2018 second-quarter forecast

Americas

The Americas stretch from the Arctic Circle in Canada to the southern tip of Chile. This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world — an ascendance aided in part by bringing Mexico and Canada into its sphere of influence. Farther south, the nations of South America are like islands, separated by vast spaces of impenetrable mountains, rivers and jungles. Try though these countries may to integrate more closely, deeper ties such as those that characterize North America will prove elusive.
10 MINS READMar 9, 2018 | 15:07 GMT
This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world

This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world

(FRANCK FIFE/AFP/Getty Images)
section Highlights
  • The White House's new tariffs on imported steel and aluminum will raise prices for U.S. manufacturers and invite retaliatory measures from other countries in the process.
  • Under pressure from Congress and the agricultural lobby, the United States will stay in the North American Free Trade Agreement this quarter, despite Canada's resistance to Washington's protectionist demands and Mexico's reluctance to compromise ahead of its presidential election.
  • In Mexico, established parties such as the Revolutionary Institutional Party (PRI) and the National Action Party (PAN) will fight an uphill battle against general dissatisfaction with the political establishment.
  • Though other countries in the region will become increasingly concerned this quarter about Venezuela's deepening economic crisis, Brazil and Colombia will butt heads over what to do about it.
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The White House Raises the Stakes on Trade

The U.S. approach to trade will take center stage this quarter as President Donald Trump's America First policies lead to action. After imposing tariffs on steel and aluminum imports, the White House may also move to punish Chinese trade practices through the World Trade Organization (WTO) and unilateral tariffs. And pressure from lawmakers will push negotiations over the North American Free Trade Agreement (NAFTA) beyond the quarter.

Unless they are granted exemptions, some of the countries targeted by the new tariffs will soon start retaliating against the United States. South Korea, Brazil, Japan and the European Union, for example, will launch challenges in the WTO and take other retaliatory measures, which could lead to new or higher tariffs on U.S. exports, mainly in the agricultural sector. Overseas, meanwhile, the oversupply of aluminum and steel will worsen as exporters shut off from the U.S. market scramble to divert their products elsewhere, prompting other governments around the world to erect additional barriers against imports of the metals.

Selected U.S. Agricultural Exports

Beyond its move on metals, the White House may take action against China this quarter after a separate trade investigation into some of the country's business practices. The inquiry, opened under Section 301 of the Trade Act of 1974, focuses on activities among Chinese firms, such as pressuring foreign companies operating in China to share intellectual property, conducting unauthorized technology transfers and illegally intruding into commercial business networks. The investigation may well continue beyond this quarter; the United States has until August to render its decision on the matter. When it does take action, though, the United States will bring WTO cases against China and will try to do so in coordination with Japan and the European Union. It will also pursue measures outside the WTO — probably tariffs or quotas in sectors in which Chinese companies have forced technology transfer from U.S. firms, such as consumer electronics, appliances and automotive parts. In response, Beijing is likely to impose tariffs of its own on key U.S. agricultural exports like sorghum and soybeans, while tightening regulations on American companies investing in China.

On the domestic front, too, the White House will face challenges to its agenda. Lawmakers up for re-election will be loath to support many of the administration's policy proposals. Even the president's watered-down immigration reforms stand little chance of reaching the 60 votes required to pass in the Senate. Trump's infrastructure funding plan will likewise run up against high hurdles, given that Congress has already approved a two-year budget deal.

NAFTA: To Be Continued

November's midterm elections will also limit the Trump administration's leeway in negotiations to revamp NAFTA this quarter. The White House will at first keep a hard line in the negotiations to get the best deal it can from Canada and Mexico. In time, however, Republican members of Congress concerned about the economic and political consequences of failed NAFTA talks will push the administration to compromise on some issues, including rules of origin on automotive products. Their pressure will probably work: As the elections approach, lawmakers are threatening to use legislative means to prevent the United States' withdrawal from NAFTA, making the move unlikely for now.

The United States isn't the only NAFTA member facing an election this year. Mexico's government will be in a similar bind ahead of the next presidential vote in July. Consequently, President Enrique Pena Nieto's administration will resist Washington's demands in the negotiations. Mexico City will continue with the talks. But whether it can quickly reach a final deal over NAFTA will depend on how it handles disagreements with the United States over rules of origin, investor-state dispute settlement mechanisms and a proposed sunset clause to establish periodic review of the trade agreement.

Aware of the political considerations constraining its fellow NAFTA members, Canada will keep an aggressive stance toward U.S. policies like these. Ottawa, for example, will press for a deal on automotive rules of origin in the next rounds of NAFTA negotiations. Its aim in doing so will be to persuade Washington to compromise in its quest to tighten regional content requirements for tariff-exempt vehicles in the bloc. (Provinces such as Ontario may follow the central government's lead and adopt laws to counter U.S. protectionist measures at the provincial level.) The Canadian government will agree only to a slight increase in rules of origin requirements in the automotive sector, and Mexico will let it take the lead on challenging the United States.

Election Races Heat Up in Mexico, Colombia and Brazil

For Mexico, NAFTA negotiations are hardly the only issue at stake in the approaching presidential election. The hotly contested race for the presidency will intensify this quarter as the leading candidates enter the final stretch. Though populist Andres Manuel Lopez Obrador capitalized early on public dissatisfaction with the government, the ruling Revolutionary Institutional Party (PRI) will try to narrow his lead, drawing on its extensive political networks to mobilize voters. The conservative National Action Party (PAN), by contrast, will continue to struggle to overcome its divisions. Margarita Zavala, a former first lady of Mexico who left the party in October 2017 to run as an independent, is sure to siphon off votes from PAN's candidate, Ricardo Anaya — to the benefit of the other contenders. The split could help push Lopez Obrador that much closer to clinching the presidency in July.

Before then, Colombian voters will cast their ballots in a highly competitive presidential election. Six major candidates are vying for the office. With such a crowded playing field, odds are good that even a party carrying only a fraction of the vote, such as the right-wing Democratic Center, could advance from the election's first round, slated for May 27, to the runoff in June. Whatever the outcome, however, the next government will have a legal obligation to proceed with implementing the peace deal with the Revolutionary Armed Forces of Colombia, since Congress approved the agreement last year.

In the meantime, the Colombian government will try to salvage its peace negotiations with the country's second-largest militant group, the National Liberation Army (ELN), having suspended the talks Jan. 29 after members of the group repeatedly attacked security forces. A peace deal with the ELN would drastically reduce violence against energy infrastructure, private companies and energy contractors in oil-producing regions of Colombia, such as Norte de Santander, Putumayo and Arauca. But the government will be hard-pressed to move the negotiations forward. At best, it will simply manage to resume the talks before handing them off to the incoming administration, which will then decide whether to continue them.

Neighboring Brazil will spend the second quarter gearing up for its own presidential election, set for October. In the wake of a wide-ranging corruption probe, the country's outsider politicians will have a better shot at victory this year. The leading candidate, former President Luiz Inacio Lula da Silva, faces an all but certain criminal conviction that will take him out of the running — leaving a gap that onetime dark horse contenders will emerge to fill. Candidates such as former Supreme Court President Joaquim Barbosa, TV personality Luciano Huck and Sao Paulo Gov. Geraldo Alckmin of the Brazilian Social Democracy Party could all gain ground in the opinion polls this quarter. Ahead of the elections, the Brazilian government will try to pass economic reforms — such as an initiative to privatize state assets, including state electrical company Eletrobras — to draw investors to the country as its economy slowly recovers.

Argentina Attempts Domestic Reform

Economic reform will also be a top priority for Argentina's government this quarter. President Mauricio Macri's administration will press for a partial labor reform to lower costs and remove red tape for businesses in the country. A comprehensive labor bill to amend Argentina's strict laws on firing workers and to grant companies major tax breaks will be difficult to push past the country's powerful labor unions and the leftist opposition's sizable minority in the Senate. Instead, Macri may opt to work with the unions to hammer out sector-by-sector reforms.

In addition to their focus on domestic reform, Argentina and Brazil also share a concern on matters of foreign trade. The two countries — the largest economies in the Common Market of the South (known by the Spanish acronym Mercosur) — are reluctant to expose their local automakers to greater competition. The issue will be a lingering point of contention in Mercosur's negotiations with the European Union over a free trade agreement and could drag the talks out beyond the second quarter.

Venezuela's Unraveling

To the north in Venezuela, the enduring political and economic crisis will become a source of growing concern for the surrounding region. President Nicolas Maduro will seek a second term in office in May in an election that will be neither free nor fair by the U.S. government's standards. Because Maduro's military and civilian allies won't allow an election that would jeopardize their hold on power, the administration will manipulate the vote as needed to ensure a favorable outcome, despite the threat of heavier sanctions from Washington. Even if the United States offers the president an amnesty deal to leave his post, officials around him will probably make sure that the arrangement includes a carefully managed transfer of power to a candidate of their choosing.

All the while, Venezuela's economy will continue its decline, pushing tens of thousands of Venezuelans abroad, mainly to Colombia and Brazil. Lawlessness and emigration will only accelerate as their country sinks ever deeper into crisis. The governments of Brazil and Colombia both see Venezuela hurtling toward a point of no return. Yet they will differ in their approaches to the issue. Bogota will back Washington's efforts to pile more sanctions on the Venezuelan oil sector, while Brasilia will resist them. Nevertheless, Brazil and Colombia alike will tighten their border controls in the coming months to stem the flood of Venezuelan migrants, who will compete with local workers for jobs and, in some cases, engage in criminal activity.

The threat of a Venezuelan military incursion into Guyana will also put neighboring countries on edge. As economic and political problems weigh on the Maduro administration, such a maneuver will become more likely, either as a bid to seize land for illegal mining or as an attempt to delay an International Court of Justice ruling on the Guyana-Venezuela border. The incursion could even occur as the unsanctioned act of a local military unit. Were that to happen, Caracas would probably allow the incursion to continue, since military disloyalty is a growing worry for Maduro's administration. 

Venezuela and Guyana

In Cuba, Castro Bows Out

Across the Caribbean, Venezuela's main security ally, Cuba will experience a momentous transition this quarter. President Raul Castro, who succeeded his brother, Fidel Castro, in 2008, will step down April 19 and appoint Miguel Diaz-Canel to lead in his stead. The transition will bring an end to the Castro brothers' rule after 59 years. But major changes in Cuba's foreign policy are unlikely. Diaz-Canel's new title notwithstanding, real control of the island nation will lie with Cuba's armed forces, which control much of the economy. The military will remain wary of U.S. intentions — particularly since the Trump administration tightened sanctions against it in June 2017. And so, the U.S. trade embargo will stay firmly in place. Lifting the embargo would require the military to loosen its grip on Cuban politics, and Havana simply isn't ready to take that step.

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