Analysts: Isaac Kinsella
Team Leader: Haliz Doskee
As a border country, Guatemala is a key country for trade and commerce in South America. As such Guatemala is a country whose GDP is heavily reliant upon both foreign trade and investment. With the culmination of the 2016 American elections; and president-elect Donald Trump, Guatemala’s relations with the United States may be put under strain.
With the biggest economy in Central America, Guatemala is a prime choice of both foreign investment and off-shore businesses. Low tax rates within Guatemala spur the foreign investment and business startups in the country. Used as incentives these low tax rates draw in foreign businesses at a steady rate, with foreign direct investment (FDI) quickly becoming one of the primary sources of income for Guatemala. The United States is one the largest trading partners with Guatemala. Since 2012 both countries have had strong economic ties via the Dominican Republic-Central America Free Trade Act (CAFTA-DR). The CAFTA-DR was developed in order to further integrate both trade, investment by eliminating tariffs and opening the markets between the United States and other Central American Countries. Representing $53 billion dollars in trade between the United States and other Central American countries, the CAFTA-DR is an integral deal to cement both political and economic relations between the United States and other Guatemala.
In light of the American election in November 2016, the President-Elect Donald Trump has the potential to shift the dynamics of American foreign policy. The traditional foreign and domestic trade policies may come under scrutiny, including the CAFTA-DR as well as the North American Free Trade Agreement (NAFTA). President-Elect Trump has been openly vocal in his disapproval of NAFTA, and has sought within his first 200 days of taking office to withdraw America from the agreement. Quoting “unfair imports” and an end to “unfair trade practices”, President-Elect Trump hopes to retain and return the manufacturing jobs back to America, by lowering the taxes and regulations on businesses. President-Elect Trump’s proposal of leaving NAFTA will have implications for other countries, including the Central American countries like Guatemala.
In leaving NAFTA the American government would attempt to return much of the foreign jobs traditionally sent to countries in which taxation would be lower. One such example would Ford Motor Co.’s creation of a 1.6 billion dollar assembly plant in Mexico. President-Elect Trump’s is looking for a way that would eliminate these sorts of maneuvers, and retain the jobs specifically within the United States. In this instance, a country such a Guatemala is particularly at risk of losing large amounts of FDI from its largest trading partner; the United States. If tax levels within the United States become a bearable level to entice more businesses to remain within the United States, the level of foreign investment into place such as Guatemala would drop sharply. As a country that heavily relies upon trade and low tax rates to entice foreign investment. An American withdrawal from NAFTA would have the side-effect of also stripping Guatemala of a large source of their income, or at the very least make the market between domestic and off-shore business startups competitive.
In a related matter, with consideration of NAFTA underway, the American government could additionally see fit to re-examine the terms of the CAFTA-DR. A restructuring of these agreements while domestically helping America, would most likely damage trade relations, and overall prosperity within Guatemala and other Central American Countries. Despite the relative political and macroeconomic stability of Guatemala, any shifts in the FDI would have drastic domestic affects. With most of the taxation falling disproportionately upon the poor within Guatemala – 54% of the country living below the poverty line – any loss of FDI would surely mean domestic tax hikes in order to compensate for the loss of revenue. In a country already with large disparities between the wealthy and poor, additional strain upon the heavily taxed poor people of Guatemala would not be welcome.
The United States has an estimated 11 million undocumented migrants. The vast majority of these migrants come from both the Central America, and Mexico. The Guatemalan authorities alone stated that at least 1.5 million Guatemalans live currently within the United States; with only a third being legal residents. During campaign, President-Elect Trump vowed to deport millions of migrants who were living illegally within America. Fearing his campaign promise to deport these undocumented foreigners, Guatemala asked President-Elect Trump to ensure the protection of these migrants in a statement that follows: “Guatemala hopes that the actions his administration will take will allow recognition of the precious contribution migrants make to the United States, and that his policies promote and ensure the respect, well-being, and protection of the migrant population.” Deporting of these migrants would cause additional strain upon the already heavily strained Guatemalan welfare services in addition to a further loss of income to the Guatemalan government. A large majority of the Guatemalan migrants within the United States send a continual supply of remittances back from the States to Guatemala. As an additional source of income to the country, these migrant workers supply a sizeable portion of income to the country which would be lost if President-Elect Trump makes good on his word to deport these migrants.
The United States and Guatemala remain strong economic partners. With the fragile Guatemalan economy heavily based on foreign actions, any strong changes in this trading partners speaks ill for Guatemala’s future. With President-Elect Donald Trump having taken office on January 20th, 2017 what will happen for both the American economy, and the Guatemalan economy only time will tell.