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Date:
Author:
Joaquin Thul

The recent burst of inflation in the US and in many other countries has led investors to wonder whether the entire inflation environment has changed.

The results of the US elections represented a clear mandate to the incoming administration to prioritise some of Trump’s campaign promises. The links with Latin America do not rank high among the next US government’s priorities. In this Macro Flash Note, Economist Joaquin Thul looks at how the region could be affected by Trump’s victory.

The magnitude of the Republican party’s victory in the 2024 US elections gave a strong mandate to Trump’s administration to shift away from the policies of the Democratic administration. According to political commentators, the top two issues for voters were the economy and immigration.

On the first issue, the Biden administration will hand over an economy growing around 3% annualised, inflation close to the 2% target and an unemployment rate just above 4%. Arguably, the Democratic party did not get enough credit for their handling of the economy.

On the second issue, polls show that around 60% of registered voters disapproved of Biden’s handling of immigration.1 Interestingly, over half of the voters identified as Hispanic disapproved of the Democrats’ more lenient stance towards immigrants.

According to the Pew Research Centre and US census data, in 2022 about 64 million people of Latin American heritage lived in the US, representing a fifth of US citizens and the second largest ethnic group.2 Among the voting-age population, the share of US citizens of Latin American heritage is 15%, or approximately 36 million voters. Historically, this group leaned towards the Democratic Party but, in 2024 Latinos’ support for Trump grew considerably.

Trump openly criticized immigration from Latin America throughout the campaign. But a large portion of the Latino community worried about the rise in illegal immigration, claiming they are to blame for the rise in crime rates in some US cities. A report from Canning House, a think-tank, explains that this group of voters are socially conservative and do not see themselves as having much in common with new immigrants.3 It is not surprising that Trump’s message resounded with them.

However, when assessing the impact of Trump’s policies on Latin America it is important to note the declining influence of the US in the region. Compared to the 1980s and 1990s, when Latin America was seen as the US’ backyard in terms of political interests, investment and trade, in 2022 China was the main trading partner for most of Latin American countries, see Figure 1. After failing to secure support for trade agreements and foreign investment from the US, the region has strengthened economies ties with China who has increased its footprint in the continent, particularly in South America.

 

Figure 1: Evolution of main trading partners for South American economies and Mexico (% of trade with each country/region, 2000 vs 2022)

chart1.png
Figure 1.1 2000
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Figure 1.2 2022

Source: IMF Direction of trade statistics and EFGAM. Data as at 18 November 2024

 

Notably, Latin America was not mentioned once by either candidate in the September Presidential debate. Therefore, it seems that Latin America will be low among Trump administration’s priorities.

President-elect Trump has nominated Marco Rubio for Secretary of State. A son of Cuban immigrants, Rubio was a close advisor on Latin American policy during Trump’s first presidency. Although this could mean an increased interest from the US in Latin America, it is more likely the region will be impacted by the side effects of the US’ main foreign policy decisions.

What to expect from the new Trump administration towards Latin America

  • US-Brazil relations. Brazil aims to become a leader within the BRICS bloc and wants to secure a permanent seat on the US Security Council. However, the US has been less keen to support this initiative given past political differences. For instance, the countries diverge on their support for Israel and on their backing of Venezuela’s authoritarian regime.4 Additionally, in recent years Brazil has strengthened economic ties with China, which is currently the destination for almost one third of Brazilian exports.
  • US-Mexico relations. Every 12 years both Mexico and the US hold elections, meaning that Trump and Sheinbaum, both with strong mandates from their voters, will have four years to establish a working bilateral relationship. US officials have criticised Mexico’s judicial reform, which can disrupt trade and investment between the two countries.5
  • Immigration policies and border control. Trump’s victory will introduce changes to immigration policy and strengthen border controls to discourage migration into the US through the southern states. Toughening of controls are expected to discourage flows of migrants from the so-called Northern Triangle (composed of El Salvador, Honduras and Guatemala) and Venezuela. Migrant crossings at the US-Mexico border hit a record high of nearly 250,000 in 2023.
  • Drug cartels. One area where Mexico and US are likely to find common ground is the fight against drug cartels and their impact on crime. The coordination of law enforcement policies against these groups will be crucial for their bilateral relations but will not be easy. Data shows that these cartels were responsible for the death of 75,000 people in the US in 2023.6 Republican officials have been in favour of designating some of Mexico’s drug cartels as foreign terrorists, something that Sheinbaum disagrees with.
  • Nearshoring and United States-Mexico-Canada Agreement (USMCA) negotiations. Mexico has been a key beneficiary from the US’ nearshoring policies, particularly during the Biden administration. Despite a decline during the first Trump presidency, foreign direct investment from the US into Mexico has averaged approximately USD 14 billion a year since 2017, above the long-term average of USD 12 billion a year since 1999, see Figure 2. However, US officials have recently questioned China’s investments in Mexico’s car industry and threatened to impose high tariffs on Mexico and renegotiate the terms of the USMCA.
  • Russia-Ukraine conflict. The war in Ukraine has disrupted input costs in Latin America. Commodity producers import large amounts of fertilisers from Russia and grains from Ukraine. A resolution to the conflict, which Trump has suggested he could facilitate, could reduce the import prices of these products.
  • US-China relations. The US will aim to limit China’s influence across the rest of the world; however, Beijing officials have been effective at providing investments in infrastructure, communications, and industrial plans across Latin America. China has become the main trading partner for most economies in South America, apart from Colombia and Ecuador. The hardening of relations between the US and China could have a negative impact on Latin America.
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Figure 2: Annual flow of foreign direct investment from US into Mexico (USD billions)

Source: Ministry of Economy, Government of Mexico, and EFGAM. Data as at 18 November 2024

 

Conclusion

Apart from immigration policies, Latin America is currently low on the Trump’s administration’s priorities list. Ideological differences between Trump and other leaders in the region’s largest economies add an extra level of complexity. The appointment of Marco Rubio as Secretary of State could lead to more engagement between the US and Latin America. This would focus on two areas, (i) limiting China’s economic expansion in the region, and (ii) increasing the negative rhetoric against left-wing authoritarian regimes such as Venezuela, Cuba and Nicaragua. Trump is expected to use tariffs as threats to countries that do not align with his way of thinking. However, as former Mexican President Lopez Obrador achieved a respectful relationship with Trump, Claudia Sheinbaum is expected to engage proactively with the US President-elect to work on areas such as trade, border control and fight against crime to find common ground.

Emerging Market Fund Manager Fergus Argyle, notes that Trump’s re-election has not materially changed his view on Latin America. If we expect more US deficit spending and rate cuts this could potentially lead to a weaker US dollar which would be supportive for the region. In addition, Mexico may benefit from investment as Trump simply can’t re-shore everything. In Mexico, if the USMCA renegotiations are used as a stick to keep the Mexican government in line then Trump may not be as bad for the country as markets may be pricing in. There is more caution towards Brazil: domestic growth is strong but the market is concerned by delays in announcing efforts to curb the fiscal deficit – along with a tightening monetary policy cycle. So far, Argentina has been the main beneficiary of the Trump trade, gaining 15% in the last month.

 

The Economist/YouGov Poll, August 4-6 2024. https://d3nkl3psvxxpe9.cloudfront.net/documents/econTabReport_qdE4wzP.pdf

https://www.pewresearch.org/short-reads/2023/08/16/11-facts-about-hispanic-origin-groups-in-the-us/

https://www.canninghouse.org/canning-insights/what-does-the-us-election-mean-for-latin-america

Brazil’s support for President Maduro has started to fade following recent election in Venezuela.

The reform could breach part of the USMCA trade agreement regarding its impact on the rule of law, judicial independence and compatibility with international obligations.

https://www.economist.com/the-americas/2024/11/07/donald-trump-is-poised-to-smash-mexico-with-tariffs

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