As executives create different scenarios for business performance in 2017, understanding the potential currency volatility stemming from the outcome of the US presidential election will be key. Another set of assumptions relates to the evolution of import and export tariffs and to the ease of integrating global supply chains.
As part of FSG’s series on the impact of the US presidential election on emerging markets, this post will focus on the impact to trade in Latin America. The most important point for executives to note is that, regardless of the winner between Clinton and Trump, the United States will undoubtedly adopt a more protectionist stance on trade, which will create worldwide repercussions. The question will be whether trade deals slow, stall or reverse depending on the winning candidate. Both candidates have proposed trade policies that depart from the status quo, which will be carefully discussed.
The medium- to long-term impact of the election on trade policy will depend, in large part, not only on the winner of the presidential election but also on the composition of Congress, which will face voting on two pending deals, the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). We do not believe that efforts by the Obama administration to pass TPP during the lame duck session will be successful.
Despite endorsing TPP while secretary of state, Clinton has more recently gone on record opposing the deal, which aims to deepen economic ties, reduce tariffs and quotas, and foster trade among 12 nations that already altogether compose an annual GDP of nearly $28 trillion, representing roughly 40% of global GDP and 1/3 of world trade.
Clinton’s trade policy agenda will be more protectionist, but is somewhat unclear
In the case of a Clinton victory, it is most likely that the Republican Party will continue to hold congressional majority, which means that, as president, she will have difficulty passing and implementing her policy agenda. That said, although Clinton has sent mixed messages about her trade agenda, particularly around issues like TPP, her stance is certainly more protectionist than President Obama’s trade policy and will, thus, change the current trade landscape.
What we do know about Clinton’s trade policy is her focus on the enforcement of existing trade laws, support for strict labor standards, concern surrounding currency manipulations by countries aiming to gain trade competitiveness, and calls for changes in the tax code to discourage the offshoring of jobs and corporate inversions (her intention is to “claw back” revenue losses from this practice to support the US manufacturing sector). Clinton has said, “I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership. I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president.”
Without the support of the US by February 2018 (the deal needs to be ratified by at least six countries that account for 85% of the group’s economic output), the current TPP deal with be terminated. This means that countries in LATAM such as Mexico, Chile and Peru, which would have benefitted from improved trade relations and lower trade barriers with the other signatories, will have to resort to an alternative approach for a new Pacific trade deal while reeling from weaker alliances with the US.
“TPP+”: a slim possibility under Clinton
Nonetheless, on the issue of TPP and Clinton’s trade policy on the whole, some experts have speculated that Clinton could essentially reverse her stance and return to her earlier pro-TPP position, a practice that would not be entirely surprising among presidential candidates. For instance, President Bill Clinton opposed NAFTA while running for office and then supported its passage once having negotiated additional side deals that included provisions on labor, environmental and safety measures. Hence, although Hillary Clinton claims to oppose TPP “in its current form,” the possibility remains that she could soften her stance once in office.
Under Trump, trade “mega-deals” would be dead in the water
On the other hand, evaluating Trump’s prospective trade policy is not as clear as evaluating Clinton’s, as the uncertainty that surrounds Trump carries over into his trade agenda and ability to enact proposals. In the case of a Trump victory, FSG anticipates that the Republican Party will continue to hold on to Congressional majority and be supportive of Trump’s policy agenda. Alternatively, a more conservative Republican Congress could serve as a check on Trump’s actions and challenge some of his policies.
Considering FSG’s more likely scenario for Trump, his victory would result in a generally uneasy environment prevailing for global trade, with deals like TPP and TTPP declared dead in the water as congressional Republicans eschew any further movement on these trade agreements, increase barriers to trade, and take a hard line on Chinese investments and trade policies elsewhere.
However, it is still very unclear whether Trump would actually choose to pursue some or all of his proposed policies due to pressures he will face from interest groups that would be directly impacted. For instance, his trade policies would affect the deeply interconnected industries that rely on the consistent importing and exporting with the US in order to generate a finished product. Trump could certainly conclude trade deals, but they would likely be bilateral, case-by-case, rather than the larger regional deals such as TPP and TTIP, that are as much about international rule-setting as they are about tariff reduction.
Trump can “rip up” NAFTA – but would he?
Most importantly, multinationals should understand that which Trump is entitled to do, and how much he could legally execute on his own. Although it is possible that his threats are no more than ploys to secure concessions from US trade partners or to induce MNCs to increase investments in the US, he is legally permitted to unilaterally implement several of his proposed policies for up to several years before courts rule on the matters. Trump’s most contentious electoral promises include the imposition of a 35% and 45% tariff on imports from Mexico and China, respectively, to renegotiate or even repeal North America Free Trade Agreement (NAFTA), to “rip up” existing trade agreements, and to even pull out of the World Trade Organization (the core framework for the US to trade with 163 other countries).
The overarching question regarding a potential President Trump is whether he would have the power to unilaterally carry out his threats. The short answer, technically, is yes, at least in the short-term. In the US, not only is the president granted constitutional power over foreign affairs, but Congress in recent decades has enacted several statutes that authorize the president to regulate foreign commerce (which includes imposing tariffs or quotas on imports).
For instance, under Section 201 of the NAFTA Implementation Act of 1993, the president has the power to proclaim return to most-favored nation (MFN) tariffs on imports from Canada and Mexico (the US would revert to WTO duties, including 38.4% on agricultural goods, and 7.7% on industrials), and to proclaim modifications or the imposition of additional duties “as necessary or appropriate” following consultations with, but not necessarily approval from, Congress. Additionally, Chapter 22 states that the president also has the power to withdraw from NAFTA so long as he provides 6 months’ notice to the other parties. During this period, a new agreement can be negotiated, although the agreement in place would expire within the 6-month window unless replaced by a new one.
Targeted trade sanctions could be a frequent Trump foreign policy, too
Moreover, President Trump would have other legal basis for implementing his trade agenda, including the imposition of tariffs or otherwise restriction of imports from Mexico, China, or other countries, without necessarily pulling out of the WTO. The Peterson Institute for International Economics outlines in its analysis that, under Section 232(b) of the Trade Expansion Act of 1962, given the adverse impact on national security of the importation of an article, the president has power to impose tariffs or quotas as needed and without limit; under Section 122 of the Trade Act of 1974, given a large and serious US balance of payments deficit, the president can impose tariffs up to 15%, or quantitative restrictions, or both, for up to 150 days against one or more countries with large BOP surpluses; and, under Section 301 of the Trade Act of 1974, if a foreign country denies the US its FTA rights or carries out practices that are unjustifiable, unreasonable, or discriminatory (e.g., a manipulated or under-valued exchange rate, market access barriers, or anything that burdens US exports, which is Trump’s argument against China), the president can institute retaliatory actions, at his or her discretion, including tariffs and quotas. Lastly, under the Trading with the Enemy Act of 1917, the president has power during time of war or in event of a national emergency (the definition of which is relatively fluid), to impose tariffs or other such trade barriers.
In the long-term, Trump would certainly face court challenges by US firms and parties that could claim he exercised powers and invoked statues in a way never intended by the Constitution or by Congress. However, any effort to block or revert Trump’s actions through the courts or even through Congressional decree would prove difficult and timely, for these cases could easily last several years. Historically, Presidents Roosevelt and Nixon have both invoked some of the aforementioned acts to regulate foreign commerce, thus creating precedent and seemingly giving Trump the freedom to do the same, including imposing tariffs at rates and on imports of his choosing.
If President Trump were to withdraw from trade agreements or impose his trade restrictions, US trade partners would retaliate, leading to economic damage and potentially an international trade war. His protectionist and isolationist trade proposals are reminiscent of the Smoot-Hawley Tariff Act, passed under President Hoover in 1930, which raised tariffs across the board with every US trading partner. These trade partners retaliated by imposing tariffs and taxes on US goods, thus sparking a global trade war and arguably contributing to the considerable magnitude of the Great Depression.
According to an analysis by the IMF that examined protectionism and higher tariffs at a global level, the higher cost of traded goods would lower global output by almost 1.75% after 5 years and by almost 2% in the long run, while global consumption, investment, and trade would decline, with imports and exports down by 15% after 5 years, and 16% in the long run. Not only would global growth plummet, but the global economy would be in danger of a serious recession. Although Trump has thus far only proposed sharp tariff hikes with Mexico and China, these two countries are among the US’s top trading partners, thus magnifying the significant impact of Trump’s trade proposals.
Implications for LATAM
Regardless of the winning candidate, there will be global tailwinds stemming from increasingly protectionist policy changes in the United States. While some sources warn that a Trump victory could lower global GDP growth by around 0.7-0.8%, pushing the global economy into a recession, others predict that his policies would spark a global trade war. Since the passage of NAFTA in 1993, US trade with Mexico has risen more than six-fold, making Mexico America’s second-largest export partner while making the US Mexico’s largest. Thus, a Trump victory would arguably hit Mexico the hardest in terms of trade, and some economists are actually predicting the event could knock 5% points off Mexico’s GDP.
However, countries like Peru and Chile would also be affected with the delay or even disavowal from the TPP, which would also have implications on the economies of those countries. Considering the impact on Latin America as a whole, the US has signed free trade agreements with 20 countries, meaning that these trade agreements would all be in jeopardy under a Trump presidency. These countries would have to turn to their other current trade partners in order to support their economies; for instance, Mexico currently has FTAs with 46 countries, which presents opportunities to deepen these existing relations.
Not all LATAM markets would be equally impacted by changes to trade relations with the US. In particular, Mexico is the market with greatest exposure to the US in terms of exports, followed by Ecuador and Venezuela. As such, multinationals operating in these markets should more closely and carefully consider the long-term impact to their businesses.
Actions to take
Global trade relations will inevitably change under either President Clinton or President Trump. In response, it will be critical for multinationals to not just prepare contingency plans in the event of either candidate’s victory, but to more carefully consider long-term consequences on business of the candidates’ trade agendas. For instance, MNCs may need to reconsider their operating footprint in Latin America if there are increased incentives to produce in the US, or evaluate their pricing strategies as changes arise in the competitiveness of imported products in the region. Depending on incentives offered in the US and the impact of trade policy on the attractiveness of doing business in emerging markets, regional executives may be faced with the need to make case for Latin America by reassessing their addressable market in the region, identifying resilient pockets of opportunity, and shifting the focus to slower but more profitable growth in emerging markets.