Trinidad & Tobago, Venezuela, Colombia, Ecuador and Argentina will all be impacted. 

 

If Trump and a Republican controlled congress succeeds in accelerating US economic growth, Latin America will benefit.  But the degree and direction of any American economic boost in Latin America will be determined by the unpredictable realm of US domestic politics and American diplomatic relations with specific Latin American countries, particularly Mexico and Cuba.  In the meantime, most Latin Americans will remain apprehensive.

 

John Price is the managing director of Americas Market Intelligence and a 24-year veteran of Latin American competitive intelligence and strategy consulting. jprice@americasmi.com. He wrote this column for Latinvex. 


© Copyright Latinvex

 

 

SEE ALSO

Trump & Latin America: What Next?

US-Mexico Trade: The Numbers

Pained Reflections on a Trump Victory

Ex-Ambassadors Warn Against NAFTA Changes

Hills: Losing Mexico Market Would Be Devastating

Farnsworth: Trump & Latin America 

Fact Check: Donald Trump Wrong on Mexico

The Cost of a US-Mexico Trade War

NAFTA: The Benefits Versus The Costs

 

 

 

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