Latin America, global trade, trade war, and the outlook
The trade war waged by the United States against China has impacted economic growth and world trade since the fourth quarter of 2018. This implies that trade between the leading economies has slowed and, in particular, between the European Union, the US, and China. The trade of final products is declining with consequences on production in these economies.
This may explain the reasons for the fall in GDP growth in the US, the European Union, and China. It should be remembered that China is growing three times faster than the US and four times faster than Europe, although they all have a declining growth trend.
The growth of Latin America's total exports fell, in 2019, in a similar way to the behavior of the world economy. Since January 2019, growth prospects and falling prices of some commodities indicate that the region will have GDP growth of less than 0.5% per year, loaded mainly by the two largest economies: Mexico and Brazil.
Both countries are the least dependent on the export of raw materials, but both have ongoing economic adjustment policies that restrict domestic demand. Their final goods trading partners, the U.S. and Argentina, respectively, are both under recessive pressure which deepens their problems. L
The Mexican slowdown is more marked than the U.S. slowdown, reflected in a growing Mexican trade surplus, but it is a mirage of the country's economic paralysis. In Mexico, the consequences will be seen as exchange rate problems, due to the withdrawal of foreign funds due to the lack of growth and its perspectives.
The rest of the countries will be affected by the fall in the prices of most of the primary commodities. Other countries, such as Bolivia, or those that do not depend on their export sector, will grow substantially.
Bolivia's commercial structure is ensured by the gas pipelines with Brazil and Argentina, and by five-year export contracts that avoid price swings. The same is true of Paraguay, which exports electricity to Brazil and Argentina from Itaipu.
Some primary exports are decisive for the growth of South American economies. The importance of soybeans in Argentina, Brazil, and Uruguay stands out. They export soybeans for 14, 11 and 16% of their total exports, respectively, and are the main producers in the world.
Copper accounts for 45% of total Chilean exports and 25% of Peruvian exports, which represent the world's largest exporters. Peru also stands out for gold exports, which are equivalent to 14% of the total. The fall in the price of copper will impact more on Chile than in Peru, which will be compensated by the rise in the price of gold.
Oil is important for a good part of Latin American economies, but more so for the U.S., which imports it but re-exports it as refined gasoline. For the U.S. refined gasoline is its most important export product (74.5 MMD) with 5.9% of total exports. Prices of this raw material have fallen since March and April 2019, and the trend will continue.
Oil is the main export product for Venezuela (25 MMD), Colombia (11.1 MMD), Ecuador (5.6 MMD) and Mexico (19.5 MMD), meaning 97, 40, 36 and 6%, respectively, which will affect their balance of payments and their economic carrying capacity.
Gold prices, unlike the others, are fully on the rise as a refuge value. The instability of the dollar, the pound sterling, and the euro, is feeding this price. The increase in the price of gold, unlike the rest, corresponds to its monetary function as a substitute for the low yields of the financial market.
The inversion of the yield curves of the bonds is dragging down the prices of futures and not the other way around. This atypical trend is due to the fact that the outlook for the world economy is downwards and, consequently, in the medium term the trend in demand for raw materials is downwards.
Normally, when yield curves are reversed, futures prices rise by portfolio effect. This is when recovery is expected in the medium term. This does not seem to be the case.
Mexico and Central America export maquila industrial products to the U.S. market, almost exclusively, and are affected by the slowdown in U.S. economic growth (see https://obela.org/analisis/thank-you-mr-trump-predicciones-economicas-2019).
There are three ongoing problems: the first is how the data are covered up. The press reports on employment and the stock market but does not show the drop in GDP growth. The second is the size of the American fiscal deficit and its inability to carry economic drag, surprising Keynesians and others. The third is the impossibility of growing having brutally expanded domestic credit in the last decade.
Meanwhile, Mexico, Central, and South America will experience economic stagnation in 2019 that will deepen in 2020 and no recovery is anticipated after 2020 if future prices are indicative of anything. We believe that the forecasts of the IMF and ECLAC are overestimated as a result of what has been said here.
Authors: Oscar Ugarteche, Senior Researcher, IIEc-UNAM, SNI-Conacyt, Coordinator of the Latin American Economic Observatory, Arturo Martínez Paredes, Faculty of Economics, UNAM