Andrés Velasco
Andrés Velasco, a former presidential
candidate and finance minister of Chile, is Professor of Professional
Practice in International Development at Columbia University's School of
International and Public Affairs. He has taught at Harvard University
and New York University, and is the author of num… read more
SANTIAGO
– Donald Trump reached the White House by bringing out the worst in the
United States’ electorate. Will his administration now bring on the
worst – both economically and politically – for Latin Americans?
The initial signs are nothing if not ominous. Not since the days of gunboat diplomacy a century ago has a yanqui
leader treated the countries south of the US border and their citizens
so badly. Trump infamously branded Mexican migrants rapists and
murderers. Guatemalans, Ecuadoreans, and Colombians, though not
explicitly mentioned, did not feel particularly reassured.
With
US participation in the 12-country Trans-Pacific Partnership (TPP) dead
in the water, the next question is whether Trump will make good on his
vow to renegotiate the rules governing the North American Free Trade
Area, or even to pull out of NAFTA altogether. Trade agreements with
Central America, Colombia, Chile, and Peru could also be at risk.
No
one (perhaps not even Trump) knows what the new administration will do
in this regard. A US president can renounce these pacts unilaterally.
But the volumes and volumes of implementing legislation were
enacted by Congress, and can be modified only by a congressional vote.
The US economy (and businesses) would not benefit from an overnight and
wholesale abandonment of the rules governing not only trade in goods and
services, but also investment, intellectual property, and government
procurement across much of the Western Hemisphere. The Republicans may
no longer be the party of free trade, but it is hard to imagine a
Republican-controlled Congress willingly jumping off that cliff.
For
Mexico and the Caribbean basin, trade with the US is crucial. For the
countries of South America, which trade as much or more with Asia –
especially China – and the European Union, macroeconomics and finance
are far more important.
The
expectation of a surge in infrastructure spending in the US under Trump
has caused a number of commodity prices to soar (overall uncertainty
has also sent investors packing into metals such as gold and copper,
which function as safe-haven assets). So, in the short run, mineral
exporters like Peru and Chile are benefiting. But the run-up in prices
may turn out to be short-lived, especially if Chinese growth continues
to slow.
If
Trump does half of what he has promised, cutting taxes on the rich and
increasing defense and infrastructure spending, the US will run a much
more expansionary fiscal policy. The resulting boost to aggregate demand
would then buttress the case for the Federal Reserve to raise
short-term interest rates faster than it had been planning to do. But,
while such a change in the fiscal-monetary mix might be beneficial for
the US in the short term, it would create new challenges for Latin
America’s emerging economies.
Tighter
money and a looser fiscal stance in the US almost surely would mean a
stronger dollar. That is bad news for governments and companies south of
the border. Yes, more prudent policies and better regulatory frameworks
have allowed local-currency bond markets to flourish in recent years.
But in Latin America, much of public and especially private debt remains
dollar-denominated, which limits how much central banks can allow
currencies to depreciate in response to higher US interest rates.
A
decade ago, economists were optimistic that flexible exchange rates
would allow emerging markets to insulate their economies from
monetary-policy shocks coming from the developed countries. Floating is
still the best alternative, but today the overall assessment is much
less sanguine. Not only is such flexibility de facto limited by
dollar debts; US monetary conditions, it seems, are transmitted to other
countries quite independently of their exchange-rate regimes.
London Business School’s Hélène Rey has argued that US monetary-policy shocks affect risk premia,
and that this channel operates internationally as well as domestically.
This “risk-taking” channel of monetary policy is so powerful
internationally that when the Fed loosens policy, credit grows all over
the world, and vice versa. So if higher interest rates in the US went
hand in hand with higher premia and a reduced appetite for risk among
investors, Latin America could find itself under financial stress.
This brings us to the broader question: how will Trump affect perceptions of risk worldwide?
Larry Summers and other thoughtful observers have long argued
that the US could use more investment in roads, bridges, and ports, and
that at today’s record-low long-term interest rates, such investments
would pay for themselves. Trump is adding to that recipe massive tax
cuts for the wealthy. The much larger deficits and debts (add several
portions of nationalist rhetoric and a generous helping of
foreign-policy inexperience to the mix) could easily prompt a surge in
risk aversion and a sizeable increase in long-term interest rates –
which would undermine much of the rationale behind self-financing
infrastructure investments.
No
one wants to live in a more uncertain world – least of all people in
the still-vulnerable countries of Central and South America. Those
vulnerabilities are political as well as economic. Just when recent
electoral results in Argentina, Peru, and Venezuela, coupled with term
limits for incumbents in Bolivia and Ecuador, suggested that South
America was reaching the end of a cycle of left-wing populism, the US –
and much of Europe – seems to be entering a cycle of right-wing
populism.
There
is no shortage of Latin American demagogues who will likely try to
emulate Trump’s campaign. The lesson will not be lost on them that no
statement is so outrageous that the news media will not cover it, and
that the benefits of increased attention outweigh the political costs of
the outrage. Just as in the US and Europe, immigration – not from
Muslim countries, but from neighboring states – could provide a
convenient lightning rod. So could nationalism: there is a certain
poetic symmetry at work when local left-wing activists complain about
threats to national self-determination – just as Trump did – in arguing
against the TPP and other trade agreements.
For
Latin America, a return to the facile rhetoric and self-defeating
policies of populism would be the most dangerous side effect of Trump’s
victory. One can only hope that, during his presidency, Trump plays as
fast and loose with his campaign promises as he did with the truth
during the campaign.
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