Image Source: BBC News.
Introduction
This report seeks to analyze the potential impact on Latin America of the economic policies likely to be pursued by Donald Trump’s incoming administration.
The report is an update of a piece we put out in early October (https://globalamericans.org/the-economic-implications-of-donald-trumps-and-kamala-harris-economic-policies-on-latin-america/) on the economic platforms of the U.S. presidential candidates. It is based on the Trump campaign’s web page and on numerous public comments made by Trump and others during the campaign that enable us to draw an outline of his policy stance. In our opinion, Trump’s platform will not be favorable to the U.S. economy, and by extension, the regional economies of LatAm. The main characteristics are support for protectionist policies and scant attention, if any, to the serious fiscal challenges facing the U.S. The approach could lead to potentially negative consequences for LatAm trade, economic growth, inflation and the dollar. Immigration policies and trade protectionism represent the areas that could have the most negative economic effects on the region.
1. International Economic and Foreign Policy: Key Differences
Trade Policy
The scope for any new free trade agreements is completely absent from today’s U.S. economic policy agendas, implying that trade competitiveness in the LatAm region will only continue to stagnate.
Trump leans towards protectionist measures, with negative consequences for the region’s exports. Trump has been vocal on tariffs, as these represent the corner stone of his economic platform. During Trump’s prior administration, import tariffs were raised across many countries, targeting China in particular. His campaign for a second term has stated that these tariffs would not only remain in place but would also be increased. He has stated that he will set them at an average rate of 20 percent, but at times he has spoken of 60 percent tariffs on Chinese imports. He has also said that he would raise tariffs on autos from Mexico and the EU and has called for a 10 percent universal tariff on all imports. Although much of the rhetoric may prove a negotiating stance, if implemented, these policies would have serious implications for the LatAm economies, especially those that are more open and that rely on exports to the U.S. Notably, unilateral tariffs could undermine and even breach existing free trade agreements (FTAs). For example, Trump has threatened to impose 200 percent tariffs on products of Chinese companies setting up shop in Mexico to export to the U.S.
The impact of trade protectionism on Latin America:
- Higher tariffs would likely slow growth and increase inflation in the U.S. In varying degrees, this would spill on to LatAm inflation and activity. Even so, increased tariffs on Chinese exports may offer up opportunities for LatAm countries to increase their exports to the U.S. For example, Mexico has seen its share of manufacturing exports rise in the U.S. as the Chinese share has declined.
- Importantly, increased U.S. tariffs could undermine existing free trade agreements such as the USMCA, and the bilateral accords with Chile, Colombia, and Peru. This would not only damage the image of the U.S. as a reliable trading partner, but also lead to lower trade volumes and higher costs for businesses operating under these agreements. LatAm countries may respond with retaliatory tariffs and/or seek dispute resolutions through mechanisms established in the FTAs, such as international arbitration, or the WTO. This would escalate trade tensions, legal frictions, and lead to a deterioration in bilateral relations.
- Countries may even push for renegotiations within existing FTAs to mitigate the impact of U.S. tariffs, potentially leading to more stringent rules of origin or greater market access demands.
- Increased tariffs would particularly harm sectors like agriculture, textiles, and the automotive industries in countries such as Mexico, which rely heavily on exports to the U.S. under FTAs. In the case of Mexico, there is a mandated review of the USMCA in 2026, and any additional tariffs would have important implications for that review. (Trump already renegotiated parts of the USMCA (or NAFTA) during his first time in office).
- Finally, there is the question of imports of critical materials such as lithium, copper and manganese, all of which are exported to the U.S. and have been part of U.S. efforts to move supply chains away from China and advance electrification. Argentina has been a large source of U.S. lithium, but the country has no FTA with the U.S. Would a Trump administration place tariffs on critical materials?
Immigration Policies
Trump’s plan for mass deportations could lead to stagflationary pressures in the U.S. by shrinking the labor force – particularly in sectors where immigrant labor plays a critical role – and wage inflation as labor becomes scarcer. The implementation of a program of deportation of possibly millions of undocumented migrants would pose significant legal, logistical and ethical challenges.
Beyond the domestic political and economic consequences, the return of masses of migrants would severely disrupt LatAm economies, particularly those of Mexico, Central America, and the Caribbean, as these economies struggle to absorb waves of returning migrants and as remittances from the U.S., which represent a major economic driver for some of the regional economies, dry up. (In 2023, remittances made up 4.2 percent of Mexico’s GDP, with over $63 billion USD being sent from abroad, primarily from the U.S. This represents a vital source of income for millions of families and supports domestic consumption. In other cases, such as Honduras, remittances from the U.S. accounted for an astounding 28 percent of GDP in 2023.) Returning migrants would flood labor markets, creating stress and market dislocations. Reduced remittance flows would constrain household consumption and investment in LatAm. It is possible that countries such as Mexico would respond by lowering cooperation with the U.S. in the war on drugs and retaliate with trade tariffs of their own.
Mass deportations and strict immigration controls risk straining U.S.-Latin American diplomatic relations, as they may be seen as undermining regional social and economic stability. Even right-leaning governments, like Argentina’s, may struggle to support such policies, especially given concerns around humanitarian treatment of migrants. This could lead Latin American countries to assert greater autonomy, scaling back cooperation on key issues like anti-narcotics and regional security, ultimately weakening the collaborative frameworks that have historically underpinned U.S.-Latin American relations.
- Implementation will depend on whether the new Trump administration would have control of both Congressional chambers or whether there is a divided legislature. With full control of Congress, immigration policy under a new Trump administration would clearly be more draconian. (As of this writing, the Republicans had captured control of the Senate, but several dozen House races remained to be called so that both parties fell short of the 218 necessary for control of that chamber.)
Currency Policy
Trump has said he favors a weaker dollar, potentially reversing the strong-dollar policy which for decades has been a feature of U.S. economic policy. While short of interfering with the independence of the Federal Reserve, it is difficult to see how his administration would engineer a concerted weakening of the U.S. dollar. A more likely scenario is that the markets grow concerned with the large expected fiscal deficits which would likely follow the tax cuts his platform predicates. This could help accelerate the loss of status of the U.S. dollar as the global reserve currency of choice. (Trump has threatened to penalize any country that tries to de-dollarize with 100 percent tariffs.)
A weaker dollar under Trump would have mixed implications for LatAm economies: it may help control inflation in the region and reduce the cost of servicing the U.S. dollar-denominated debt of countries and the private sector but would also reduce the value of the region’s exports. Perhaps more important, it would dampen commodity prices, on which many LatAm economies depend. But the bottom line is that the Trump administration will have very limited direct influence on the currency markets.
2. Domestic Economic Policies and Their External Implications
Fiscal and Tax Policies
Trump is expected to maintain relatively expansionary fiscal policies. Much will depend on whether the incoming administration is working with a divided Congress or there is single-party (Republican) control of Congress. The largest looming fiscal issue is the expiration in 2025 of the individual tax cuts enacted by Trump in 2017. Trump has stated that his new administration would likely renew all the tax cuts. Besides this, Trump’s platform features many other fiscal proposals, all of them involving tax cuts of one form or another, which essentially are expansionary for the economy in the near term, but fiscally negative.
With the U.S. budget deficit now at 7 percent of GDP, significantly loose fiscal policies are likely to be inflationary, ultimately requiring an offset in the form of a tightening of monetary policy, which in turn would eliminate the short-term benefits of stronger growth. The impact of Trump’s fiscal and tax policies on the LatAm economies is mixed and, in the end, probably not large. Economic activity in the region would initially benefit from a loose U.S. fiscal policy, but ultimately this would lead to higher U.S. interest rates, which would be negative for LatAm growth and financing.
Industrial Policy
Trump is expected to continue pursuing industrial policies that prioritize U.S. economic self-sufficiency. Trump’s focus is on fossil fuels and not on green energy, reflecting his broader view on climate and energy issues. His emphasis on fossil fuels would benefit LatAm oil exporters such as Colombia, and Venezuela, but at the expense of longer-term sustainability goals.
Conclusion
The economic platform of President-Elect Donald Trump presents challenges for Latin America, with differing implications depending on the country and the sector. Key to the feasibility of all the promises and threats from both sides will be the composition of Congress. The Senate will now be controlled by the Republican party, but the race for the House is still undecided. Trade tariffs on U.S. imports and the implications of harsh measures on immigration appear to be the areas that are likely to have the biggest influence on the LatAm economies, especially if plans for mass deportations are enacted. Ongoing loose fiscal policy, tax, industrial and dollar policies may lead to reduced growth, higher inflation, and increased economic volatility across the region, but are likely to have much less of an impact. The incoming Trump administration will likely increase these risks.
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