The U.S. Recession and Latin America

1. The U.S. Recession and Latin America By Mark Weisbrot Co-Director of the Center for Economic and Policy Research (CEPR) Wednesday, May 14, 2008

2. Growth of U.S.Trade Deficit • A rapidly growing U.S. economy has provided an important boost to our trading partners • From 1994-2007: • U.S. GDP grew by $6.8 trillion • U.S. imports increased by more than $1.5 trillion • The current trade deficit is seen by most economists as unsustainable • To return to a more sustainable level, the United States will need to reduce imports and increase its exports

3. The Western Hemisphere • The most affected countries are those where: (a) exports constitute a higher share of national GDP and, (b) exports to the United States represent a larger share of total national exports • The countries that will likely suffer most are those which entered into “free trade” agreements with the United States, such as NAFTA and CAFTA-DR, including: • Mexico, Guatemala, El Salvador, Costa Rica, Nicaragua, Honduras, Dominican Republic

4. Western Hemisphere: Nominal GDP, total Exports to the World and to the U.S. in 2007[The Economic Impact of a Slowdown on the Americas, CEPR, March 2008]

5. The Relative Importance of Exports to the U.S. Market • Some countries are much more dependent on the U.S. market than others. For example: • 77 percent of Mexico's exports go to the U.S. market, and these exports to the United States accounted for approximately 21 percent of the country's GDP in 2007 • Other countries where exports to the U.S. constitute a significant percentage of GDP include Honduras (37 percent), Nicaragua (26 percent), Canada (23 percent), and several other countries in Central America and the Caribbean.

6. Projected Reduction in Exports, by 2010 • Low-adjustment Scenario • Trade deficit falls from 5.2 percent of GDP in 2007 to 3.0 percent of GDP in 2010 • A trade deficit of this size would imply that the ratio of U.S. foreign debt to GDP would still rise but at a much slower pace than the increases in recent years • High-adjustment Scenario • Trade deficit falls back to 1.0 percent of GDP by 2010 • Depending on foreign investment, this trade deficit could still be associated with a rising ratio of foreign debt to GDP; however, the rate of increase would be slow

7. Scenario A: Small Decline in U.S. Imports • Small-Adjustment Scenario: a reduction in the size of the U.S. trade deficit to 3.0 percent of GDP by 2010. [The Economic Impact of a Slowdown on the Americas, CEPR, March 2008]

8. Scenario B: Large Decline in U.S. Imports Large-adjustment scenario: a reduction in the size of the U.S. trade deficit to 1.0 percent of GDP by 2010. [The Economic Impact of a Slowdown on the Americas, CEPR, March 2008]

9. Conclusion: Impact on the Americas • As demand for our trading partners’ exports decreases, we will see slower growth in the Americas • Other potential channels of transmission: • Remittances sent home by foreign nationals working in the United States decreasing • Credit crunch, investment flows, continued problems in international financial system • Pro-cyclical policy responses Continued, next slide

10. Conclusion: Impact on the Americas • Continuation of Long-Term Trend: Latin America Drifts Further from U.S. • Further FTA’s unlikely • More regional economic integration • More diverse economic and possibly development strategies