By Horacio Arredondo*
The last stretch of 2024 said goodbye with some economic clouds on the horizon, especially for the United States’ trading partners. Donald Trump threatened to impose 25% tariffs on Mexico and Canada if these countries do not do more to control border security, and an additional 10% on imports of Chinese origin. The president-elect also warned of future tariff increases to the European Union if it does not buy more American gas and oil. In response to these threats, their partners open themselves to negotiations while preparing possible retaliation, weighing potential losses in a kind of already seen where the rhetoric of trade wars and economic protectionism once again set the pace of international relations.
Now the eyes of the world are focused on January 20, the day Trump will assume his second term as president of the United States and begin to implement his agenda. America First. However, uncertainty will not dissipate overnight and all scenarios must be considered, especially for Mexico, from possible trade interruptions to a harsh review of the USMCA before 2026, affecting different industries and economic sectors on both sides of the border. the border. Thus, a new tariff escalation with its partners or even a larger-scale trade war is not ruled out.
In addition to the inflationary risk that these types of measures pose for domestic economies, they could aggravate commercial fragmentation between countries and, in the worst case, cause a global recession, as indicated by the International Monetary Fund (IMF), causing a 7% decline in long-term global economic output. It is interesting to contrast the impact that trade restrictions have had in the past. For example, a study published by the Council of Foreign Relations confirms that the economic damage caused by the tariffs that Trump imposed on China in his previous administration was “extensive, significant and counterproductive” for the United States.
And in Latin America, what can we expect? Without a doubt, a deepening of protectionism would affect the countries of the region differently, which largely depend on their exports to the United States and China (42% and 15%, respectively). At the intraregional level, there are large disparities in flows: while Mexico and Central America are very focused on the US market, countries like Chile and Peru depend heavily on their trade with China.
In an interesting article published by the Bank of Spain in 2023, the degree of exposure that Latin America would have to the risk of geopolitical fragmentation of global trade is analyzed. The authors use a model based on trade in goods that evaluates the impact on each country in the region based on two hypothetical cases: if trade ties with the United States or with China are cut. For example, if Mexico stopped trading with the United States, its total exports would be reduced by 60%, slightly offset by demand from third countries. On the other hand, in South America, the greatest losses would be experienced if trade with China were stopped, with the exception of Colombia and Ecuador. A trade break in one direction or another, conditioned by the policies of the White House, could be complex for Latin American economies.
Regardless of the degree of exposure that countries have to the “Western” or “Eastern” trading bloc, it is clear that the countries that can suffer the most are those most open to international trade. In this sense, Mexico is a paradigmatic case: more than 80% of non-oil exports are destined for the United States. The imposition of tariffs can reduce the competitiveness of the Mexican economy, harm the integration of supply chains and force the country to undergo costly diversification to sell to other countries.
However, some lights illuminate this gloomy picture. Let us remember that Mexico had the opportunity in 2023 to surpass China as the United States’ first trading partner, in part, thanks to the trade war that Trump unleashed. To avoid tariffs, many companies moved their production to the country, promoting the so-called nearshoring. This means that a trade war with China can benefit Mexico, or, put another way, that Trump needs his southern partner to continue reducing his trade deficit.
It is likely that, in order to reduce China’s economic influence in the United States without directly affecting economic growth, Trump will focus on some specific industries or measures, such as modifying the so-called rules of origin – the minimum percentages of components and raw materials. coming from North American suppliers. Or that tariff threats are only intended to pressure its partners on specific policies. Faced with any of these scenarios, Mexico and Latin America need to prepare to take measures and negotiate in a new year marked by economic uncertainty and aggressive rhetoric.
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*Horacio Arredondo is dean of EGADE Business School
The opinions expressed are solely the responsibility of their authors and are completely independent of the position and editorial line of Forbes Mexico.
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