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  HOME | Latin America (Click here for more)

US-China Trade War Threatens Economic Growth in Latin America

GUAYAQUIL, Ecuador – The already flagging economies of Latin America could be hurt by the ongoing trade war between the United States and China, the chief economist of the Inter-American Development Bank (IDB) said on Wednesday.

Eric Parrado told a press conference in Guayaquil that the IDB has reduced its forecast for growth in the region this year from 1.4 percent to 1.1 percent, due mainly to signs of weakness in the largest Latin American economies: Brazil and Mexico.

But “external shocks,” such as the US-China dispute, “could (also) have a significant impact of reducing growth in Latin America and the Caribbean,” he said during the 2019 Annual Meeting of the IDB Board of Governors.

Because production chains are no longer contained within individual nations, bilateral trade conflicts can spill over onto third countries, Parrado said.

“There are value chains in many countries in which each country contributes in some way, and growth can be hurt,” the IDB economist said.

Another potential source of trouble is a global fall in asset prices that could push regional growth rates into negative territory in 2020, he said.

Regarding Latin America’s ability to withstand a major external shock, he described the current situation as a “little weaker” than that ahead of the 2008 international financial crisis, as the region’s governments have less room to adjust fiscal and monetary policies.

“We don’t have all the resiliency we should have to face these kinds of vulnerabilities,” Parrado said.

The “only positive aspect” is that Latin American and Caribbean central banks are “in a better position” in terms of the liquidity of their international reserves than they were before the 2008 crash, he said.

“Obviously, that is good news, but it does not suffice to compensate for the other macroeconomic variables, above all, those related with the fiscal ambit,” the economist said.

In trying to explain the difference between growth rates in Latin America with those of the most dynamic Asian economies, the IDB emphasizes higher levels of investment and productivity in Asia.

On average, annual investment in Asian nations is roughly equal to 25 percent of gross domestic product (GDP), compared with around 12 percent of GDP in Latin America, which Parrado said falls far short of meeting the region’s “development needs.”

The IDB urges Latin American governments to establish national infrastructure funds that are focused on long-term goals and insulated from changes in administration.

 

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