As Donald Trump starts his second term, his administration’s robust approach to Latin America raises concerns about the economic impact of his latest policies.
His new policies, which includes trade tariffs and efforts to regain geopolitical dominance, may have negative effects on the US and its southern neighbours.
According to Alejandro Grisanti, an economist and head of Ecoanalitica, based in the Dominican Republic, these new policies are uncertain.
“Ultimately we still don’t know Trump’s true intentions toward Latin America”, he said.
“We believe he has a vision to negotiate, as abrupt as it may appear, and that his purpose is to make deals with the countries in the region”, he added.
US-China competition in Latin America
Speaking to Ivezz, the expert explained the complicated economic realities in Latin America, as well as current US policy against China, to better understand the brewing conflict.
The US is taking an aggressive trade approach apparently to discourage Latin American corporations from doing business with Chinese companies.
However, the outcome will vary per country.
Venezuela, for instance, may align further with China, while El Salvador and Argentina may be more inclined to the Trump administration.
In any of these scenarios, Grisanti predicts a “war between two commercial giants” in the region, reflecting the economic goals of both the US and China.
He also provided a nuanced and country-agnostic approach to the current global challenges.
He highlighted the changes in Panama Canal operations, including renegotiated contracts with Chinese enterprises.
Grisanti stressed China’s engagement in Latin America, stating that the rivalry will prompt varied responses based on each country’s political and economic objectives.
Tariffs as economic leverage
Trump’s intention to use tariffs against Latin American countries that refuse to accept deported migrants is particularly concerning.
The idea is to apply economic pressure and force cooperation on immigration.
But the fallout from those tariffs could be devastating.
Also, tariffs could bring trade wars and higher costs for American companies, which means higher prices for American consumers.
Trump recently threatened tariffs against both Mexico and Colombia.
Although both countries were able to effectively negotiate and avert a tariff war for the time being, looming threats remain a source of anxiety for any country in the region that does not cooperate with the US administration’s demands.
Tariff threats are not isolated events. Retaliatory tariffs may harm US exports if other countries oppose the policies.
These actions may deepen economic dependence.
An increase in trade barriers would slow growth, create disruptions in supply chains and possibly lead to even higher inflation in the U.S. economy.
According to Grisanti, one of the most significant economic consequences on Latin America will come from increased tariffs and trade restrictions enforced by the US.
He said that these actions might put significant pressure on inflation and prices, resulting in unexpectedly high inflation levels in the United States, with core inflation rising to 3.3% when a closing rate of 3.1% was forecasted.
As a result, Grisanti predicted the Federal Reserve would be less inclined to cut interest rates, with the possibility of rate hikes to battle inflation.
He added that the Federal Reserve’s decision not to decrease, or potentially raise, interest rates would likely strengthen the US currency.
This scenario would contribute to the ongoing devaluation of currencies throughout Latin America and ultimately put more pressure on the weakest economies of the region.
Panama Canal and goods trade lines
One of Trump’s prominent threats has been the retaking of the Panama Canal.
Most of the region’s governments responded to these statements with both rejection and astonishment.
When Trump made his inflammatory comments about the Panama Canal, it was more than just an ancient claim; it was a possible disruption of key arteries for trade.
Rumblings of a return of this key chokepoint are likely to provoke the ire of Panama and other regional players, potentially jeopardizing decades-old trade treaties and maritime security.
If the Panama Canal were destabilized, the result would be higher costs and delays in shipping that would impact global supply chains.
This situation may raise the cost of transportation for US businesses that are dependent on such routes for their imports and exports.
According to political analyst, Pablo Quintero, this statements from Donald Trump, regarding the Panama Canal are “expansionists” and might trigger an economic war.
“This is a situation that will likely bring tension and economic hurdles but might also trigger more Chinesse participation in the region”, he said.
For Quintero, Trump’s declarations are contrary to the established by the international law and treaties like the Torrijos-Carter.
He emphasized that the new foreign policy toward Latin America is a “smart power” one that prioritizes the United States’ national interests.
Quintero also warned about the possibility of the US imposing economic sanctions to Panama, arguing that Trump’s administrations main interest is to maximize its earnings.
Migration: the most urgent issue for Trump’s administration
On the other hand, Grisanti pointed out how clear the US immigration stance is with its insistence on the aggressive deportation of undocumented migrants.
He argued that Latin American countries are being pressured to take back their nationals and cover the costs — thousands of flights associated with it.
Grisanti stressed, however, that the general effect on Latin America will be minimal, influencing remittances at most, as there are about 11 million undocumented migrants and the capacity for deportation from the United States is relatively low.
According to Grisanti, just a small number of undocumented migrants have been deported, with estimates ranging from 3,000 to 5,000.
He predicts that any significant impact on remittances and consumer habits will be felt quickly, with a limited impact on Latin America’s economy.
“Taking into account the number of undocumented migrants in the US, it will take at least 10 years to deport them all”, the economist stated.
Venezuela as a separate regional case
Tensions with Venezuela have been a persistent issue in relations with the US.
Since Chavismo’s rise to power, his stance has been defined as “anti-imperialist” and in political opposition to American leaders.
In the end, this resulted in economic sanctions imposed on Venezuela during Donald Trump’s first term.
However, the desired outcome, which was to remove Nicolas Maduro from power, has not occurred.
Venezuela’s government has increased pressure on citizens, exacerbating the humanitarian crisis, and have caused Venezuela to align more with countries opposing the US, such as Russia, China, and Iran.
In this context, Quintero believes Trump’s new policy towards Venezuela in his second term appears to be more focused on achieving oil negotiations.
“At the moment, the United States does not want a war with Venezuela and avoids violent scenarios. There is a powerful Republican lobby that is primarily interested in continuing to export Venezuelan asphalt,” Quintero explains.
According to the analyst, Trump’s approach to Venezuela appears cautious and of seeking agreements on the oil sector, aiming to prevent the country from approaching closer to China.
Quintero further suggests that the recent renewal of Chevron licenses is indicative of Trump’s new policy towards the southern nation.
According to the analyst, Trump’s policies aim to fix the Venezuelan migration issue and establish a win-win relationship.
Regional growth estimations for 2025 amid geopolitical pressures
According to Econanalitica, economic growth in Latin America is expected to remain within a range of 2.5% to 3%, indicating weak performance in 2025.
However, the new operating pace is not sufficient to promote overall well-being.
Over the previous 10-20 years, some smaller countries have had faster growth rates than before.
Grisanti identified Panama and the Dominican Republic as the two most vibrant economies, with the Dominican Republic expected to grow by 3% or more and Panama showing strong promise for recovery.
Grisanti noted that other Central American countries, such as Costa Rica and El Salvador, had good growth potential alongside Panama and the Dominican Republic.
According to the expert, Guatemala’s growth will be above average, albeit not as significant as expected.
Smaller economies are expected to grow faster and more dynamically than larger ones, such as Brazil and Mexico.
Grisanti highlighted the unusual case of Argentina, where analysts predict growth of more than 5% due to a “rebound effect.”
This phenomenon occurs when the economy recovers significantly after a period of decline.
Given Argentina’s recent economic struggles, this rebound effect could result in a significant comeback, allowing Argentina to play a dominant role in the broader Latin American landscape as it seeks stability and long-term progress.
Regardless of this estimate, it is clear that any move taken by the Trump administration, whether political or economic, will have a significant impact on the region’s growth prospects, particularly the currencies and FX markets.
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