Andres Oppenheimer

In Trump’s trade war with China, Latin America is especially vulnerable | Opinion

An employee works in a Chinese wheel factory.
An employee works in a Chinese wheel factory. Getty Images

There is some speculation that President Trump’s trade war with China could be a godsend to Mexico and other Latin American countries, because they could increase their own exports to the world’s two biggest markets. However, it’s more likely that a protracted trade war would hurt the region both economically and politically.

Granted, Mexico could increase its sales of electronic goods to the U.S. market, and Argentina could boost its exports of soybeans to China as a result of the escalating U.S.-China tariff war.

Some multinational companies, such as China’s Fuling Global Inc., which sells paper cups to U.S. restaurants, and GoPro, the sporting-camera firm, already have announced plans to move their factories to Mexico to avoid the threat of rising U.S. tariffs on Chinese goods.

But that’s just one part of the story. Most economists agree that a prolonged trade war between the United States and China would slow both countries’ economic growth. And if the U.S. and Chinese economies slow down, they will buy fewer goods from other countries, including Mexico and Latin America.

“Nobody would be safe from a prolonged trade war,” says Alberto Bernal, chief global strategist with XP Securities. “It would be like a huge flood. Some countries would be more flooded than others, but we would all be under water.”

According to Oxford Economics, China’s economic growth would be cut by 0.8 percent this year, and the U.S. economy would shrink by 0.3 percent, if both countries carry out their threatened tariff hikes.

China has announced it will in increase its tariffs on $60 billion worth of U.S. goods in retaliation to Trump’s announcement of higher tariffs on $200 billion worth of China’s exports to the United States. Trump and Chinese leader Xi Jinping are expected to meet at the G-20 summit in Tokyo in June, and they could make progress toward a trade agreement there.

But other economists point out that the fallout of a prolonged trade war would be much bigger than the Oxford Economics forecast, which does not take into account the psychological side effects of the U.S.-China trade sanctions.

XP Securities estimates that the ripple effects could lead to a U.S. recession in 2020, while dragging down Mexico’s economy to a negative growth rate of -2 percent next year.

That’s because if the United States and China continue to escalate their trade sanctions, China may start putting more restrictions on U.S. corporations doing business in China, such as General Motors or Boeing. That would drive down the U.S. stock market, and drag down stock markets around the world.

Latin American countries would be further hurt by the fact that, in times of economic uncertainty, people in the region rush to buy U.S. dollars to protect themselves from currency devaluations. That weakens Latin American currencies, forces countries to hike interest rates and hurts their economic growth.

But, while all of this may be averted by a Trump-Xi trade agreement, the U.S. president already has inflicted major damage on Latin America by abandoning America’s traditional role as a champion of free trade and giving political ammunition to some of Latin America’s worst populists.

Last week, Argentina’s corruption-ridden former populist president Cristina Fernández de Kirchner, who is mulling a run for the presidency in October’s elections, cited Trump’s protectionist policies as a validation of her own economic policies during her 2007-2015 presidencies.

“Look at the United States: Their economy is on a roll,” Fernández de Kirchner said in a May 9 speech. Referring to Trump’s economic nationalism, she added that Argentina should return to the “strong internal market” policies she carried out when she was in power, while failing to add that she inherited a booming economy and left her country bankrupt.

Barring a collapse of world trade, the worst impact of Trump’s economic nationalism may be political. It is encouraging nationalist populists who support protectionist policies that benefit their cronies in the business world, but at the cost of reducing their countries’ competitiveness, raising prices for consumers and often fueling massive corruption.

When Cristina Fernández de Kirchner praises Trump’s economic policies, it’s time to worry.

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