What the Brexit Means for Latin America

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On Thursday, the United Kingdom did what many analysts had long-considered unthinkable: it voted to leave the European Union. Anger, confusion, shock, and blame are circulating in about equal measures among London’s typically-composed political circles. As the British elite reels with the implications of the vote, the rest of the world must now grapple with the ripple effects. Latin America is no different. The consequences are sure to impact the region’s economic and political future in a wide variety of ways, the majority of which are likely negative:

• Uncertainty, above all, should be the primary fear. Predicting the upshot of the Brexit for Latin America is difficult precisely because the outcomes are uncertain for everyone. Britain has taken a giant leap into the unknown, and may drag the rest of the world with it. In political and economic terms, the contours of the next decade just got murkier. For Latin America, this means unstable financial markets, vulnerable export sectors, and rising borrowing costs. Mexico has already moved to cut spending by $1.68 billion dollars to try to try to reassure markets and reduce deficits, and others are likely to follow. Hopefully markets will soon adjust, and the long-term costs will be limited. But for a region that has struggled to find direction and its place in the world after a number of difficult years, this new volatility is foreboding.

• New headwinds for the global economy may rise, and a chain reaction of factors could circle the globe to Latin America. As The Economist describes, “a weaker European economy will certainly hurt Chinese exports (…) [and] as Europe’s currencies weaken, [this] might put renewed downward pressure on the yuan.” Latin America has already suffered from a slowdown in China’s economy and currency—further deterioration could be disastrous for export sectors, especially in Brazil.

• Trade with the UK and the EU-Mercosur negotiations could also be at risk. While regional trade with the UK is limited—about .65% of the region’s total exports—several countries are more exposed to the British market, especially Colombia and Brazil. Foreign investment is also a factor. For example, 18% of Peruvian FDI comes from the UK. Although Latin America could actually benefit from the Brexit in this regard, if British capital goes looking elsewhere. More importantly, the struggling Mercosur trade bloc is in the middle of a last-ditch effort to restart 16-year old negotiations for a trade deal with the EU. Europe overall is Latin America’s top investor and second largest trading partner. The chaos around Brexit may sink the pact. This blow comes just at the moment when, thanks in part to leadership changes in Argentina and Brazil, South America is warming to trade with Europe. Not to mention, the EU is the explicit model for Mercosur, and the Brexit may dampen its members’ enthusiasm even further. To be fair, a Mercosur-UK deal is now possible, but such an agreement would be little more than a consolation prize.

• A stronger dollar and lower oil prices are the all-but inevitable outcome of flight from the pound and euro. Already oil prices fell by 4.4% overnight, although they have since recovered some ground. This has negative implications for oil producing countries—chiefly the already crisis-bound Venezuela, but also Colombia, Ecuador, Brazil, and Mexico—as well as any governments with dollar-denominated debts. These together mean that a default in Venezuela is even more likely. The Brexit is also worrying for countries that depend on imports from the United States, especially if a stronger dollar is paired with lowered growth in the US. At the same time, Latin American treasuries can find solace in reports that the Brexit may postpone another US Federal Reserve rate hike until 2017, putting downward pressure on interest rates.

• Political turmoil, the domino effect, and the rise of the populists may be the most concerning implications of the Brexit worldwide, and for the region. While Latin America certainly has much less to lose from the fraying of the transatlantic alliance than the United States and Europe, Latin American leaders should still care about what comes next politically. Already the vote has inspired Europe’s far right, including Marine Le Pen in France and Geert Wilders in the Netherlands, and a coming recession in the UK or Europe could only give them more power. Other European countries could very plausibly follow the UK’s lead, permanently and radically altering the global political order, and the willingness of British voters to openly defy a near-consensus among economic and political experts to “remain” should raise eyebrows everywhere. Eurasia group president Ian Bremmer called the Brexit “the most significant political risk the world has experienced since the Cuban Missile Crisis.” Rising instability in Europe, a weakened NATO, an empowered Russia, and unclear geopolitical fault lines all have complications for Latin America—and may also contribute to increased fragmentation within the region. For many Latin Americans, though, the worst outcome is if the Brexit populist surprise presages the US presidential election. A similar vote for Donald Trump would have worrying and far more direct implications for Latin American interests.

• The demise of the TTIP trade agreement between the US and the EU, while far from a certain impact of the Brexit, may also be more likely. Chaos in Brussels makes negotiations more difficult, and this surprising show of anti-globalization muscle should make pro-free trade politicians on both sides of the Atlantic rethink their calculus, at least if they want to avoid David Cameron’s fate. For Latin America, though, this may actually be a silver lining. According to the Bertelsmann Foundation, the deal could pose a threat to Latin America, particularly “countries that trade extensively with the US.” If the US and EU do strike a deal, the report argues, “Latin America could lose its insider-access to US markets.” But if TTIP is a casualty of Brexit, Latin American markets could have at least one reason to celebrate.

With all that said, the Anglo-European divorce is still barely 12 hours old. The coming negotiations to establish a new relationship between the UK and the EU will take years, and we won’t know many of the consequences of the split for at least that long. There is always the chance that the process will be smoother than expected, and apocalyptic predictions may just be hyperventilation. The UK and EU could well come to a relatively quick accord that preserves many of the main features of the relationship. Moreover, proponents of integration can only hope that—should the British experience be painful—other countries will learn from this example.

All the same, Latin Americans should pay close and cautious attention to the Brexit. They are not immune to the fallout.