Trump’s Tough Trade Talk: How Latin America Should Respond to Its Northern Neighbor Now
From the beginning of his presidential campaign through the first months of his administration, President Donald J. Trump has made it clear he believes the U.S. economy is suffering from disadvantageous trade deals struck by his predecessors and is prepared to act on that belief.
During the campaign, Mexico and China were the primary targets of Trump’s opprobrium. Mexico, he said, was stealing U.S. jobs, and he vowed to build a physical wall along the U.S.-Mexican border (which Mexico, he promised, would pay for) and levy taxes on imported Mexican goods. He said he would brand China a currency manipulator.
Trump has made good on many, although not all, of his promises. On Jan. 23, days after taking office, he signed an executive order canceling U.S. participation in the Trans-Pacific Partnership and, speaking to the Conservative Political Action Conference, said this decision to “protect our economic freedom” heralded a new era in which the United States would eschew multilateral trade agreements, negotiating with countries one-on-one. This included possibly ignoring World Trade Organization policies by unilaterally imposing tariffs and other trade barriers against nations he believed unfairly took advantage of U.S. businesses.
Trump’s criticism of the North American Free Trade Agreement (NAFTA), implemented simultaneously in 1994 by Mexico, Canada and the United States, has been a running theme of his campaign and presidency. On April 27, he tweeted, “If we do not reach a fair deal for all, we will then terminate NAFTA.”
But China and Mexico have not been alone in being targeted.
In January, Peter Navarro, head of the administration’s new National Trade Council, accused Germany of exploiting the United States by using a “grossly undervalued” Euro as a proxy Deutschemark. Navarro declared talks with the European Union over the Transatlantic Trade and Investment Partnership (TTIP) dead and called U.S.-German trade “a multilateral deal in bilateral dress.”
In April, Trump began focusing on Canada, calling its dairy pricing “another typical one-sided deal against the U.S.” And the Commerce Department said it would begin levying a tariff on imported Canadian softwood lumber, accusing Canada of improperly subsidizing its timber industry.
The fact that, as of this writing, Trump has not levied any tariffs against Canadian lumber nor has China been labeled a currency manipulator should only be read as indication of how difficult it is to divine Trump’s intentions. This alone should be concerning to Latin American governments and businesses. They should not be sanguine about the administration’s future trade policies.
Unfortunately, many seem to be in denial.
Latin America in the Crosshairs
Most Latin American countries are dependent upon trade with the United States. According to the U.S. State Department, nearly 80 percent of Mexico’s exports in 2013 went to the United States, including (but not limited to), manufactured products, oil and oil products. Over a third of Colombia’s exports (36 percent) go to the United States, including (but not limited to) oil and coal, chemicals, machinery, coffee and cut flowers. [For more on the Latin American industries that would be impacted by new trade deals with the United States, see “Latin American – U.S. Trade by the Numbers,” at the bottom of the page.]
The concept of free trade has long been accepted as a good thing, globally and in the United States, particularly by Republicans. However, in March, the Trump administration vowed to review all 14 U.S. free-trade agreements – and government procurement policies – to promote the interests of U.S. companies. These free-trade agreements cover 20 countries, including Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama and Peru. But the administration’s loud focus on Mexico has led other Latin American countries to believe – naively, in our opinion – that they will be safe, and business with the United States can continue as usual or even improve.
In January, Colombian Commerce Minister Maria Claudia Lacouture said she did not believe that re-negotiating Colombia’s free-trade agreement with the United States was a Trump “priority.”
Brazil seems to be echoing Colombia’s attitude. In January, Trade Minister Marcos Pereira noted that “Brazil has not appeared in Trump’s sights,” and declared that “Brazilian manufacturers will not be hurt,” as they could fill the spaces Trump’s protectionist policies would create in European and Asian markets. Although both ministers’ positions make economic sense and may help create a sense of certainty in their respective markets, businesses in both nations would be ill-advised to rely on a strategy based on hope and optimism.
Our view is that the region will be heavily impacted by the shift in trade priorities and philosophies that the current administration has pronounced.
For example, U.S. aid to Central America – particularly to Honduras, El Salvador and Guatemala – has been critical to the Caribbean’s economic viability and social stability. The potential damage a reduction in aid would cause those economies is obvious, but the social disruption that inevitably will follow will have a manifestly negative impact on tourism throughout the region. Tourism represented almost 15 percent of the Caribbean’s GDP in 2014, a total of $52 billion, and that is income the region can ill-afford to lose.
Finally, but perhaps more importantly, there is the very real danger that, as a mistaken retaliatory measure, the philosophy of America first-ism will spread to Latin America, if only as a self-protective response, leading to a resurgence of populism, protectionism and nationalism, fragmenting the continent, and working against economic prosperity and social justice.
For all these reasons, we believe that Latin America must be proactive in its relations with the United States, engaging at all levels to promote a healthier, more productive multilateral environment. For businesses across the region, strengthening relations with their northern neighbor should be part of any comprehensive five-year plan.
The Mexican Model
In declaring his candidacy for the presidency in the Trump Tower lobby on June 16, 2015, Trump said, “I will build a great, great wall on our southern border. And I will have Mexico pay for that wall. Mark my words.” Since then, Mexico has remained central to Trump’s message. But to date the heated rhetoric has not translated into action, and the outlook seems to be more positive now as dramatic shifts in dollar-peso parity illustrate. The day after Trump’s election, the Mexican peso fell to a near-all-time low, dropping 11 percent. But, by March, it had recovered to pre-election levels, and in April it had risen 16 percent from its lowest point.
According to an April report in The Wall Street Journal, the post-election improvement in relations between the United States and Mexico, the deceleration of administration plans for punitive taxes, and a slightly more favorable administration position towards NAFTA are due in part to a series of meetings between U.S. and Mexican officials. This has led to the creation of the personal relationships so critical to commerce between nations. Mexican Foreign Minister Luis Videgaray has reportedly become close with Jared Kushner, both Trump’s son-in-law and an advisor to the President with a broad portfolio. The Journal also reports that big U.S. companies, “in consultation with Mexican and Canadian officials, have launched an aggressive, behind-the-scenes effort to explain what they consider to be NAFTA’s benefits.”
At certain points, this approach seems to have worked. In fact, in late April, the White House said in a statement that, after talking to the Mexican and Canadian leaders, President Trump had agreed “not to terminate NAFTA at this time.”
Still, it’s too early for Mexico to claim success, and it should expand its engagement efforts. Four days into his tenure as U.S. Trade Representative, Robert Lighthizer notified Congress of the administration’s intent to begin NAFTA renegotiations. Although the context for renegotiation is certainly more positive now than it was some months ago, Mexico should not forget that Trump’s America-first slant on trade is a long-held belief, and that so long as his constituency continues to believe that NAFTA is a fundamentally unfair deal for the United States, the temptation to appeal to that audience will be considerable. To temper that attitude in the current U.S political climate and achieve positive results, broader communications strategies to reach more stakeholders than direct lobbying can – the current Mexican approach – will be necessary.
Still, even in these early days, Mexico’s experience illustrates that there are substantive benefits to engagement with the Trump administration. As they continue to monitor and, in some cases, prepare for potentially adversarial actions on trade, Latin American countries and businesses should reach out both directly to key officials in Washington and to strategic business partners that share their concerns and interests.
Every exporter has an importing partner that may be hurt by actions taken against its supplier, and it’s important to make common cause with those partners in Washington.
The Engagement Imperative
While it’s true that the Trump administration has had a myriad of early difficulties rolling out its agenda, there is no reason to believe that it has tabled them. There is no reason, and no evidence, to believe that President Trump will not attempt to fulfill the promises that led to his surprising electoral victory. Therefore, to protect its interests, Latin America must engage on many levels and in the following ways with U.S. officials and U.S. commercial parties.
It certainly behooves Latin American businesses to understand how Washington operates, and specifically this administration, with its ever-shifting pockets of people who have the President’s ear. That begins with good intelligence gleaned from having boots on the ground both in Washington and in Latin American power centers.
Ideally, Latin American businesses should identify critical partners and stakeholders who share their goals. By not taking a stand, by failing to recognize and proclaim the very real risks posed by the administration’s proposed policy shifts, Latin America sends at best a mixed, and at worst a poor, message to the world markets that may produce a decline in the direct foreign investment so important to the region’s economic and social health. In this outreach, it may be most effective to engage a third party that knows the lay of the land and possesses the expertise and capability to promote the region’s interests.
It also is critical for Latin American businesses to make sure their story is heard by U.S. business elites, think tanks and, perhaps most importantly, the media. Effective media engagement – both traditional and social – will ensure that the American public is alerted to the potential damage a shift away from decades of pro-trade U.S. policy could have on the American economy and the American consumer.
The time for business as usual for Latin America ended on Friday, January 20, 2017 – Inauguration Day. The region must take the Trump administration’s proposed policies seriously as a clear and present threat that will negatively impact both business and government in the region.
It is only reasonable to prepare for all possibilities.
Latin American – U.S. Trade: By the Numbers
© Copyright 2017. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
Senior Managing Director