Is the United States becoming Latin America? When friends from the region wryly ask, it’s not because the American West was once part of Mexico or Spain claimed Florida, or the United States now has the second largest Spanish speaking population worldwide. Rather, they point with a mixture of surprise, concern, and a dose of schadenfreude to the dramatic, all-too-familiar political and economic shifts from Washington. The comparison, as the Trump Administration aggressively seeks to stimulate domestic production, reduce imports, and increase the government position in the economy, is no longer absurd.
For years, Latin America was plagued by the allure of import substitution, a theory claiming that behind high tariff walls and government-led industrial policy nations would increase high value production, direct capital effectively to national champions and favored causes, and grow economies and create jobs unchallenged by more efficient, lower cost production from abroad. Instead, predictably, the opposite occurred. Competition slackened, costs increased, governments wasted large sums trying to pick and support commercial winners, and corruption flourished as companies devoted more and more effort to gaining government rents than by innovating through research and development. Compounded by traditional family ties that embedded political and commercial favoritism including access to capital, lack of quality education opportunities for the majority, and a malleable and politicized rule of law, it ensured that those at the top would remain at the top, and those below would have little opportunity to advance.
That this economic agenda coincided with the days of dictatorships, authoritarians, and regional strongmen caudillos is no coincidence. The names are embedded in history, from Argentina’s Juan Peron to Venezuela’s Hugo Chavez, and their contemporaries and successors, both sharing the ignominity of turning their then-wealthiest nations in Latin America into economic basket cases. To do so, they declared emergencies to promote their populist agendas by capturing state institutions, reducing the press, rallying “the people” against their predecessors and “the elites,” and moving aggressively to use the levers of the state to channel and often coerce economic activity and private interests toward their preferred outcomes.
Thankfully, much of the worst of the model has been left behind, but Latin America continues to lead the world in economic and social inequality. That’s in part from the vestiges of protected markets and the ongoing temptation of direct and indirect government interventionism. And progress is uneven: some nations, like Mexico, are returning to previous models, while Argentina is now in the early days of a complete political and economic re-boot.
Chile’s experience is notable. Like many nations, Chile has faced difficulty in recent years, including destructive riots in 2019, and the economy has slowed. Nonetheless, for years the United States upheld Chile as a model for the rest of Latin America, both for its democratic principles as well as its commitment to sound macroeconomics and an active trade liberalization agenda. Trade in particular was seen as a way to open Chile to the discipline of the global marketplace, increasing competition, strengthening Chilean enterprises, reducing corruption, and drawing significant and necessary foreign direct investment. It was an explicit repudiation of the siren song of import substitution, and Chile, consequently, outperformed.
Today, the Trump Administration is implementing its own trade experiment. Since so-called “Liberation Day” on April 2, Washington has been engaged in a disruptive conversation on tariffs, threatening then postponing them, raising them unilaterally, assigning them randomly (for example treating democratic, peaceful Costa Rica the same as despotic Venezuela), and going ahead without seeming appreciation for the broader impact on US economic interests, alliances, and national security. Various justifications have been offered, including desires to raise new revenues from consumers to offset reduced income taxes, encourage domestic investment and manufacturing while taking equity in “strategic” economic production, and punish countries including allies for trade deficits. In short, import substitution.
What’s even more evident to observers from Latin America is the political rebalancing required to implement such a dramatic economic shift. In six months, the administration has rejected long-established political norms including international treaties, disdained the virtually unanimous views of economists and policy experts, ignored democratic institutions including Congress, and claimed breathtaking emergency authorities while making continuous popular appeals to “the people.” Trade with the United States is now less a global stabilizer than a global disruptor, especially given the number of non-trade related issues that have recently been added into the mix. To wit: a punitive, personalized 50 percent tariff on Brazil for taking judicial actions against previous president Jair Bolsonaro. Goodbye to Most Favored Nation principles, which underlay the global trading system for 80 years, disproportionately to US benefit.
So then, the United States of Latin America? Well, not just yet. Despite growing similarities, deep differences remain. Among them, rule of law. The Trump Administration has claimed the authority for tariff actions under IEEPA, the International Emergency Economic Powers Act of 1977, which gives the President extraordinary authority to take certain actions in response to national security emergencies. By declaring the trade deficit to be a “national emergency,” the President has ascribed to himself virtually limitless authority to levy tariffs against anyone at any time for any purpose. It’s a theory now being tested legally, with the ultimate destination, likely, the Supreme Court.
IEEPA was never intended for such application. Congress, with which the Constitution vests tariff authority, did not clearly acquiesce to such a sweeping interpretation. If the Administration’s claims are permitted to stand, look out. That Pandora’s Box will never again be closed, as national emergencies can be declared–and dramatic action taken–for climate change, say, just to name one obvious example. The stakes are enormous.
We’ll know soon enough whether IEEPA or other authorities permit the President to continue his current course. But the broader fight has been joined. Latin America may yet have the last laugh.
