By Margaret Myers, Director of the Asia and Latin America Program at the Inter-American Dialogue
The U.S.-China trade war has so far had disparate effects on the Latin American economic landscape. Soybean traders in Brazil have benefitted from growing Chinese demand for Latin America soy, for example, in addition to a relatively weak Brazilian currency, which makes Brazilian imports comparatively inexpensive for Chinese buyers.
In other cases, new tariffs have prompted international companies to relocate their production to the region. China’s Fuling Global, Inc. has reportedly moved its manufacturing to Nuevo León, Mexico to export paper products across the border to the U.S. market. U.S. companies, such as GoPro, are also planning to move their production to Mexico. And U.S. snowmobile maker, Polaris, which relies heavily on imports of wire harnesses, stampings, and castings from China, has suggested it will do the same in the near future to save on labor costs.
However, as the U.S.-China trade war escalates, with both sides announcing hikes in tariffs this month on an estimated $260 billion in goods, Latin Americans are mostly bracing for economic impact.
A protracted trade war is expected to have lasting effects on the region’s economies. The IMF estimates slowing global growth in 2019, including in third markets, based on large part U.S.-China trade tensions. Ongoing economic uncertainty could also weaken Latin American currencies if populations there invest in U.S. dollars to avoid the effects of local currency devaluation.
Consumers will also be impacted by the decoupling of the tech sector, which features prominently in broader U.S.-China competition. This month, the U.S. effectively banned its companies from selling products or services to Huawei and several other tech companies, based on a belief that Chinese firms allow the country’s government to install backdoors into their systems, posing a threat to buyers’ national security.
Although the ban could cripple many parts of Huawei’s business, China also has considerable leverage as the U.S.’ main supplier of rare earths, a critical component in telecommunications hardware that is so far exempted from tariffs. Continued decoupling will be painful both for suppliers in the U.S., China, and other regions and for consumers of mobile and other products, who will see prices rise for popular tech goods.
Of broader concern is ongoing U.S. pressure on Latin American governments to avoid doing business with Chinese companies, whether in the tech or infrastructure development. Whoever the partner, Latin American nations must approach major financing agreements and construction or procurement contracts judiciously. But the region’s governments could also lose out on key deals and opportunities as the U.S. and China vie for space in Latin America’s most strategic economic sectors.
The silver lining for Latin America is fairly thin, all said. Some in the region are bound benefit from the ongoing U.S.-China trade war, whether as alternative suppliers of primary commodities to China or as U.S. and Chinese companies relocate their production to Latin America to reduce costs. Latin American and other firms might also benefit from U.S. efforts to “even the playing field” for international companies, whether in China or other markets.
But Latin American consumers will face higher costs for a range of popular goods, and the prospects for considerably more Latin American participation in affected U.S. or Chinese supply chains are relatively limited. In the short-term, at least, Latin America is a viable alternative supplier of mostly low-value-added goods to China and the U.S.. Higher costs for technological inputs will also limit the region’s own efforts to boost innovation and competitiveness. If tensions persist, the overall effect on the region’s economies and consumers won’t be a particularly positive one.