This final report in FSG’s series on the impact of the US presidential election on emerging markets will focus on the effects of certain US foreign and domestic policies as they pertain specifically to Latin America.
With regards to foreign policy, Hillary Clinton has vowed to preserve and strengthen key US alliances around the world, namely NATO, urging cooperation and vowing to invest in partnerships in Latin America. On the other hand, Trump has advocated for a more transactional, quid pro quo stance on foreign policy that he has termed America First, in which he could destabilize US alliances by pulling out of NATO and reducing US security guarantees to key allies. We will examine the stance of each candidate on key foreign and domestic issues, and consider implications to Latin America.
Clinton has praised President Obama’s efforts to normalize diplomatic relations with Cuba, supporting his policies and calling for an end to the trade embargo with the island nation. FSG expects Congress to vote on the Cuban embargo as early as 2017, although discussions about the lift of the embargo will likely be postponed until 2018, particularly if the Republican Party continues to hold congressional majority.
Trump’s message on Cuba has been more mixed, from initially supporting President Obama’s executive order to reengage, to more recently vowing to reverse these diplomatic relations with the island nation.
China policy: affects LATAM via demand for commodities
Clinton has expressed her intent on increasing cooperation and the cultivation of trust with China, while taking a stronger stance against the country’s trade practices given the competitive disadvantages, such as the undervaluing of Chinese exports.
On the other hand, Trump’s pledges against China, particularly in terms of trade, could place downward pressure on the country’s economy, which has already been slowing in recent years. Not only would a US trade war with China hurt the US economy, which would have trickle down effects on LATAM economies, but the pressures on Chinese economic growth could have an overall impact on commodity demand on global prices.
Iran policy: affects LATAM via oil prices
Clinton has offered cautious support for upholding the Iran deal, which lifted some of the multinational sanctions on the country so long as it complies with its promise to stop its nuclear program, but is willing to reintroduce sanctions unilaterally for any violation.
Trump has been more outspoken than Clinton with regards to Iran, vowing to dismantle the nuclear deal, which could be met with a surge in oil output as a form of retaliation. Iran’s oil minister has expressed the country is ready to increase its supply, thus maintaining downward pressure on global oil prices and hurting oil exporters in Latin America, particularly Mexico and Venezuela, and to a lesser extent Colombia and Ecuador. Additionally, Brazil could feel the effects through lower investment into the country’s deep-water oil projects.
Clinton: infrastructure lending more likely than infrastructure spending
Clinton has pledged to increase federal spending in several areas: $275 billion on infrastructure, $500 billion on higher education, $100 billion in energy and research, and $25 billion on housing. Her proposed increase in infrastructure investment in the US over the next five years focuses on upgrades to roads, airports, schools, bridges, and public transit systems, while also opening an infrastructure bank to attract private capital for public works.
While congressional Republicans are broadly supportive of federal infrastructure investment in order to drive economic growth, contention is likely to arise when discussing the sources of funding for the $275 billion plan, which has been the case during Obama’s presidency. While Clinton is planning to fund her infrastructure plan by raising tax revenue, Republicans are likely to push back thus delaying the pace of implementation of her infrastructure program. The debate on the source of financing of infrastructure investments is one on which the Republican and Democratic parties have traditionally disagreed, and it is likely that the debate will persist if Republicans retain control of Congress. On the other hand, should Clinton have a Democratic-controlled Congress that supports her tax reform program, it is more likely that her infrastructure plan may be implemented in her first 100 days in office, as she has promised.
Trump: huge infrastructure spending
Trump agrees with Clinton with regards to an increase in infrastructure spending in the hundreds of billions; however, where his plan differs is the source of the funding. Trump has proposed a massive, albeit vague, plan that costs “at least double” that of Clinton’s $275 billion, and pledged to encourage companies to invest in the US by lowering taxes and removing regulations for doing business in order to achieve 3.5% GDP growth over 10 years. His plan, like Clinton’s, is likely to face challenges in Congress, as the government tries to find sources of funding for infrastructure spending, particularly alongside Trump’s pledge to lower taxes. There is ample precedent for a Republican-controlled Congress to approve broadly-popular new spending programs proposed by a Republican president, even without commensurate revenue increases.
Implications for Latin America
Under President Clinton, the US would maintain President Obama’s stance with regards to many of its foreign policy relations. However, given the high likelihood that Republicans retain control of Congress, it is unlikely that the Cuban Embargo will be lifted, at least until the 2018 midterm elections. On the other hand, President Trump would upend the status quo on US foreign relations, instituting a more transactional approach where the US would need to see direct benefits of its engagement with other nations. Depending on how relations unfold with the Middle East, it is possible to see significant oil price volatility, which could affect oil-exporting countries in Latin America, while a hard stance on US relations with China could place downward pressure on global commodity prices.
Both Clinton and Trump’s infrastructure investment plans present opportunities for cement and metals producers in Latin America, as increased investment in US manufacturing, technology and renewable energy would raise US demand for commodities such as copper and cement from Latin America. For instance, Mexican Industrias Penoles, which exports 73% of its products to the US, and Cemex, whose biggest market is the US, have both seen substantial growth in returns this year directly correlated with growth in the US. If either candidate is able to successfully pass his or her infrastructure plan through Congress, the ensuing construction and growth in the US would continue to benefit suppliers of materials to the US.
Actions to take
As multinationals look to the medium- to long-term impact that the next US president’s agenda could have on their business, it will be important to monitor changes to US alliances and to the Congressional approval of public infrastructure development. MNCs will need to address their exposure to markets that would be most vulnerable to changes in US security guarantees, and prepare contingency plans in the event of drastic changes to global commodity prices.