Could US-China storm clouds hold a silver lining for Latin America?

Bnamericas Published: Monday, August 05, 2019
Could US-China storm clouds hold a silver lining for Latin America?

A commodity-producing region, Latin America is particularly exposed to fallout from the US-China trade spat. This can be illustrated by recent drops in copper prices and the weakening of key producer Chile's local currency in the wake of US President Donald Trump's latest tariff threat.

These tensions - linked to a divergence of the strategic, technological and political interests of the US and China - are unlikely to disappear anytime soon, even if US President Donald Trump were to be voted out of office next year. 

This generates headwinds for Latin America, especially for countries that provide raw materials which fuel China’s economic engine, since any drop in demand by a weaker China could hurt exports.

Against this backdrop, Latin American countries must figure out the right policy response, says Thomas Torgerson, co-head of sovereign ratings at Toronto-headquartered rating agency DBRS. He adds that the situation - if the trade war is sustained - may present opportunities for the region, citing the potential relocation of production operations to Latin America from China.

BNamericas: Do you think US-China trade tensions will dissipate? 

Torgerson: We are concerned that this is going to remain an issue for quite some time. Ultimately, some of the US policy objectives are going to be very difficult for China to actually deliver on and they kind of directly contradict some of China’s core economic strategy. 

We even think, even if the administration were to change, a potential Democratic nominee and administration would still be under pressure to continue to be tough with China. As we see the campaign unfold, we expect a lot of the Democratic nominees to be talking about what they will do to help the American worker, kind of playing to that somewhat populist message that Trump has kind of taken and run with.

I’m not sure that even a change in the administration will necessarily improve things quickly. We expect this to be a persistent theme over the next few years.

BNamericas: If trade tensions don’t dissipate, what could that mean for Latin America?

Torgerson: Ultimately, it means that domestic policies are going to matter a great deal and the quality of the policies becomes even more critical.

Governments need to find ways to keep their fiscal house in order but also to promote growth in the private sector and diversify their economies, diversify trade links. There are still opportunities for a lot of these economies. We’ve seen Brazil and Argentina starting to talk about their trading relationships and wanting to push forward on that front. That’s a positive sign – we see Latin America looking for ways to continue to support and diversify their economies. I think, ultimately, that’s the course they need to take.

There will probably be attempts on the side of China and the US for them to kind of pick sides. But ultimately those Latin American countries can continue to remain neutral in that overall dispute and try to expand on their trade linkages and continue to move into more value-added products. If they get the domestic policies right, I think there are opportunities to get some of the trade diversion [such as relocation of production operations to Latin America] that might come from this trade dispute as well. 

There are potential positives but, ultimately, it depends on whether those Latin American countries are in a position to capitalize on those.

BNamericas: Some say we may be witnessing the end of globalization as we know it. 

Torgerson: To the extent that globalization means ever-increasing trade volumes, I think there is perhaps an element of truth to that, that we might be seeing the end of that era. However, I think we are going to continue to see continued specialization in trade and, because of that, there is still a lot of opportunities in trade and services and for other types of trade to continue to grow. 

I think the only type of event that could really reverse globalization would be a pretty dramatic geo-strategic type of shift, which we just don't see as likely.

There may be a prolonged rivalry, and more overt rivalry, between US and China, for example.

BNamericas: Any final comments?

Torgerson: I think [regarding] Latin America’s outlook, domestic policies are going to matter a lot. That’s what we’re ultimately focusing on. The external environment doesn’t look particularly hospitable, but that’s been the case for the past several years and will remain the case going forward.

So, ultimately, we’re very focused on how they respond through their own policies and what they do to try to continue to foster good conditions for domestic growth and for their own economies to prosper and to integrate further even within the region: there are benefits to that.    

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