Friday, December 15, 2017

Trump Complicates Latin America's Economic Outlook

The UN's Economic Commission for Latin America and the Caribbean issued its preliminary report on the economic outlook for 2018, which is mostly positive (less positive if you're in a dictatorship).

But Trump injects some uncertainty into the situation. Increasing uncertainty is a strength of his.

In addition, the tax reform bill now moving through the legislature in the United States could ease the corporate tax burden and bolster capital flows to that country. In addition to the possible redistributive effects of that bill, the cuts in corporate tax rates and the repatriation of capital may not only have a direct effect on capital flows, but may also change the rules of the game in international taxation. This could trigger other reductions in corporate taxes (in what is known as a “race to the bottom”) that could have an impact on the tax systems of other countries, including those of the region (p. 96).
That bill is not 100% set but is extremely close. I had not thought about tax cut contagion but Latin American governments may well decide to chase the money.

The uncertainty surrounding the future trend in trade volumes also has to do with the growing protectionism being observed in some countries. The mounting support for anti-globalization political parties in some European countries and the vote in favour of Brexit in the United Kingdom in 2016 are just two examples. Meanwhile, the rhetoric used by the United States in the latest rounds of the North American Free Trade Agreement (NAFTA) talks suggests that the dissolution of that treaty is a less remote possibility than it used to be, especially in view of that country’s withdrawal from the Trans-Pacific Partnership (TPP) (p. 95).

This, of course, is an ongoing concern. Even Bernie Sanders is cheering on Donald Trump's effort to radically change NAFTA. Latin American leaders will continue to look outside the region for investment and trading deals.

As so often happens, Latin America is held hostage to intermestic policy, as U.S. domestic politics drives U.S. foreign policy. This puts a question mark on the 2018 outlook.


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