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South America: Mr. Trump, we haven’t devaluated our currency on purpose

Last week, President Trump tweeted that he would restore tariffs on all steel and aluminum that Brazil and Argentina export to the United States. He would do that because, according to his tweet, the two South American countries “have been presiding over a massive devaluation of their currencies”, which is “not good” for American farmers.

He is right. The devaluation of the Brazilian real and the Argentine peso really is a bummer for American farmers. It makes producers in those countries happy with the price received for the products they ship, and that spurs farmer selling. At the same time, prices in U.S. dollars paid by importers don’t necessarily climb – sometimes they even fall, making South American exports more competitive when compared to products shipped by the United States.

A metric ton of Brazilian soybeans priced at $350 FOB Santos, for example, equals to BRL1,050 when the Brazilian real is at BRL3 to the dollar. The same $350 becomes BRL1,400 when a swing to BRL4 occurs. Even with an unchanged price in U.S. dollars, Brazil receives 33 percent more for its soybeans just because of currency devaluation.

Since the beginning of 2019, the Brazilian real lost 7 percent of its value against the U.S. dollar. In late November, it hit a fresh new low at BRL4.27 per dollar. In Argentina, the devaluation reached 62 percent in the same period and now the peso is around ARG58 to the dollar. And why did that happen? Have Brazil and Argentina’s governments devaluated their currencies on purpose, as President Trump suggested with his tweet?

In this particular case, Mr. Trump is wrong. Neither Brazil nor Argentina has done anything to artificially weaken their currencies. We are not that competent. But thank you anyway for overestimating us, sir.

In Argentina, a serious economic crisis and a political swing that resulted in the election of center-leftist Alberto Fernandez to the presidency of the country, after four years of conservative incumbent Mauricio Macri, are the main reasons behind the massive devaluation seen in 2019, since foreign investors believe that Fernandez will not be able (or will not be willing) to conduct any kind of market-friendly reforms to the economy.

The currency devaluation has helped Argentina’s agricultural exports, which are also buoyed by fears that the new president (whose vice-president is former president Cristina de Kirchner, farmers’ worst nightmare) will raise export taxes for soybeans, corn and wheat as soon as he takes office this Tuesday, Dec 10. But, despite giving a hand to Argentina’s exports, a very weak currency is not exactly a good thing to an economy which has been in such a fragile position. So, no, Argentina has not intentionally devaluated its peso.

And what about Brazil? After the election in late 2018 of President Jair Bolsonaro, recently described by The Wall Street Journal as a “rainmaker” for the economy, odds were that the Brazilian real would get stronger. This year, however, a series of factors that include lower interest rates (to stimulate business and create jobs), an overall strength of the U.S. dollar against other currencies such as the euro, the effects of the trade war between the United States and China, the economic crisis in Argentina and political unrest in some other South American countries, contributed to the devaluation of the Brazilian real.

The weaker real has helped Brazilian agricultural exports. But the country’s exports are in good shape this year mainly because of the trade war (which makes China buy more Brazilian soybeans) and the fear that the United States would have a crop failure after a way too rainy planting season – which made traditional importers such as Japan, Korea and Vietnam buy Brazilian corn.

Brazil is not likely to retaliate the United States if President Trump really goes ahead with the threat of raising tariffs on steel and aluminum exported by Brazil. That would be a setback for the sector, since the United States is the main destination of Brazilian steel. But targeting the metal sector would not have any effect on Brazilian agricultural exports and would not have any compensatory effects for the American farmer. What farmers in the United States, Brazil and Argentina need is a healthy trade environment that allows them to export their products as fair competitors and, above all, as allies in the mission of feeding the world.

One comment

  1. Thanks for sharing this info with us…!

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