Mexico in the firing line
US trade protectionism focuses first and foremost on reducing trade deficits.That’s bad news for the Mexicans. They cause the US's 4th largest bilateral deficit (after China, Japan and Germany). Mexico ships more than three quarters of its exports, mainly manufactures, to the US. The backlash is already visible. The North American Free-Trade Agreement (Nafta) is being renegotiated. Moreover, the Mexicans agreed to voluntarily impose export restrictions on sugar.
What about US free-trade agreements with 10 other Latin American countries?
Do Chile, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, the Dominican Republic and Peru need to worry? Not too much. The US records a trade surplus with all these countries, except for Colombia. But the Colombians have a (very) small trade surplus with the US. Therefore it is unlikely Trump will target the country.
Venezuela faces other uncertainties
After Mexico, Venezuela is the Latin American country with the largest trade surplus with the US (the 22th largest). This is mainly explained by oil exports. Yet, protectionist motives are not the real reason why Trump is taking measures against Venezuela.The US sanctions target Venezuelan individuals, equity, securities and debt because of the Venezuelan political crisis.
Product-specific issues: copper and crops
Though Latin America – except Mexico – is off the radar for potential US retaliatory trade measures, there are product-specific issues.
• Recently the US Department of State threatened to launch a Section 232 investigation into copper imports.This could affect Chile and Peru.
• The risk remains that US agricultural companies lobby to introduce barriers on certain agricultural items.These measures could especially hit Argentina and Brazil.
However, up until now no measures have been initiated.Moreover, exports from Chile, Peru, Brazil and Argentina have little exposure to the US: on average only 2.5% of their GDP.
The rebound of a possible China ban
Latin America could be hit indirectly by US trade protectionism towards China. It is an important trading partner of Latin America. Possible measures against China could affect Latin American commodity exporters of oil, iron ore, copper and soya.
What if the US heavily taxed the remittances of its foreign labourers?
Although most of the estimated 11 million undocumented workers in the US are Mexican, a heavy tax would have a smaller effect. Only 6% of Mexican current account receipts come from remittances.
Other Latin American countries would be hit much harder. The following countries rely on the remittances of their foreign labour force for a bigger percentage of their current account (CA) receipts:
• El Salvador: 40% of CA receipts,
• Honduras: 35% of CA receipts,
• Guatemala: 35% of CA receipts,
• Caribbean islands (e.g. Jamaica): 30% of CA receipts,
• Dominican Republic: 25% of CA receipts,
• Cuba: 25% of CA receipts.
However, so far these resources have not been impacted.