US Proposed Border Tax Will Hit LatAm’s Dollarized Economies Hard

The proposed 20% border tax on goods imported to the United States from other countries is expected to cause the dollar to soar in value, leaving nearly half a dozen Latin American economies in shambles.

Dollarized economies – including Jamaica, El Salvador, and Panama – would lose shine as well as competitiveness, according to an analysis by U.S. ratings agency Moody’s.

Interestingly, the region’s large economies – such as Argentina, Mexico, and Brazil – are not expected to be affected much, partly because their foreign currency debt represents a relatively smaller share of GDP.

There is no doubt that Mexico’s export sector will struggle to survive, because more than 80% of the nation’s exports are directed toward the U.S.

“In theory, the proposed 20% border tax could result in an immediate and permanent nominal appreciation of the dollar by 25%,” says Moody’s senior analyst Madhavi Bokil.

Other countries around the world will also feel the ripple effect of the dollar appreciation, due to the vast majority of $1.8 trillion foreign currency sovereign debt globally being denominated in U.S. dollar.

“Even a partial dollar appreciation could … pose significant but varied risks for other countries,” said Elena Duggar, a Moody’s Associate Managing Director.

The agency has warned that the border tax may end up sparking a trade war, tempting other countries to retaliate with their own protectionist policies.

“Escalating retaliatory actions, especially in the event that the WTO concludes that the border tax does not comply with WTO rules, could potentially spiral into trade wars,” the report noted.

Economists say the dollar appreciation will not help any country, even including the United States. Countries with a huge U.S. dollar-denominated debt would find it extremely hard to service it.

“In Latin America, this would be particularly relevant for Jamaica, with its high ratio of currency debt to GDP,” Moody’s said. Other dollarized economies in the region include Ecuador, El Salvador, Venezuela, and Panama.