After several decades of trade liberalization, the announcement of tariff increases by the United States has changed the framework of international trade. The measure aims to protect U.S. production from foreign competition, mainly from China. The previous post available here provided some insight into the origins of the issue. In this one, we discuss some of its effects and the opportunities it presents.

What are the effects of protectionism?
As the name suggests, protectionism protects domestic production from goods and services coming from other countries. In the short term, it encourages the purchase of domestic products by making foreign goods more expensive, which might seem beneficial. However, tariffs have harmful medium-term effects on the country that imposes them: they discourage companies from innovating, using inputs more efficiently, and increasing productivity.

Nowadays, production processes are highly integrated; a large portion of trade consists of flows of intermediate goods that move between countries before becoming part of the final goods’ production chain. Tariffs increase the cost of raw materials and intermediate goods from other markets, and this cost increase is borne either by the producer (who will see a reduced margin) or by the buyer of the product (who will face a higher price). If price increases are widespread, inflation in the country will rise. Recent estimates from the Federal Reserve Bank of San Francisco available here suggest that a 25% tariff would raise the cost of investment goods in the U.S. by 9.5% and consumer goods by 2.2%. In short, tariffs act as a negative supply shock in the country that imposes them.

Protectionism increases uncertainty about the final price of goods and delays or reduces investment projects. Figure 1 shows the evolution of uncertainty related to trade policy: the indicator has surged in recent months. In such a scenario, financial institutions reassess risk and tighten credit. Additionally, tariffs often require extra administrative procedures and bureaucracy, which encourages corruption and rent-seeking behavior.

For exporting countries, the trading partner’s tariff acts as a negative demand shock, reducing both the production and the price of the affected goods. It is common for trade partners to respond to protectionist measures by imposing similar barriers. Supply chains are disrupted, economic activity is geographically reallocated, and making sound decisions becomes more difficult. The result is a decline in trade flows, technology transfer, and GDP growth. This is the opposite mechanism of trade liberalization; history shows that periods of free trade are associated with stability, growth, and poverty reduction. The clearest example is the globalization process that began in the 1990s.

Figure 1. Uncertainty over trade policy

Both theoretical arguments and empirical evidence warn of the damage caused by protectionism. However, in the short term, it may present opportunities for some countries. President Trump’s tariff policy aims to restrict exports from China and other Southeast Asian countries to the U.S. This creates a golden opportunity for countries that can replace these economies in the American market. One of the regions best positioned to do so is Latin America.

The new tariffs in Latin America
In general, the new tariffs planned for Latin American countries are moderate because their trade balances show a deficit with the U.S. (unlike Asian nations). According to announcements from the White House, Latin American countries face a nominal or theoretical tariff of 10%, except for Guyana (38%), Nicaragua (18%), and Venezuela (15%). Additionally, Mexico faces a 25% tariff due to its participation in the NAFTA free trade zone.

The U.S. is an important trading partner for Latin America, so reciprocal tariffs are unlikely. In fact, governments in the region are opting to negotiate tariff reductions and exemptions. Given their limited economic maneuverability, it is likely that any concessions will be tied to greater efforts in combating drug trafficking and illegal immigration, as well as a more favorable stance toward foreign direct investment.

Not all products are subject to the general 10% tariff; some items are exempt, while others (such as steel, aluminum, and auto parts) face higher rates because they compete directly with American goods. When specific cases are considered, the effective tariff for many countries in the region falls below 10%, as illustrated in Figure 2. The chart also shows that countries with the highest effective tariffs are those in Central America (which export auto parts, steel, and aluminum). In contrast, the effective tariff for Argentina, Chile, and Colombia stands at 6.7%, 5.6%, and 5.5%, respectively.

Mexico is a special case. It started from a seemingly favorable position due to its NAFTA membership, along with Canada. In 2023, Mexico replaced China as the U.S.’s top trading partner. However, the U.S. has imposed a general 25% tariff on both Mexico and Canada. In recent weeks, Mexico has secured some exemptions, so it’s possible that its effective tariff now stands at around 10.5%.

Figure 2. Nominal and effective tariffs in U.S. with respect to Latin America (%)

Source: Center for Global Development and own elaboration. New tariff in blue, effective tariff in orange

Risks

The new measures pose risks for Latin American countries. The most immediate is the loss of competitiveness in their exports due to tariffs, especially on goods that the U.S. explicitly seeks to protect—aluminum and steel (which particularly affects Argentina and Brazil), and automotive components (Mexico). The second risk is a drop in the prices of certain raw materials, such as copper and oil.

A potential slowdown in China’s economic activity could also be harmful. While the main trading partner for Central American countries and Mexico is the U.S., for South American countries it is China. A reduction in China’s growth would therefore decrease the demand for, and prices of, many South American exports. That’s why China’s economic policy strategy is crucial for the continent. If China stimulates consumption through fiscal measures or secures alternative markets for its products (such as the EU), thereby maintaining its growth, the risks to its South American partners would be reduced. Moreover, China is a major investor in infrastructure across the region.

The International Monetary Fund (IMF) has revised down Latin America’s growth forecast for 2025 from 2.5% (January) to 2% (April). For Mexico, the growth forecast has been downgraded from 1.4% to a contraction of 0.3%. However, the IMF anticipates a more favorable inflation outlook: from 16.6% in 2024 down to an estimated 7.2% in 2025.

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Opportunities

This scenario also presents several opportunities for countries in the region: replacing Asian exporters in U.S. markets, strengthening trade ties with the European Union (for example, via a treaty between the EU and Mercosur), and supplying Asian countries with products previously exported by the U.S.

Latin American countries have some characteristics that position them well to replace Asian production in U.S. markets. On one hand, their economies are relatively diversified—Mexico and Central America export manufactured goods, while South America provides natural resources. In addition, their geographic location allows for moderate transportation costs to the U.S.

Part of the challenge is logistical. However, the Logistics Performance Index, which measures elements such as infrastructure, customs, and the ability to track shipments, shows that Brazil, Panama, Chile, Peru, Uruguay, Colombia, Costa Rica, Honduras, and Mexico have an adequate level of logistics performance (according to JP Morgan’s analysis available here).

Mexico and Central America are well-positioned to export manufactured goods to the U.S., replacing Asian suppliers. Honduras, Guatemala, and Nicaragua have low labor costs; Costa Rica and Guatemala already attract significant investment. Costa Rica produces semiconductors and hosts a medical device industry (in partnership with Abbott), while Guatemala has investment and facilities from Walmart.

Resource-rich countries such as Argentina, Chile, Colombia, and Peru may offer investment opportunities to U.S. companies in key sectors such as mining, energy, and infrastructure. This strategy could also produce other positive effects, as foreign direct investment fosters technology transfer, «learning by watching,» the spread of best practices, and economic growth. In parallel, these countries are redirecting their exports toward Asia.

Chile and Peru, which produce 40% of the world’s copper, already consider China their main trading partner and are exploring opportunities in India. During Trump’s first term, China sought soybean suppliers to replace the U.S. and established a profitable alliance with Brazil. Brazil aims to strengthen this relationship and is also looking to export meat products to Japan (which used to import 40% of its meat from the U.S.). Additionally, Brazil is one of the world’s largest coffee producers, along with Vietnam, Indonesia, and Colombia. The U.S. has proposed tariffs of 46% on Vietnam and 32% on Indonesia to penalize the relocation of Chinese producers to Southeast Asia. These barriers could boost coffee exports from Brazil and Colombia to the U.S. Brazil could also replace China in the U.S. footwear market.

The case of Argentina is more complex. The U.S. was Argentina’s second-largest export destination in 2024. At first glance, the new protectionist measures favor Argentine agricultural products but hurt steel and aluminum. President Milei is reluctant to return to past protectionist policies, which proved disastrous for Argentina. The U.S. is prioritizing negotiations with a group of countries that includes Argentina and is working on a free trade agreement that would benefit the country. In fact, there is already a cooperation agreement between the U.S. and Argentina on critical minerals for the American tech sector, such as copper and lithium; this is especially relevant because Argentina, together with Chile, produces one-third of the world’s lithium. Additionally, China has recently reached a preliminary agreement with Argentine exporters of soybeans, corn, and vegetable oil. Argentina could also benefit from a potential EU-Mercosur deal, which would facilitate aluminum exports to Europe.

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Conclusion

Tariffs discourage the pursuit of efficiency, raise prices, generate uncertainty, and reduce investment. They also decrease trade flows, economic growth, and the transfer of technology. The most favorable outcome for all parties is a gradual return to free trade. If that does not happen, however, certain conditions could still become opportunities for some countries. Latin American nations are well positioned to export to Asia and gain a larger share of the U.S. market.

It is crucial to take advantage of this scenario by seeking new markets and trade agreements, and by developing infrastructure and logistical capacity. Other priorities include maintaining macroeconomic and political stability and building strong institutions. In the 1960s, much of Latin America adopted inward-looking policies and trade restrictions, with negative results. Faced with a new opportunity to open up to the world, it is essential to make decisions and design strategies based on technical and empirical arguments, avoiding the temptation of populism.