South America would benefit from reduced dependency on American remittances, which under a Trump administration might be subject to a 10% tax if US Senator JD Vance follows through with his proposed tax.
Latin America is eagerly awaiting November 5, when American voters will decide whether to continue with Vice President Kamala Harris’s relatively stable policies or revert to former President Donald Trump‘s policies that caused instability in the biggest markets and economy.
The main ways that the US election 2024 could shock the neighboring region are through trade and tariffs and the impact of monetary policy on interest rates.
A Trump win would cause ripple effects throughout the region, like tightening the limits on some currencies.
Biden’s administration did not reverse the tariffs on China introduced during the Trump administration. However, Harris proposed to maintain them as they made her a dove of the second-largest economy in the world. Under Trump, tariffs on Chinese goods will increase to over 60%.
China is also trying to amend the USA, Mexico, and Canada trade agreements (USMCA) scheduled for 2026, as some items, like those made at Chinese business transplant factories, may no longer be classified as Mexican. Content standards of the automotive industry, also called rules of origin, will be a main topic of discussion. Trump threatened to impose a tariff of 200% on cars imported from Mexico some weeks ago.
If Trump were to win the presidency, there would probably be a trade war with China, and Mexico might be most impacted in Latin America, according to Carlos de Sousa, strategist for developing markets and fixed income portfolio manager at Vontobel. If Trump is elected, he will undoubtedly attempt to use the USMCA’s sunset clause to negotiate to change the rules of origin.
He added that there’s a chance of more volatility in Mexican asset values than in the previous five or six years due to the increased monitoring of the trade regulations about Mexico.
In a recent client note, Lazard stated that a uniform 10% tax, similar to the one Trump has proposed, might be used to stop countries from evading tariffs by opening up shop with trading partners of the United States.
South American countries can avoid stricter trade policies from the USA. If Harris prevailed, these calculations would become less significant.
In its October outlook for emerging markets, released last week, the investment bank stated that if Democratic candidate for vice president Kamala Harris wins, there would probably be a divided government. Tariff risk would decline and lower growth and investment conditions in the United States, which could lead to sustained outperformance of the EM assets.
Under a second Trump administration, Mexico’s industrial export-based economy would probably suffer, while other countries that export mostly commodities might profit.
South America would benefit from reduced dependency on American remittances, which under a Trump administration might be subject to a 10% tax if US Senator JD Vance follows through with his proposed tax.
Some Central American countries, such as Honduras and El Salvador, receive more than 20% of GDP from remittances. Thus, the tax could result in an annual couple of percentage points of GDP losses. A 2023 forecast says that Mexico, which receives the most remittances in terms of dollars, might lose out on nearly $6 billion in annual inflows.
Under Trump, due to trade tensions with Beijing in 2018, China began importing soybeans from Brazil instead of the US. At the moment, Brazil trades more with China than any other country, and South America’s largest economy would benefit from increased trade with China.
Alejo Czerwonko, CIO for emerging markets in the Americas at UBS Global Wealth Management, stated that a tariff outcome could benefit Latin America if it diverts the purchase of primary products from the United States to other suppliers like Brazil and Argentina.
It predicts that Trump’s presidency will increase the national budget deficit more than a Harris administration, which would boost interest rates and cause inflation.
According to Vontobel’s De Sousa, a slower disinflation process may result in slower monetary policy in the United States if Trump wins and the deficits increase. Historically, tighter monetary policy in the United States has resulted in lower prices for financial assets in emerging nations, particularly Latin America.
Finally, Javier Milei, the president of Argentina, who shared a stage alongside Trump earlier this year at a conservative event outside of Washington, might see his Trump-like aggressive style rewarded. If Trump were to win the presidency, Milei would gain more American backing as the South American grains exporter looks to extend its credit program with the International Monetary Fund, of which the United States is the biggest shareholder.
Francisco Campos, head economist for Latin America at Deutsche Bank, stated that Trump would focus less on institutions and more on personal relationships. Given Trump and Milei’s similar political ideologies and governing approaches, Argentina might benefit slightly from a Trump administration.has context menu