There’s a lot of debate regarding the application of tariffs on US imports. Some say they will be severe, and some say gradual.
We comment on severe.
Severe tariffs from the US will weaken currencies versus the US dollar, and potentially stimulate inflation in the exporting country. Put simply, a lower currency versus the US dollar boosts exports, but also raises the price of imported goods.
In Latin America, Mexico seems best positioned to deal with tariffs. Mexico’s inflation rate has been coming down and is near the government target ceiling. So, there is a little room for inflation to go up. Furthermore, the currency has stabilized since the beginning of the year.
Brazil is not so fortunate. Brazil’s inflation has little room to go up and the government clings to the idea of raising interest rates this year. Higher interest rates could lead to slower economic growth, and a weaker currency could lead to higher inflation-not a good combination.
Severe tariffs could push the Euro to parity, 1:1, versus the US dollar, which would be inflationary. At the same time, europe’s economy could benefit from lower interest rates, but if inflation increases that probably won’t happen.
What to watch to gauge the impact of tariffs on exports? We will be watching the Baltic Dry Index, an index that tracks rates for ships carrying dry bulk commodities.
The rate rose from 1,400 to 1,800 right after the US Presidential election, and has now gone down to 1,023. It seems to be a good indicator of trade and tariff impact.
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