Hydrocarbons in Latin America under the "Thucydides" trap

 

The likelihood of a new round of high U.S. tariffs on China increased after Trump's choice of running mate JD Vance. In one scenario, Goldman Sachs economists estimate a roughly 2 percentage point hit to China's GDP from a 60% U.S. tariff. Their counterparts at UBS this week calculated a 2.5 percentage point hit to growth in a year. As for the U.S., Wells Fargo warned that a full-blown tariff war could lead to a drop in U.S. GDP, along with a rise in inflation, but there is no solid estimate yet.

There are several reasons why Trump is likely to raise tariffs on China. The perception in Washington is that the first trade war, which Trump launched in 2018, did not leave the United States unduly damaged. While there were many negative warnings at the time, there was no noticeable increase in inflation or impact on employment or financial markets. Therefore, "resistance to further action is low."

A full 60% tariff on all Chinese imports, combined with the 10% universal base tariff on all other countries also proposed by the Trump team, would bring the weighted average U.S. tariff rate to nearly 17%, the highest since the Smoot-Hawley era of the 1930s. It is also possible that a tariff between 50% and 60% is just a negotiating ploy to squeeze something else out of the Chinese. Bilateral trade between China and the U.S. could collapse to $100 billion or less. Last year, the two countries had $575 billion in direct trade.



Likewise, Trump has suggested that the only way the Chinese will produce is in the United States. If it manufactures in the U.S., then perhaps there are no tariffs. What Trump is asking for is employment in the United States, which would be a blow to nearshoring in Mexico. Not so much for Brazil's because it serves a specific demand in South America. If you remember well, that is what Japan did in the 90's with Clinton and it worked. In any case, if China decides to move some factories to American soil, a Solomonic solution, some countries with free trade agreements such as Colombia or Chile could take advantage of this situation, but it would be a marginal advantage. Those who will continue to benefit the most will be the countries with large hydrocarbon reserves.

So the energy consequence for the Western Hemisphere will be that if China and the United States at some point reach an agreement for Chinese industry to produce on American soil, the United States' energy needs will be even greater and its sense of energy insecurity will grow with it. With China controlling the Middle East and getting closer to doing so with a navy of greater operational capacity, the United States will need much more oil from allied fields in the medium term, especially for its industry, as renewables are unlikely to provide the energy intensity needed for that industry. Indeed, all eyes are on the Venezuela-Guyana-Brazil axis. That is where the most promising deposits of cheap and safe gas and oil will be, if you can get the Russians and Chinese out of there. Something that is not difficult if the United States sets its mind to it.


The South American Deepwater Sector




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