U.S. Recession Will Hurt Major U.S. Trading Partners, Projections Show

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March 6, 2008

U.S. Recession Will Hurt Major U.S. Trading Partners, Projections Show

For Immediate Release: March 6, 2008
Contact: Dan Beeton, 202-293-5380 x104

Mexico, Canada, Central America and Caribbean Will Be Hardest Hit; South America Less Affected by U.S. Slowdown

WASHINGTON, D.C. - Major U.S. trading partners in the Western Hemisphere will experience a significant economic slowdown as the U.S. economy heads into recession, according to projections from the Center for Economic and Policy Research. Countries in the Americas that are more heavily dependent on the U.S. import market will be hardest hit, such as NAFTA partners Mexico, Canada, and CAFTA partners Honduras, and Nicaragua. Most South American nations will generally fare better than Central America and the Caribbean will, due to their lower proportion of trade with the U.S.

“A number of  U.S. trade partners have seen trade expand during the ‘good times’ of economic expansion and rising U.S. trade deficits,” said CEPR Co-Director and lead author of the paper, Mark Weisbrot. “But now there’s a downside, and the countries more dependent on exporting to the U.S. are going to feel the crunch.”

The paper, "The Economic Impact of a U.S. Slowdown on the Americas,” by Mark Weisbrot, John Schmitt, and Luis Sandoval, shows that U.S. trade partners could experience significant drops in exports and GDP – a decline in exports between 11 and 15.5 percent (5.9 -8.3% of GDP) by 2010 for Honduras, and a 10.4 - 15.1% export drop (2.9 %- 4.1%- of GDP) for Mexico. Canada’s GDP is projected to decline by between 2.8% and 4 % by 2010, as exports fall off by a measure of 9.5 – 13.5 %. 

This reduction could push some of the United States' major trading partners into recession. Growth in both Canada and Mexico, for example, slowed sharply in 2001, during the last U.S. recession, with real GDP growth in Mexico slipping to zero for that year. The last U.S. recession was relatively short (March to November 2001) and mild in terms of lost output. The next (possibly current) recession in the United States will likely be worse.

Meanwhile, countries that are less dependent on the United States as a market for their exports, or more reliant on domestic demand, will see smaller impacts of the U.S. recession on their total exports and national GDP.

The economic slowdown in the United States is likely to be associated with a reduction in the size of the U.S. trade deficit to a more sustainable level over the long run. In recent years, the demand for imports created by a rapidly growing U.S. economy provided an important boost for many U.S. trade partners. The U.S. built up trade deficits during this period, which peaked at 5.8 % of GDP in 2006, but these deficits cannot be sustained over the long-term. A recession in the U.S. is likely to accelerate the process of reducing the U.S. trade deficit.   

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The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.