What's the future of U.S.-Latin America trade relations?
What a renegotiation of NAFTA could mean for Mexico, and for the economies of Latin America as a whole, has been at top of mind for markets and the region since 18 May when U.S. Trade Representative Robert Lighthizer sent formal notice to Congress of the administration’s intention of renegotiating the agreement.
President Trump has repeatedly stated that the main objective of his trade policy is to reduce trade deficits with several of the U.S.’ trading partners and to review 20 of its agreements that contain "possible abuses and violations." The executive order explicitly states that all trade relations and preferential trade programs must contribute favorably to the United States’ trade balance and strengthen its manufacturing industry. Yet many of the agreements are failing in this regard.
According to the government, the trade deficit and the lack of reciprocal treatment for American products and investments are the result of non-compliance with that criteria, and therefore action is required. It’s clear that this is not just rhetoric, the recent increase in countervailing and antidumping duties is evidence that the U.S. is sticking to its word. The government has also invoked Section 232 of the Trade Expansion Act of 1962, which allows the U.S. to impose restrictions when imports threaten to "impair" national security, such as the recently-implemented measures against steel and aluminum imports.
The U.S.’ aggressive stance toward international trade has the potential to affect trade relations with Latin America in a number of ways. It has already affected the country’s relationship with Mexico—the U.S. had a trade deficit of USD 64 billion with Mexico last year, representing the fourth largest bilateral deficit in terms of magnitude after China (USD 347 billion), Japan (USD 69 billion) and Germany (USD 65 billion). Mexico and its northern neighbor have begun formal talks and the United States has already sent a document to Congress describing a set of objectives for the renegotiation of NAFTA.
The argument that bilateral deficits reflect unfair practices is a weak one. While it has already been stated, it’s worth noting again that trade deficits simply reflect the current state of trade between two countries. Global deficits reflect underlying macroeconomic conditions and trends in exchange rates. In fact, the United States maintains a trade deficit with the rest of the world because it saves less than it invests and because it consumes more than it produces. In addition, the relative strength of the dollar against other currencies also explains part of the country’s trade deficit with the rest of the world. However, the administration continues to stubbornly dismiss these arguments.
While Mexico is Trump's immediate target, other Latin American countries could also see themselves drawn into the debate. In a recent speech, Commerce Secretary Wilbur Ross talked about launching a Section 232 investigation into copper imports, which could seriously affect Chile and Peru, the world's top producers. In addition, the investigations could affect free trade agreements with Chile, Colombia, Peru, the Dominican Republic and Central America.
A document sent by the Executive to Congress in July describes the objectives of the NAFTA renegotiation, most of which are in line with expectations, while the "hard proposals" were omitted. For the first round of negotiations, which will take place from 16-20 August, Mexico's priority is to make concessions that allow Trump to demonstrate that he has fulfilled his campaign promise and to avoid more damaging measures such as quotas or tariffs. However, sensitive issues such as security, immigration and rules of origin, represent new risks for Mexico’s upcoming elections. One of the main objectives will be to conclude the process early next year and prevent negotiations from being politicized in the run-up to the 2018 elections.
The Central American countries and the Dominican Republic, which are part of the CAFTA-DR agreement, could be subject to scrutiny by the United States. However, U.S.’ surplus with the region is small, which reduces risks. In 2016, the U.S. also maintained a trade surplus with several South American countries, which in commercial terms are "friendly", with the exception of Colombia, with which the U.S. registered a deficit of USD 700 million.
Although the threat of retaliation against most countries in the region is far removed, with the exception of one-off measures, the Trump administration does not appear to have a strategy of any kind when it comes to Latin America. The problems in the State Department have not only hindered the creation of a strategy, but they have not allowed for the definition of a clearer stance toward Cuba and Venezuela either, given the recent events in those countries.
The new U.S. administration is facing big challenges and any significant agenda on commerce and foreign policy directed at Latin America is unlikely in the near future. And given how things are being managed in the superpower, it would be best if they don’t look south.
*Guest blog post from Latinoamerica21.
Ricardo Aceves is a Mexican economist specializing in Latin American macroeconomic issues and currently works as a credit risk analyst at CRIF Ratings in Barcelona. He previously worked as Senior Economist for Latin America at FocusEconomics.
Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: ¿Como serán las relaciones comerciales entre América Latina y EEUU?
*Guest blog posts do not reflect the views of FocusEconomics.
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Date: August 17, 2017
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